AvantGarde

(This is the first of a series of articles which tend to explain the concept of Money Laundering and the efforts needed to combat it.)

One might wonder what ‘Laundering’ has to do with ‘Money’, or vice versa. Two completely abstract terms together, and inviting a lot of attention over the past decade or so.

Money Laundering is the process through which illegal money is injected into the financial system in a systematic manner by disguising its true illegal origin and the usage of legitimate funds for purposes related to organized crimes.

History of Money Laundering

The term dates back to the 19^th century, though it was not criminal at that point of time. In olden days, underworld and mafia groups used Laundromat businesses that they owned to legitimize the income they received from illegal businesses like extortion, gambling etc.

The Laundromats were used as a face to inject the illegal funds into the financial system where they could be layered through different transactions, and brought into the financial system as though they were legitimate.

The International Monetary Fund (IMF) has estimated that the aggregate amount of funds laundered in the world could range between 2 to 5% of the World’s Gross Domestic Product. In 1996, these percentages would amount to between US$ 590 Billion to US$ 1.5 Trillion.

The Process of Money Laundering

It involves 3 stages:

1)      Placement

2)      Layering

3)      Integration

Placement: This stage is where illegal funds are initially placed into the financial system by separating the identity from the original illegal source. E.g. Proceeds of drugs sold in the black market injected through multiple cash deposits.

Layering: Through a series of repeated transactions from one account to the other within the country or outside, the launderer tries to disguise the true origin of the transaction. E.g. Multiple transfers across different accounts of the same bank or different banks/countries.

Integration: This is the stage where illegal funds are integrated into the financial system as true legitimate funds. E.g. Purchase of Luxury Items, High Risk Financial Instruments etc.

Source: UNODC Website

Various Money Laundering Methods

1. Structuring – An attempt to evade reporting requirements by breaking transactions into amounts that are just below the reporting thresholds. This usually happens during the placement stage. E.g. A person depositing Rs. 49900/- in a bank to avoid giving the PAN card number, and returning the next day with another deposit of the same amount.
2. Smurfing – A method of structuring which involves a third person who transacts with the bank on the launderer’s behalf. This person is known as a smurf. E.g. Group of individuals using multiple branches of a bank to send money to the same individual.
3. Front Companies – A company where the actual owners are unknown and the business is primarily used to hide ill gotten proceeds. It is mostly involved in cash oriented businesses. E.g. Casinos, Restaurants, Laundromats where the actual revenue might be much lesser than what is reported.
4. Stored Value Cards -  Cash cards like those used to recharge cell phones or make purchases do not require facial recognition of the customer identity, and thus can be used to utilize the money procured from illegal means.
5. Pre-Payment of Credit Cards – A customer makes heavy purchases from a Credit card and repays the amount by cash.
6. Overvalued/Under Valued invoices on Imports/Exports – An importer who pays an overvalued invoice and an exporter who undervalues the invoices to remit money outside and into the country is a cause for surveillance. E.g. Letters and bills of exchange that do not represent the correct value and are invoiced wrongly.
7. Alternative Remittance Systems (Hawala) – A lucrative business in the middle-east, Asian and African countries.
   1. Remitter in Country A approaches ‘Hawaladar’ and seeks to send money in Country B.
   2. Hawaladar accepts money and deducts commission.
   3. Hawaladar contacts his counterpart in Country B and asks him/her to pay the equivalent local currency to beneficiary in Country B.

There are no records maintained, and transactions happen informally over phone. No receipts or slips are exchanged.

1. Cash Surrender of Insurance Policies
2. High Value Items – Products such as antique pieces, paintings, diamonds are easy to hide and store and thus can be used to carry huge values without notice.

Businesses that are the Most Vulnerable to Money Laundering

• Banks
• Broker-Dealers
• Money Service Businesses
• Insurance Companies
• Credit and Debit Card Companies
• Lawyers and certified public Accountants
• Mutual Funds
• Real Estate Broking
• Investment Advisory
• Non Financial, high value Businesses like Jewellers

To be continued. The next article will talk about various International Bodies and Guidelines practising AML and the procedures to be undertaken to identify fraudulent transactions.

The author was working as an IT Enabler for a leading American Bank’s AML Division for a period of 2.5 years prior to joining the Management Program @ IIT Kanpur.

Manu Agrawal

MBA batch of 2011,

IIT Kanpur