Alarming increase in money laundering and terror activities forced international community to focus and devise methods to tackle this cancerous problem. The magnitude of problem made sure that international community came together and take the problem head on. International organizations along with various nations took initiatives and prescribed certain Rules/ Regulations/Policies/Procedures which the Banks/ Citizens/ other Financial Institutions in each country were bound to follow to fight the evil of Money Laundering.
Various standards, documents, legislation and instrumentalities that have been developed for combating money laundering and terrorist financing have been discussed in this chapter. A brief account thereof is given hereunder.
The main focus of the battle against money laundering is to protect the integrity of financial systems and reduce the available markets where the proceeds of crime can be spent and enjoyed. Money laundering initiatives helps make sure that there is not enough opportunity for Money Launderers to do their illegal activities.
To fight Money Laundering it was needed that all the countries should move ahead in a unified manner and make sure that all loopholes are plugged. International community/ organizations realizing that the problems of money laundering and terrorism require a coordinated approach took a number of steps to develop standards for combating the menace of money laundering, terrorism and terrorist financing.
Various countries and organizations have over the period of time developed common theme of promoting actions/steps to deny criminals, terrorists and their cohorts??? access to their funds. Many international agreements and resolutions have been formulated and implemented in the fight to prevent Money Laundering.
It was also recognized that drug trafficking was an international problem and it could only be addressed effectively on multilateral basis. This recognition led to international effort being put in vigorously. Thus, the first international convention concerning money laundering focused on drug trafficking offences as the only predicate offences.
No country is immune to the threat of money laundering and terrorism. To tackle this menace, different countries have enacted various laws/legislations that prescribe rules/regulations and policies/procedures to be adopted by banks and other financial institutions. Money Laundering has a direct relationship with Crime. It increases with the increase in crime and decreases with decrease in crime. Alarmingly disturbing surge in drug and other major crimes provided the impetus for concerned efforts against money laundering.
Money Laundering was traditionally seen as a domestic law- and order problem and not something that required major collective efforts; some cross-border criminal activities have been the subject of rudimentary attempts at establishing governance and control. However, it was only during 1980s and 1990s that transnational money laundering became a clear focus of efforts at international governance.
International Community has tried to tackle this menace of money laundering, organized crime and drug trafficking by resorting to a 3 tier process. First is the creation of international norms and conventions. For example various international conventions have been initiated and implemented. The norms provided in these conventions guide the nations in such a way that all the nations act in a unified manner to tackle this problem. Second is the information sharing to enhance law enforcement that has been made possible after the creation of Interpol, which can cross borders quickly and get hold of the international criminals quickly. Third is the creation of creation of education and eradication programs that aim to prevent the criminal activities, especially drug trafficking at regional and global level.
An important objective of money laundering activities is to remove the proceeds of crime from the jurisdiction in which they were obtained to help disguise their origins. This frequently involves the international movement of those proceeds, which is facilitated by the increasingly international character of business, financial and criminal activity. Although money laundering has become a large global problem that affects all countries in varying ways and degrees, jurisdictional boundaries have made international law enforcement difficult. International co-operation and co-ordination have become essential to the deterrence, detection and prosecution of money laundering, leading to the development of many international initiatives over the past decades to address this issue.
A few of the laws relating to money laundering and terror financing in some major centers and initiatives taken by some major international organizations are enumerated here below :
Till 1972, around 12 multilateral drug control treaties were concluded. Efforts till then were mainly focused on regulation of the movement and supply of drugs for legitimate and scientific purposes. Because of the enormous magnitude of drug trafficking and huge amounts of criminally generated money entering the mainstream economy, UN, through the United Nations Drug Control Programme (UNDCP) initiated an international agreement to combat drug trafficking and money laundering. As a result of these ongoing efforts, in 1988, United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (1988) also known as Vienna Convention was adopted.
