In the world we live in today, it is easier than ever before to conduct seamless financial transactions on a global basis. With the rapid advancements in technology now available to us, any person can send money from any place in the world to any other place, relatively cheaply and almost instantly.
However, while this has made international transacting and commerce easier, it has had the unintended effect of facilitating criminal activities. Today, criminal organizations rely on the financial system to move large sums of money from illicit enterprises and make them seem legitimate – a practice known as money laundering.
Money laundering is a crime, along with many of the illicit activities through which the laundered money is realized. Yet, illicit financial flows continue to be a problem for countries around the world. How exactly does money laundering occur and why does it persist? Here’s all you should know about money laundering.
What is Money Laundering?
According to the Central Bank of Trinidad and Tobago (CBTT) Guideline on Money Laundering and Combatting of Terrorism Financing, “Money laundering is the process used by criminals to conceal the illegal origin and ownership of funds derived from criminal activities.” It includes all the schemes and tactics through which illegal money is moved, concealed, disguised and transformed in order to make it look like it was earned from legal sources.
Usually, this money comes from a variety of illegal activities such as human trafficking, tax evasion, drug trade and other illegal enterprises. In many other cases, the money is meant for financing terrorist activities and is being laundered in order to enable the money to reach the terrorists it is meant for.
Money can be laundered in various ways, including by putting it through the financial system, the use of pyramid schemes, investing it into real estate or even by purchasing stocks, bonds, and other securities. In some cases, criminal masterminds may play on the emotions of the unbanked and underbanked persons to launder money in schemes which appear legit at first glance. The overall goal of money laundering is to make illegal money appear legitimate so it can be enjoyed by criminal offenders or used to facilitate the laundering of other illegal sums of money.
The term ‘money laundering’ itself literally means washing or ‘cleaning’ money. The term is reported to have been coined by agents who were tasked with investigating notorious gangster, Al Capone. The investigation discovered Al Capone had been funneling the proceeds of his criminal empire through a chain of laundromats he owned at the time – a money laundering operation in every sense.
Although there is no concrete data on the exact amount of money laundered globally every year, estimates are that the figures run into trillions of dollars. According to the Financial Action Task Force on Money Laundering (FATF), the sum laundered around the world annually is roughly $1.5 trillion. The United Nations Office on Drugs and Crime similarly reports that between $800 million to $2 trillion is laundered every year – roughly between 2% and 5% of global GDP. For local context, the Financial Intelligence Unit for the period April to June 2020 reported a total of $2.7 billion (TTD) in suspicious transactions/ activity received via filing of Suspicious Transaction Reports and Suspicious Activity Reports from supervised entities.
Examples of Money Laundering
There are several ways through which money laundering is carried out. Often, criminal organizations and individuals prefer to adopt a mix of strategies that include property and business investments, as well as creative accounting.
Some of the most common examples of money laundering include casino schemes, smurfing and cash or front business schemes. Let’s look at some of these examples below:
- Casino schemes: Casinos are one of the largest repositories of money locally. Pre Covid-19 every day, thousands of people spend millions of dollars in casinos and many people are able to remove sums equal to this from the system. This makes casinos perfect for criminal organizations that want to launder large sums of money. The scheme works by injecting large sums into the casino by purchasing betting chips (usually in cash) and betting these chips only partially. The sums are then cashed out as legitimate casino winnings to be utilized as desired.
- Cash business: Money laundering schemes that use cash businesses as a front are one of the most common. The scheme starts by placing large sums of cash with a legitimate business. These cash sums will then be injected into the business’ accounting in the form of fake transactions, which are then mixed in with usual business conducted during the day. At the end of the process, the injected cash will be reported as part of the company’s profit, and can then be adapted to any purpose.
- Smurfing: Smurfing, also called structuring, is another popular practice designed to integrate illicit wealth into the financial system. The scheme works by placing small amounts of cash into multiple bank accounts over a period of time until all the illegal money has been placed. Usually, banks have obligations to report transactions that exceed a certain threshold. However, through smurfing, criminals can avoid triggering this reporting obligation by making multiple deposits that stay beneath the threshold. Many smurfing operations are very sophisticated and they include strategies to vary the deposit amounts in order to beat any automatic detection mechanisms.
- Foreign investment: This scheme can be very hard to discover and beat. Foreign investment schemes launder illegal money by disguising it as legitimate investment in a country by a foreign investor. Usually, the money is transferred to a third party that has no apparent connections to the illegal activity or individuals that made the money. The third party then ‘invests’ the money in a business of the criminals’ choosing. The money can later be taken out in the form of dividends, high executive salaries and other measures.
