Worldwide: Prevention Of Money Laundering: A Global Panorama

Various international organizations and multilateral agencies have given their respective description to the term 'Money Laundering'. The essence is same but on a comparative reading there are some variations. The global police watchdog "INTERPOL" (International Police) defines it as "any act or attempted act to conceal or disguise the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources"1; the United Nations Office on Drugs and Crime ('UNODC')2 identifies 'Money Laundering' as "the method by which criminals disguise the illegal origins of their wealth and protect their asset bases, so as to avoid the suspicion of law enforcement agencies and prevent leaving a trail of incriminating evidence". Albeit, number of initiatives were taken by some major international organisations to prevent money laundering, the creation of Financial Action Task Force on Money Laundering ('FATF') in 1989, brought about the much needed dedicated organisation guiding the member countries3 in curbing this menace of money laundering. FATF an inter-governmental body established to set standards and promote effective implementation for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system defines 'Money Laundering' as the "processing of criminal proceeds to disguise its illegal origin, thereby enabling the criminal to enjoy the profits without jeopardizing the source".

The global community, for the first time identified money-laundering as an international crime in the year 1988 when the United Nation adopted the United Nations Vienna Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances ('Vienna Convention'). The Convention was signed by 171 countries of the world and further implemented by 168 of them, however the aspect of money laundering was dealt in the light of drug trafficking as the Preamble of the Convention itself suggests that "illicit traffic generates large financial profits and wealth enabling transnational criminal organizations to penetrate, contaminate and corrupt the structures of government, legitimate commercial and financial business, and society at all its levels" and affirms that the international community is henceforth "determined to deprive persons engaged in illicit traffic of the proceeds of their criminal activities and thereby eliminate their main incentive for so doing".

In the year 1989, the Financial Action Task Force was convened in Paris by the Heads of States of seven major industrialized countries4 and the President of the European Community under French Presidency with the aim to fight against money laundering, which by then had become an important concern for the developed and developing countries of the world. In April 1990, the Task force issued a report with a comprehensive programme of Forty Recommendations for improving national legal systems, enhancing the role of the financial sector and intensifying cooperation in the fight against money laundering. The said report was endorsed by the Finance ministers or other competent ministers of all FATF members in May 1990. Since then, the FATF has been the apex "policy-making body" working to generate the necessary political will to bring about national legislative and regulatory reforms against money laundering. The Recommendations have also been revised further in 1996, 2001, 2003 and in 2012 to ensure an updated and relevant policy guide for the member states.5

The link between laundered money and terrorism funding was realized by the world soon after 9/11 incident on the World Trade Center in the United States. Underlining the same, the United Nations Security Council comprising the most developed economies of the world adopted Resolution No. 1373 for the prevention and the suppression of the financing of terrorist acts, the criminalization of terrorism-related activities and the provision of assistance to carry out those acts, the denial of funding and safe-haven to terrorists and the exchange of information to prevent the commission of terrorist acts. The General Assembly then adopted the International Convention for the Suppression of the Financing of Terrorism which came into force in April, 2002 to take measures to protect their financial systems from being misused by persons planning or engaged in terrorist activities.

The following years witnessed the UN Conventions, against Transnational Organized Crime and against Corruption in September 2003 and December 2005 respectively. The Conventions widened the scope of money laundering offence by covering the proceeds of all serious crimes in addition to the proceeds of illicit drug trafficking. The countries were sought to create a comprehensive domestic supervisory and regulatory regime for banks and non-bank financial institutions, including natural and legal persons, as well as any entities particularly susceptible to being involved in a money laundering scheme.

The Conventions also for the first time ever called for the establishment of financial intelligence units.

A number of initiatives were taken at the international level to tackle money laundering which inter alia includes the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, 1988; European Union Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime; Organization for Economic Cooperation and Development Convention on Combating Bribery of Foreign Public Officials in International Business Transactions; United Nations Convention against Corruption.

European Union Convention

The European Union ('EU') defines Money Laundering as the process by which criminal proceeds are 'cleaned' so that their illegal origins are hidden. It is underlined that the offence of money laundering has direct connection with organized crimes generating huge profits in cash, such as trafficking in drugs, weapons and human beings as well as fraud.