The Vienna Convention mainly focuses on provisions to fight the illicit drug trade and related law enforcement issues. The Vienna Convention however is limited to drug trafficking offences and does not emphasize much on the concept of money laundering.
The convention came into force on November 11, 1990. It does not use the term money laundering, but it defines the concept and calls upon countries to criminalize the activity.
As a result UN asked member states to introduce money laundering as crime into their domestic legal systems. It recommended the adoption of measures to accomplish the following:
1. Enable the tracing, freezing and confiscation of the proceeds.
2. Co-operate with the other countries in identifying ,tracing, freezing and seizing these assets, and
3. Provide for bank, financial or commercial records to be available to investigators, notwithstanding bank secrecy.
This convention focuses on tracing down the illegal wealth of money launderers. Article 3 of the convention requires the member countries to establish as criminal offence under its domestic law, those activities facilitate and perpetuate money laundering. It calls upon the nations to declare those acts which lead to money laundering as a crime in their domestic laws.
Article 5(2) of the Convention calls upon the member countries to enact and enforce in its domestic provision to identify, trace, seize and forfeit the profit derived from illegal activities
One of the most important provision of the Vienna convention has been provided in article 5(3) which requires member countries to empower the courts in domestic country to summon the record or seize the records of those banks/ financial institutions which are most likely to commit offences. The Vienna Conference also acted to ensure that the concept of bank secrecy did not needlessly hinder the search for and the eventual confiscation of the assets derived from this form of criminal activity. A party cannot decline to supply the information on the ground of bank secrecy .
Other important feature of this convention worth noting is that ensures that proceeds which have been derived from illegal trafficking does not escape forfeiture just because their form has been changed or has been intermingled with other property.
The Convention emphasizes on the idea of taking the profit out of crime. The Convention gave this idea a powerful boost and set a new standard for anti-money laundering efforts by governments.
It can be safely concluded that the 1988 Convention was a potent weapon for the international community with necessary tools to take on the financial power of cartels and other mafia groups.
BASEL Committee on Banking Regulations and Supervisory Practices- known as The Basel Statement of Principles
The Central Bank governors of Belgium, Canada, France, Germany, Italy, Japan, Netherland, Sweden, Switzerland and United States also known as the G-10 group met in December 1988 to discuss the issues relating to Money Laundering. The result of the meeting was that a committee was formed on Banking regulations and supervisory practices to evolve a set of principles to guide the members to fight the menace of money laundering. These principles came to be known as the Basel Principles, they deal with the prevention of the criminal use of the banking system for the purpose of money laundering.
Basel Committee provided many guidelines and out of those guidelines, three of them were related to Money Laundering.
Statement of Principles on Money Laundering
The BASEL Committee issued its statement on prevention of criminal use of the Banking System for the purpose of Money Laundering. It initiated the concept of ‘Know Your Customer’, often referred to as ‘KYC’.
Principles to be followed by banks and financial institutions are clearly identified in the BASEL Statement.
These principles are :
1. Compliance with laws- The banks must comply with domestic laws which play an important role in prevention of money laundering.
2. Customer Identification- The banks and financial institutions also must identify the customer and verify his antecedents. The banks must make sure that the accountholder is not a fake person. It must check his addresses before opening account.
3. Conduct of Business with ethical standards- The banks and financial institutions must conduct their business in free and fair manner. They should follow the ethical Code of Conduct. Banks must follow the rules of the game in fair manner as banks play an important role in curbing the activities of money launderers.
4. Compliance with local laws and regulations governing financial transactions- Banks must also follow local laws which govern financial transactions.
5. Co-operation with Law Enforcement authorities- Co-operation with enforcement agencies becomes the most important factor in controlling money laundering as co-ordinated efforts will bring unthinkable results.
Adherence to the statement emphasizes the need to develop policies in line with the statement and to keep all the members posted with the banks’ policy in this regard.
In 2001 it published, ‘Customer Due Diligence’ document. The document emphasizes the need to undertake adequate and enhanced customer due diligence and the associated risks of not embracing such due diligence and that without this due diligence, banks subject themselves to reputational, operational and legal risk, which can result in significant financial cost.
