Introduction to money-laundering

Money is the prime reason for engaging in almost any

type of criminal activity. Money-laundering is the
method by which criminals disguise the illegal origins
of their wealth and protect their asset bases, so as to
avoid the suspicion of law enforcement agencies and
prevent leaving a trail of incriminating evidence.

Terrorists and terrorist organizations also rely on

money to sustain themselves and to carry out terrorist
acts. Money for terrorists is derived from a wide variety
of sources. While terrorists are not greatly concerned
with disguising the origin of money, they are concerned
with concealing its destination and the purpose for
which it has been collected. Terrorists and terrorist
organizations therefore employ techniques similar to
those used by money launderers to hide their money.

 Definition: The process of disguising the

proceeds of crime in an effort to conceal their illicit origins and legitimize their future
use.

Preventive Measures on Money Laundering

The Financial Action Task Force on Money Laundering (FATF) published a revised set of Forty
Recommendations on anti-money laundering measures in June 2003. As a member of the FATF,
Hong Kong has the obligation to implement these Recommendations. Consequently, the SAR
Government has requested the Authority's assistance in implementing the Recommendations as
applicable to the real estate agency sector in Hong Kong.

At the present stage, the Authority would ask estate agency practitioners to adopt the following
measures to help prevent money laundering :

(1) Client identification

Where an agent has successfully arranged for the sale or purchase of a property by a client who
is an individual, upon the client's signing of the provisional agreement for sale and purchase
(whether by himself or through a company), the agent should examine the already executed
estate agency agreement (or, in the case of non-residential properties, the relevant "property
viewing form" or similar document) to ensure that the following information has been properly
recorded :

 name of the client who is an individual;

  type and number of the client's identity or travel document (e.g. Hong Kong Identity
Card, passport, two-way permit for Mainland residents, etc.); and
 client's address.

In addition, the agent should state on the agreement :

 address of the property bought or sold;

 price; and
 date of signing of provisional agreement for sale and purchase.

(2) Documents retention

Estate agents should retain the estate agency agreement or "property viewing form" or similar
document securely for at least 5 years from the date of the signing of the provisional agreement
for sale and purchase, to be provided to the relevant authorities as required.

If practitioners fail in their practice to follow the above measures in client identification and
record-keeping, they may be subject to disciplinary action by the EAA.

In accordance with the Organised and Serious Crimes Ordinance (Cap. 455) and the Drug
Trafficking (Recovery of Proceeds) Ordinance (Cap. 405), practitioners are also under a duty to
disclose to the Police and Customs any property that directly or indirectly represents proceeds of
a crime. For a few pointers on such suspicious transactions provided by the Police, please refer to
the Annex. Practitioners who would like to know more about money laundering are welcome to
attend the seminar to be organised jointly by the Authority and the Police. Announcement will be
made on the EAA website (www.eaa.org.hk) and by other means in due course.

The revised Forty Recommendations by the FATF can be viewed on the FATF homepage

Each day the methods used by money launderers become more sophisticated and the financial
transactions more complex. With increased use of electronic communications, the speed with
which money and assets can be converted and transferred has increased exponentially.

There is no specific method of laundering money. Despite the variety of methods employed, the
laundering process is accomplished in three basic stages which may comprise transactions by the
launderers that could alert a financial institution to criminal activity.

The Money Laundering Process

Money laundering is not a single act but is in fact a process that is accomplished in three basic
steps. These steps can be taken at the same time in the course of a single transaction, but they can
also appear in well separable forms one by one as well. Traditionally it has been commonly
accepted that the money laundering process comprises three main stages:

a) Placement
b) Layering
c) Integration

Process of Money Laundering

Placement

The process of placing, through deposits or other means, unlawful cash proceeds into traditional
financial institutions. At this stage cash derived from criminal activity is infused into the
financial system. The placement makes the funds more liquid since by depositing cash into a
bank account can be transfer and manipulated easier. When criminals are in physical possession
of cash that can directly link them to predicate criminal conduct, they are at their most
vulnerable. Such criminals need to place the cash into the financial system, usually through the
use of bank accounts, in order to commence the laundering process.

This is the first stage in the washing cycle. Money laundering is a “cash-intensive” business,
generating vast amounts of cash from illegal activities (for example, street dealing of drugs
where payment takes the form of cash in small denominations). The monies are placed into the
financial system or retail economy or are smuggled out of the country. The aims of the launderer
are to remove the cash from the location of acquisition so as to avoid detection from the
authorities and to then transform it into other asset forms; for example: travellers cheques, postal
orders, etc.
Layering

Layering is the process of separating the proceeds of criminal activity from their origin through
the use of many different techniques to layer the funds. These include using multiple banks and
accounts, having professionals act as intermediaries and transacting through corporations and
trusts, layers of complex financial transactions, such as converting cash into traveler’s checks,
money orders, wire transfers, letters of credit, stocks, bonds, or purchasing valuable assets, such
as art or jewelry. All these transactions are designed to disguise the audit trail and provide
anonymity.

Layering usually involves a complex system of transactions designed to hide the source and
ownership of the funds. Once cash has been successfully placed into the financial system,
launderers can engage in an infinite number of complex transactions and transfers designed to
disguise the audit trail and thus the source of the property and provide anonymity. One of the
primary objectives of the layering stage is to confuse any criminal investigation and place as
much distance as possible between the source of the ill-gotten gains and their present status and
appearance.

Typically, layers are created by moving monies in and out of the offshore bank accounts of
bearer share shell companies through electronic funds’ transfer (EFT). Given that there are over
500,000 wire transfers – representing in excess of $1 trillion – electronically circling the globe
daily, most of which is legitimate, there isn’t enough information disclosed on any single wire
transfer to know how clean or dirty the money is, therefore providing an excellent way for
launderers to move their dirty money. Other forms used by launderers are complex dealings with
stock, commodity and futures brokers. Given the sheer volume of daily transactions, and the high
degree of anonymity available, the chances of transactions being traced is insignificant.

Integration

It is the stage at which laundered funds are reintroduced into the legitimate economy, appearing
to have originated from a legitimate source. Integration is the final stage of the process, whereby
criminally derived property that has been placed and layered is returned (integrated) to the
legitimate economic and financial system and is assimilated with all other assets in the system.
Integration of the “cleaned” money into the economy is accomplished by the launderer making it
appear to have been legally earned. By this stage, it is exceedingly difficult to distinguish legal
and illegal wealth.

Not all money laundering transactions go through this three-stage process. The three basic stages
may occur as separate and distinct phases or may occur simultaneously or, more commonly, they
may overlap. Transactions designed to launder funds can for example be effected in one or two
stages, depending on the money laundering technique being used. How the basic steps are used
depends on the available laundering mechanisms and requirements of the criminal organisations.

Business that are ideal for laundering cash

Given the diverse channels, through which money laundering proceeds are moved, an effective
approach to combating money laundering must involve all aspects of the financial system. It
must cover money that has already been “placed” into the financial system and, of course must
cover money derived from other forms of crimes that has never been in the form of cash. Certain
businesses that have naturally occurring high levels of cash are ideal for laundering cash:

• Banks; • Restaurants;
• Security houses; • Hotels;
• Financial intermediaries; • Bars;
• Accountants; • Nightclubs;
• Solicitors; • Dry cleaners;
• Surveyors and estate agents; • Video rental companies;
• International money transmitters; • Vending machines operators;
• Company formation agents and management • Fairgrounds and attractions;
services companies; • Parking lots;
• Casinos and bookmakers; • Retail outlets;
• Art, bullion and antique dealers; • Others, dealing in high value commodities
• Car dealers; and luxury goods.