The European Parliament and the Council of the European Union, responding to the concerns in the field of money laundering adopted Council Directive6 for the prevention of the use of the financial system for the purpose of money laundering. It required Member States to prohibit money laundering and to oblige the financial sector, comprising credit institutions and a wide range of other financial institutions, to identify their customers, keep appropriate records, establish internal procedures to train staff and guard against money laundering and to report any indications of money laundering to the competent authorities.

The Directive has been revised thrice and the Third Directive7 was adopted on October 26, 2005 which identifies following instances as money laundering:

  1. Conversion or transfer of property, knowing that such property is derived from criminal activity or from an act of participation in such activity, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in the commission of such activity to evade the legal consequences of his action;
  2. Concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that such property is derived from criminal activity or from an act of participation in such activity;
  3. Acquisition, possession or use of property, knowing, at the time of receipt, that such property was derived from criminal activity or from an act of participation in such activity;
  4. Participation in, association to commit, attempts to commit and aiding, abetting, facilitating and counselling the commission of any of the actions mentioned in the foregoing points;
  5. Activities which generated the property to be laundered which were carried out in the territory of another Member State or in that of a third country.

Europol8, the European Union's law enforcement agency also has a broad mandate in the area of combating money laundering, and provides Member States with intelligence and forensic support to prevent and combat international money laundering activities. The main objective in tracing illegal assets and money laundering is to:

  • find the criminals involved;
  • disrupt their associates;
  • confiscate the proceeds of their crimes.

The Financial Intelligence Unit ('FIU') of Europol, FIU.net further supports the FIUs in the European Union in their fight against money laundering and the financing of terrorism through its decentralized and sophisticated computer network.

OECD Convention

The OECD's First Forum on Tax and Crime, referred to as Oslo Meeting, was convened in March 2011 to support the countries in combating the threats through greater transparency, more effective intelligence gathering, and improvements in co-operation between government agencies and countries to prevent, detect and investigate offences, prosecute criminals and recover the proceeds of their illicit activities.

The Second Forum on Tax and Crime was held in Rome in June 2012, hosted by the Italian Guardia di Fidanza, and the Third in Istanbul, Turkey. The outcome statement of the third meeting stated that the G20 Leaders (at the Saint Petersburg Summit9) had emphasized how cross-border tax evasion, money laundering, terrorism financing and corruption undermine public finance, impede economic growth and poverty reduction, threaten financial stability and undermine the rule of law. On this premises and the need to combat financial crimes, the political leaders at the Saint Petersburg Summit supported the ongoing work of the OECD, the Financial Action Task Force (FATF), the World Bank and other organizations to combat these threats.

The Fourth OECD Forum on Tax and Crime was held in Netherlands in September, 2015. Senior officials and experts from over seventy countries gathered in the meeting and international organizations to address the priority issues and support required for the ambitions future programmes. The panels over the two-day discussions included, inter alia, the fight against terrorist financing, emerging tax evasion risks in an era of greater transparency, enabling developing countries to tackle illicit flows, alternative payment platforms used to facilitate tax crime and other financial crimes, financial professional enablers and their role in organized crime, and improving co-operation between tax and anti-money laundering authorities.

The OECD Report Improving Co-operation between Tax and Anti-Money Laundering Authorities-Access by Tax Administrations to Information held by Financial Intelligence Units for Criminal and Civil Purposes was released in the Fourth Meeting.10

The key recommendation of the Report focused on the need that, subject to appropriate safeguards, tax administrations be granted the fullest possible access to the Suspicious Transaction Reports (STRs) received from responsible parties by the FIUs in their jurisdictions. For this goal to be achieved, according to the Report, the jurisdictions should not only provide a suitable legislative framework that allow that access, but also ensure the operational structure and the procedures to facilitate the maximum effectiveness in the use of STRs.

The aforesaid Report called for a "whole of government" approach to combat money laundering and other financial crimes, recognizing that knowledge skills required to effectively fight against these offences are often spread across different bodies, such as tax and customs administrations, FIUs, specialized criminal law enforcement authorities, financial regulators and the public prosecutor's office. As the Report recognized, this approach does not imply altering the fact that FIUs primary function is to tackle money laundering and that of tax administrations to ensure tax compliance; it simply acknowledges that by working closely together all these bodies would be better positioned to achieve their objectives.

Based on a survey conducted by OECD Task Force on Tax Crimes and Other Crimes ('TFTC') in 2013, later updated and enlarged in 2014, the existence of a wide range of practices among countries as regards allowing tax administrations access to STRs was confirmed.

