Money Laundering and Terrorist Financing Activities

Milan Frankl, Ayse Ebru Kurcer

• Publisher: Business Expert Press
• Year: 2016
• Print ISBN: 9781631575938
• eBook ISBN: 9781631575945
• Topic: Business
• Subtopic: Finance
• Index: Business

The purpose of this book is to introduce the reader to mechanisms useful for detection and avoidance of money-laundering activities (MLAs) and terrorist financing as well as suggest improvements to existing anti-MLA methods and procedures where appropriate. Money laundering occurs in every country. The significant factor is to diagnose illegal MLAs and apply regulations to mitigate them. To meet this objective, managers of financial instituÂtions need to train their employees about anti-money-laundering proÂcesses and how to diagnose and prevent them. Anti-money-laundering activities can also affect financial systems of a country. MLAs can create a big gap between income classes. Money laundering can also decrease bank's and financial instituÂtion's credibility. This book will be of special interest to financial managers in the priÂvate and public sector and will also be a useful guide for those involved in international financial transactions.

CHAPTER 1

Background

Evolution of the Money Laundering Process

In many countries the “unregistered economic values” have been an important issue for the evolution of money-laundering activities. Although clear definition of ‘unregistered economy’ exists, according to Erdilek, unregistered economy could be associated with:

• Excessive tax burdens,

• Corporate and personal taxes,

• Social security contributions,

• Inflexible labor markets (Erdilek, 2007).

Erdilek adds that ‘the reluctance of some people to pay their share of taxes’ could be another reason for unregistered economy. He mentions that the reason for the unwillingness of paying the full share of taxes could be that people believe governments are wasting tax revenues.

Economic activities could be defined using the Gross Domestic Product (GDP) index. GDP involves legal and illegal economic activities. For example, according to the Turkish Confederation of Employers’ Associations’ survey in 2003, ‘Turkey’s unregistered economy increased from 36 % of the registered economy in 1985 to 66 % in 2003’ (Erdilek, 2007). The Turkish Central Bank study in 2004 revealed that the unregistered Turkish economy, (including 52 % of total employment and 37 % of private sector employment), was between 16 to 50 % of total economic activity. In 2005, The Trade Union Turkish-Is reports that ‘more than half of the Turkish labor force was engaged in the unregistered economy’ (Erdilek, 2007).

Unregistered economies have negative effects on the country’s economy.

The unwanted effects of the unregistered economy could be listed as follows:

• Official statistics are no longer reliable.

• Financial policies are difficult to develop and implement.

• Companies within the registered economy invest out of the country because of unfair competition.

• Governments need to increase the tax load that results from unregistered taxes.

• The value for the legal foundations of the society decreases.

Besides the negative effects, unregistered taxes have some positive effects on the society and economy: they maintain an additional employment and income opportunity. However, the negative effects of unregistered economy are much greater than the positive ones to people and the country’s financial system.

Countries’ financial systems may include different methods of illegal fund movement transactions. These fund movements can be considered as a form of unrecorded economy and could include:

• Funds accumulated for tax evasion,

• Funds generated from illegal activities, and

• Funds to be used for terrorist financing.

Even though these three types of fundsare different, at times they partly cover each other’s area according to the type of criminal financial activity.

The source of the funds for criminal activities is called ‘Black Money’.

The cycle process of black money can be shown as:

Crime

Black Money

Money-Laundering¹

Criminals launder money to hide the original source of funds that are generated by a criminal activity. The purpose of the activity is to legalize illegal income with an official cover through a variety of methods.

Hiding money laundering activities can be achieved through:

• Converting dirty money into acceptable form of funds,

• “Washing” the proceeds gained from the drug trade, and

• Formalizing the incomes generated from illegal activities.

Illegal sources of money can be listed as follows:

• Bribing,

• Drug Smuggling,

• Illegal weapon or arms trading,

• Human trading,

• Refugee smuggling, and

• Other unofficial trading activities.

Money laundering gives criminals significant financial power.

In the 1970s, the United States of America implemented the Bank Secrecy Act (BSA)² to prevent money laundering-type activities. According to Internal Revenue Service (IRS)’s report in 2011, ‘The BSA requires businesses to keep records and file reports that are determined to have a high degree of usefulness in criminal, tax, and regulatory matters’. This act helped also other governments limit terrorist financing activities and control financial transactions.

Financial institutions have a variety of policies and regulations to fight illegal money transactions. These policies help prevent criminals from using individual banks for money laundering transactions. These policies are often referred to as anti-money laundering applications.

Anti-money laundering applications could affect financial institutions’ legal positions, and involve compliance costs as well as affect negatively their financial position.

Legal Position

Employees in financial institutions are required to follow their organization’s rules. Besides following organization’s rules, employees are also required to

• Maintain proper record-keeping of financial transactions,

• Maintain internal reporting, and

• Train other employees about legal obligations and report suspicious transactions to management.

Compliance Cost

The compliance costs of financial institutions or services increase when adopting anti-money laundering applications in an organization. These costs consist of administration, training, and storage costs.

Compliance departments within financial institutions are established to monitor the activities of a financial institution and identify possible suspicious transactions within the organization. Financial organizations establish these compliance departments and develop policies required to meet the legal standards and manage clients’ assets.

For that reason, banks implement a continuing compliance program to meet their obligations and responsibilities.

Compliance policies regulations and procedures support the fulfillment of anti-money laundering and anti-terrorist financing measures. Those measures are also supported with strict local laws and regulations. In this respect, the functions of Compliance Officers are vital for financial institutions.

