BANKING AND MONEY LAUNDERING

Definition:  What is money laundering?   Money Laundering is a process, in which, money earned from various criminal activities, like smuggling, black marketeering, drug peddling, etc., is channelled into the Banking system, in the form of legitimate commercial transactions.   Money, thus parked, in a Bank, acquires a seemingly legitimate and legal status, and can be utilized, thereafter, for genuine commercial and other transactions.    Simply speaking, money laundering is the process of converting Bad Money into Good Money.

Of course, it is not an easy task, and the money launderers take considerable pains to accomplish their task!   The methods adopted in converting bad money into good money vary from place to place and time to time.   For example, in India, it may involve the money launderer  purchasing a winning lottery ticket from the genuine holder, by paying him the full amount of the lottery, and then substituting his bad money for the lottery money.   This way the criminal’s bad money becomes good, and the original winner of the lottery does not pay his taxes due on the winning ticket.   This is, but just one of the hundreds of ways in which criminals launder their ill gotten wealth into clean money, that can be used for engaging in regular business transactions.

The FATF:  FATF stands for Financial Action Task Force.   What is this organisation about, and what does it do?   The FATF is an international body of experts, promoted originally by  the members of the G7 group of countries, dealing in money laundering issues.   The body was set up in 1989, and presently has about 35 members.   Their key responsibility is to deliberate and come up with practical recommendations for preventing the misuse of the financial and banking system by criminals.

The job of the FATF can be summarised as:

1.  To act as a central agency and clearing house on all matters related to money laundering;  and to coordinate with national and international institutions, etc., in efforts to prevent money laundering through the financial system.

2.  To study the various techniques and modus operandi employed by criminals throughout the world, in the process of money laundering, and to come up with recommendations that can be practically implemented to combat the menace of money laundering.

3.  To follow up with member countries to ensure compliance of their recommendations, and where such recommendations pose a problem, to study the same further, and come up with suitable modifications, with the primary aim of countering money laundering.

4.  To act as a sort of pressure group to promote necessary legislation and regulations by the member states to fight money laundering.

5.  To cooperate with other international agencies engaged in similar work, for example, anti terror organizations,to exchange notes on their respective activities, and to help each other.

6.  Most of the member states of the FATF have set up specialized agencies to deal with the problem of money laundering.   These agencies coordinate with the FATF, and financial institutions, in effectively implementing the laws relating to money laundering.

Role of Banks:  What are the Banks expected to do, to detect and to prevent, the incidence of money laundering through their systems?   Simply speaking, Banks are expected to identify and stop transactions relating to money laundering, that are sought to be channellised through them.

For instance, money launderers may open accounts in a Bank, with the help of fictitious documents, in assumed names etc.   They may tempt the Bankers with promises of good business to them.   And seek the Bank’s ‘cooperation’, in opening such accounts and conducting business through them.   On the face of it, the documents and also the persons involved, may appear to be perfectly normal to the Bankers.   And so, in good faith, the Bankers, in their eagerness to get business, may patronise such customers, and get themselves into trouble.

The money launderers take advantage of the eagerness of the Bank to do business, and put through transactions of a dubious nature, by passing them through various layers of legitmacy, thereby misleading their Bankers, who accept the transactions as genuine.   This way, money earned in various criminal activities, gets into the Banking system, and acquires legal status.

Therefore, Banks are expected to take due precautions in opening accounts, and following all the laid down norms in this regard.   Being vigilant at the first point of the criminal’s entry into the Banking system would go a long way in preventing money laundering.

Regulatory authorities in different coutries have laid down elaborate systems and regulations, to be complied with, by the Banking industry, in the fight against money laundering.   Some such requirements to be followed by the Banking industry, include reporting of suspicious transactions, especially those of large value, particularly in cash.  Similarly, records pertaining to such transactions, are to be preserved for a longer duration than other records, for future reference.   It is expected, that by following these stipulations, Banks would be able to effectively deal with money laundering, and all the implications it has for the Banking industry.

Points to Ponder: 

1.  While fighting money laundering is everyone’s business, and concern, it must be noted that this process has come into prominence only after 911, which gives it a distinct American flavor.

2.   There is no uniform application of the Anti Money Laundering (AML) provisions in various countries, not only on account of differing systems, but also differing perceptions of what constitutes money laundering.   For instance, in Switzerland, the law makes a distinction between tax evasion and tax fraud.

3.  Dividing the world into the Western and Eastern Hemispheres, it is observed that money laundering is more prevalent in the Western side, whereas the focus of the West, especially the United States, is on the Eastern Hemisphere.

Some of the major centers of money laundering in the Western Hemisphere are Switzerland, Channel Islands, Guernsey Islands, The Bahamas, Luxembourg, etc.   Switzerland, perhaps, would win, the vote as the world’s largest money laundering center.   Of course, the Swiss have a different story to tell.   Or rather, they would not tell any story at all, citing “Banking Secrecy”.   But intense pressure from the United States is cracking open the secret world of the Swiss Banking System, for the world to see.

4.  Apart from the perceived geographic bias, as seen above, in the fight against money laundering, allegations abound, about how Islamic Countries, Institutions and Muslim individuals are being unfairly targetted under the guise of fighting money laundering as also terrorism.

5.  After about a couple of decades of fighting money laundering and especially after 911, the financial services industry has come to realize, that for all the troubles taken by them, and the enormous amounts of money spent in fighting money laundering, the end result does not appear to be encouraging.  

This fight against money laundering has given birth, in its wake, to a new software industry, that comes up with more and more sophisticated, and expensive  software, supposedly to counter this phenomena of money laundering, without actually giving the desired results.   This is causing a lot of heart burning in the financial services industry, whose transaction cost of conducting business has gone up many fold.

Conclusion:  From the above, we may conclude, that to make the fight against money laundering more meaningful, the perceived and or real religious and geographical bias must end.   It must be ensured that the AML procedures and measures are focussed on the actual extent of the problem without exaggerating it.   The emphasis of the AML measures must be towards catching the big fish first, then the smaller ones.  

The West, especially the United States, must take care not to be seen practising double standards, therby weakening the system.   Money laundering centers in the West, especially, countries like Switzerland, must be made to comply with the AML rules in letter and spirit.   Uniformity in application of the rules should be promoted for a more harmonious result from such efforts.

And last, but not the least, a cost-benefit analysis must be done, to see  what has been achieved so far, by spending huge sums of money on hi fi software systems and other expensive gadgets, in countering money laundering.    Wherever necessary, corrective action must be taken to prevent mutual recriminations among various states so that the focus of the joint effort is not lost.