Money Laundering-Concept & Preventions

Mahesh Lahoti ( Hons C.S Professional Programme)   (1311 Points)

12 February 2011  


Money laundering is generally regarded as the practice of engaging in financial transactions to conceal the identity, source, and/or destination of illegally gained money by which the proceeds of crime are converted into assets which appear to have a legitimate origin. In theUnited Kingdom the statutory definition is wider.[1] It is common to refer to money legally obtained as “clean”, and money illegally obtained as “dirty”.





Money laundering occurs over a period of three steps: the first involves the physical distribution of the cash (“placement”), the second involves carrying out complex financial transactions in order to camouflage the illegal source (“layering”), and the final step entails acquiring wealth generated from the transactions of the illicit funds (“integration”).




In the past, the term money laundering was applied only to financial transactions related to organized crime. Today its definition is often expanded by government and international regulators such as the U.S. Office of the Comptroller of the Currency to mean any financial transaction which generates an asset or a value as the result of an illegal act, which may involve actions such as tax evasion or false accounting. In the UK, it does not even need to involve money, but any economic good. Courts involve money laundering committed by private individuals, drug dealers, businesses, corrupt officials, members of criminal organizations such as the Mafia, and even states.



As financial crime has become more complex, and "Financial Intelligence" (FININT) has become more recognized in combating international crime and terrorism, money laundering has become more prominent in political, economic, and legal debate. Money laundering is ipso factoillegal; the acts generating the money almost always are themselves criminal in some way (for if not, the money would not need to be laundered).



Cashing up

A business taking large amounts of small change each week (e.g. a convenience store) needs to deposit that money in a bank. If its deposits vary greatly for no obvious reason this can draw suspicion; but if the transactions are regular and roughly the same the suspicion is easily discounted. This is the basis of all money laundering, a track record of depositing clean money before slipping through dirty money. In the United states for example, cash transactions and deposits of more than $10,000 must be reported by the cashier (the bank etc.) as "significant cash transactions" to the Financial Crimes Enforcement Network FinCEN, with any other suspicious financial activity identified as "suspicious activity reports" In other jurisdictions suspicion-based requirements may be placed on financial services employees and firms to report any suspicious activity to the authorities.

Captive business

Another method is to start a business whose cash inflow cannot be monitored, and funnel the small change into it and pay taxes on it. But all bank employees are trained to be constantly on the lookout for transactions that seem to be trying to get around reporting requirements. To avoid suspicion, shell companies should deal directly with the public, perform some service (not provide physical goods), and have a business that reasonably would accept cash as a matter of course. Dealing directly with the public in cash gives a plausible reason for not having a record of customers. For example, a hairstylist is paid in cash, and even if she knows her customers' names, she does not know their bank details. A record of a haircut must ostensibly be accepted as prima facie evidence. Service businesses have the advantage of the anonymity of resources—but the disadvantage that they must deal in cash. A business that sells computers has to account for the computers, whereas the hairstylist does not have to produce the cut hair, but the receipt for the computer, even if inflated, exists—that for the haircut probably does not. It is of course also possible to invent customers, purely for the purpose of accepting money from them.


In structuring, (also known as "smurfing"), money is put into the licit economy in such a way as to avoid legal record keeping and reporting requirements. For example: deposits of less than $10,000 (anything over that amount would require a report to be filed with the IRS) are made into multiple bank accounts that are then withdrawn after a sufficient amount of time has passed to avoid suspicion.


Many jurisdictions adopt a list of specific predicate crimes for money laundering prosecutions as a "self launderer".


In Bangladesh, this issue has been dealt with by the Prevention of Money Laundering Act, 2002 (Act No. VII of 2002). In terms of section 2 (tha), "Money Laundering means (a) Properties acquired or earned directly or indirectly through illegal means; (b) Illegal transfer, conversion, concealment of location or assistance in the above act of the properties acquired or earned directly of indirectly through legal or illegal means." In this Act, “Properties means movable or immovable properties of any nature and descriptttion”.[citation needed] To prevent these Illegal uses of money Bangladesh Govt. has introduced the Money Laundering Prevention Act. The Act was last amended in the year 2009 and all the Financial Institutes are following this act. Till today there are 26 Circulars issued by Bangladesh Bank under this act. To prevent Money laundering a banker must do the following:  While opening a new account, the account opening form should be duly filled up by all the information of the Customer.  The KYC has to be properly filled up  The TP (Transaction Profile) is mandatory for a client to understand his/her transactions. If needed, the TP has to be updated at the Client’s consent.  All other necessary papers should be properly collected along with the Voter ID card.  If there is any suspicious transaction is notified, the BAMLCO (Branch Anti Money Laundering Compliance Officer) has to be notified and accordingly the STR (Suspicious Transaction Report) reporting has to be done.  The Cash department should be aware of the Transactions. It has to be noted if suddenly a big amount of money is deposited in any account. Proper documents will be required if any Client does this type of transaction.  Structuring, over/ under Invoicing is another way to do Money Laundering. The Foreign Exchange Department should look into this matter cautiously.  If in any account there is a transaction exceeding 7.00 lac in a single day that has to be reported as CTR (cash Transaction report)  All the Bank Officials must go through all the 26 Circulars and must use in doing the Banking.


