The deafening noise of the washing machines, the floral smell of detergents, and the tinkling of the coins were the framework in the process of legitimizing Al Capone’s revenues. Revenues obtained from extortion, prostitution, drugs, alcohol transformed into simple earnings of small businesses such as laundries. This picture has changed in recent years, from the laundries in the suburbs, the process now starts in paradisiacal beaches and luxurious offices in big capitals.
In fact, money laundering schemes often start in banks, and the recent cases of Danske Bank, HSBC, and the Panama Papers are significant evidence of the deep involvement of the banking sector in the cycle of money laundering. This exposed the fragility and the lack of enforced regulations of banks, especially when dealing with Anti Money Laundering and Counter-Terrorism Financing regulations. Even though there have been many steps taken towards the regulation of money laundering on an international level, this was not enough. Banking regulation has been and still is a key aspect in the prevention of money laundering and countering terrorism financing. But how is this issue being tackled?
What do we mean by “money laundering”?
Money laundering can be defined in various different ways. The majority of states around the world follow the definition given by the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (1988) (Vienna Convention) and the United Nations Convention Against Transnational Organized Crime (2000) (Palermo Convention) :
• The conversion or transfer of property, knowing that such property is derived from any [drug trafficking] offense or offenses or from an act of participation in such offense or offenses, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in the commission of such an offense or offenses to evade the legal consequences of his actions;
• The concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that such property is derived from an offense or offenses or from an act of participation in such an offense or offenses, and;
• The acquisition, possession, or use of property, knowing at the time of receipt that such property was derived from an offense or offenses or from an act of participation in such offense/offenses.
The problem that is presented with these definitions is the recognition of which predicate offense actually results in the offense of money laundering. For example, the Vienna Convention limits the scope to drug affairs, excluding in this way many other illicit sources of dirty money. Over the years, however, this was recognized by the international community, so the FATF which is recognized as the international standard setter for anti-money laundering (AML) efforts, defines the term “money laundering” as “the processing of […] criminal proceeds to disguise their illegal origin” in order to “legitimize” the ill-gotten gains of crime, expanding in this way the Vienna’s Convention definition to include other predicate offenses. Also, the Palermo Convention compels all member countries to recognize that money laundering offenses are linked to “the widest range of predicate offenses”.
Financing of terrorism
Often when we think about terrorist attacks we reminisce what happened in Paris, Nice, Barcelona, and not of white extremist attacks. This shows one of the biggest controversies about terrorism: its definition. Many countries around the world do not share the same opinion when specifying what actions constitute acts of terrorism. This happens because the attack is not analyzed simply for what it is but it is filtered by all the different political, religious, and national implications which obviously differ from country to country. FATF, which is also recognized as the international standard setter for efforts to combat the financing of terrorism
(CFT), does not clearly define the term financing of terrorism in its nine Special Recommendations on Terrorist Financing (Special Recommendations) written after the events of September 11, 2001. Nonetheless, FATF urges countries to ratify and implement the 1999 United Nations International Convention for Suppression of the Financing of Terrorism, which states:
- Any person commits an offense within the meaning of this Convention if that person by any means, directly or indirectly, unlawfully and willingly, provides or collects funds with the intention that they should be used or in the knowledge that they are to be used, in full or in part, in order to carry out:
a. An act which constitutes an offense within the scope of and as defined in one of the treaties listed in the annex; or
b. Any other act intended to cause death or serious bodily injury to a civilian, or to any other person not taking any active part in the hostilities in a situation of armed conflict, when the purpose of such act, by its nature or context, is to intimidate a population or to compel a government or an international organization to
do or to abstain from doing an act.
- For an act to constitute an offense set forth in paragraph 1, it shall not be necessary that the funds were actually used to carry out an offense referred to in paragraph 1, subparagraph (a) or (b).
However, the absence of a common definition has not stopped global cooperation in countering the financing of terrorism.
The link between money laundering and the financing of terrorism
Why are money laundering and terrorism interrelated? The answer is very simple: terrorism needs money. Terrorist networks around the world require quite a significant amount of money, just think about weapons and all the means necessary not only for the attacks but for the organization and communication between the individuals.
