Money Laundering

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MoneyLaundering

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Abstract

Inthis paper I will argue that money laundering is a practice that hassignificant social repercussions such as collapsing of banks andorganizations as well as distraction of state economies. According toQuirk (2012), &quotMoneylaundering and the financing of terrorism are financial crimes witheconomic effects” (p. 200). He goes on to add that, “They canthreaten the stability of a country`s financial sector or itsexternal stability more generally” (p.200).Victims of money laundering and the society incur huge losses as aresult. Money laundering activities lead to the distortion of savingsand investments, it brings about alterations in the export and importmarket as well as their growth. Money laundering in a major wayaffects employment in countries involved, the output and the income.It affects public sector revenues and places a huge threat onprivatization. Financial and monetary sectors are affected, and thisraises the incidences of crime, corruption, bribery and terrorism.Richards (2008) says that, “The illegal business involved withmoney laundering is a contamination to legal businesses and it causesundermining to political institutions and foreign policy” (p.46).

Iwill argue that in order to control these peccary social effects,that money laundering needs to be checked and controlled. This can bedone by the establishment of anti-laundering programs. Grill &ampTaylor (2004) stated, Effectiveanti-money laundering and combating the financing of terrorismregimes are essential to protect the integrity of markets and of theglobal financial framework as they help mitigate the factors thatfacilitate financial abuse” (p.123).The formed compliances must incorporate procedures, policies andinternal controls in a reasonable way, they must designate an officerto be in charge every day compliance. All individuals conductingfinancial transactions must be properly identified by the specificfinancial institutions they are transacting with, high standards ofethics while carrying out financial transactions must be observed andthere should be compliance with the regulations and specific lawsthat govern the financial institutions. According to Castaldi (2014),“Cooperation with the law is important to ensure the adherence tothe law.” (p.202).The social effects can also be controlled by providing the staff witha chance to train so that they become informed in order to carry outthe principles put in place. There are also argued techniquesemployed by investigators in their attempt to locate and seize theproceeds from money laundering.

Inorder to substantiate these claims, I will look at some examples offinancial institutions that almost saw their end because of theproblem of money laundering. I will look into Barclays and the seriesof scandals it has faced as a bank over a number of years in thepast. There are major cases of laundering that have befallen theUnited Kingdom-based bank that the bank never seems to learn from soas a result, it has paid huge fines for the repeated money launderingcases within the bank. I will also examine the history of theanti-laundering policies in both the private and the public sector.It shows how the policies have been implemented in the U.S, as wellas the whole world at large. For more recent cases of moneylaundering I will look at the case that befell ‘Panama Papers’ indepth.

Millionsof confidential documents were leaked from a law firm in panama. Thisbrought back the issue of evading tax and laundering of money. Itincluded an alleged amount of 2 billion dollars. The trail was linkedto the associates of the president of Russia. The dump was reportedlyfrom a law firm known as Mossack Fonseca. The law firm hasspecialized in creating shell companies in tax havens globally forthe wealthy and has offices in other 35 countries. The data wasinclusive of emails and documents of 40 years. They contained detailsfor more than two hundred thousand shell companies.

Theleaking was to a German newspaper and in the few years that have goneby, many reporters in the world’s media outlets went through therecords. ICIJ’s website claims that the documents included offshorecompanies’ data that was linked illegally to 12 former or currentheads of government or state, members of their families or evenassociates. Lionel Messi, an Argentinian footballer was alsomentioned. Messi and his father are being faced with evasion of taxin Spain despite him threatening to sue a certain Spanish newspaper.

MossackFonseca, denied the participating in any of the crimes. Companies andthe wealthy people set up offshore entities to take advantage of theloopholes in taxes that are perfectly legal or for other purposesthat are legitimate. It is therefore not illegal. Prestigious banksoften assist such doings, accounting firms and law firms. Castaldi(2014) says, “It cannot also be ignored that offshore entities havebeen used in the past, and can still be used to for illegal taxevasion or for laundering money and hiding it as well” (p.203).