The National Initiative to Combat Money Laundering, with the involvement of the Solicitor General of Canada, the RCMP, Justice Canada, Canada Customs and Revenue Agency, and, Citizenship and Immigration, began operation in 1998.[citation needed]


The Prevention of Money-Laundering Act, 2002 came into effect on 1 July 2005. Section 3 of the Act makes the offense of money-laundering cover those persons or entities who directly or indirectly attempt to indulge or knowingly assist or knowingly are party or are actually involved in any process or activity connected with the proceeds of crime and projecting it as untainted property, such person or entity shall be guilty of offense of money-laundering.[citation needed]

Section 4 of the Act prescribes punishment for money-laundering with rigorous imprisonment for a term which shall not be less than three years but which may extend to seven years and shall also be liable to fine which may extend to five lakh rupees and for the offences mentioned [elsewhere] the punishment shall be up to ten years.[citation needed]

Section 12 (1) prescribes the obligations on banks, financial institutions and intermediaries (a) to maintain records detailing the nature and value of transactions which may be prescribed, whether such transactions comprise of a single transaction or a series of transactions integrally connected to each other, and where such series of transactions take place within a month; (b) to furnish information of transactions referred to in clause (a) to the Director within such time as may be prescribed and t records of the identity of all its clients. Section 12 (2) prescribes that the records referred to in sub-section (1) as mentioned above, must be maintained for ten years after the transactions finished.

The provisions of the Act are frequently reviewed and various amendments have been passed from time to time.

The recent activity in money laundering in India is through political parties corporate companies and share market.

United Kingdom

Money laundering and terrorist funding legislation in the UK is governed by four Acts of primary legislation:-

The Proceeds of Crime Act 2002 contains the primary UK anti-money laundering legislation,[6] including provisions requiring businesses within the 'regulated sector' (banking, investment, money transmission, certain professions, etc.) to report to the authorities suspicions of money laundering by customers or others.[7]

Money laundering is widely defined in the UK.[8] In effect any handling or involvement with any proceeds of any crime (or monies or assets representing the proceeds of crime) can be a money laundering offence. An offender's possession of the proceeds of his own crime falls within the UK definition of money laundering.[9] The definition also covers activities which would fall within the traditional definition of money laundering as a process by which proceeds of crime are concealed or disguised so that they may be made to appear to be of legitimate origin.[10]

Unlike certain other jurisdictions (notably the USA and much of Europe), UK money laundering offences are not limited to the proceeds of serious crimes, nor are there any monetary limits, nor is there any necessity for there to be a money laundering design or purpose to an action for it to amount to a money laundering offence. A money laundering offence under UK legislation need not involve money, since the money laundering legislation covers assets of any descriptttion. In consequence any person who commits an acquisitive crime (i.e. one from which he obtains some benefit in the form of money or an asset of any descriptttion) in the UK will inevitably also commit a money laundering offence under UK legislation.

This applies also to a person who, by criminal conduct, evades a liability (such as a taxation liability) - referred to by lawyers as "obtaining a pecuniary advantage" - as he is deemed thereby to obtain a sum of money equal in value to the liability evaded.[8]

The principal money laundering offences carry a maximum penalty of 14 years imprisonment.[11]

Secondary regulation is provided by the Money Laundering Regulations 2003[12] and 2007[13]

One consequence of the Act is that solicitorsaccountants, and insolvency practitioners who suspect (as a consequence of information received in the course of their work) that their clients (or others) have engaged in tax evasion or other criminal conduct from which a benefit has been obtained, are now required to report their suspicions to the authorities (since these entail suspicions of money laundering). In most circumstances it would be an offence, 'tipping-off', for the reporter to inform the subject of his report that a report has been made.[14] These provisions do not however require disclosure to the authorities of information received by certain professionals in privileged circumstances or where the information is subject to legal professional privilege.

