Background to the Main Issue
The Purpose of Money Laundering
Criminals commit crimes for many reasons. One of these is to profit and obtain value or money in a variety of forms, for instance cash or all types of property, whether real or personal, heritable or moveable. They also try to obscure the illegal origin of these proceeds. They perform a number of money laundering (ML) activities/transactions to ensure that their illegal activities/transactions are not discovered. The term ML denotes the process(es) which criminals use to obscure the real origin of the proceeds which have been derived from criminal activity and to make illegal proceeds appear as if they were legitimate property.1 ML is an effective way for criminals to avoid prosecution, conviction and confiscation of illegal proceeds2 since their origin is disguised or turned into legitimate proceeds.3 This depends on the criminal activity which generates the illegal proceeds4 which can take various forms, such as drug trafficking, human trafficking, embezzling, fraud, tax evasion, bribe and piracy. These crimes are “predicate offences” for ML and cover any crime which generates illegal proceeds. The criminalisation of ML has therefore two important objectives. Firstly, to prevent criminals from committing crimes which generate illegal proceeds, namely predicate offences for ML. Secondly, to prevent money launderers from enjoying their illegal proceeds.5
Indeed, the predicate offences for ML depend on the national legislation which a particular country has adopted and/or the international treaties which the country is a party to. A country can basically adopt one of the following four approaches:
- 1.The “all offences basis” means that all crimes are considered predicate offences for ML under domestic law, for instance as the United Kingdom (UK) system recognises.6
- 2.Using the “threshold” approach which means a threshold is connected either to the punishment of imprisonment applicable to the predicate offence or to a group of serious offences.7
- 3.There is a list of predicate offences, as in the United Arab Emirates (UAE).8
- 4.Undertaking a combination of these approaches.9
ML is a global phenomenon since its activities are not confined to the borders of one country. This is done either through physical transfers to another country or via online transfers. ML is the third largest industry in the world after the oil trade and foreign exchange.10 The Managing Director of the International Monetary Fund (IMF) estimated that 2 to 5 % of the world’s gross domestic product (GDP) constitutes ML.11
At the national level, ML causes social and economic harm. Social harm is caused through increased crime levels, as predicate offences are committed to obtain profits. Accordingly, without the commission of crimes there is no ML.12 Countries with high crime levels have more corrupt officials and professionals, who assist in disguising the sources of the illegal proceeds.13 Economic harm is also caused since the stability of the country’s financial and economic system is undermined and less trust exists in the financial institutions of the country.14
Stages of ML
The process of ML normally involves the following three stages: (1) placement, (2) layering and (3) integration.
Placement is the first stage which money launderers use to introduce the illegal proceeds from the commission of the predicate offences into the financial system. Bank deposits or cheque cashing businesses are often used to convert the cash into negotiable instruments, such as money orders or traveller’s cheques.15 It is difficult to introduce large amounts of money generated from the commission of predicate offences, so that a technique known as “smurfing” is used, which separates the large amounts into small amounts below the reporting thresholds, for instance through bank deposits.16 The main purpose of the smurfing technique is to avoid suspicious transactions reports (STRs) and suspicious activities reports (SARs).
The second stage is layering, which involves various complex transactions to hide and distance the relationship between the money and the predicate offence. These complex transactions take a number of forms, for example the transfer of money to another bank account within/outside the jurisdiction, the purchase of real estate or precious metals and other high-value goods for the purpose of resale.17 In addition, money can be transferred to bank accounts located in Offshore Financial Centres (OFCs), which enjoy a high degree of banking confidentiality.
The last stage of the ML process is integration, which aims at reintegrating the laundered money into the financial and economic system18 after distancing it from the illegal source in order to look like a normal and legitimate business activity or a personal/commercial transaction.
Online banking services can also be used to transfer funds much more easily and rapidly between banks accounts located within and outside a particular jurisdiction. More importantly, there is no longer a need to use computers to transfer money electronically, but instead “Smartphones”19 can be used for mobile banking services, including for the electronic transfer of money, the purchase of goods or services and the payment of bills.20 The relevant persons in banks and other financial institutions have therefore to possess a high degree of integrity, experience and to pay attention in order to detect suspicious transactions/activities.21 Of course, not all ML activity comprises the three stages since each ML process depends on various factors, such as knowledge and experience of the money launderer, the nature of the predicate offence and the robustness and effectiveness of the anti-money laundering (AML) laws and regulations in the relevant jurisdiction(s).22
The Need to Establish a Financial Intelligence Unit (FIU)
ML transactions and activities cannot be easily specified since they develop according to the experience of the perpetrators and the development of information technology (IT), which result in techniques for conducting ML activities. As a result, there has been an urgent need to create an agency at the national level, which is able to identify and analyse complex patterns suggestive of ML activities and transactions. In the early 1990s, the need arose to create a central and specialised entity at the national level, which could collect, analyse and disseminate information associated with ML. This is due to the fact that the law enforcement agencies (LEAs) had only limited access to the relevant financial information.23 Throughout this period, a number of FIUs were established. The number increased in the following years, especially with the establishment of the Egmont Group in 1995.24 When a group of FIUs met at the Egmont Arenberg Palace in Brussels, it was decided to set up the “Egmont Group of Financial Intelligence Units” in order to foster international cooperation amongst FIUs to detect and prevent ML.
The establishment of national FIUs has received a lot of attention at both the national and international level after the Egmont Group adopted Article 7 (1)(b) of the 2000 UN Convention against Transnational Organised Crime (Palermo Convention 2000)25 and Article 14 (1)(b) of the UN Convention against Corruption.26
International AML standards have also been published by the Financial Action Task Force (FATF)27 which has established nine regional groups known as the FATF-style regional bodies (FSRBs), which facilitate the global implementation of the FATF Recommendations. The task force drew up various principles in 1990 in order to counteract ML, which have come to be known as the “Forty FATF Recommendations.” The initial 1990 Recommendations and their very first revision in 1996 did not explicitly mention the term “FIU,” which first appeared in Recommendation 26 of the 2003 revision of the FATF Recommendations, though, apart from noting that it is a national agency, it did not provide any in-depth details about its core functions. Recommendation 29 of the 2012 FATF Recommendation, which replaced Recommendation 26 of the 2003 FATF Recommendations, sets out more accurately the core functions and powers of the FIU. Most countries have now established an FIU, including the UK and the UAE.