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Special Topics In Banking &

Finance

Dr. Karim Kobeissi


Arts, Sciences and Technology University in
Lebanon

Chapter IV: Money Laundering & Terrorist


Financing

Money Laundering
-Definition
Money laundering (ML) is the process by which earnings
from a criminal activity are masked to hide their illegal
origin (between $ 500 billion and $ 1.5 trillion annually). If
successful, the money can lose its criminal identity and
appear legitimate.

Terrorist Financing - Definition


Terrorist Financing (TF) is the act of providing
financial

support

to

terrorists

or

terrorist

organizations to enable them to carry out


terrorist acts.

LINK BETWEEN MONEY LAUNDERING AND TERRORISM


FINANCING

The techniques used to launder money are essentially


the same as those used to hide the sources of, and
uses for, terrorist financing.

In contrast with money laundering where the funds


used are derived from criminal activities, funds used to
support

terrorism

may

originate

from

sources, criminal (illegal) activities, or both.

legitimate

What are the sources of


Terrorist Financing?
Legal Sources
CONTRIBUTIONS AND
DONATIONS

Illegal Sources
DRUG TRAFFICKING
EXTORTION AND KIDNAPPING

SALE OF PUBLICATION
ROBBERY
LEGITIMATE BUSINESS
ACTIVITIES

FRAUD
GAMBLING
SMUGGLING AND TRAFFICKING
IN COUNTERFEIT GOODS

Fighting Money Laundering & Terrorist Financing


Over the years, countries have been struggling with the
issues relating to money laundering and terrorist financing
through prevention, detection and prosecution.
The complexity in the fight against this menace is mainly
as a result of the sophisticated techniques adopted by
criminals. Such techniques involve the use of different
types

of

financing

institutions,

multiple

financing

transactions, the use of intermediaries such as financial


advisers,

accountants

and

other

service

providers,

transferring to and from different countries as well as the


use of different financial instruments and all kinds of

Simple Money Laundering


Concept
Mr A

illegal smuggling
of weapons

Friend

Works in a Bank in
jurisdiction X
with lax banking laws

Jurisdiction B: confidentiality
laws

Is Mr A Laundering Money?
How about the Friend?

A Typical ML Scheme

Three Stages of Money


Laundering
Placement
Stage

Layering
Stage

Integration
Stage

Initial injection of illegal Multiple layers (covers) Reintroduction of illegal


funds into the financial of transactions that funds into legitimate
system.
further separate funds economy.
from their illegal origins.
Purpose is to separate Purpose is to make it
illegal funds from their difficult to trace the
illegal origins.
funds to their illegal
origins.

Purpose is to allow
criminals to use the
funds without raising
any suspicion.

Placement Stage
This is the physical disposal of cash earnings derived from illegal
activity.
Examples

Depositing cash into an account or into several accounts in


different locations.
Paying cash for bank drafts (cheques drawn by a bank on its own
funds), traveler's cheques, and other value instruments.
Purchasing items of value for cash (such as works of art, antiques,
motor vehicles, and so on) for the purpose of selling them.
Combining

criminal

cash

with

legitimate

cash

business account.
Converting cash in one currency into another currency.

in

Layering Stage
This is the process of separating illegal earnings
from their source by creating complex layers of
financial transactions designed to disguise the
audit trail and provide anonymity.
Examples
Wiring payments to and from various accounts
(personal and corporate) in different jurisdictions
Buying, then selling, an investment product
Buying and then giving way a single-premium
insurance contract
Engaging in international trade transactions
Making other types of payment where funds
move from one account to another

Integration Stage
This is provision of apparent legitimacy of criminally derived
wealth. If the layering process has succeeded, integration
schemes place the laundered earnings back into the economy
in such a way that they re-enter the financial system and
appear to be normal business funds.
Examples
Purchase of property (for personal use or investment)
Purchase of other high-value items, for example, jewelries,
antiques, works of art
Purchase of legitimate businesses
Purchase of investments for income
Any purchase for personal use with a cheque, credit card, or
other payment method

Where do ML/TF Operations Take


Place?
Money launderers and terrorism supporters
INTERNATIONALIZE their operations to
achieve various objectives.