The techniques used to launder money are basically the same as those used to conceal the sources of and uses for, terrorist financing. Funds used to support terrorism may originate from legitimate sources, criminal activities, or both. Nonetheless, disguising the source of terrorist financing, regardless of whether the source is of legitimate or illicit origin, is important. If the source can be concealed, it remains available for future terrorist financing activities. Similarly, it is important for terrorists to conceal the use of the funds so that the financing activity goes undetected. For these reasons, FATF has recommended that each country criminalize the financing of terrorism, terrorist acts, and terrorist organizations, used, directly or indirectly, to
finance or support terrorism and designate such offenses as money laundering predicate offenses. A big concern is quantifying the amount of money that flows in this system and needless to say, reliable estimates on a global basis are not available. With regard to money laundering, the IMF believes that the amount could range between 2% and 5% of the world’s gross domestic product and this equals a staggering amount of money.
“The archetypal tax haven may be a palm-fringed island, but […] there is nothing small about offshore finance. If you define a tax haven as a place that tries to attract non-resident funds by offering light regulation, low (or zero) taxation, and secrecy, then the world has 50-60 such havens. These serve as domiciles for more than 2m companies and thousands of banks, funds, and insurers. Nobody really knows how much money is stashed away.”
The process of money laundering
Initially, the revenues were especially originated from the drug markets. Today the sources are a vast range of criminal activities like illegal sales of weapons, human trafficking, and exploitation, political corruption. However, the process of money laundering remains the same and still very complex but we can simplify it by saying that it relies on 3 important actions which are: placement, layering, and integration. These three stages are followed also in terrorist financing schemes, except that the third step that deals with integration involves the distribution of funds to terrorists and their supporting organizations, while money laundering, as previously stated, goes in the opposite direction meaning that they will integrate criminal funds into the legitimate economy. We must remember that money laundering and the financing of terrorism can, and do, occur in every country of the world, especially those with complex financial systems. The perfect targets for these activities are countries where AML and CTF enforcement are lax, ineffective, or corrupt. This means that no country is exempt. This happens because international financial transactions can be easily used and abused to expedite the laundering of money and terrorist financing occur within other hosts in different countries. So, it’s important to note that the placement, layering, and integration may each occur in three separate countries; one or all of the stages may also be removed from the original scene of the crime.
The consequences of money laundering and effective AML/CTF
While money laundering and the financing of terrorism can occur in any country, we must highlight the significant economic and social consequences that it has on developing countries. This happens because their internal market is smaller and consequently more sensitive to any kind of disruption. The magnitude of these adverse consequences is difficult to establish, however, since such adverse impacts cannot be quantified with precision, either in general for the international community or specifically for an individual country.
On the other hand, an effective framework for anti-money laundering (AML) and combating the financing of terrorism (CFT) have important benefits, both domestically and internationally, for a country. These benefits include lower levels of crime and corruption, enhanced stability of financial institutions and markets, positive impacts on economic development and reputation in the world community, enhanced risk management techniques for the country’s financial institutions, and increased market integrity. When money laundering itself is made a crime, it gives a new mean to prosecute criminals, both those who commit the underlying criminal acts and those who assist them through laundering illegally obtained funds.
Similarly, an AML/CFT framework that includes bribery as a predicate offense and is enforced effectively provides fewer opportunities for criminals to bribe or otherwise corrupt public officials. An effective AML regime is a deterrent to criminal activities in and of itself. This definitely makes it less likely for criminals to benefit from their actions. In fact, confiscation and forfeiture of money laundering proceeds are a key step to the success of any AML program. This because forfeiture of money laundering proceeds eliminates those profits altogether, making it less desirable to keep that type of business going.
Europe and the EBA
World leaders have realized that international efforts are indispensable to counter money laundering and terrorist financing. Also, they’ve understood the importance of public confidence in financial institutions hence their stability, which is obtained also by sound banking practices that reduce financial risks to their operations. These risks include the potential that individuals or financial institutions will bear losses as a result of fraud from direct criminal activity, lax internal controls, or violations of laws and regulations.
