The practise of hiding criminal proceeds and incorporating them into the legitimate financial system is known as money laundering. It is difficult for criminals to use illicit money before proceeds of crime are laundered because they cannot explain where it came from and it is simpler to trace it back to the crime. It is difficult to identify money from genuine financial resources after it has been laundered, and the cash might be used by criminals without being detected.
How Does Money Laundering Work?
There are countless ways to launder money. Generally, money laundering can be broken down into three stages:
- Placement – the initial entry of illicit money into the financial system
- Layering – the process of separating the funds from their source, often using anonymous shell companies
- Integration – the money is returned to the criminal from legitimate-looking source.
Where Do Banks Come In?
Money laundering nearly invariably involves passing it through one or more banks, the principal defence tactic is to force banks to do particular checks and monitor transactions to ensure that their accounts are not being used for money laundering. Following a high-risk transaction, they may be required to file a suspicious activity report (SAR) with police enforcement. They may refuse to do business with a dubious client in extreme instances.
Money laundering scandals have engulfed a number of high-profile Western banks in recent years. HSBC, for example, acknowledged to breaking the Bank Secrecy Act by failing to supervise over $200 trillion in wire transfers between its Mexican and US businesses, among other things. The Sinaloa and Norte de Valle drug cartels were revealed to have transported $881 million in drug money through HSBC-accounts Mexico’s to HSBC-USA via unmonitored wire transactions.
What about Trade-Based Money Laundering?
To transport huge amounts of illicit money between nations, sophisticated criminal groups frequently use trade-based money laundering, which can also include trade misinvoicing. Launderers can conceal the ultimate source of illicit funds by mixing the proceeds of crime with the proceeds of legitimate enterprise. In the Lebanese-Canadian Bank case, for example, a worldwide narcotics money laundering enterprise linked to Hezbollah mixed proceeds from used car sales in Europe with proceeds from cocaine sales in Africa.
What Does GFI Recommend We Do about Money Laundering?
Many of GFI’s policy proposals, such as removing anonymous shell firms and addressing trade misinvoicing, will make it more difficult for criminals to launder money, which means they will make it more difficult for them to spend their money without being caught. In addition, GFI offers a number of policy proposals for combating money laundering:
- Make all felonies predicate offenses for money laundering. In many countries, certain key crimes such as tax evasion cannot be the basis for a money laundering charge.
- Countries should comply with all FATF standards. According to a 2013 OECD report, many FATF countries are poorly compliant on key standards designed to prevent money laundering.
- Better enforce existing criminal laws. Bankers who knowingly commit crimes and allow bank accounts to be used to shelter criminal money should be held personally accountable. To date, enforcement has generally focused on moderate-sized fines and promises by banks to improve compliance. No bank should be “too big to jail.”