Due Diligence requires,
I. Knowing your Customer through proper identification, verification;
II. Regularly reviewing your customer base to ensure you understand the nature of the accounts you offer and the risks they pose;
III. Routinely monitoring account activities including wire transfers to ensure the activity matched with the customer’s profile.
General Guide to Account Opening and Customer Identification
This document emphasizes on the guidelines to be followed by banks and financial institutions for account opening and customer identification procedures. It is a general guide to good practice based on the principles of the Basel Committee’s Customer Due Diligence for Banks Document. The document has been prepared by the Working Group on Cross-Border Banking which does not cover every eventuality, but it does focus on some of the mechanisms that banks can use in developing an effective customer identification programme.
All the three documents- Statement of Principles, Due Diligence for Banks and General Guide to Account Opening and Customer identification have provided the base for developing mechanisms for customer due diligence and for combating Money Laundering and terrorism procedure. All the banks and financial institutions have developed their AML policies, systems and procedures modeled on these principles enunciated by the Basel Committee. Compliance with these principles represents a major self-regulatory initiative taken by the banking sector.
The Basel Customer Due Diligence Document was principally meant for the Banking Sector. However when FATF undertook the 2003 revision of its 40 recommendations, it drew heavily on the principles enunciated in this document.
The Financial Action Task Force (FATF)
Direct consequence of Vienna Convention was that a Financial Action Task Force (FATF) was established in 1989 in Paris. It was formed so that it could act as an inter-governmental body and acts a link between various governments. Its main objective is to develop and promote the policies at National and International levels to combat money laundering and terrorist financing.
FATF called upon all the member nations to bring in compliance all their local/ domestic laws with the directives/recommendations of the FATF.
FATF is a ‘policy-making body’. It is responsible for monitoring members’ progress and also helps in implementing necessary measures along with reviewing money laundering and terrorist techniques and counter-measures. It is also responsible for implementing appropriate measures globally. It also helps to fight money laundering by collaborating with other international bodies. FATF has made sure that actual work is done on ground rather than just doing lip-service. It has brought an action plan which all the countries must keep in mind while formulating their domestic law to deal with the menace of Money Laundering.
FATF in its first report issued in 1990 provided that money laundering should be criminalized. However, in June 2003, it revised its Forty Recommendation for fighting Money Laundering and Terrorist Financing. These recommendation focus on measures to be taken by financial institutions and places particular emphasis on the establishment of- Solid Customer Due Diligence (CDD) and Record- Keeping Systems.
FATF published a list of countries that have been ‘non-cooperative’ (NCCT) as regards the fight against Money Laundering. It includes those countries whose attitude has been negligent and unresponsive with respect to money laundering. The list changes from time to time. Countries and territories who are on NCCT list are considered as risky countries and any country which is doing business with such a country must do it its own peril. The relationship, business or business with such countries must be carefully examined and reviewed. At present no country falls in NCCT category.
FATF’s sharply focused mission is to:
1. Spread the anti-money laundering message to all continents and regions of the globe. It sets international standards to combat money laundering and terrorist financing.
2. Monitor the implementation of its Recommendations and to assess its members??? compliance with the FATF standards through a peer review process of mutual evaluations;
3. Review and publish money laundering trends and counter-measures and thereby conduct typologies studies of money laundering and terrorist financing methods, trends and techniques.
FATF issued 40 recommendations in 1990 which provided a comprehensive plan of action to fight money laundering. And there after in 2001, 9 special recommendations for combating terrorist financing were added in the list. These recommendations formed the backbone for all international AML/CFT policies, procedures and processes. It has 36 members and its recommendations are used by more than 180 governments to combat these crimes
With effect from February 2012, FATF has revised all the recommendations. The 40 revised recommendations termed as International Standards on Combating Money Laundering and The Financing of Terrorism and Proliferation provide authorities with a strong framework to act against criminals and address new threats to the international financial system.
