Question

Evaluate any five (5) reasons why money laundering activities in the banking system, when not monitored, can bring down the economy of a nation. (750 - 900 words)

Answer 1

What is Money Laundering?

Money laundering is the illegal process of making large amounts of money generated by a criminal activity, such as drug trafficking or terrorist funding, appear to have come from a legitimate source. The money from the criminal activity is considered dirty, and the process "launders" it to make it look clean.Money laundering is a serious financial crime that is employed by white collar and street-level criminals alike.1 Most financial companies have anti-money-laundering (AML) policies in place to detect and prevent this activity.

• Money laundering is the illegal process of making "dirty" money appear legitimate instead of ill-gotten.
• Criminals use a wide variety of money laundering techniques to make illegally obtained funds appear clean.
• Online banking and cryptocurrencies have made it easier for criminals to transfer and withdraw money without detection.
• The prevention of money laundering has become an international effort and now includes terrorist funding among its targets.

How Money Laundering Works

Money laundering is essential for criminal organizations that wish to use illegally obtained money effectively. Dealing in large amounts of illegal cash is inefficient and dangerous. Criminals need a way to deposit the money in legitimate financial institutions, yet they can only do so if it appears to come from legitimate sources.Banks are required to report large cash transactions and other suspicious activities that might be signs of money laundering.

The process of laundering money typically involves three steps: placement, layering, and integration.

• Placement puts the "dirty money" into the legitimate financial system.
• Layering conceals the source of the money through a series of transactions and bookkeeping tricks.
• In the final step, integration, the now-laundered money is withdrawn from the legitimate account to be used for whatever purposes the criminals have in mind for it.

There are many ways to launder money, from the simple to the very complex. One of the most common techniques is to use a legitimate, cash-based business owned by a criminal organization. For example, if the organization owns a restaurant, it might inflate the daily cash receipts to funnel illegal cash through the restaurant and into the restaurant's bank account. After that, the funds can be withdrawn as needed. These types of businesses are often referred to as "fronts."

Money Laundering Variants

In one common form of money laundering, called smurfing (also known as "structuring"), the criminal breaks up large chunks of cash into multiple small deposits, often spreading them over many different accounts, to avoid detection. Money laundering can also be accomplished through the use of currency exchanges, wire transfers, and "mules"—cash smugglers, who sneak large amounts of cash across borders and deposit them in foreign accounts, where money-laundering enforcement is less strict.

Other money-laundering methods involve investing in commodities such as gems and gold that can easily be moved to other jurisdictions, discreetly investing in and selling valuable assets such as real estate, gambling, counterfeiting; and using shell companies (inactive companies or corporations that essentially exist on paper only).

Electronic Money Laundering

The Internet has put a new spin on the old crime. The rise of online banking institutions, anonymous online payment services and peer-to-peer (P2P) transfers with mobile phones have made detecting the illegal transfer of money even more difficult. Moreover, the use of proxy servers and anonymizing software makes the third component of money laundering, integration, almost impossible to detect—money can be transferred or withdrawn leaving little or no trace of an IP address.

Money can also be laundered through online auctions and sales, gambling websites, and virtual gaming sites, where ill-gotten money is converted into gaming currency, then back into real, usable, and untraceable "clean" money.

The newest frontier of money laundering involves cryptocurrencies, such as Bitcoin. While not totally anonymous, they are increasingly being used in blackmail schemes, the drug trade, and other criminal activities due to their relative anonymity compared with more conventional forms of currency.

Anti-money-laundering laws (AML) have been slow to catch up to these types of cybercrimes, since most of the laws are still based on detecting dirty money as it passes through traditional banking institutions.

Preventing Money Laundering

Governments around the world have stepped up their efforts to combat money laundering in recent decades, with regulations that require financial institutions to put systems in place to detect and report suspicious activity. The amount of money involved is substantial. According to the United Nations Office on Drugs and Crime, global money laundering transactions account for roughly $800 billion to $2 trillion annually, or some 2% to 5% of global GDP.

