According to the IMF, the scale of money laundering world-wide could be somewhere between 2% and 5% of world GDP. On 1996 statistics, this translates into a range of US$590 billion to US$1.5 trillion. Growing concern about this activity has prompted a number of initiatives at the international level. Organisations like the United Nations and the Basel Committee have been looking into the problem of money laundering since the late 1980s. But it was not until the Financial Action Task Force on Money Laundering (FATF) was set up by the G7 in 1989 that co-ordinated action really began to be developed. One of the first tasks of this body, which comprises twenty-six member countries and jurisdictions, two international organisations and three observers, was to spell out a number of measures that national governments should take to combat money laundering. These became known as the “Forty Recommendations”.
They cover the criminal justice system and law enforcement, and the financial system and its regulation. In addition, international organisations like the European Union and the Organization of American States, to name only two, have established anti-money laundering standards for their member countries, while the Caribbean, Asian and Eastern European countries have created regional FATF-type groupings.
Progress has certainly been made, notably in the countries that have introduced anti-money laundering measures, but the problem has by no means been resolved. The facilities and methods used by launderers are changing all the time as they try to circumvent the preventive measures put in place. Instead of introducing illegally obtained cash into the country’s financial system, they move it to other countries where no questions are asked about its origin. Set-ups involving offshore financial centres seem to have certain common features: a series of financial transactions by the centre’s intermediary, use of dummies or other intermediaries to handle the transactions and an international network of shell companies.
Often a laundering deal will involve more than one offshore centre. The inability to obtain information about the real owners of the foreign entities with corporate status is one of the chief obstacles to detection, investigation and prosecution of persons suspected of money laundering. In this regard, the non-cooperative countries and jurisdictions, i.e. those that explicitly refuse to co-operate with the FATF, continue to be a cause of major concern (see bibliography).
But the problem of money laundering is more than just a matter of particular countries or jurisdictions. It also involves the professional service providers – accountants, lawyers and similar professionals – who operate not only in offshore zones, but also in some FATF countries. These service providers set up and manage entities with corporate status, thereby giving the apparatus of money laundering considerable sophistication and a gloss of respectability. At present, only a few countries require professional service providers to report suspicious transactions, and their notifications have been on a limited scale.
INCREASINGLY SOPHISTICATED METHODS
With the ever-widening range of financial instruments on offer, other laundering possibilities are being opened up. The derivatives and securities markets seem particularly susceptible to recycling of organised crime proceeds because the audit trail is so easily blurred. A broker can very well launder a sum of money through a perfectly legal transaction, with no need even to make a false entry. All that is necessary is to assign genuine trading losses to the account in which the illegal funds will be deposited. For example, it is absolutely legal for a dealer in the financial futures market to hold two contracts for subsequent offset. By assigning trading gains and losses to two different accounts, one “regular” and the other to receive the laundered funds, the dealer can put through a laundering operation on the loss account without breaking the law.
Insurance – notably life, property and long-term capitalisation bonds – is another possibility. Launderers generally pay for the insurance with cash and then request early redemption of the policy or make a claim against their property insurance, thus obtaining payment in bank money from the insurance company.
Electronic fund transfers continue to be the preferred method for the layering of criminal proceeds once they enter the legitimate financial system. Frequently, these proceeds are smuggled out of one country, deposited in another, and then wired back to the country of origin. The new payment technologies – smart cards, online banking and electronic cash – can theoretically increase the opportunities for laundering. If an online financial institution is located in an area known for high levels of banking secrecy and requires little or no proof of identity for opening an account, the money launderer can then move funds from the convenience of his computer terminal.
Certain smart card and e-cash systems likewise present a risk in that no upper limit is set on transactions. While most smart card systems do not permit direct card-to-card transactions, others are being developed that may have this capability of bypassing a financial intermediary. In the absence of consistent standards and suitable monitoring by the supervisory authorities, these new payment technologies could well be vulnerable to money laundering operations.
THE GOLD “HEDGE”
As in the case of high-value commodity markets, the gold market is causing some concern over the money laundering possibilities it offers. A number of FATF members have received reports of suspicious gold transactions. In some instances, these transactions appeared to reflect attempts to avoid high VAT rates by making large purchases of gold in countries with low VAT rates and then exporting the bullion back to the country of origin. The use of gold for purposes of laundering is often intrinsic to movements of money through parallel banking circuits, an example being the South Asian hawala/hundi system. This particular system, based on trust and close business contacts, enables gold to be transferred without being physically moved. Using the system is more cost effective and less bureaucratic than moving funds through officially recognised banking systems. Laundering of this kind, which is extensively practised over the sub-continent, has spread to many other parts of the world. But the Gulf States are the hub of hawali/hundi gold movements to and from South Asia.
The introduction of the euro in eleven countries of the European Union is another source of risk. Preventive measures have been taken to forestall all attempts at money laundering. But the experts fear that the surge in exchange transactions during the period of changeover to the euro may swamp the personnel of financial institutions and make them more likely to miss or disregard indications of laundering. This could be the case during the period from January to June 2002, when euro coins and banknotes will replace national legal tender. However, the preventive measures in place –customer identification, due diligence, reporting of suspicions, etc. – should make it possible to detect any suspect transactions. Even so, some FATF members have decided to take additional measures to strengthen their anti-laundering precautions.
The fact remains that money launderers have time and again shown their ingenuity in circumventing the law and there is no reason to think that they will lose that innovativeness in the years ahead. Consequently, every effort has to be made to acquire maximum knowledge of the different methods and techniques of money laundering. Corporate and non-financial laundering and the new payment technologies should be given particular attention. Also, in the current context of globalisation, reviews of laundering typologies should be extended to other regions of the world: Asia, Africa, Latin America, Central and Eastern Europe.
©OECD Observer No 220, April 2000