Money+laundering

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Definition
Money laundering is the process of making illegally obtained money appear legal. According to the Financial Action Task Force the act of money laundering is a process which takes place in order to disguise the origins of the money obtained through illegal measures. Money laundering makes it possible for the criminals to use the money they've obtained without revealing its origins. Regardless of who benefits from money laundering activities, the operational principles remain more or less the same.

 While the current globalisation trend has led to the globalisation of the economic activities, it has also led to a rise of the organised crime in the business area.

The three stages of money laundering
 In practise money laundering can be conducted in several ways. According to FinCEN it typically involves three steps, placement, layering & integration. During the placement stage the “dirty” money is entered to the financial system. This means that the money leaves the hands of the original owner and it is being placed to the legitimate financial system. The placement stage involves removing the money to a new location.

 The main purpose of the second stage called layering is to separate the illegally obtained money from its source and disguise the trail. This is defined as the most complex stage of the process and it usually involves international movement of funds. This could mean for instance electronically moving the money from one country to another.

 The final stage of the process, integration, involves returning the money to its original owner (e.g. the criminal) through what seem to be legitimate channels. The laundered funds are now fully returned to the financial system and available for use for any purpose.

 An alternative way to describe the three steps is described as follows by a Romanian researcher Stefan Mihu (2011):

 1. The cash placement takes place either by couriers or by the financial and banking system. Taking into account the space localization, the location where the money is to be placed is generally close to the place where the initial illegal activity that generated the “dirty money” was undertaken. In their pursue of a consistent client portfolio and a larger market share, the banks often act superficially, breaking their own internal regulations or those enforced by the central bank and involuntarily become a part in the “dirty money” laundering. On the other hand, the “captive” banks in the tax heavens are often aware of their own complicity.

 2. Stratification implies the undertaking of a string of successive transactions and operations, apparently not inter-connected, having as a goal the cover up of the money provenance. In this way an aura of legitimacy is created for the illegally obtained funds. These funds are transferred within such multi-layer structures from the legitimate economy to its “grey” areas.

 3. Integration – the last step of the money laundering phenomenon. It implies the transit of the money through the “grey“ area of the economy and its reappearance into the legitimate economy (usually into that of a respectable and stable sate). The amounts are in this way “whitened” or “recycled” by using loans or donations or by paying for certain services or goods that have never been rendered or delivered.

History
 In the US one of the first known money laundering cases involved a narcotics investigation of an opium trafficker in Hawaii in the early 1920’s. In 1970 The Bank Secrecy Act (BSA) was passed by the US Congress. It created a trail of paper enabling the officials to track the money laundered through the financial institutions.

 However, money laundering really only started to attract international attention during the 1980’s. During that time the context was mainly related to drug trafficking. In 1989 the Financial Action Task Force was established by the G7 summit held in Paris.

 The European Union has been involved in trying to curb the money laundering activities by launching different directives aimed to create tighter control over the issue. During the last 20 years the EU has adopted three different money laundering directives. The first of these was adopted in 1991, the second which amended the first directive was launched in 2001. The third money laundering directive was published in 2005. This directive provides a mutual basis for implemeting the FATF recommendation.

 The United Nations Office on Drugs and Crime (UNODOC) estimated that US$2.1 trillion was laundered in 2009, equal to 3.6% of global GDP. The European Commission estimates that member states lose between 2% and 2,5% of their combined GDP annually to tax crimes. Tax Justice Network has also said that around US$21-32 trillion of accumulated untaxed wealth is held offshore by global wealthy individuals.

<span style="font-family: Arial,Helvetica,sans-serif;">Tax havens & money laundering
<span style="font-family: Arial,Helvetica,sans-serif;"> Through tax havens companies are able to utilise fiscal management that also covers the repatriation of the dividends in foreign currency. Tax havens are used for money laundering purposes when companies look to maximise their profits and avoid paying taxes.

<span style="font-family: Arial,Helvetica,sans-serif;"> There are noticeable similarities between the techniques used to launder the proceeds of crime and to commit tax crimes. Tax havens and their use can be limited with the instruments from the anti-money laundering policy at least when it comes to controlling the transfer of assets to tax havens. This is possible when it comes to the use of the tax havens by individuals. However, tax evasion as an act does not as of yet fall under the category of an underlying precursor offence and cannot therefore be connected to money laundering activities and treated accordingly.

<span style="font-family: Arial,Helvetica,sans-serif; line-height: 1.5;"> A possible improvement for the situation could be interlinking the different policy areas involved with for instance anti-fraud and financial and corporate law and creating a single framework when it comes to dealing with the issue of tax havens. Cooperation with third countries could also lead to significant benefits.