Professional guidance (which is submitted to and approved by the UK Treasury) is provided by industry groups including the Joint Money Laundering Steering Group[15] and the Law Society.[16]

However there is no obligation on banking institutions to routinely report monetary deposits or transfers above a specified value. Instead reports have to be made of all suspicious deposits or transfers, irrespective of their value.

The reporting obligations include reporting suspicions relating to gains from conduct carried out in other countries which would be criminal if it took place in the UK.[17] Exceptions were later added to exempt certain activities which were legal in the location where they took place, such as bullfighting in Spain.[18]

There are more than 200,000 reports of suspected money laundering submitted annually to the authorities in the UK (there were 240,582 reports in the year ended 30 September 2010 - an increase from the 228,834 reports submitted in the previous year[19]). Most of these reports are submitted by banks and similar financial institutions (there were 186,897 reports from the banking sector in the year ended 30 September 2010[20]).

Although 5,108 different organisations submitted suspicious activity reports to the authorities in the year ended 30 September 2010 just four organisations submitted approximately half of all reports, and the top 20 reporting organisations accounted for three-quarters of all reports.[21]

The offence of failing to report a suspicion of money laundering by another person carries a maximum penalty of 5 years imprisonment.[11]

[edit]Bureaux de change

All UK Bureaux de change are registered with Her Majesty's Revenue and Customs which issues a trading licence for each location. Bureaux de change and money transmitters, such as Western Union outlets, in the UK fall within the 'regulated sector' and are required to comply with the Money Laundering Regulations 2007.[13] Checks can be carried out by HMRC on all Money Service Businesses.

United States

In U.S. law, "reasonably accepting cash" means the business must regularly perform services that on average are less than $500 each. It is assumed that above that amount most people pay with a check, a credit card, or another (traceable) payment method. The company should actually function on a legitimate level. In the hairstyler example, it is perfectly reasonable for a lot of the business to involve mostly labour (dyes and machine oil and so forth being relatively small concerns), and for most transactions to be settled in cash. But it is unreasonable for all of the business to work without parts and just on cash. So the legitimate business will generate a legitimate (if low) level of parts use, and enough traceable transactions to mask the illegitimate ones.[citation needed]

Anti-money laundering (AML/CFT)[clarification needed] laws typically have other offences such as "tipping off (warning)", "willful blindness", "not reporting suspicious activity", "conscious facilitation of a money launderer", "assisting a terrorist financier with moving terrorist financing".[citation needed]

The Bank Secrecy Act of 1970 requires banks to report cash transactions of $10,000.01 or more. The Money Laundering Control Act of 1986 further defined money laundering as a federal crime. The U.S.A PATRIOT Act of 2001 expanded the scope of prior laws to more types of financial institutions, and added a focus on terrorist financing, specifying that financial institutions take specific actions to "know your customer" (KYC).[citation needed]

In the United States, Federal law provides: "Whoever ... knowing[ly] ... conducts or attempts to conduct ... a financial transaction which in fact involves the proceeds of specified unlawful activity ... with the intent to promote the carrying on of specified unlawful activity ... shall be sentenced to a fine of not more than $500,000 or twice the value of the property involved in the transaction, whichever is greater, or imprisonment for not more than twenty years, or both.[citation needed]

While money laundering typically involves the flow of "dirty money" (criminal proceeds) into a clean bank account or negotiable instrument, terrorist financing frequently involves the reverse flow: apparently clean funds converted to "dirty" purposes. A hawala may launder drug proceeds and help fund a terrorist, netting the incoming and outgoing funds with only occasional small net settlement transactions.[citation needed]

NASA case

From 1992 to 1996 a nine-agency Federal Task Force investigation led by NASA's Office of Inspector General investigated Omniplan Corporation of Houston and California. It became the largest count indictment and conviction in NASA history, with the owner of Omniplan, Ralph Montijo, being convicted of 179 felonies in his multi-million dollar embezzlement scheme. Five of his companies were also convicted of felonies, they were, Omniplan, Papa Primo's of Texas, Papa Primo's of Arizona, Omnipoint Production Services and Mercury Trust. These companies, together with two unincorporated companies, Space Industries Leasing and Space Industries Properties were liquidated. Each embezzlement count was associated with a corresponding money laundering count which resulted in dozens of convictions for money laundering. In a New York Times story, NASA Office of Inspector General Senior Special Agent Joseph Gutheinz, who led the Omniplan investigation, said "We didn't get any pizzas, but we got the bills", referring to the fact that some of the alleged mischarging to the NASA contract also involved costs associated with two of Ralph Montijo's pizza companies, Papa Primo's of Texas, and Papa Primo's of Arizona.[citation needed]

Laundered or not?

