The magnitude of money laundering
The International Monetary Fund has estimated the amount of money laundered worldwide at somewhere between $500 billion and $1.5 trillion each year; that is, 1.5 – 4.5% of gross world product.
In the UK, the National Criminal Investigation Service (‘NCIS’) estimates that drug money alone could account for as much as 1% of GDP, or around £8.5 billion a year.
The term ‘laundering’ is used because the techniques used are intended to turn ‘dirty’ money into ‘clean’ money. The US underworld coined the term through the use of launderettes for fronting. But of course laundering is not confined to cash.
Money laundering is an evolving and ubiquitous activity, which knows no frontiers. Unlike many of the world’s largest industries, crime is recession-proof, war-proof, terrorist-proof and independent of the price of oil and interest rates. Against this backdrop, the forces of globalisation have created new opportunities that criminals have been quick to seize, with the result that the scale of global criminal activity has grown to staggering proportions.
How money laundering works
Money laundering allows criminals to maintain control over the proceeds of their activities, to spend the money safely, avoid suspicion and thus detection, and avoid confiscation or forfeiture. Ultimately, then, it provides a seemingly legitimate cover for the illicit funds.
Typically, money laundering proceeds along a three-part itinerary:
• Placement of illegally earned cash into the banking system – be careful because this is the point where the launderer is most likely to be detected.
• Layering by setting up multiple transactions that confuse the audit trail and separate the money from its criminal origins – and note that often these transactions have no particular economic purpose.
• Integration and repatriation of the laundered money into the legitimate economy – so that it appears as normal legally earned funds.
The ugly face of money laundering
To constitute an act of money laundering there must normally be an offence. Where no offence has been committed, no money laundering offence can, in the normal course, arise.
An element of intent is required before many criminal offences can be committed. It may be that criminal intent is suspected where, for example, there is a pattern of suspect behaviour, or where the act giving rise to the proceeds is clearly criminal. Nevertheless, in some cases, where the monetary proceeds of a suspected theft or tax fraud are small, it may be that the perpetrators were acting in error, or in the mistaken impression that they had permission to act as they did.
Most often, the money launderer acquires or enters into transactions involving criminal property or becomes concerned in an arrangement which the launderer facilitates (by whatever means) the criminal property by or on behalf of another person. Normally the launderer knows or suspects that the property in question represents a benefit from criminal conduct.
Thus the launderer’s targets are:
To enjoy the proceeds of crime
To direct terrorist funds
To obtain control over criminal property
To disguise criminal property
To convert criminal property
To transfer or remove criminal property
But it’s not all plain-sailing for the money launderer either. Criminals face a difficulty that does not burden legitimate businesses: the very profits they make can draw unwanted attention from the law enforcement authorities. This problem is worsened by the fact that criminal profits usually arrive as cash. In an age where cash is falling out of favour, going out and spending large amounts of it invites suspicion. In managing their income criminals therefore face a choice: whether to keep it in cash form and find some way of using it that escapes the attentions of law enforcement agents, or whether instead to transfer the wealth into a non-cash form that might make it appear more legitimate. Cash, of course, is anonymous and provides no audit trail. It follows that if criminally earned cash can be safely spent as cash, there would be no need to launder. But once a criminal`s funds become too great to spend without drawing attention to them, they will need to be laundered. In non-cash based societies, this is almost always the case. Even illegally acquired funds that are undeclared for tax may need to be laundered, if they cannot be spent without the fear of detection. Remember what happened to poor old Al Capone!
In considering the overall picture of anti-money laundering and financial compliance, it should be noted that anti-money laundering and financial compliance issues may arise equally onshore and offshore in tax havens or international offshore financial centers (IOFCs). In the context of offshore strategic and international tax planning, it should be noted that all high-tax jurisdictions have some form of anti-tax avoidance legislation directed against the use of offshore structures in tax havens or international offshore financial centers (IOFCs). Such anti-tax avoidance legislation has, in many countries, made offshore strategic and international tax planning increasingly difficult. Again, in the context of offshore strategic and international tax planning, it should be noted that the line between anti-money laundering legislation and anti-tax avoidance legislation is far from clear, with the Revenue sometimes using anti-money laundering legislation in order to bolster its strategies of anti-tax avoidance. These anti-money laundering strategies may come into operation when dealing with onshore situations quite as much as in dealing with situations in tax havens or international offshore financial centers (IOFCs).
Furthermore in examining anti-money laundering and financial compliance situations, it should be noted that anti-money laundering and financial compliance issues may arise equally onshore and offshore in tax havens or international offshore financial centers (IOFCs), and that this may impact on offshore strategic and international tax planning.