Where do ML/TF Operations Take


Place?
OBJECTIVES FOR
ML AND TF

AVOID JURISDICTIONS WITH STRONG LAW ENFORCEM

TAKE ADVANTAGE OF CONSTRAINTS IN COMMUNICATION BETW

EXPLOIT REGULATORY AND LAW ENFORCEMENT

ADD LAYERS TO TRANSACTIONS TO MAKE IT DIFFICULT TO TR

Where do ML/TF Operations Take


Place?

The Socio-economic Impact of Money


Laundering

The Socio-economic Impact of Money Laundering


(con)

Affecting macro economy


Rapid movement of large amount of money
inconsistent with financially productive purposes
destabilizes:
Proper interest rate movement
Proper exchange rate movement
Proper pricing of real estates
Discourage long-term investment in legitimate
activities
Deprives the country of legitimate tax paying
business

The Socio-economic Impact of Money Laundering


(con)

Affecting the rule of law


Undermine the rule of law in society.
Tend to induce corruption in the public
sector.

The Socio-economic Impact of Money Laundering


(con)

Affecting the financial system


Reputational risk

Discourage people to put their money in banks because of


lack of trust

Operational risk
Institutions incur reduced, terminated, or increased costs
for inter-bank or correspondent banking services

Legitimate businesses and enterprises suffer from


reduced access to world markets or access at a higher
cost due to extra scrutiny of their ownership,
organization and control systems
Tend to induce corruption in the financial sector

The Socio-economic Impact of Money Laundering


(con)
Affecting economic liberalization
By using front companies and other investments in
legitimate companies money laundering proceeds can
be utilized to control whole industries or sectors of
the economy of certain countries
Threaten the efforts of many countries to reform their
economies
through
privatization.
Criminal
organizations are capable of outbidding legitimate
purchasers of former state-owned enterprises
Encourage governments to impose restrict capital
controls
Encourage governments to impose restrict regulations
on financial transactions and trade with jurisdictions
that do not have adequate money laundering control
policies

The Socio-economic Impact of Money Laundering


(con)
International
Investment

Consequence

and

Foreign

- A reputation as a money laundering haven, alone, could cause


significant adverse consequences for development in a country.
- Foreign Financial Institutions may decide to limit their transactions with
institutions from money laundering havens.
- At times, legal businesses and enterprises from such a country may
suffer from reduced access to world markets or are subjected to a higher
cost due to extra inspection of their ownership, organization and control
system.
- Any country known for Lax enforcement of ML/TF is less likely to receive
foreign private investment.
For developing nations, prerequisite for
foreign governmental assistance is also likely to be severely limited.
- More importantly is the possibility of inclusion in the non-co-operating
countries and territories; list maintain by FATF (Financial Action Task
Force ).

Preventative Measures
The FATF (Financial Action Task Force - is an intergovernmental body established in 1989 by the Ministers of its
Member jurisdictions. The objectives of the FATF are to set
standards and promote effective implementation of legal,
regulatory and operational measures for combating money
laundering, terrorist financing and other related threats to the
integrity of the international financial system) has established
a number of preventive measures for countries and institutions
to adopt in the fight against money laundering.

Preventative Measures (con)


Confidentiality Laws
Confidentiality laws should not conflict with or inhibit the
effectiveness of money laundering strategy.

Appropriate Customer Identification


Diligence Procedures in Place

&

Customer identification requirements known as Know Your


Customer (KYC) assist in the detection, restriction and prevention
of money laundering and terrorist financing.

Preventative Measures (con)


Record Keeping Requirements
Institutions should keep customer identification and transaction
records for period of not less than five years.

This information

should be detailed enough to permit the prosecution of criminal


elements and should be readily available to authorities upon
request.

Suspicious Transaction Reporting


To recognize the obligation to report if institution knows or suspect or
have reasonable grounds to suspect that funds involve were
derived from a criminal activity.

Preventative Measures (con)


Cash Transaction Reporting
Reporting of transactions involving cash beyond the
threshold set by the regulatory authorities.

Awareness Raising and Training


-

Create awareness (customers, counterparties and public);


and
Training and continuous training of staff.

Preventative Measures (con)


A well functioning anti-money laundering system:
Makes it difficult for corrupt officials to expatriate
their ill-gotten funds
Increases public confidence in the financial system
Increases investment in the legitimate private
economy, allowing for increase resources from
taxes
Provide a disincentive for the criminal involvement
in the economy, promoting transparency and
productivity