The different models for making STRs available to tax administrations can be grouped in three main categories:

  • Unrestricted and independent tax administration access to STRs,
  • Joint Financial Intelligence Unit and Tax administration decision-making allocation of STRs, and
  • FIU decision making on allocation of STRs.

The Report details the strengths and challenges of each model in accordance with countries' practices.

The Report further recommends that as long as the domestic legal framework permits, STRs be used at the tax administration level not only for identifying tax crimes but also for civil purposes, this is, in connection with tax compliance.

When addressing the issue of confidentiality and data protection, the Report identifies three essential building blocks: the legal framework, information security management (practices and procedures) and monitoring confidentiality, compliance and sanctions to address breaches (improper disclosure or use of information). The report further states that depending on the national jurisdiction legal framework, there may be also requirements restricting the use of STRs aimed at protecting the reporting entity and the individuals in the reporting entity who actually report the STRs.

Financial Action Task Force ('FATF')

The FATF monitors its Member countries' as well as other countries' progress in implementing the FATF Recommendations; reviews money laundering and terrorist financing techniques and counter-measures; and, promotes the adoption and implementation of the FATF Recommendations globally.

The FATF Recommendations set out a comprehensive and consistent framework of measures which countries should implement in order to combat money laundering and terrorist financing, as well as the financing of proliferation of weapons of mass destruction. The FATF Recommendations, value the diverse legal, administrative and operational frameworks of the countries and different financial systems and therefore, set an international standard, which countries should implement through measures adapted to their particular circumstances.

The main functions of FATF comprise:

  1. Identifying and analyzing money laundering, terrorist financing and other threats to the integrity of the financial system, including the methods and trends involved; examining the impact of measures designed to combat misuse of the international financial system; supporting national, regional and global threat and risk assessments;
  2. Developing and refining the international standards for combating money laundering and the financing of terrorism and proliferation (the FATF Recommendations);
  3. Assessing and monitoring its Members, through 'peer reviews' ('mutual evaluations') and follow-up processes, to determine the degree of technical compliance, implementation and effectiveness of systems to combat money laundering and the financing of terrorism and proliferation; refining the standard assessment methodology and common procedures for conducting mutual evaluations and evaluation follow-up;
  4. Identifying and engaging with high-risk, non-co-operative jurisdictions and those with strategic deficiencies in their national regimes, and coordinating action to protect the integrity of the financial system against the threat posed by them;
  5. Promoting full and effective implementation of the FATF Recommendations by all countries through the global network of FATF-style regional bodies (FSRBs) and international organizations; ensuring a clear understanding of the FATF standards and consistent application of mutual evaluation and follow-up processes throughout the FATF global network and strengthening the capacity of the FSRBs to assess and monitor their member countries;
  6. Responding to significant new threats to the integrity of the financial system consistent with the needs identified by the international community, including the United Nations Security Council, the G-20 and the FATF itself; preparing guidance as needed to facilitate implementation of relevant international obligations in a manner compatible with the FATF standards (for instance, continuing work on money laundering and other misuse of the financial system relating to corruption);
  7. Assisting jurisdictions in implementing financial provisions of the United Nations Security Council resolutions on non-proliferation, assessing the degree of implementation and the effectiveness of these measures in accordance with the FATF mutual evaluation and follow-up process, and preparing guidance as needed to facilitate implementation of relevant international obligations in a manner compatible with the FATF standards;
  8. Engaging and consulting with the private sector and civil society on matters related to the overall work of the FATF, including regular consultation with the private sector and through the consultative forum;
  9. Undertaking any new tasks agreed by its Members in the course of its activities and within the framework of this Mandate; and taking on these new tasks only where it has a particular additional contribution to make while avoiding duplication of existing efforts elsewhere.

As one of its key objectives, the FATF identifies countries with such serious shortcomings in their Anti-Money Laundering /Counter Financing Terrorism ('AML/CFT') system and engages with them to establish an action plan. It works with them to strengthen their measures to protect the financial system from abuse. Through the work of its International Co-operation Review Group ('ICRG'), the FATF publicly identifies these countries, which also serves to raise awareness about the risk they represent and help protect the integrity of the global financial system. Once identified, the FATF closely monitors the progress that each country makes to address the weaknesses in their AML/CFT system.