It is clear that the world will be insecure and extremely dangerous if there is a place where funds are available for future terrorist financing activities regardless of their original legitimate or illegitimate source. In Europe, many different authorities starting from the European Parliament and European Parliament have adopted directives and regulations in prevention and aiming to reduce money laundering. The first thought we have when speaking about money laundering goes to the British Virgin Islands or to Wyoming however as we stated before, it happens everywhere. This highlights the importance of cooperation and transparency in Europe. Europe needed supervisory authorities mandated to create binding technical standards (BTS). These European Supervisory Authorities are 3 and they deal with different aspects of the financial market: banking, investments, and insurance/pensions. The European Banking Authority has the power “to contribute to the establishment of high quality common regulatory and supervisory standards and practices, in particular by providing opinions to the Union institutions and by developing guidelines, recommendations and draft regulatory and implementing standards” (soft law) and it then it is up to the Commission to endorse it and adopt it. An important role given to the EBA is stated in art.17 in case of breach of Union law, so when a competent authority has not applied what has been adopted or breached the law in particular by failing to ensure that the requirements are followed, it can start an investigation and issue recommendations. This shows how Europe is trying to cope with the problem of money laundering almost from the origin, the placement stage. It’s important to realize how banks are a fundamental step in the process
of money laundering, so checking that they follow the AML-CTF directives is fundamental to prevent it. However, we must remember that the first supervisory role is given to the Central Banks of each country of the European Union, so these are the national competent authorities that have the biggest role in countering money laundering with the private banks themselves.
Central Banks and the Basel Committee
Many Central Banks in Europe are part of the Basel Committee on Banking Supervision (BCBS) that is the primary global standard-setter for the prudential regulation of banks and provides a forum for regular cooperation on banking supervisory matters. Its 45 members comprise central banks and bank supervisors from 28 jurisdictions. Its Secretariat is located at the Bank for International Settlements in Basel, Switzerland.
The Basel Committee is responsible for issuing guidelines on supervisory standards which the international community expects from banks and bank supervisors. It sets supervisory standards and guidelines without intending to have supervisory and enforcement authorities and recommends statements of best practice to implement them in accordance with their own national systems.
One of its objectives is to improve supervisory standards and the quality of supervision worldwide in three ways:
1.exchanging information on national supervisory arrangements;
2.improving the effectiveness of techniques for supervising international banking business;
3.setting minimum supervisory standards in areas where they are considered desirable.
Since the Committee has been concerned with money laundering issues it has been part of a joint issuance –a statement of what each of the three sectors (banking, insurance, and securities) has done and should do in the future to eliminate ML and counter the FT – along with the IAIS and the IOSCO. The Committee has also introduced twenty-five Core Principles for Effective Banking Supervision, the most important global standard for prudential regulation and supervision, in 1997, and this was revised and published in 2006. One of these core principles is considered as an important part of the AML-CFT institutional framework which is known as “Know Your Customer” or “KYC” policies and procedures.
Supervisors must be satisfied that banks have adequate policies and processes in place, including strict “know-your-customer” schemes, that ensure high ethical and professional standards in the financial sector and prevent the bank from being used, intentionally or unintentionally, for criminal activities. The extent of KYC robustness is closely associated with the field of anti-money laundering and combating the financing of terrorism. This example of banking regulation is a model to follow in the prevention of money laundering in banks.
There is no doubt to say that the Basel Committee on Banking Supervision has made every effort to improve supervisory standards and the quality of supervision worldwide and so have the European rules along with the worldwide cooperation on anti-money laundering and terrorist financing. Effectively combating money laundering and terrorist financing requires a coordinated approach from legislators, AML/CFT supervisors, law enforcement authorities, judicial authorities, financial intelligence agencies, banks, and other financial institutions, and many others.
The sharing of important information between all these bodies has often and sadly been insufficient, particularly across borders. This is also because there is a broad heterogeneity of institutional setups among the Member States, involving judicial authorities limited to cooperation and implementation, as well as surveillance authorities attached either to the executive or judicial branch, and their interaction with prudential supervisors. This situation makes combating money laundering and terrorist financing complicated from both a legal and a practical point of view. This battle can only be won through cooperation. However, it is important to remember that the first responsibilities and steps are in the hands of the private banks and the national competent authorities that have to put in place and maintain internal systems and controls to ensure that they properly manage the risks to which they are exposed.
“Everyone’s worried about stopping terrorism. Well, there’s really an easy way: Stop participating in it.”
― Noam Chomsky