What is money laundering?
Money laundering is the concealment, conversion, transfer or disguise of any property that represents proceeds from criminal activity. It can also be defined as legitimising funds used in or resulting from criminal activity. Put differently it is cleaning dirty money.
Why do people launder money?
People launder money in an attempt to explain that they acquired their wealth legitimately. In some countries it is now considered a criminal activity and therefore people launder in an attempt to evade the legal systems.
How is money laundering conducted?
The money laundering process can be summarised in three main stages i.e. placement, layering andintegration. This summary is for ease of understanding because the process is normally complicated and there are no straight – forward rules or ways in which laundering is done.
Placement involves getting the money into the financial system either through banks or businesses or converting it into assets, which can be resold. The purpose is to avoid holding conspicuous sums of money by altering their form and location as much as possible. An example in a banking scenario is where there are substantial increases of deposits of an account within a short
time, sometimes even using numerous deposit slips of small amounts, especially if they are transferred out of the account within a short time.
Once the money has entered into the financial system, the launderers usually want to pass through a series of financial transactions (layers) to make audit trail very difficult. An example is once the money is placed, the owner comes and converts it into traveller’s cheques, letters of credit, bank drafts etc. A typical case in banking is a customer who constantly pays in cash to cover
requests for bank drafts, money transfers or other negotiable instruments.
This is the stage when the cleaned money is put back to the system. At this stage it is extremely difficult to distinguish it from clean (legitimate) money. For example paying inflated or false invoices for exports/imports will immediately integrate the money into the economy.
The problems associated with money laundering:
In some countries, it is prohibited by law and it is a punishable offence.
The people who launder money through business compete unfairly
with the legitimate businesses. This is because they will go to any length to make sure their business survives hence strategies like cutting prices below market levels is common. This can eventually put honest people out of business.
The people involved often either buy off or threaten to kill any body
who comes their way to hinder their business. Bankers, lawyers and accountants who in one way or another may have to see this malpractice, in the ordinary course of their work are very susceptible.
Such crime only leads to more crime and corruption. A spiral of crime
and corruption develops regulators and law enforcement agencies become compromised. If ignored, they soon gain respectability within the society and in so doing even commit more crimes. An example in Uganda is people who donate a lot of money to charitable causes are often held with very high esteem.
If a business or company is involved in money laundering and it is
eventually unearthed, they can lose reputation and eventually profits because people will be reluctant to do business with them.
There is increasing international pressure, and some countries have
enacted laws that have extra-territorial dimension. Powerful countries like the US, Germany and Britain often exert a lot of pressure on the
countries concerned and could even threaten them with sanctions.
What should Financial Institutions do?
The following measures are suggested as a way of fighting against money laundering:
Identification of Customers:
Financial institutions should require proper identification of their customers and other clients when entering into a business relation. This will help the organisation to assess the risk it faces in doing business with the client.
Where a formal credit rating agency exists, it is advisable to get in touch with them. Letters of reference, financial statements etc are all useful sources of information.
Screening Suspicious Transactions
Financial institutions should put in place mechanisms and systems that check suspicious transactions such as unusual cash deposits by individuals who normally deposit cheques, sudden increase in deposits in an account which is then quickly taken out, customers whose deposits contain counterfeit notes or forged instruments e.t.c. They should also have clear instructions on how staff should handle such cases. Where the case could be reported to authorities outside the banks, one should be mindful of the confidentiality requirements and exceptions to the rule.
Financial institutions should have proper record keeping systems. These records should be kept in such ways that any review, examination or investigation can be carried out effectively and efficiently by auditors or any other interested party. Such records must also be sufficient to allow reconstruction of individual transactions. Record Keeping is an effective tool in monitoring money – laundering activities.
Financial institutions should also know their employees. Sudden change in characteristics like lavish life style, changes in performance should be closely monitored because they could be danger signals. Almost all cases of money laundering take place with knowledge of or assistance by an insider. Financial institutions should also have on-going training programmes of their
employees on ways of combating money laundering.
The Financial institutions should put pressure on the law making agencies to enact laws that will criminalize money laundering. Such laws will also protect the employees from criminal liability arising from disclosure of information imposed by any contract.