Introduction to Money Laundering
Definition of money laundering
Money Laundering is the process by which criminals attempt to conceal the true origin and ownership of the proceeds of their criminal activities. If undertaken successfully, it allows them to maintain control over those proceeds and, ultimately, to provide a legitimate cover for their source of income. Failure to prevent the laundering of the proceeds of crime permits criminals to benefit from their actions, thus making crime a more attractive proposition.
Understanding Money laundering
Each year, huge amounts of funds are generated from illegal activities such as drug trafficking, people smuggling, theft, tax evasion, arms trafficking and corrupt practices. These funds are mainly in the form of cash.
The criminals who generate these funds need to reintroduce them into the legitimate financial system without raising suspicion and without losing control. They convert cash into other forms in order to conceal the origin and true ownership of the proceeds of their criminal activities and to make it more useable. It also puts a distance between the criminal activities and the funds.
‘Money laundering’ is the name given to the process by which illegally obtained funds are given the appearance of having been legitimately obtained. According to Robinson:
“Money laundering is called what it is because that perfectly describes what takes place – illegal, or dirty, money is put through a cycle of transactions, or washed, so that it comes out the other end as legal, or clean, money. In other words, the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income”.
It has been estimated that criminal profits in excess of US$1.5 trillion are laundered each year. This movement of ill-gotten wealth is considered to be the world’s third largest industry after forex and the oil trade.
Regulatory authorities are in a continuous effort to combat money laundering in order to reduce crime and weaken criminals. For example, if it becomes very difficult and cost effective for drug traffickers to clean and use the money generated by trafficking, this activity is likely to diminish.
Money Laundering offence
The 3rd EU Directive describes a money Laundering offence as follows:
Every person who knows or ought to have known that any kind of property constitutes proceeds from the commission of a predicate offence (see definition below), is guilty of an offence if he carries out any of the following:
a) Converts or transfers or removes such property, for the purpose of concealing or disguising its illicit origin or of assisting in any way any person who is involved in the commission of the predicate offence to carry out any of the above actions or acts in any other way in order to evade the legal consequences of his actions;
b) Conceals or disguises the true nature, the source, location, disposition, movement of and rights in relation to, property or ownership of this property;
c) Acquires, possesses or uses such property;
d) Participates in, associates, co-operates, conspires to commit, or attempts to commit and aids and abets and provides counselling or advice for the commission of any of the above mentioned offences;
e) Provides information in relation to investigations that are carried out for laundering offences for the purpose of enabling the person who acquired a benefit from the commission of a predicate offence to retain the proceeds or the control of the proceeds from the commission of the offence
Predicate offences
Predicate offences are:
a) All criminal offences punishable with imprisonment exceeding one year (this time may vary depending on the jurisdiction), as a result of which proceeds have been derived which may constitute the subject of a money laundering offence as defined above.
b) Financing of Terrorism offences as well as the collection of funds for the financing of persons or organisations associated with terrorism
c) Drug Trafficking offences.
In general a money laundering predicate offense is the underlying criminal activity that generated proceeds, which when laundered, results in the offense of money laundering.
Why do criminals launder money?
There are several reasons why people launder money. These include:
- Hiding wealth: criminals can hide illegally accumulated wealth to avoid its seizure by authorities
- Evading taxes: criminals can evade taxes that would be imposed on earnings from the funds
- Avoiding prosecution: criminals can avoid prosecution by distancing themselves from the illegal funds
- Increasing profits: criminals can increase profits by reinvesting the illegal funds in businesses
- Becoming legitimate: criminals can use the laundered funds to build up a business and provide legitimacy to this business
Consequences of money laundering
There are severe economic and social consequences of money laundering. These include:
- Undermining financial systems: money laundering expands the black economy, undermines the financial system and raises questions of credibility and transparency
- Impact on economic stability: money laundering is thought to pervade, to some degree, all economic, political and social institutions. Economically it is thought to have an impact upon exchange rates and interest rates as large amounts of money are moved from one country to another, thereby affecting inflation, employment and economic stability. This is of particular concern to developing countries, as the flight of capital (often against exchange controls) from developing countries prevents internal investment and development.
- Expanding crime: money laundering encourages crime because it enables criminals to effectively use and deploy their illegal funds
- ‘Criminalising’ society: criminals can increase profits by reinvesting the illegal funds in businesses
- Reducing revenue and control: money laundering diminishes government tax revenue and weakens government control over the economy
- Impact at the social level: organised crime has an impact at the social level, where it often leads to the development of an alternative, underground, economy, which is untaxed and unregulated. The fact that it is untaxed often leads to national budgeting problems and a government fiscal deficit, as public spending exceeds revenue receipts causing governments to borrow. Whenever governments try to control public spending, it is often social welfare programmes that are the first to suffer
- Disintegration of social structure: the profits of crime, when suitably laundered, are often ploughed back into the organisation and used to develop the criminal enterprise and prevent detection. Dirty money is often used for bribes and for the purposes of corruption of government, judicial and law enforcement officials. This leads to a disintegration of social structure, to injustice and human rights’ violations that can threaten democracy itself.
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