Money laundering is the process of disguising illegal sources of money so that it looks like it came from legal sources. Methods by which money may be laundered are varied and can range in sophistication. Many regulatory and governmental authorities quote estimates each year for the amount of money laundered, either worldwide or within their national economy.
Regardless of the difficulty in measurement, the amount of money laundered each year is in the billions of US dollars and poses a significant policy concern for governments. As a result, governments and international bodies have undertaken efforts to deter prevent and apprehend money launderers. Financial institutions have likewise undertaken efforts to prevent and detect transactions involving dirty money, both as a result of government requirements and to avoid the reputational risk involved.
Money laundering often occurs in three steps: first, cash is introduced into the financial system by some means called -placement, the second involves carrying out complex financial transactions in order to camouflage the illegal source – layering, and the final step entails acquiring wealth generated from the transactions of the illicit funds – integration. Some of these steps may be omitted, depending on the circumstances; for example, non-cash proceeds that are already in the financial system would have no need for placement.
Anti-money laundering (AML) is a term mainly used in the financial and legal industries to describe the legal controls that require financial institutions and other regulated entities to prevent detect and report money laundering activities. An effective AML program requires a jurisdiction to have criminalized money laundering, given the relevant regulators and police the powers and tools to investigate; be able to share information with other countries as appropriate; and require financial institutions to identify their customers, establish risk-based controls, keep records, and report suspicious activities.
Leaders throughout the international community recognize that anti-money laundering (AML) and counter-terrorist financing (CFT) measures are powerful tools that are effective in the fight against corruption.
The fight against money laundering has been an essential part of the overall struggle to combat the activities of organized crime, and more recently the financing of terrorist activity. It became apparent over the years that banks and other financial institutions have been an important source of information about money laundering and other financial crimes investigated by law enforcement. Concurrently, governments around the world began to recognize the corrosive dangers that unchecked financial crimes posed to their economic and political systems.
One of the first organized efforts on a world level to address the problem of money laundering is the Financial Action Task Force on Money Laundering (FATF). The FATF was set up by the Group of Seven industrialized countries at its Economic Summit in Paris in July 1989. It is an inter-governmental body whose purpose is the development and promotion of policies, to combat money laundering and terrorist financing, both at national and international levels. Anti-money laundering guidelines came into prominence globally as a result of the formation of the Financial Action Task force (FATF) and the promulgation of an international framework of anti-money laundering standards. These standards began to have more relevance in 2000 and 2001 after FATF began a process to publicly identify countries that were deficient in their anti-money laundering laws and international cooperation, a process colloquially known as name and shame.
It also monitors its members’ progress in implementing necessary measures, reviews money laundering and terrorist financing techniques and counter-measures, and promotes the adoption and implementation of suitable measures worldwide. It also collaborates with other international bodies involved in combating money laundering and the financing of terrorism.
The FATF membership is currently made up of 31 countries and territories and 2 regional organisations. The FATF does not have a tightly defined constitution or an unlimited life span. The Task Force reviews its mission every five years and it will only continue to exist and to perform its function until the member governments agree that this is necessary.
In October 2001 the FATF expanded its mandate to deal with the issue of financing of terrorism, and took the important step of creating the Nine Special Recommendations on Terrorist Financing. These Recommendations contain a set of measures aimed at combating funding of terrorist acts and terrorist organizations, and are complementary to the Forty Recommendations.
These Recommendations set minimum standards for action for countries to implement the detail according to their particular circumstances and constitutional frameworks.
In 2003 FATF issued a revised version of the Recommendations. Major changes to the revised Recommendations include:
Specifying a minimum list of designated categories of predicate crimes for money laundering;
Extending several AML requirements to cover financing of terrorism, including suspicious transaction reporting (STR) requirements;
Introducing risk-based application of customer due diligence (CDD),
Imposing specific conditions and CDD for business and transactions where third parties are relied upon for completing CDD;
Extending required AML/CFT measures,
Including additional key institutional measures,
Prohibiting shell banks; and
Improving transparency of legal persons.
FATF’s three primary functions with regard to money laundering are:
Monitoring members’ progress in implementing anti-money laundering measures.
Reviewing and reporting on laundering trends, techniques and countermeasures.
Promoting the adoption and implementation of FATF anti-money laundering standards globally.
Moneyval was formerly known as the Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures. Today, it has 27 permanent members, 2 temporary members and 1 active observer. In addition, an important number of countries and organizations have regular observer status.
The aim of MONEYVAL is to ensure that states have effective systems in place to counter money laundering and terrorist financing and to comply with the relevant international standards in these fields.
Moneyval mutually evaluates States against all relevant international standards in the legal, financial and law enforcement sectors.
As of June 2006, Moneyval has become an Associate Member to FATF. This status provides an opportunity for more countries within Moneyval to attend and actively participate in FATF meetings as part of the Council of Europe/Moneyval delegation.
Separate legislations created specialized governmental agencies as countries around the world developed systems to deal with the problem of money laundering. These entities are now commonly referred to as “Financial Intelligence Units” or “FIUs”.
Recognizing the benefits of a FIU network, in 1995, a group of FIUs at the Egmont Arenberg Palace in Brussels decided to establish an informal group for the stimulation of international co-operation. Now known as the Egmont Group, these FIUs meet regularly to find ways to cooperate in the areas of information exchange, training and sharing of expertise.
There are currently 101 countries with recognized operational FIU units, with others in various stages of development. Countries must go through a formal procedure established by the Egmont Group in order to be recognized as meeting the Egmont Definition of an FIU. The Group as a whole meets once a year. There is no permanent secretariat, and administrative functions are shared on a rotating basis.
Although initially the focus of the Egmont FIU was essentially on money laundering, FIUs also play an important role in the international effort to combat the financing of terrorism.
Egmont approved the following definition of an FIU in 1996, consequently amended in 2004 to reflect the FIU’s role in combating terrorism financing:
A central, national agency responsible for receiving, analyzing and disseminating to the competent authorities, disclosures of financial information: concerning suspected proceeds of crime and potential financing of terrorism, or required by national legislation or regulation, in order to combat money laundering and terrorism financing.
According to the Statement of Purpose of the Egmont Group, the Financial Intelligence Units participating in the Egmont Group resolve to encourage co-operation among and between them in the interest of combating money laundering and terrorism financing.