Thedocuments, according to ICIJ, bring out a huge network of companiesthat are offshore and a network of trusts linked to Mr. Putin’slifelong pal Sergei Roldugin. Allegedly, in complex transactions, thecompanies were involved in close to two billion U.S dollars. Theknowledge of what had happened triggered responses right before therevelations. Ghost hackers held a launch of a “distributed denialof service attack” in an attempt to shut down a number of websiteswhich had the information online and published stories for thepublic.

Definingmoney laundering

Accordingto Richards (2008), “Money laundering is the process by which largeamount of illegally obtained money, from drug trafficking, terroristactivity or other serious crimes, is given the appearance of havingoriginated from the legitimate source” (p.87).Laundering of money is a criminal activity that is on the rise in thewhole world. It is the activity making criminal activity proceedsseem like they are legal. Money launderers transform gains obtainedillegally into funds that seem legitimate. The problem is spreadworldwide with close to 300 billion dollars annually undergoing theprocess in the United States. Selling narcotics illegally accountsfor a larger amount of this money. Those who involve themselves inmoney laundering usually attempt the crime on their own, but there isa new category of criminals who offer services of laundering toorganized crime. The class is made up of bankers, lawyers, andaccountants.

Criminalsusually prefer laundering as movement of cash can be freely donethrough society without fearing that there is a possibility oftracing the money back to the activities of crime they engaged in.Laundering of money on top of that, prevents confiscation of the cashby police. According to Tsingou (2013),“Money laundering is calledwhat it is because that perfectly described what takes place-illegalof dirty, money is put through a cycle of transactions or washed, sothat it comes out the other end as legal, or clean money” (p. 78).In other words, the source of illegally obtained funds is obscuredthrough a succession of transfers and deals in order that those samefunds can eventually be made to appear as legitimate income.

Thereare three stages involved in money laundering placement, layeringand integration. During placement, illegal funds or assets are firstbrought into the financial system. Beare (2003) illustrates that,“this ‘placement’ makes the funds more liquid” (p.48). Funds are deposited in financial institutions or cash is convertedto instruments whose prices can be negotiated upon. It is thetoughest step to get through. There is, however, an easier waythrough which criminals start laundering huge amounts of money. Theydeposit the money into financial institutions. The federal BankSecrecy Act passed in 1970 in the U.S. requires that financialinstitutions report large deposits of more than ten thousand dollarscash deposited by one person in one day. To act like there is nocriminal activity launderers obtain the cash by operating at the&quotfront&quot operation. That is, a business like services forchecking cash or a store of jewelry. Another option that could beused is converting the much money one has into instruments that canbe negotiated upon like money orders, cashiers` checks or checks fortravelers.

Beare(2003) says that, “For layering, it is to conceal the illegalorigin of the placed funds and thereby make them more useful, thefunds must be moved, dispersed and disguised” (p.50).Thereis wire transfer of money through multiple accounts to try to concealwhere the true origins of the funds are. This in most cases promptlaunderers to transferring funds to countries have been built on lawsof bank secrecy that are strict. Countries of interest include theBahamas, Cayman Islands, and Panama. After the money has beendeposited in town. Layering involves transferring funds via multipleaccounts. The reason behind it is hiding the origin of the funds.Normally criminals transfer them to foreign countries out of the U.S.whose secrecy laws are way stricter. Cayman Island is an example ofsuch states, and the Bahamas. Once the criminals deposit the funds ina bank in a foreign country, the money is moved through specificaccounts which only handle laundered money. It is not easy forenforcers of the law.