Money obtained by an illegal action is not, of itself, laundered money in most jurisdictions (an exception being the United Kingdom where mere possession of the proceeds of any crime is itself capable of being a money laundering offence[9]). The laundering offence comes from the attempt to conceal its source, not because the transaction was itself illegal (which is a separate offence).[citation needed]

The Supreme Court of the United States on June 2, 2008, rendered two judgments in favour of defendants, narrowing the application of the federal money-laundering statute.[citation needed]

In a unanimous opinion written by Justice Clarence Thomas, the Court reversed Acuna, Mexico's Humberto Cuellar's conviction and ruled that "hiding $81,000 in cash under the floorboard of a car and driving toward Mexico is not enough to prove the driver was guilty of money laundering; instead, prosecutors must also prove the driver was traveling to Mexico for the purpose of hiding the true source of the funds." That is, the prosecution had not made its prima facie case. The Court further ruled "that federal prosecutors have gone too far in their use of money laundering charges to combat drug traffickers and organized crime; that money laundering charges under the Money Laundering Control Act of 198, Sec. 18 U.S.C. § 1956(a)(2)(B)(i) apply only to profits of an illegal gambling ring and cannot be used when the only evidence of a possible crime is when a courier headed to the Texas-Mexico border with $81,000 in cash proceeds of a cannabis transaction; it cannot be proven merely by showing that the funds were concealed in a secret compartment of a Volkswagen Beetle; instead, prosecutors must show that the purpose of transporting funds in a money laundering case was to conceal their ownership, source or control; the secrecy must be part of a larger design to disguise the source or nature of the money."[citation needed]

Later, in a divided decision, the Court reversed the convictions of Efrain Santos of Indiana and Benedicto Diaz for money laundering based on cash from an illegal lottery. In the plurality opinion, Justice Antonin Scalia wrote that the law referred to the "proceeds of some form of unlawful activity; paying off gambling winners and compensating employees who collect the bets don't qualify as money laundering; the word “proceeds” in the federal money-laundering statute, 18 U.S.C. § 1956, and §1956(a)(1)(A)(i) and §1956(h), applies only to transactions involving criminal profits, not criminal receipts; those are expenses, and prosecutors must show that profits were used to promote the illegal activity." Congress clarified the meaning of the statute in the Fraud Enforcement and Recovery Act of 2009, defining proceeds explicitly to include both profits and gross receipts.[citation needed]

Congress enacted the 1986 statute after the President's Commission on Organized Crime stressed the problem of "washing" criminal proceeds through overseas bank accounts and legitimate businesses. It imposes a 20-year maximum prison term.[citation needed]

Fighting money laundering

The first defense against money laundering is the requirement on financial intermediaries to know their customers—often termed KYC know your customer requirements. Knowing one's customers, financial intermediaries will often be able to identify unusual or suspicious behavior, including false identities, unusual transactions, changing behaviour, or other indicators of laundering. But for institutions with millions of customers and thousands of customer-contact employees, traditional ways of knowing their customers must be supplemented by technology. Many Companies provide software and databases to help perform these processes. Bank and corporate security directors can also play an important role in fighting money laundering.[clarification needed]

Using information technology

Information technology can never be a replacement for a well-trained investigator, but as money laundering techniques become more sophisticated, so too does the technology used to fight it. Before anti-money laundering programs became commonplace, in the U.S. the Bank Secrecy Act required financial institutions to file Currency Transaction Reports for cash transactions of more than $10,000. These CTRs prove invaluable for investigators, but money launderers began to structure their transactions to avoid the reporting requirements. As a result, the U.S. passed laws against structuring transactions to avoid the reporting requirements, and most structuring would trigger a Suspicious Activity Report by the financial institution.

The various software packages are capable of name analysis, rule-based systems, statistical and profiling engines, neural networks, link analysis, peer group analysis, and time sequence matching. Also, there are specific KYC solutions that offer case-based account documentation acceptance and rectification, as well as automatic risk scoring of the customer taking account of country, business, entity, product, transaction risks that can be reviewed intelligently. Other elements of AML technology include portals to share knowledge and e-learning for training and awareness.

This software is not used exclusively to track money laundering, but more often the common theft of credit cards or bank details. Unusual activity on an account may trigger a call from the card issuer to make sure it has not been misused.

Financial Crimes Enforcement Network FinCEN is an organization created by the United States Department of the Treasury. FinCEN receives Suspicious Activity Reports from financial institutions, analyses them, and shares their data with U.S. law enforcement agencies and Financial Intelligence Units FIUs of other countries. One of its strategic goals is to improve information-sharing through eGovernment. It offers training and advice to organizations of foreign governments to help improve the efficacy of their own anti-money laundering programs.