The revised FATF recommendations have now fully integrated the counter-terrorist measures along with money laundering controls. Also to counter the financing of proliferation of weapons of mass destruction needs to be added to the list and it will further strengthen the fight against money laundering of proceeds of tax crimes and corruption.
These recommendations are based on the following fundamental principles:
c. Penal Provisions
The revision will enable national authorities to take more effective action against money laundering and terrorist financing at all levels from the identification of bank customers opening an account through investigation, prosecution and forfeiture of assets. At the global level, the FATF will also monitor and take action to promote implementation of the standards.
The revised recommendations are as follows:
a. Combating the financing of the proliferation of weapons of mass destruction through the consistent implementation of targeted financial sanctions when these are called fr by the UN Security Council.
b. Improved transparency to make it harder for criminals and terrorists to conceal their identities or hide their assets behind legal persons and arrangements.
c. Stronger requirements when dealing with politically exposed persons(PEPs).
d. Expanding the scope of money laundering predicate offences by including tax crimes.
e. An enhanced risk-based approach which enables countries and the private sector to apply their resources more effectively by focusing on higher risk areas.
f. More effective international cooperation including exchange of information between relevant authorities, conduct of joint investigations, and tracing, freezing and confiscation of illegal assets.
g. Better operational tools and a wider range of techniques and powers, both for the financial intelligence units, and for law enforcement to investigate and prosecute money laundering and terrorist financing.
The framework for the FATF’s recommendation to combat money laundering is as follows:
1. Each country should take immediate steps to ratify and implement the 1988 United Nations Convention against Illegal Traffic in Narcotics and Money laundering,
2. Financial Institutions secrecy laws should be conceived so as not to inhibit the implementation of these recommendations,
3. Effective money laundering enforcement program should include increased multilateral cooperation and mutual legal assistance in money laundering investigations, prosecutions and extradition wherever possible.
The 1990 Council of Europe Convention
The Council of Europe Convention was adopted in November 1990 to establish a common criminal policy on money laundering. The objective of the Convention is to take into account developments in the threats posed and to refine international best practices in order to preserve the health, integrity and stability of credit institutions and other financial institutions and to upkeep confidence in the financial system as a whole while establishing an area of freedom, security and justice
It provides for a legal definition of money laundering and sets out common measures to deal with it. The convention focuses on principles which are necessary for international co-operation among the contracting parties. The membership of the council was not restricted to Europe as any country could be a part of thus council. The scope of council is not limited to the crime proceeds from money laundering. The Convention has been a very significant step against terrorism, by attacking its financing on a broad front and ensuring that logistical cells cannot find financial safe havens anywhere in Europe.
However, the Convention fails to adhere to certain important provisions. For example it does not impose an obligation to ensure that corporations and other legal persons can be held liable for money laundering. Some have expressed the view that practical experience of its operation has not yet been sufficient to permit conclusions to be drawn as to its adequacy and that, consequently, it would be premature to undertake a modernizing initiative of this type.
The EGMONT Group (Financial Intelligence Units)
An FIU is the central authority in each country responsible for the receipt, analysis and dissemination of financial information for anti-money laundering and counter-terrorist financing (AML/ CFT) purposes.
Egmont Group is an informal group for the stimulation of international co-operation in the fight against money laundering and terrorist financing. It is named Egmont as the first meeting took place in Egmont Arenberly Palalce in Brussels in 1995.
The objective of the group is to provide a forum for FIUs around the world to meet and share information to improve support for each of their national AML programs and to co-ordinate AML initiatives in the fight against money laundering, terrorist financing and other financial crimes. This support includes;
1. Expanding and systematizing the exchange of financial intelligence information,
2. Improving expertise and capabilities of personal, and
3. Fostering better communication among FIUs through technology and helping to develop FIUs worldwide
These FIUs meet regularly to find co-operate , especially in the areas of information exchange, training and the sharing of expertise. A member must also commit to act in accordance with the Egmont Group???s Principles for Information Exchange between Financial Intelligence Units for Money Laundering Cases. These principles include conditions for the exchange of information , limitation on permitted uses of information , and confidentiality.