The ICRG process started in 2007 and since then, the FATF has reviewed over 80 countries, and publicly identified 59 of them. Forty-eight have since taken the necessary steps to strengthen their AML/CFT framework.

Recent Global Developments

In its least abridged form, money laundering consists of any act which converts money or other property which is acquired through illegal activity into money or property that appears legitimate, thereby concealing its illegitimate source. The financing of such criminal activity, including terrorist acts, originates with laundered proceeds, generally in the form of cash. However, in the present digitalized set-up and technological advancements, the mode of money laundering has also witnessed substantial changes.

The traditional processes of placement of the criminal proceeds into the financial or other transfer system; layering the funds so as to conceal their original source; and integration into the legitimate financial markets have undergone changes to further deceit the legitimate transactions monitoring system.

Some recent transactions/ payment(s) which have been found susceptible are:

Prepaid Value Cards: In 2006, FATF in its report Global Money Laundering & Terrorist Financing Threat Assessment published new payment methods used for legitimate economic transactions which could be exploited by money launderers. It featured the increasing role of non-banks in offering prepaid value cards, electronic purses, mobile payments, internet payment services and digital precious metals.

Better than the ATM network (which generally uses surveillance video), these methods provide criminals new methods of avoiding face-to-face contact with financial service providers who could identify them to police.

Online Payment Systems: Money launderers make illicit cash disappear in a maze of online accounts. Diverse as they are, many of these cybercriminals have something important in common. The dangers of online payment systems, whether as digital currency, virtual banking systems, or other methods are difficult to address. The locations of the operators and websites are often unknown or they are located in jurisdictions which will not render assistance to a criminal investigation.

It is 'virtually' impossible to trace the physical location of any value because there really is no such location.

Gatekeepers to establish Sophisticated Trusts: Gatekeepers have become a greater money laundering threat than in previous years. These professional accountants, lawyers, and company service providers engage in both self-laundering and third-party laundering. FATF considers Politically Exposed Persons ('PEPs') as gatekeepers because they have access to funds and systems in their country which they can manipulate to personal advantage, and because they have the power to change financial legislation or rules for their own benefit. Such actors often engage in self-laundering of state funds which they have extracted for themselves.

The International Monetary Fund ('IMF') conducting work analyzing global and national AML/CFT regimes and the interaction of AML/CFT on contemporary matters, highlights virtual currencies, costs of and mitigating strategies for corruption, and the withdrawal of correspondent banking relationships as predominant factors of money laundering.

PMLA (Prevention of Money Laundering Act) - Extra Territorial jurisdiction – An Analysis

Money-laundering is curbed principally in legislative terms by virtue of promulgation of the Prevention of Money Laundering Act, 2002 ('PMLA'). The said Act was amended in the year 2012.

Section 2(u) of the PMLA defines 'proceeds of crime' to include the property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property or where such property is taken or held outside the country, then the property equivalent in value held within the country.

Further, the Indian Penal Code, 1860 suggests extra-territorial application of the Criminal Law in some instances as well. It inter-alia provides that the provisions of the Code shall apply to any offence committed by:

  • Any citizen of India in any place, both in and beyond India;
  • Any person on any ship or aircraft registered in India;
  • Any person in any place in India committing an offence targeting a computer resource located in India.

The offender of such offences can be dealt with as if the offence has been committed in India.

The formal mechanisms for co-operating with foreign prosecutors are given under section 166A of the Code of Criminal Procedure, 1973.

One such mechanism is through a letter rogatory or formal letter of request. During the course of an investigation into an offence, an application can be made by an investigating officer that evidence is available in a country or place outside India.

The competent court may then issue a letter of request to a court or authority outside India to:

  • Examine any person acquainted with the facts and circumstances of the case and record his statement.
  • Require such person or any other person to produce any document or thing that may be in his possession pertaining to the case.
  • Forward all the evidence to the court issuing the letter.

The Central Bureau of Investigation serves as the national central bureau for the purpose of correspondence with ICPO-INTERPOL (an international police organisation to extend co-operation between member countries and their police forces, which may furnish or request information or services for combating international crime) to co-operate and co-ordinate with each other in relation to collection of information, location of fugitives and other such ancillary matters.

