The International Monetary Fund and World Bank estimate that three to five per cent of world GDP (USD 1.6 trillion) is laundered every year, a plague since 1973.
Money laundering, lavado de dinero, blanchiment, riciclaggio–the term was first used in 1973 during the Watergate scandal, and there is no antecedent legal definition to describe what the Financial Action Task Force (FATF) calls the process of disguising the illegal origin of crime proceeds to make them appear legal. The laundering process usually starts with an initial accumulation of illegal capital (“placement”) deriving from activities typical of organized crime: arms sales, smuggling, drug trafficking, tax fraud, insider trading, bribery, and computer fraud schemes. Eventually, the funds are laundered by disguising their sources, changing their form, or transferring them to a place where they are less likely to attract attention (“layering”). Finally, once in the financial system, the funds can be invested in legitimate and quasi-legitimate economic and productive activities (“integration”).
TWO CLOSE FRIENDS OF ML: OFFSHORE FINANCIAL CENTERS (OFCs) AND BANK SECRECY
The globalization of the world economy and the concomitant increasing complexity of the global financial system have resulted in a large number of jurisdictions functioning as offshore financial centers. Offshore centers allow businesses to move their income to a foreign jurisdiction with more favorable tax laws and stronger voluntary or statutory privacy provisions compared to where the investor resides. In practice this means: greater privacy and secrecy, lower taxation (thus the term tax haven), easier access to deposits, and less regulation. These advantages are attractive not only to legitimate customers but also to money launderers who choose offshore centers that offer adequate financial and business infrastructure and, at the same time, strict banking and financial confidentiality facilitated by a general lack of transparency. In addition, some jurisdictions still apply bank secrecy so that authorities cannot access personal and bank information unless certain conditions apply. Bank secrecy is still prevalent in certain countries such as Luxembourg, Singapore, Lebanon, as well as at offshore banks and other tax havens where extreme client anonymity and discretion are guaranteed. Switzerland, the country that historically has played a leading role in bank secrecy, has been under intense pressure to find a way to allow its banks to share information with foreign authorities so as to avoid potential legal action. (UBS settled tax evasion claims with U.S. authorities in 2009 at a cost of $780 million.) Luxembourg announced in April that it would begin sharing information about depositors’ accounts in 2015, just two days after fellow hold-out Austria signaled it would enter EU negotiations to do the same.
AN OPEN DOOR
It is clear that ML profits hugely from the exploitation of offshore jurisdictions and strong banking confidentiality laws adopted by some countries. That is why European regulators have been fiercely trying to erode this privilege by implementing anti-money laundering regulations for banks and financial intermediaries to protect the integrity and stability of the international financial system and make it more difficult for those engaged in crime to profit from their criminal activities. Three European directives were issued, and there are currently talks on issuing a fourth Anti-Money Laundering Directive. Will the legislators be able to promote transparency and accessibility of beneficial ownership information to chip away at criminals profits?
HOW TO BE ON THE SAFE SIDE OF THE ROAD
Current EU legislation, known as the Third Anti-Money Laundering Directive, has been in force since 2005 and applies to banks as well as to lawyers, notaries, accountants, real estate agents, casinos, and company service providers. These recipients are required to:
- undertake “customer due diligence”: identify and verify the identity of their customers and of the beneficial owners of their customers (for example, by ascertaining the identity of the natural person who ultimately owns or controls a company), and monitor the transactions of and the business relationship with customers;
- report suspect money laundering or terrorist financing to the public authorities, usually the financial intelligence unit;
- take supporting measures, such as ensuring the proper training of personnel and establishing appropriate internal preventive policies and procedures. The logic behind the provisions contained in the Directive is to construct a well-defined preventive apparatus that derives its effectiveness (i) from fines inflicted on intermediaries and other entities performing activities in direct contact with those intending to launder money and assets, and (ii) by impacting the world of business. The concept of due diligence requires adopting a series of measures which are binding upon the entities involved, most importantly by checking that transactions are compatible with what the entities involved know about their customer, his commercial activities and risk profile, and, if necessary, by looking into the origin of the funds and updating all information on the customer.
WHO FAILED TO COMPLY?
Failure to comply with AML laws and regulations and breaching financial sanctions can have serious consequences, such as:
- criminal proceedings for individuals and legal entities benefiting from the crime with sanctions such as imprisonment, monetary fines and fund-freezing;
- fines for non-compliance;
- damage to reputation.
Some famous cases in the past are:
- HSBC Holdings and HSBC Bank USA N.A. agreed to forfeit $1.26 billion and enter into a deferred prosecution agreement with US authorities for failing to maintain an effective anti-money laundering (AML) program and to conduct appropriate due diligence on its foreign correspondent account holders. The HSBC Group illegally conducted transactions on behalf of customers in Cuba, Iran, Libya, Sudan and Burma, all countries that were subject to sanctions enforced by the Office of Foreign Assets Control (OFAC) at the time of the transactions.
- American Express was ordered to pay $65 million US in penalties for alleged violations of anti-money laundering provisions. The company failed to create an adequate anti-money laundering program as well as procedures designed to monitor compliance. One of the events that the authorities identified was that American Express Travel Related Services “failed to file a significant number of suspicious activity reports.”
- damage to reputation.
Published in the hard-copy of Work Style Magazine, Fall 2013