The Egmont Group has grown dramatically from 14 units in 1995 to recognized membership of 131 FIUs in 2012. The FIUs of Gabon, Jordan , Tajikistan and Tunisia joined the Egmont Group in 2012.
To meet the standards of Egmont membership , an FIU must be a centralized unit within a nation or jurisdiction established to detect criminal financial activity and ensure adherence to laws against financial crimes, including terrorist financing and money laundering. Today the FIU concept is an important component of the international community???s approach to combatting money laundering and terrorist financing. The Egmont Group is an important mechanism for information sharing and adds enormously to the capacity of governments to track the proceeds of crime as they move through multiple jurisdictions.
The Asia Pacific Group (APG)
The Asia Pacific Group on Money Laundering operating under the principles of the Financial Action Task Force (FATF) is dedicated to the enactment of anti-money laundering legislation and enforcement activity on the proceeds of crime in this geographical area.
Formed in 1997 its key goals are to ;-
1. Assess the AML compliance of its members,
2. Conduct/ co-ordinate bilateral and technical assistance and training in the Asia Pacific region ,
3. Co-operate with the FATF and other international AML networks,
4. Provide APG members with research and analysis reports on the latest money laundering trends and vulnerabilities, and
5. Contribute to the global policy development of anti-money laundering and counter-terrorism financing standards.
It currently has 41 active members; Papua New Guinea, who joined in December 2008, is the most recently added member. In addition, three jurisdictions; France, Kiribati and the United Kingdom are currently observers. There are also currently 20 international organizations that assist the APG in their work including the Financial Action Task Force (FATF) and the Egmont Group.
European Union (EU)
In 1999, the EU issues a directive on money laundering compatible with the original 40 FATF recommendations. It required mandatory reporting of suspicious transactions, identification of beneficial owners and customers of financial transactions and accounts. The EU took a renewed and serious interest in AML/CTF after the 9/11 terrorist attacks as many state members were involved in international anti-terrorism cooperation among themselves and even outside the EU community since the 1970s.
The First European Money Laundering Directive was focused on combating the laundering of drug proceeds through conventional financial channels and on requiring banks to maintain systems for identification of customers, record keeping and suspicious transactions reports. The directive required all member states to amend their national laws for the purposes of strengthening it and preventing it from getting exploited for the purposes of money laundering . The first directive also paved the way for the promulgation of the UK Criminal Justice Act; the Drug Trafficking Act 1994 and the Money Laundering Regulations 2003.
The Second EU Directive has extended the provisions of the first directive, beyond the financial sector to a broader group of businesses that includes:
1. Lawyers and Accountants
2. Estate Agents
5. Dealers in high value goods.
Business activity defined in the EU First and Second Directives is referred to a ???Regulated Activity???
The EU has issued a third directive. It introduces additional requirements and safeguards for higher risk.
It puts emphasis on the processes to detect and report suspicious activity across all of a bank???s lines of business.
The Fourth EU AML Directive
On 5th February,2013 the European commission adopted two proposals for a fourth money laundering directive to update, improve and reinforce existing rules on Anti- money laundering and transfer of funds. On 12th March, 2014 EU Parliament has voted the draft proposals.
Both proposals fully take into account the revised the revised recommendation of the Financial Action Task Force (FATF) February 2012, and the review conducted on the implementation of the third money laundering directive. Proposals go further into a number of fields to promote the highest standards for Anti- Money Laundering and counter terrorism financing.
