Money Laundering

History

The traditional criminal law considered the concealment and disguising of dirty

money as merely part and parcel of the criminal act, and as a logical consequence of

the crime. Times have changed, however, as modern criminal legislation worldwide now

considers laundering the proceeds of a crime also a crime in itself. Thus, two separate

crimes are committed: the predicate offense and the laundering of the money itself.1

Money laundering first originated in 1920s from Mafia ownership of Laundromats

(a service mark used for a commercial establishment equipped with washing machines

and dryers, usually coin-operated and self-service2) in the United States of America.

Since Laundromats were cash businesses, money launderers used Mafia-owned

Laundromats to hide large sums of cash received from various criminal activities,

including extortion, kidnapping, prostitution and other crimes, by investing them in

legitimate Laundromat businesses. Equally important, Laundromats enabled illicit funds

to be converted into legitimate funds by mixing unlawful funds with the legitimate money

they were earning from their legal businesses.3

1
Geronimo, G. (n.d.) Amlas Firm Resolve. Retrieved on 02 January 2014 from
http://www.businessmirror.com.ph/index.php /en/news/opinion/9904-amla-s-firm-resolve
2
laundromat. (n.d.). THe Free Dictionary. Retrieved on 24 December 2013 from
http://www.thefreedictionary.com/Laundromat
3
United Nations Institute for Training and Research. (2011). Fundamentals of Anti-Money
Laundering: International Standards and Compliance Issues. Module 1: An Introduction to Money
Laundering, p.4
 It was not, however, until the 1980s that money laundering as a criminal offense

was first recognized, when the Money Laundering Control Act of 1986 was passed in

the United States (US). It was during the same period that the United Nations (UN)

adopted the United Nations Convention against Illicit Trafficking in Narcotic Drugs and

Psychotropic Substances in 1988, also known as the Vienna Convention, after realizing

the growing scope of money laundering in international financial transactions, with half

of these transactions related to money laundering and drug trafficking. While the Vienna

Convention made money laundering a criminal offense, it limits the scope of offense to

drug trafficking. In 2000, the Palermo Convention or the UN Convention against

Transnational Organised Crime was adopted by the United Nations which extended the

legal definition of money laundering to include all serious crimes.4

Definition

Money Laundering is the process of disguising criminal proceeds or the true

ownership thereof in order to make it appear that the money has come from a legitimate

source. This is substantially the definition of money laundering in various institutions

and countries. The difference lies in the crimes that may give rise to such proceeds

which then need to be laundered. This is largely because of the fact that the Financial

Action Task Force (FATF) has left to the discretion of each country the determination of

which serious crimes should be covered within the definition of predicate offenses in

accordance with their domestic laws. Most countries subscribe to the definition of

money laundering adopted by the Vienna Convention 1988 and the Palermo
4
Ibid., p.5
Convention 2000, which provide that a person commits money laundering if he is

involved in: The conversion or transfer of property, knowing that such property is the

proceeds of crime, for the purpose of concealing or disguising the illicit origin of the

property, or of helping any person who is involved in the commission of the predicate

offence to evade the legal consequences of his or her action; the concealment or

disguise of the true nature, source, location, disposition, movement, ownership of, or

rights with respect to property knowing that such property is the proceeds of crime; and

the acquisition, use or possession of property, knowing, at the time of receipt that such

property is the proceeds of crime.5

R.A. 10365, which was the latest amendment to R.A. 9160, provides how money

laundering is committed, viz.:

Section 4. Money Laundering Offense. Money laundering is

committed by any person who, knowing that any monetary instrument or
property represents, involves, or relates to the proceeds of any unlawful
activity:
(a) transacts said monetary instrument or property;
(b) converts, transfers, disposes of, moves, acquires, possesses or uses
said monetary instrument or property;
(c) conceals or disguises the true nature, source, location, disposition,
movement or ownership of or rights with respect to said monetary
instrument or property;
(d) attempts or conspires to commit money laundering offenses referred to
in paragraphs (a), (b) or (c);
(e) aids, abets, assists in or counsels the commission of the money
laundering offenses referred to in paragraphs (a), (b) or (c) above; and
(f) performs or fails to perform any act as a result of which he facilitates
the offense of money laundering referred to in paragraphs (a), (b) or (c)
above.

