While delivering a training session on the subject of Anti-Money Laundering and Counter Financing Terrorism, I realised that “Basics no more remain basics.”
Instead, the audience was well aware of the topic as well as its implications. Thus, the need to talk about such a topic was far too far better understood, mutually by the staff and the superiors who had scheduled it. As I began with the literal meaning of word “Laundering” as “Wash and Iron either cloths or linen,” connecting it to the metaphorical money laundering, which means “cleaning of dirty money,” I observed an unusual spark in the audience. The process of converting illegal funds or assets into legitimate funds or assets is the basic understanding of money laundering as this process converts black or illegal money into white or legal money.
Basic objectives of money laundering are three; hide, move and invest. Hide; to reflect the fact that the cash is often introduced to the economy via commercial concerns, which may, knowingly or unknowingly, be a part of the laundering scheme. These ultimately prove to be the interface between criminal activity and the financial sector. Secondly, “Move” clearly explains that money launderers use transfers, sales and purchase of assets, and change the shape and size of the lump of money to obfuscate the trail between money and crime or money and criminal. Lastly, “Invest;” the criminals spend the money in assets or his lifestyles. To achieve these objectives, techniques employed during money laundering could be several, for instance, deposit structuring or smurfing, connected accounts, payable through accounts, loan back arrangements, Forex Money Changers, Credit/Debit cards, Investment Banking and their Securities Sectors, Insurance and Personal Investment Products, Companies Trading and Business Activity, Lawyers, Accountants and other Intermediaries and misuse of other Non-Profit Organisation. Turning the pages of history, the BSA (Bank Security Act) was established to become one of the most important tools in the fight against money laundering in 1970. A decade later, money laundering as a crime attracted interest in the 1980s, essentially within the drug trafficking context. Financial Action Task Force (FATF) was formed in 1989 to set up standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system. The FATF is, therefore, a “policy-making body” that works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas.
Although terrorist financing is a form of money laundering, it doesn’t work the way conventional money laundering works
Money laundering methods have become more creative and stringent since 1989, 1993, 1996, 2001, 2003 and most recently in 2012. According to Jeffery Robinson in the book, “The Laundrymen,” “After foreign exchange and oil industry, the laundering of dirty money is the world’s third-largest business.”
Interestingly, as per IMF’s estimate, 2.7 per cent of global $1.6 trillion are laundered so far. Stock markets, agricultural products (as there is no income tax and mostly, the transactions are cash-based), property market, creation of bogus companies, loans, false export and import invoices, commodities like gold, metal, diamond, etc., and valuable antiques are some popular places from where the money is laundered.
FATF has three criterions of classification; White List, Grey List and Black List. In specific, in relation to AML/CFT, as far as legal and regulatory obligations in Pakistan are concerned, following laws and regulations have been promulgated in Pakistan: AML Act 2010; Regulations 770(I)/2018; Guidelines on Anti Money Laundering; Countering Financing of Terrorism and Proliferation Financing Issued by Securities and Exchange Commission of Pakistan in September 2018.
Combating the Finance of Terrorism (CFT) involves investigating, analysing, deterring and preventing sources of funding for activities intended to achieve political, religious or ideological goals through violence and the threat of violence against civilians. Money to fund terrorist activities moves through the global financial system via wire transfers and in and out of personal business accounts. It can sit in the accounts of illegitimate charities and be laundered through buying and selling securities and other commodities or purchasing and cashing out insurance policies. Although terrorist financing is a form of money laundering, it doesn’t work the way conventional money laundering works. The money frequently starts to clean, i.e. as a ‘charitable donation’, before moving to terrorist accounts. It is highly time-sensitive and requires a quick response. Collection of membership dues, sales of publications, cultural or social events, door-to-door solicitation within a community and appeal to wealthy members of the community are the legal sources of terrorist financing apart from illegal sources. Whereas kidnapping and extortions, smuggling, fraud including credit card frauds, misuse of a non-profit organisation and charity funds, theft and robbery, drug trafficking and human trafficking come under illegal sources.
Financial institutions used for the purpose go through serious risks, such as reputational risk, legal risk, operational risk (failed internal processes, people and systems and technology) and concentration risk. Moreover, all these risks are inter-related and together have the potential of causing serious threats to the financial organisation in their execution. Protection of whistleblowers is an important focus for the legal systems, as is incentivising whistle blowing when there are many reasons stopping employees from doing so.
In reality, no individual has the power to stop money laundering alone. If a country is hostile to money laundering, criminals simply look elsewhere for a place to clean their funds. Therefore, global cooperation is essential.
Financial Action Task Force (FATF), an international organisation with 37 member states, has issued “40 Recommendations” for a financial institution as standard to curb money laundering. Some of these recommendations include identification and background check of depositors; reporting all suspicious activities and building an internal task force to identify laundering clues. Financial institutions should not keep anonymous or fictitious accounts. With regard to politically exposed persons, financial institutions should, in addition to performing normal due diligence measures, have appropriate risk management systems to determine whether the customer is a politically exposed person or not. Take reasonable measures to establish the source of funds and wealth. Obtain senior management’s approval for establishing a business relationship with such customers. Moreover, financial institutions should maintain, for at least seven years, all necessary records on transactions, to enable them to comply swiftly with information. Financial institutions should pay special attention to all complex, unusual large transactions, and all unusual pattern of transactions, which have no apparent economic or visible lawful purpose. If a financial institution has reasonable grounds to suspect that funds are the proceeds of criminal activity, it should be required, directly or indirectly, by law, to report promptly its suspicions to the regulatory authorities.
The writer is a motivational speaker based in Rawalpindi