The Money Laundering Market

Regulating the Criminal Economy

Killian J. McCarthy, Killian McCarthy

• Publisher: Agenda Publishing
• Year: 2018
• Print ISBN: 9781911116431
• eBook ISBN: 9781788211529
• Topic: Politics & International Relations
• Subtopic: Finance
• Index: Politics & International Relations

Global money laundering transactions are estimated to be $3.5 trillion annually. Although global spending on anti-money laundering compliance was more than $8 billion in 2017, with most countries having adopted anti-money laundering measures, less than 1 per cent of illicit financial flows are seized by authorities. This collection of essays takes an integrated look at money laundering and the challenges facing regulators in the digital age.

The contributors examine the opportunities for money laundering presented by the emergence of new payment methods, such as crowdfunding and mobile payment services, the largely unregulated financial services sector of hedge funds, private equity funds and derivatives, the explosion of online gambling, and the rise of cryptocurrencies and blockchain technology.

The essays show how the anonymity, irreversibility and instantaneous nature of these online transactions, outside of the traditional banking system, make them ideally suited to hide, launder and move criminal revenues.

While highlighting the challenges these digital technologies present, each essay also considers some of the tools regulators have and can use to close down the opportunities for money laundering that continues to keep crime profitable and illegal activities funded.

PART I

 

MONEY LAUNDERING

1

AN INTRODUCTION TO THE CHALLENGES OF MONEY LAUNDERING

Svenja Berg and Killian J. McCarthy

1.1 INTRODUCTION

Globalization is the process by which businesses or other organizations develop international influence or start operating on an international scale. Globalization has been encouraged by many organizations, such as the European Union (EU), the North American Free Trade Agreement, as well as the World Trade Organization. These institutions have fostered and enabled the opening of economies for international trade and cooperation in the past decades because globalization has been a force for good; it has increased global wealth, by growing economies and creating employment; and it has brought more people out of poverty than has been achieved at any other point in history.

An essential part of globalization is the incorporation of capital, information and technological expertise into one market, allowing the participants in this process to approach other parts of the world at a more rapid pace and with lower costs (Schroeder 2001). The financial sector, therefore, gains particular benefits from globalization. In fact, it is often stated that the financial market is the only sector that “has realized globalization in the true sense of ‘globalization’” (Shangquan 2000). One of the unintended effects of a globalized financial system, however, has been the globalization of crime.

Variously defined as “deviant behaviour [that] violates the prevailing norms and cultural standards on how humans ought to behave”, as a “public wrong” and as an exploit “injurious to the community” (Ormerod 2005), crime exists and endures because it offers the individual an opportunity to gain. Crime provides the individual with a cost-effective source of power, influence and authority, and so crime, it must be recognized, is the unavoidable consequence of human ambition and creativity, and the flip side of entrepreneurial spirit. It is held to be “wrong” and “injurious” because the private gains it creates typically benefit the criminal far less then they cost society. Estimates place the cost of crime to the US, for example, at about $1 trillion per annum (Anderson 1999; Reuter & Truman 2004; Takats 2007). Thus, inevitable as it may be, society can tolerate only a low level of crime, and all “injurious” behaviour must be criminalized.

In observing that crime is often motivated by profit, regulators are faced with three options: (a) increase the risk of capture; (b) increase the severity of the punishment; (c) decrease the profitability of crime by denying the criminal the rights to use a criminally derived income in the legitimate economy. The third option, by direct intention, effectively “taxes” criminals’ income at a rate equal to the state’s interest in tackling crime. Because crime already pays less (Wilson & Abrahamse 1992), any loss in profitability implies an adverse shock to the supply of crime, and so criminal activity will be reduced. As an unintended consequence, however, a demand for “money laundering” services will be created. Broadly defined as financial services conducted “to conceal or disguise the nature, location, source, ownership or control”, the aim of the money laundering (ML) service is to make it possible for criminals to invest or to consume the proceeds of crime, and to circumvent the crime-stopping efforts of government. ML, in other words, keeps crime profitable, and ML, therefore, must be tackled if crime is to be effectively reduced.

This volume is dedicated to the topic of ML. It looks at the current ML market, and the ways in which ML is being tackled, and considers the threats to the fight against crime, in the form of emerging technologies, such as digital currencies, and emerging markets, such as online gambling. This chapter beings with a review of the literature on ML, asking a number of simple questions: (a) What is ML, how and by whom is it defined? (b) Who are the main players in the fight against ML? (c) Why does ML occur? (d) Why is it a problem, beyond the obvious fact that it facilitates crime? (e) How is money laundered? (f) How big is the problem, and what techniques are being employed to measure ML? And finally, (g) what are the current tools and techniques that are being used, at the international level, to tackle ML?

1.2 WHAT IS MONEY LAUNDERING

ML is a complex process, and its study is made all the more complex by the fact that there are a variety of definitions. So what is ML? And what are the common elements across the definitions?

1.2.1 Institutional definitions

There are many variations in the definitions of ML, all of which are based upon the United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (Vienna Convention) of 1988 and the 2000 United Nations Convention against Transnational Organized Crime (Palermo Convention; World Bank 2011a). One of the most complete definitions, perhaps, is found under US law. There, ML is defined as the process by which criminals attempt to “conceal or disguise the nature, location, source, ownership or control” of their ill-gotten gains,1 so as to make it possible to invest or consume the proceeds of crime. Similar definitions are employed by other anti-money laundering (AML) bodies, such as Interpol, the international police agency, the United Nations Office on Drugs and Crime (UNODC), and the Financial Action Task Force (FATF) – an intergovernmental body nested within the Organization for Economic Cooperation and Development (OECD) and responsible for developing and promoting policies to combat ML – although the emphasis can vary per body. Table 1.1 provides an overview of the various definitions that these organizations...

Table of contents

• Cover
• Title
• Copyright
• Contents
• Contributors
• Part I. Money laundering
• 1. An introduction to the challenges of money laundering
• 2. Who runs the laundry?
• 3. Money laundering regulation in the European Union
• Part II. The weak links in the anti-money laundering chain
• 4. The shadow banking system
• 5. Money laundering, sports betting and gambling
• Part III. Digital currencies
• 6. Bitcoin and money laundering: mining for an effective solution
• 7. Cryptocurrency, blockchain and crime
• 8. Using blockchain technology for the prevention of criminal activity
• Index