Beare(2003) notes, “In integration, once the funds are layered anddistanced from their origins, they are made available to criminals touse and control as apparently legitimate funds” (p.58).layered funds which cannot be traced to the origin of criminalactivities are transferred into the world of finance, where they mixup with funds obtained legitimately. The purpose of integration is tocreate an illusion of a source that is legitimate for funds that havebeen acquired criminally. It involves numerous and creativetechniques such as those employed to raise profit while reducing theliability of taxes by legitimate businesses. Some techniques that arecommonly used include the production of invoices that have beenfalsified for goods that have been sold to a firm in a foreigncountry by a firm in one country. Funds held in foreign banks act assecurity for domestic loans.

Mostof the banks never complied with the BSA in 1970 and 1980 early years(Force 2012). Multiple federal investigations followed, andrevelation had it that there was a failure by the banks to reporttransactions that exceeded the normally allowed rates and that led tothe requirements for reporting being strengthened. There was also anenacted act in 1986 which is popularly known as the Control Act (MLCA). The act criminalizes any activity of moneylaundering. It focuses on those who conspire to take part in theactivity and the actual criminals who launder money. Castaldi (2014)notes that, “The groups being watched keenly include professionals,bankers, and merchants, who help criminals in money laundering” (p.253).These are the most notorious perpetrators of the crime as they haveeverything to gain with a successful laundering act. MLCA allows thegovernment the authority to confiscate all traceable property that isassociated with violating the law put against laundering money.

Thefederal government started to make very close investigations afterthe United States was attacked in September 2001. The main aim of theinvestigations was to find out how terrorism was connected to thesale of narcotics and drugs that are illegal. President George W.Bush stated that terrorists used profits obtained from the sale ofdrugs as funds for their cells to engage in acts of murder.

Causesand consequences of international money laundering

Thereare three main crime types committed by criminals – violent crimesor vandalism, economic crimes and crimes of honor or passion.Vandalism is a minor crime. The most widespread type of crime is thecrime committed to making money. It is otherwise known as economiccrime. The main reasons for committing crime – for kicks – this isto show proof that they can participate in a particular crime and getaway with it. The other reason is that they imagine more money comesfrom crime as compared to a legitimate endeavor.

Aftermaking money from whichever crime, criminals use it to invest in adifferent crime. They can hide it for future use or spend itimmediately. Following the laundered money is an investigative methodthat has been tested and successfully tried. As a result, criminalsalways try to transport the stolen money as fast and as far thaninvestigators can follow.

Criminalslaunder money for the sole purpose of concealing the origin of themoney. Money is representative of the lifeblood of a participatingorganization. The money covers the expenses of operation in criminalactivities, and it replenishes any inventory that was used up, buysthe services of officials who are corrupt to avoid being detected andraising interests of enterprises that are illegal. Money pays forflashy lifestyles, thus the cause of laundering.

Thecriminal act alters the course of the income from proper investmentsto the ones that are risky and of low quality. There is solid proofthat in the United States, funds that evade tax are channeled tooinvestments that are more risky but have higher yields in the sectorfor small businesses. In the same way, crimes designed to be doneagainst an individual like kidnappings and theft, have a morelikelihood to be directed to individuals who are wealthy and thusshow bias against savings. According to Kuhn (2014), “When it comesto human trafficking for instance, the high profits outweigh therisks to the trafficker, making this a lucrative crime” (p. 178).This could come as a result of money laundering and by setting upanti money laundering schemes the problem can be identified andprevented. This is evidence for investment and savings distortion.Money launderers are mostly guided by the need to evade control anddetection rather than they are guided by investing this is the mainreason for their investment choices which can cause damage to theeconomy as their assets of investment generate negligible employmentor economic activity. Felipe (2015) explains, “Distortion ofInvestment, in particular in the real estate sector. A lot of moneylaundering seems to finally end by investing large amounts of wealthin real estate”. (p. 96)

Moneylaunderers are always willing to purchase certain assets at costshigher than what they actually cost so as to disguise the origin oftheir illegal funds. They also go for the purchase of an enterpriseor a property that is unappealing as it presents them with a chanceto raise their share of o certain market and acquire a moreestablished foothold within the economy of their interest. Thiscauses increase in prices artificially. On the same note, investingin the capital market leads to an artificial rise in share prices.