In 1989, the Group of Seven (G-7) formed an international committee called the Financial Action Task Force (FATF) in an attempt to fight money laundering on an international scale. In the early 2000s, its purview was expanded to combating the financing of terrorism.

The United States passed the Banking Secrecy Act in 1970, requiring financial institutions to report certain transactions to the Department of the Treasury, such as cash transactions above $10,000 or any others they deem suspicious, on a suspicious activity report (SAR) The information the banks provide to the Treasury Department is used by the Financial Crimes Enforcement Network (FinCEN), which can share it with domestic criminal investigators, international bodies or foreign financial intelligence units.

While these laws were helpful in tracking criminal activity, money laundering itself wasn't made illegal in the United States until 1986, with the passage of the Money Laundering Control Act. Shortly after the 9/11 terrorist attacks, the USA Patriot Act expanded money-laundering efforts by allowing investigative tools designed for organized crime and drug trafficking prevention to be used in terrorist investigations.

The Association of Certified Anti-Money Laundering Specialists (ACAMS) offers a professional designation known as a Certified Anti-Money Laundering Specialist (CAMS). Individuals who earn CAMS certification may work as brokerage compliance managers, Bank Secrecy Act officers, financial intelligence unit managers, surveillance analysts and financial crimes investigative analysts.

What Is a Suspicious Activity Report (SAR)?

A Suspicious Activity Report (SAR) is a tool provided under the Bank Secrecy Act (BSA) of 1970 for monitoring suspicious activities that would not ordinarily be flagged under other reports (such as the currency transaction report). The SAR became the standard form to report suspicious activity in 1996.

Suspicious Activity Reports can cover almost any activity that is out of the ordinary. An activity may be included in the Suspicious Activity Report if the activity gives rise to a suspicion that the account holder is attempting to hide something or make an illegal transaction.

Understanding Suspicious Activity Report (SAR)

The Suspicious Activity Report (SAR) is filed by the financial institution that observes suspicious activity in an account. The report is filed with the Financial Crimes Enforcement Network who will then investigate the incident. The Financial Crimes Enforcement Network is a division of the U.S. Treasury. The financial institution has the ability to file a report within 30 days regarding any account activity they deem to be suspicious or out of the ordinary. An extension of no more than 60 days may be obtained, if necessary to collect more evidence. The institution does not need proof that a crime has occurred. The client is not notified that the Suspicious Activity Report has been filed regarding their account.

Suspicious Activity Reports are part of the anti-money laundering statutes and regulations which have become much stricter since 2001. The USA Patriot Act significantly expanded SAR requirements in an effort to combat global and domestic terrorism. The goal of the Suspicious Activity Report and the resulting investigation is to identify customers who are involved in money laundering, fraud or terrorist funding. The customer is not told that a report is being filed. Disclosure to the customer, or failure to file a Suspicious Activity Report, can result in very severe penalties for both individuals and institutions. SARs allow law enforcement to detect patterns and trends in organized and personal financial crimes so that they can anticipate criminal and fraudulent behavior and counteract it before it escalates.

In the United States, financial institutions must file a SAR is they think that an employee or customer has engaged in insider trading activity. They must also file a SAR if they detect potential money laundering or violations of the BSA. A SAR is required if a financial institution detects evidence of computer hacking or of a consumer operating an unlicensed money services business. SAR filings must be kept for five years from the date of the filing.

Example of a Suspicious Activity Report Situation

For example, Albert is an account holder at XYZ Financial Institution. Albert has been a client for nearly five years and has an established account history and very predictable transactions. Every month, he deposits $15,000 into the account and buys an index fund. One day, he starts to receive weekly transfers of $9,000 into the account. Almost as quickly as the money hits the account, it leaves again. This is out of the ordinary for Albert's account and usual activity. The financial institution may consider this to be suspicious activity and might file a Suspicious Activity Report.