According to the ‘Bank Regulatory Compliance Officer Job Description’ on the website www.advisoryhq.com, the duties of a bank’s Compliance Officer are as follows:

• Ensuring that the bank unit operates in compliance with all applicable regulations as well as the internal policies and procedures,

• Implementing bank’s Compliance Policies within the unit,

• Providing counsel on regulatory issues and potential effect of regulatory changes,

• Developing, implementing, and revising compliance policies,

• Cooperating daily with local regulatory authorities,

• Ensuring senior management and staff are educated and trained with the bank’s compliance policies and procedures,

• Monitoring the bank’s compliance unit’s activities to detect and prevent possible faults of the agreement,

• Conducting regular internal investigations and providing recommendations to correct some actions,

• Dealing with complaints and maintain objection files and records,

• Managing clients’ orders and permissions with written guidelines and restrictions,

• Interacting with members from internal audit, risk management, and financial reporting, and

• Reporting hierarchically to the Management Board and functionally to the Council of Directors.

Financing terrorism and money laundering are related to each other. Money launderers are not always providing funds to terrorist organizations. However, terrorism financing activities need money laundering to legalize their funds and sources.

Money Laundering Stages

Money laundering may look like a simple process that criminals use for hiding the source of the proceeds of their illegal financial criminal activities. However, money laundering has a deep social significance with direct links to corruption in financial organizations.

United Nations Office on Drugs and Crime (UNODC) (See Figure 1.1), states the money laundering process has three stages: Placement, Layering, and Integration.

In the Placement stage, the launderer tries to transform the cash into other assets such as postal orders or checks to remove the link between the cash and its source. In the second stage, Layering, the goal is to conceal the audit trial, source, and ownership of funds. To achieve that purpose, the launderer disguises the source of the funds by creating complex layers and forming different financial transactions. During the third stage, Integration, the launderer assimilates the money with other assets of the financial system.

Under the above scheme, banking systems are at the center of the money laundering processes. Therefore, rules and regulations applied in banking systems are the key factors for fighting money laundering activities.

Money laundering activities, which also can be used as terrorist-financing activities, affect the world’s economy. As a result of an international networking system, countries affect each other’s economy. Illegal money transactions increase the gap between different classes of incomes. Governments cannot collect taxes from these illegal sources of income. Consequently, corruption increases.

Some bank offerings could attract money launderers, notably:

• A wide range of services and access to wider financial systems.

• International connections and facilities.

• Accessibility through networks. (Kumar, 2009)

A wide range of services and access to wider financial systems

A wide range of services and access to wider financial systems refer to the activity of controlling money transactions.

Figure 1.1 The money-laundering cycle

Source: UNODC (United Nations Office on Drugs and Crime) https://www.unodc.org/unodc/en/money-laundering/laundrycycle.html

Managing money laundering activities are difficult when financial activities increase and become complex.

International connections and facilities

International connections and facilities refer to the transfer of the funds. In addition, international connections make tracing money transactions difficult after the funds are transferred from one financial institution to another.

Accessibility through networks

International networks make money transfers easier.

Financing Terrorist Activities

The terrorism in the Southeast Asia and the financial sources behind the terrorist groups are mentioned by the authors. The authors also state that Southeast Asia has been a home for terrorist groups for decades. Islamic groups focus on religious and domestic issues such as adoption of Islamic law within Southeast Asia. The militant groups like Al Qaeda in the Southeast Asia are against globalization and America’s increasing power in some countries like Iraq and Afghanistan. The authors argue that the militant groups in Southeast Asia are also trying to collaborate with other Muslim groups within the region to increase their financial power. Governments of Southeast Asia play a significant role in enforcing social discipline. The law and its penal sanctions could decrease terrorist activities if the governments of Southeast Asia apply them. (Vaughn et al., 2008)

Giraldo and Trinkunas explore the relation between terrorist activities and terrorism financing. The authors discuss various ways to finance terrorism by transferring the ‘dirty money’ (a term for illegally acquired funds) from one source to another. The writers also explore terrorist financing activities in different regions such as Arabia, Europe, East Africa, Southeast Asia, and South America. The authors also suggest developing a comparative perspective on the topic, possible solutions, and governments of Arabia, Europe, East Africa, Southeast Asia, and United States of America (USA)’s responses. For instance, after the attack of September 2001, the USA government strengthened the anti-money laundering policies with the implementation of the Patriot Act (Giraldo and Trinkunas, 2007). As a result of the strict money laundering regulations within the Patriot Act in the USA, ‘dirty money’ activities have decreased. However, USA’s strict policy about money laundering affects other regions. Terrorism funds and money-laundering activities increased in Europe as result of USA’s Patriot Act (Giraldo and Trinkunas, 2007).

Financial Action Task Force (FATF) is an international standard setter for combating money laundering and terrorist financing (Borekci and Erol, 2011). The authors mention that Turkey’s current situation has improved as a result of following FATF measures for combating money laundering and terrorist financing.

MASAK, the Turkey’s Financial Crimes Investigation Board, explores preventing money laundering and terrorist financing in its Suspicious...

Table of contents

• Cover
• Half Title Page
• Title Page
• Copyright Page
• Dedication
• Contents
• Acknowledgments
• Chapter 1 Background
• Chapter 2 Money Laundering Methods
• Chapter 3 Money Laundering Detection Methods
• Chapter 4 Effects of Money Laundering on the Macro Economy
• Chapter 5 Suspicious Transaction Types
• Chapter 6 Organizations Dealing with Money Laundering and Terrorist Financing
• Chapter 7 Two Money-Laundering Cases
• Chapter 8 Corporate Money-Laundering Events in USA
• Chapter 9 New Place to Launder Money
• Chapter 10 Measures for Preventing Money Laundering
• Conclusion and Recommendations
• References
• Index