Asan effect of money laundering, the competition in the market becomesunfair. Gresham’s law appears to be applicable in this aspect. That‘bad money drives out good money’. When an individual holds on tofunds that have been obtained through illicit means, they in mostcases feel incriminated. They as a result attempt to convert them toless suspicious assets like real estate and many other businesseswhich appear as legitimately acquired wealth. They outbid honestindividuals who have the potential of purchasing the assets sincethey are in possession of large funds and can take part in extensivepurchases. Because their interest in the named assets is not genuineand that the only reason behind the purchase is to conceal theirtracks, they pay more cash than what the asset really costs.Artificially, this drives up prices of purchases making themunaffordable to those who are buying them honestly.

BarclaysBank

Barclaysbank was laundered six billion dollars six years ago by a man calledMr. Budovski. This scandal almost put the bank in shade for such ahuge loss. This has not been the only case of laundering in thatspecific bank, however. There have been recent probes of moneylaundering within the various Barclays businesses across the globe.There was a recent probe of potential laundering of money that wasconnected to transactions in currency at its South African business.There are plans by the British lender to wind down investments at theinstitution.

Thepotential fraudulent activity at the Absa Bank Ltd, which is thesubsidiary of Barclays Africa Group Ltd in South Africa was conductedby some customers who used payments on import advances to effectexchange of foreign currency transfers from the accounts in SouthAfrica to accounts belonging to their beneficiaries available inAsia, the United States, the United Kingdom, and Europe. This wasaccording to their annual report by the bank based in London.Barclays also mentioned that there is a review being conducted thatis of relevant activity, systems, processes and controls andregulators have been made aware of the wrong doing that wassuspected.

Investigatingthe launder is a big setback for the current Chief Executive Officer,Jes Staley since he is new. He is attempting to underline the stringof scandals, the involvement of the bank in the manipulation offoreign exchange and Libor rigging included. There was a fine of tenmillion rands imposed on Barclays back in 2014 after the central bankof South Africa discovered that the controls of the bank to combatlaundering of money and financing terrorists were deficient(Halliday, Levi, &amp Reuter, 2014). The money lender said that thebank would sell 62% of its stake in the bank based in Johannesburgwithin the coming two to three years (Halliday et al., 2014). The CEOof Barclays Africa confirmed however that the probe was not connectedto a broader investigation into whether banks conspired to rig therand, Barclays included.

Investigatingand preventing money laundering

Thefollowing techniques can be used while investigating any case ofmoney laundering:

Whileinvestigating money laundering, investigators don`t have to provideproof that the individual who laundered the money was aware of theexact specified unlawful activity from which the proceeds wereobtained from. The person who is carrying out the investigation onlyneeds to prove that the launderer was involved with dirty money. Thisgives permission to the person investigating to give proof of theelement of knowledge wholly via circumstantial evidence bydemonstrating that the person who laundered the money received themoney or even handled it in a way that differs from a process ofmoney transfer that is out rightly innocent. Specified unlawfulactivity proceeds the knowledge by the launderer that the profitsoriginated from a kind of felony and a transaction that has anintention of concealing proceeds or to encourage a specified unlawfulactivity are the basic elements of laundering money required asproof under Title 18, Section 1956, U.S. Code.

Aslong as the criminals transfer funds to or from the U.S. with anintention of promoting a specified unlawful activity, there is theneed for the people investigating to provide proof that the money isdirty. Clean money transferred internationally in the promotion of anSUA will support money laundering charges effectively. The elementsthat require being proved are, therefore, moving or attempting tomove funds to the U.S or from with the intention of promoting an SUA.

Thegovernment is entitled to seize money and property that belongs tothe criminal by the federal asset forfeiture laws once there is proofusually done in conjunction with overall investigations. The law ishowever misunderstood or neglected quite often, and criminals arethereby allowed to enjoy their gains from the crime even after beingconvicted. Coordination and cooperating with all industrial aspectstouched by the efforts of the criminals to launder money is vital tothe success of investigators in the combating of the ever evolvingthreat. During an investigation, one should be aware that thecriminals are well aware of means of defending themselves so theright law enforcement acts should be used to convict them.