The proposed directive aims at improving the clarity, consistency and transparency pf the rules of the Member States. The key areas are identification of beneficial owners, availability of beneficial owner information as to the identity of those who in reality stand behind the company , clarification of the existing 25% ownership threshold, Risk assessment at the National Level inclusion of Tax Crimes as predicate offence, customer due diligence , ensuring better knowledge of customer and a better understanding of their nature of their business, expanding the provisions relating to Politically Exposed Persons to now include ‘domestic and foreign’ PEPs, coverage of gambling sector, and information accompanying the transfer of funds, Co-operation and information sharing between EU-FIUs.
The Palermo Convention 2003
This convention came into force on the 29th of September 2003. It has been signed by 147 countries and ratified by 82 countries. The Palermo Convention is important because its AML provisions adopt the same approach as adopted by the Financial Task Force (FATF) in its Forty Recommendations on Money Laundering.
To identify and to expand the Vienna Convention effort to fight international organized crime, the UN adopted the International Convention against Transnational Organized Crime (2000) (Palermo Convention). As per practice this convention is also named after the city in which it was signed, it contains a broad range of provisions to fight organized crime and commits countries that ratify this convention to implement its provisions through enacting of domestic laws. With respect to money laundering, the Palermo Convention specifically obligates each ratifying country to:
1. Criminalize money laundering and include all serious crimes as predicate offences of money laundering, whether committed in or outside the country.
2. Establish regulatory regimes to deter and detect all forms of money laundering, including customer identification, recordkeeping and reporting of suspicious transactions.
3. Authorize the cooperation and exchange of information of information among administrative, regulatory, law enforcement and other authorities, both domestically and internationally, and consider the establishment of financial intelligence unit to; collect, analyze and disseminate information.
4. Promote international co-operation.
The Eurasian group on combating money laundering and financing of terrorism (EAG)
In order to extend international standards to countries outside the FATF, 8 regional groups of its type have been set up. The EAG is one of them.
In February 2005, the EAG was granted observer status in the FATF. The Eurasian Group has been an associate member of the FATF since June 2010. Associate member status in the FATF is recognition of the group’s achievements from the international community.
It is a FATF-style regional body. Belarus, India, Kazakhstan, China, KYRGYZSTAN, RUSSIA, Tajikistan, Turkmenistan and Uzbekistan are the members. 16 more states and 17 international and regional organizations have observer status.
Its objectives are to support countries in the region to create legal and institutional framework in line with FATF standards to combat money laundering and terrorist financing.
The main tasks of EAG:
a. assisting member states in introducing International standards in the sphere of combating legalization of illegally-gained incomes and financing of terrorism (FATF Recommendations);
b. developing and conducting joint activities aimed at combating money laundering and terrorist financing;
c. implementing a program of mutual evaluations of member states based on the FATF Recommendations, including assessment of the effectiveness of legislative and other measures adopted in the sphere of AML/CFT efforts;
d. coordinating international cooperation and technical assistance programs with specialized international organizations, bodies, and interested states;
e. analyzing money laundering and terrorist financing trends (typologies) and exchanging best practices of combating such crimes taking into account regional specifics.
It aims at creating the conditions for effective interaction and cooperation at the Eurasian level, The whole purpose is integration of all member states into the international AML/CFT system.
The Wolfsberg Group AML Principles
The Wolfsberg group is an association of 11 banks. It provides the global Anti-money laundering guidelines for banking. For this purpose it has developed Know Your Customer, and Anti-Money Laundering and Counter-Terrorist financing policies standards. It has published global anti-money laundering (AML) guidance, statements and principles on a number of topics, including Private Banking, Correspondent Banking, the Suppression of Terrorist Financing, and the Risk Based Approach. These principles are considered as the most acceptable standards in these areas by most of the major international regulators and institutions.
It has issued Statement against Corruption, (2007) that identifies some of the measures financial institutions may consider in order to prevent corruption in their own operations and protect themselves against the misuse of their own operations in relation to corruption. In 2011 it issued another statement endorsing measures to enhance the transparency of international wire transfers to promote the effectiveness of global anti-money laundering programs.