Further, India has negotiated an extensive network of Double Tax Avoidance Agreements ('DTAA') and finalised Tax Information Exchange Agreements ('TIEA') with various countries to strengthen exchange of information relating to serious offences such as tax evasion and money laundering etc.

In addition, Mutual Legal Assistance Treaties ('MLAT') facilitate co-operation in matters relating to service of notice, summons, attachment or forfeiture of property or proceeds of crime, or execution of search warrants under section 105 of the Code of Criminal Procedure, India also has adopted the Convention on Mutual Legal Assistance in Criminal Matters and has operational agreements with 34 countries.

Therefore, it axiomatic to suggest in Indian context, the competent court has reasonable grounds to believe that a property has been obtained by committing an offence, it can make an order of attachment or forfeiture of such property under the provisions of the Criminal Procedural Code. The court can issue a letter of request to any authority or court of the contracting state for execution of such order. India has also entered into Mutual Legal Assistance Treaties for asset recovery with many jurisdictions, including the US, UK and UAE.

It can therefore be suggested that the provisions of PMLA and criminal laws in India have jurisdiction which can be exercised over their citizens abroad, for an offence which has been committed within the territory of India or outside it.

In Conclusion

According to the IMF, the scale of money laundering world-wide could be somewhere between 2% and 5% of world GDP11. On 1996 statistics11, this translates into a range of US$590 billion to US$1.5 trillion. Growing concern about this activity has prompted a number of initiatives at the international level.

The increasing significance of international co-operation and cross-border dependence has given powers to international organisations to suggest measures and practically apply them for the causes of money laundering and other illicit manifestations of it.

Some steadfast progress has certainly been made, notably in the countries that have introduced anti-money laundering measures, but the problem yet remains to be fully resolved. The facilities and methods used by launderers are changing all the time as they try to circumvent the preventive measures put in place. Instead of introducing illegally obtained cash into the country's financial system, they move it to other countries where no questions are asked about its origin. Structures involving offshore financial centres seem to have certain common features: a series of financial transactions by the centre's intermediary, use of dummies or other intermediaries to handle the transactions and an international network of shell companies.

Often a laundering deal will involve more than one offshore centre. The inability to obtain credible, real time information about the real owners of the foreign entities with corporate status is one of the chief obstacles to detection, investigation and prosecution of persons suspected of money laundering. In this regard, the non-cooperative countries12 and jurisdictions, i.e. those that explicitly refuse to co-operate with the FATF, continues to be a cause of major concern.

However, the real challenge of money laundering is more than something which is country specific. It also involves the professional service providers – accountants, lawyers and similar professionals – who operate not only in non-cooperative jurisdiction, but also in some FATF countries. Such service providers set up and manage entities with corporate status, thereby giving the apparatus of money laundering considerable sophistication and a gloss of respectability.

The solution therefore pragmatically rests more in the actual implementation of the policy-making by the Governments and international organizations, and therefore can be resolved effectively through efficient monitoring and inherent discipline by the administrative authorities and decision makers.

Footnotes

1 https://www.interpol.int/Crime-areas/Financial-crime/Money-laundering

2 https://www.unodc.org/unodc/en/money-laundering/

3 The FATF currently comprises 35 member jurisdictions and 2 regional organisations, representing most major financial centres in all parts of the globe. India became the member of FATF in 2010.

4 G-7 Countries: Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.

5 The FATF currently comprises 35 member jurisdictions and 2 regional organisations, representing most major financial centres in all parts of the globe. http://www.fatf-gafi.org/about/membersandobservers/

6 91/308/EEC on June 10, 1991

7 2005/60/EC

8 The European Police Office (commonly abbreviated Europol) is the law enforcement agency of the European Union (EU) that handles criminal intelligence and combating serious international organised crime by means of cooperation between the relevant authorities of the member states, including those tasked with customs, immigration services, border and financial police etc.

9 September 5 and 6, 2013

10 September 2015

11 http://www.imf.org/external/np/speeches/1998/021098.htm

12 Panama, Afghanistan, Iraq, Kenya, Nepal, Nigeria, Vietnam, Sri Lanka, Cyprus etc.
Refer http://www.fatf-gafi.org/publications/high-riskandnon-cooperativejurisdictions/?hf=10&b=0&s=desc(fatf_releasedate)

This article was first published in the April, 2017 issue of the monthly journal published by The Chamber of Tax Consultants.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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