Strategiesthat can be used to combat money laundering

Thereare various strategies that can be used to control money launderersand the activity itself. A coordinated response that encompassesfinancial institutions, law enforcement, and the judiciary is a veryeffective measure to be taken. Criminalizing laundering can also bedone to curb the crime, establishment of a unit of financialintelligence which is made up of banking experts, investigators andfinancial analysts is also a good way to go. According to Grill &ampTaylor (2004), “Bank secrecy laws should be repealed and largesuspicious transactions reported in due time to be able to acquireuseful and reliable information” (p.300).

Bybeing able to identify their customers, banks can do away with theelement of anonymity when faced with such scandals. It is alsorecommended that transaction as well as customer information berecorded from up to five years. Banks are supposed to establishinternal programs that are anti-laundering and conduct training toboth employees and officials on anti-laundering and also giveaccountability within the institution. Global Cooperation is keygiven the speed and ease at which criminals can layer laundered moneyover boarders. Adopting forfeiture laws should not be taken forgranted also. Tsingou (2013) notes, “Relieving competitivepressures from specialized and offshore financial centers andproducing increasingly sophisticated marketing techniques in privatefinancial institutions” (p.104). Thisis another way through which money laundering can be controlled sincesuch entities have been taken advantage of for a long time incarrying out the practice.

Furtherresearch areas

Itwould be of great benefit to research further into the issue of moneylaundering in the future so as new policies that are more improvedare formulated. Investigations should be done to find out and assessthe hiding spots for huge sums of laundered funds and the methodsused in laundering. More research should be done concerning moneylaundering and global trade in depth as it is a key sector for mostcountries. Money laundering sector studies should be done as well asrisks for insurance and real estate. The role played by third partiesduring the activities of money laundering should be looked intodeeply. There should be a thorough scrutiny on the balance of paymentfor laundering. Trust companies and special purpose entities shouldbe analyzed in relation to involvement with money laundering.Investigations should be carried out on the new techniques and risksof the particular techniques, for example, cyber technology andbearer instrument.

Conclusions

Imprisoninga convicted criminal is a significant way of deterring people fromcommitting the crime in future. The deterrence is more effectivehowever when to practice together with the establishment of lawsinvolving asset forfeiture which are made to deprive launderers ofany motivation that led them to commit the crime the very first time.

Thelaw enforcement community has been faced with unbeatable challengesdue to the threat of money laundering. Pursuing the evidentiary trailof a launderer demands that agencies involved in enforcing the lawidentify and make use of techniques and tools that can be ofassistance to them while crossing international borders. Multilateralconventions that require those taking part to take up measuresagainst money laundering, the regional as well as the globalorganizations that have come up and pressed for a standardizedapproach to address money laundering have all bestowed upon thestrides made in addressing the problems that have been brought about.

Effortsput into place by nations that don`t depend on the internationalcommunity often result in variations significantly from the standardsthat are accepted and affect the facilitation of the activities ofmoney laundering rather than assist in combating them. The Barbudaand Antiguan government, for instance, weakened the laws that hadbeen made concerning money laundering and as a result, the UnitedStates Treasury Department issued advice that warned financialinstitutions and banks to be aware of transactions assigned out of orinto the territories. Tsingou (2013) notes that, “The alterationsmade to the law made bank secrecy stronger, put limits to the scopeof investigating laundering and hindered corporation internationally”(p. 57).

Usinga harmonized approach that is common to all states will inhibitlaunderers from making use of the various practices and laws amongthe authorities to their gain at the expense and disadvantage ofnations that have an interest in pursuing them. Law enforcementagencies can work together with different administrators andregulators with harmonized laws to bring the problem of moneylaundering to an end.

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