Why Do People Launder Money?
There are countless reasons why people may choose to launder money. Despite the fact that the act is an offense and often involves money from illegal enterprises, a lot of money still gets laundered.
A primary purpose for doing this is to be able to enjoy the illegal wealth criminal organizations and individuals have amassed. Ordinarily, it can be difficult to make and spend money from illegal conduct. Most criminal organizations prefer to make criminal transactions in cash, since it is generally untraceable. But this money accumulates, and soon, it becomes inconvenient to have it all in cash. So, money laundering is considered an option to protect the money and utilize it.
Certain other organizations and individuals launder money in order to finance illegal activity. For instance, countries and organizations that fund terrorist organizations typically do not want any ties between them and the terrorists they fund. In situations where a cash handover is not possible, it is beneficial to provide this funding through a complicated maze of financial transactions which usually involve the use of charities and non-profit organisations that does not lead back to them.
As a result, money laundering is almost exclusively a tool utilized by people who want to hide the source of their money or the ends they wish to put it to.
3 Stages of Money Laundering
As mentioned already, there are several different ways in which money laundering schemes are carried out. Apart from the examples listed above, there are thousands more ways in which criminal organizations move and protect their illicit wealth.
However, there are certain typical elements that underlie all money laundering schemes. These are commonly referred to as the “stages” of money laundering which must be achieved in order to clean the “dirty” money. They are as follows:
- Placement: This is the first stage of the money laundering process. At this stage, illegal money is first introduced into the financial system without arising great suspicion. For instance, the money may be deposited in a bank at this stage, introduced into a casino by purchasing betting chips or injected into a cash business.
- Layering: The second stage is where the illegal money is blended with legitimate money in order to confuse the money trail. Layering often involves complex financial, accounting or strategic tactics that are designed to thoroughly disguise the placed funds. The trail can become so confusing that even skilled accountants and forensic experts may lose sight of the funds. Examples of layering include transferring deposited funds across a complicated network of accounts, creation of fictitious loans, and payment on false invoices.
- Integration: Once the money is thoroughly cleaned during the layering process, it is then integrated into the financial system as legitimate money. At this stage, you may see the money being received as fair dividends on stocks, shares and bonds, or executive compensation from legitimate businesses. As a final step, the money may be fixed in short to long-term investments such as real estate, and several other investment vehicles.
Consequences of Money Laundering
While money laundering may seem like something that affects only the people involved in doing it, the reality is that it has far reaching effects. One of the immediate consequences of money laundering is that it helps to finance further organized crime in society.
It allows criminal organizations the facilities they require to use their illegal wealth, giving them the resources to expand their operations. In addition, it fosters the dangerous narrative that crime pays as it removes barriers to gaining and enjoying wealth from criminality.
For developing economies, money laundering can be especially devastating. It erodes local and international confidence in the financial system, and in the same manner, it can result in both de-risking and capital flight. De-risking in this context refers to foreign financial institutions terminating their business relationships with local banking institutions. This creates the loss of correspondent banking relationships which are critical for access to global payments and financial systems.
It is for these reasons above that the fight against money laundering is receiving attention from the authorities. Locally, the oversight of money laundering falls under the purview of several organisations mainly the Financial Intelligence Unit of Trinidad and Tobago, the Central Bank of Trinidad and Tobago, and the Trinidad and Tobago Securities Exchange Commission. These agencies are supported by Law Enforcement Agencies such as:
- Financial Investigations Bureau of the Trinidad and Tobago Police Service
- Criminal Tax Investigations Unit of the Inland Revenue Division
- Financial Investigations Unit of the Customs and Excise Division
How do we reduce Money Laundering?
Money laundering has the potential to pose a serious threat to the overall functioning of our local financial system. As such, various industries (such as banks, insurance companies, investment brokers and advisers, credit unions, casinos, real estate brokers and agents, attorneys, accountants, jewellers, and motor vehicle sales businesses) are regulated by the various supervisory authorities. This regulation involves the adoption of anti-money laundering measures to identify the risks associated with money laundering and to implement measures to mitigate against these risks.
At FirstLink Business Solutions Limited, we provide a full-service anti-money laundering (AML) compliance solution which seeks to understand and manage supervised entities AML/CFT risks, develop comprehensive compliance programs in accordance with their risk appetite and better detect and report instances of money laundering and terrorist financing. If your business is regulated by any one of the Supervisory Authorities above, Schedule a Free Consultation with one of our Certified Anti-Money Laundering and Financial Crimes experts today.