Money laundering is also committed by any covered person who,

knowing that a covered or suspicious transaction is required under this Act

5
Ibid., p.6-8
 to be reported to the Anti-Money Laundering Council (AMLC), fails to do
so.

Stages and Techniques of Money Laundering

There are three stages of the money laundering process and these are

placement, layering and integration. The placement stage is a process by which the

proceeds of crime or dirty money is introduced into the financial system or economy.

This happens, for example, through cash deposits, smurfing, which is known as the

act of breaking down a transaction into smaller transactions to avoid regulatory

requirements or an investigation by the authorities,6 hawala system, which is an

alternative or parallel remittance system that exists and operates outside of, or parallel

to traditional banking or financial channels,7 or smuggling assets. Once the dirty

money enters the financial system, layering takes place, i.e., money is passed through

a lot of complex transactions to hide, or at least distance it from, its origin. The

techniques may involve opening off shore or shell companies under false

identifications, forged invoices, inflated invoice payments, or false loan repayments.

Through the last stage of integration, the dirty money is put back into the financial

system as clean money after its origin has been obscured. The techniques may

involve purchase of assets such as real estate, bank notes, or luxury goods. 8

6
smurfing. (n.d.). The Free Dictionary. Retrieved from http://financial-
dictionary.thefreedictionary.com/Smurfing
7
United States Department of the Treasury. (n.d.). The Hawala Alternative Remittance System
and its Role in Money Laundering, p.5. Retrieved on 02 January 2014 from
http://www.treasury.gov/resource-center/terrorist-illicit-finance/Documents/FinCEN-Hawala-rpt.pdf
8
United Nations Institute for Training and Research. (2011) Module 1, p.9
 The methods employed to launder money are always evolving and are different

from country to country depending upon the countrys financial system and economy.

Money launderers are usually very clever and will surely employ different methods or

schemes, both simple and complex, to launder money.9

Economic Impacts of Money Laundering

The impacts of money laundering on the economy include weak financial

institutions, increased crime and corruption, slow economic development, damaged

international reputation and reduced foreign investment, and serious negative effects on

the development of the private sector.10

With regard to the weakening of financial institutions, money laundering can

damage the integrity of a countrys financial institutions. Money laundering can pose

significant legal, operational, reputational and concentration risks to financial institutions

such as banks and insurance companies, which may have proceeds of crime deposited

within their institution, and may result in huge financial loses. If, for example, a large

amount of proceeds of crime are operating through a particular bank account and then

they suddenly disappear by making a wire transfer to a third party in an offshore

country, without notice, it can result into liquidity problems for a bank. Similarly, money

laundering can result in significant loses to financial institutions by increasing their

investigation costs, claims against financial institutions, asset seizures and freezes, and

9
Ibid., p.10
10
Ibid., p.18-21
termination of other facilities available to these institutions. Once any financial institution

is exposed of being involved in a money laundering process whether as a victim,

perpetrator or as an instrumentality, it will result in undermining the integrity of that

institution and the loss of public confidence in that institutions operations. Moreover,

experts have linked the financial crisis of major nations to money laundering like the

Russian financial crisis of 1998, Mexican crisis of 1994-1995, and Asian crisis of 1997.11

Money launderers will encourage corruption and bribery in a country by involving

officials and authorities at different levels to facilitate the process of money laundering

and help them make their efforts of laundering illicit proceeds be successful. Such

officials that money launderers target to achieve their motives may include, for example,

lawyers and accountants, police officials, legislators, enforcement agencies, courts,

prosecutors, and employees and managers of financial institutions.

Money laundering in a country will result in slow economic growth by reducing

productivity in the economys real sector by diverting resources, at the same time

increasing crime and corruption. Michael Camdessus, the former managing director of

the World Bank, has estimated that the magnitude of money laundering is between 2 to

5 percent of the worlds gross domestic product, or at least $600,000 million.