Anti-money laundering (AML) software

Anti-money laundering (AML) software is a type of computer program used by financial institutions to analyze customer data and detect suspicious transactions. Anti-laundering systems filter customer data, classify it according to level of suspicion and inspect it for anomalies. Such anomalies would include any sudden and substantial increase in funds or a large withdrawal. In both the United States and Canada, all transactions of $10,000 or greater must be reported. Smaller transactions that meet certain criteria may be also be flagged as suspicious. For example, a person who wants to avoid detection will sometimes deposit a large sum as multiple smaller sums within a brief period of time. That practice, known as "structuring," will also lead to flagged transactions. The software flags names that have been blacklisted and transactions involving countries that are thought to be hostile to the host nation. Once the software has mined data and flagged suspect transactions, it generates a report.

Important aspects of AML software:-

  • Suspicious Activity Detection
  • Know Your Customer (KYC) Management
  • Caution / Watch List Management & Checking Of Customers / Prospects
  • Customer Risk Categorization
  • Link Tracing
  • Large Cash Transaction Reporting
  • Regulatory Reporting
  • KPI / KRI Dashboards for Chief Compliance Officers
  • Online AML and List Check for Remittance Transactions

[edit]9/11 and the international response to the underground economy

After September 11, 2001, money laundering became a major concern of the United States' war on terror, although critics[who?] argue that it has become less and less important for the White House.

Clearstream International, based in Luxembourg, was a central securities depository and clearing house, a "bank of banks" which practicedfinancial clearing and centralized debit and credit operations for hundreds of banks. It was accused of being a major operator of theunderground economy via a system of unpublished accounts. Bahrain International Bank, owned by Osama bin Laden, would have profited from these transfer facilities.[22] The scandal prompted André Lussi, Clearstream's CEO, to resign on 31 December 2001; several judicial investigations were opened and the European Commission was interpelled by Members of the European Parliament (MEPs) Harlem Désir,Glyn Ford, and Francis Wurtz, who asked the Commission to investigate the accusations and to ensure that the 10 June 1990 directive (91/308 CE) on control of financial establishment was applied in all member states, including Luxembourg, effectively.[23]

The international response to the underground economy has been coordinated by the [24] "FATF" (also known by its French acronym of "GAFI"), whose original 40 principles form the basis of most international responses to money laundering. A further 8 principles, designed to counteract funding to terrorist organisations, were added on 30 June 2003, in response to the 9/11, with another added 22 October 2004, to form what are now known as the [25] (AML/CFT). Compliance with these principles, or at least a move towards them, is now seen as a requirement of an internationally active bank or other financial service entity.[by whom?]

FATF: Financial Action Task Force against Money Laundering

Formed in 1989 by the G7 countries, the Financial Action Task Force on Money Laundering (FATF) is an intergovernmental body whose purpose is to develop and promote an international response to combat money laundering. In October 2001, FATF expanded its mission to include combating the financing of terrorism. FATF is a policy-making body, which brings together legal, financial and law enforcement experts to achieve national legislation and regulatory AML and CFT reforms. Currently, its membership consists of 31 countries and territories and two regional organizations. In addition, FATF works in collaboration with a number of international bodies and organizations. These entities have observer status with FATF, which does not entitle them to vote, but permits full participation in plenary sessions and working groups.


Many regulatory and governmental authorities quote estimates each year for the amount of money laundered, either worldwide or within their national economy. A frequently cited figure is 2-5% of the worldwide global economy, stated by the IMF. But some academics note that such figures are usually simply "best guesses". In 1997 the FATF, an arm of the OECD set up to combat money laundering, frankly admitted "the vast majority of FATF members lack sufficient data to support any credible estimate."[26] Although admissions of that nature are no longer maintained, there is still a dearth of data on the actual amounts of money laundered worldwide. Some academic commentators have expressed real concerns about the reliability and basis of figures used by governmental and multinational organizations. It is always hard to find out real figures about illegal acts.

We are faced with the problem that there has been little work to develop an objective academic analysis of the true extent of laundering, which means that we do not have a framework within which the appropriateness of legislative measures can be evaluated. Without this, it is difficult to challenge the 'alarmist' position of the authorities whereby such estimates have been put forward, quoted and repeated, becoming, through such repetition, seemingly established truths. It can be argued ... that global estimates are little more than informed guesses: "large numbers are frequently thrown around without serious support" (Reuter and Truman, 2005, p.56), reproduced to the point at which they gain, through mere repetition, some form of reliable accuracy.[27]