In view of the fact that money launderers are not generally interested in making

profits from their proceeds of crime, but to hide their origin and make it less likely to be

detected, they will invest their laundered money in such schemes where there are no
11
Ibid.
high rates of return on their funds. By adopting such practices, they will adversely affect

the economic development of a country by redirecting their funds from sound

investments to low-quality investments and also by affecting the currency and interest

rates. It will also increase the threat to the economic stability of the country due to

misallocation of resources from artificial distortions in asset and commodity prices. It will

distort the economys external sector such as international trade and capital flows to the

detriment of long term economic growth. Such practices will result in inexplicable

changes to money demand and increased volatility of international capital flows, interest

and exchange rates.

Furthermore, money laundering will also result in huge losses to government

revenues by diminishing government tax revenues. Considering that laundered

proceeds of crime generally go undetected, no tax is applied or paid on such money,

which will result in less economic development due to the loss it brings to government

income. It will also increase tax burden on genuine tax payers by increasing overall tax

rates.

Although it is true that no country nowadays, however developed or advanced it

may be, is immune to money laundering, it cannot be overlooked that money laundering

can have devastating effects on the international reputation of a country, which may

adversely affect the confidence of world economy and investors in that countrys

financial system. If money laundering is prevalent in a country, it will result in the

reduction of genuine foreign investment in a countrys economy that will otherwise help
boast its economic development. However, on the other side, such countries will

become attractive to organized criminal groups to achieve their various short-term

goals. Furthermore, due to the loss of investors confidence in a countrys economy

brought about by the revelation of large-scale involvement of its financial institutions in

money laundering activities, the legitimate global opportunities and sustainable growth

of a country will also diminish.

Countries with damaged international image due to high risk of money laundering

will become home to criminals from all over the world and it can result in various other

social, security and economic problems in a country. Once a countrys international

reputation is distorted, it is very hard to revive it, and it may take several years for

governments to build it again on the international level by putting effective systems and

procedures into place.

Money laundering can have serious effects on the development of the private

sector in a particular country. Money launderers often use front companies to hide the

origin of their illicit proceeds of crime by mixing their illegitimate funds with legitimate

funds.

It will also adversely affect the spirit of fair competition within the private sector

by making it difficult for local or legitimate businesses to compete with front companies

that are principally structured to launder and conceal the proceeds of crime. Because

the primary objective of money launderers is to launder the money and not to compete
in the marketplace to earn high profits, they can offer their services or goods at below

market rates with very minimal profits or sometimes even at a loss.

Furthermore, money laundering can seriously threaten the privatization initiatives

of many countries. Although privatization is often economically beneficial, it can also

serve as a tool for money laundering. Since criminal organizations have the financial

power to outbid legitimate purchasers, they can easily purchase marinas, resorts,

casinos, and banks to hide their illicit proceeds and further their criminal activities.12

Social Impacts of Money Laundering

Money laundering can not only have devastating effects on the economic

development of a country but it can also negatively affect the social environment of a

country. It can result in significant social costs and risks. If money laundering is

prevalent in a country, there is a high risk of drug trafficking, arms dealing, smuggling,

bribery, and other related crimes. It is obvious that when proceeds of crime are

circulating in any economy, the criminals will spend these proceeds, which were not

hard earned by them, to commit various other crimes. It will increase bribery and

corruption in an economy and this can indirectly give rise to the transfer of economic

power from the government and citizens to the criminals. This transfer of power by

corrupting the officials and nationals of a country by using illicit funds would result in the

criminals virtual take-over of the legitimate government.

12
Ibid., p.18-21
 In many countries that have high risk of money laundering and corruption,

criminals often use their illicit funds to contest elections by bribing the vote bank and

thereby winning the elections and becoming the center of power. If, however, they do

not opt to contest elections, they can support a particular candidate for elections by

contributing huge amounts of money either to its partys funds or to the candidate

directly, and then use those particular candidates or parties for achieving their illegal

goals.

Furthermore, increased crime and corruption in a country due to money

laundering will also increase government expenditure to put into place appropriate

systems and to combat serious consequences of increasing crime. In addition to that, it

will result in more government costs on health care systems, for example, for the

treatment of drug addicts, which may have increased due to proliferation of drug

trafficking and flow of illicit funds in a country.13

13
Ibid., p.21-22