Money-laundering

Money-laundering is the processing of criminal proceeds to disguise their illegal origin. For
instance, a drug trafficker might buy a restaurant to disguise drug profits with the legitimate
profits of the restaurant. In this way, the drug profits are "laundered" through the restaurant to
make the income look as if it was earned lawfully. Money-laundering is crucial to organized
crime operations because offenders would be discovered easily if they could not "merge"
their illegal cash into, for instance, a legal business, bank, or real estate (Soudijn, 2014; Malm
and Bichler, 2013).

The crucial need to conceal organized crime activity was addressed by articles 6 and 7 of the
Organized Crime Convention. Article 6 requires State parties to criminalize money-
laundering, while article 7 refers to measures to combat money-laundering.

Criminalization of the laundering of proceeds of crime in article 6 of the Organized Crime

Convention

1. Each State Party shall adopt, in accordance with fundamental principles of its domestic
law, such legislative and other measures as may be necessary to establish as criminal
offences, when committed intentionally:

(a)

(i) The conversion or transfer of property, knowing that such property is the proceeds of
crime, for the purpose of concealing or disguising the illicit origin of the property or of
helping any person who is involved in the commission of the predicate offence to evade
the legal consequences of his or her action;

(ii) The concealment or disguise of the true nature, source, location, disposition,
movement or ownership of or rights with respect to property, knowing that such property
is the proceeds of crime;

(b) Subject to the basic concepts of its legal system:

(i) The acquisition, possession or use of property, knowing, at the time of receipt, that
such property is the proceeds of crime;

(ii) Participation in, association with or conspiracy to commit, attempts to commit and
aiding, abetting, facilitating and counselling the commission of any of the offences
 established in accordance with this article.

Article 6(1) of the Convention requires that each State party criminalize money-laundering.
Criminalization not only allows national authorities to organize the detection, prosecution and
repression of the offence, but also provides the legal basis for international cooperation
among police, judicial and administrative authorities, including mutual legal assistance and
extradition.

The Organized Crime Convention seeks to establish uniformity for the intolerance for
money-laundering, which serves to conceal organized crime activity. In article 7,
requirements for comprehensive domestic regulatory and supervisory schemes for banks and
non-bank financial institutions are set forth, as is strong guidance for cooperation and the
exchange of information at the national and international levels to investigate suspected
money-laundering activity.

The money-laundering cycle can be broken down into three distinct stages; however, it is
important to remember that money-laundering is a single process. The stages of money-
laundering include:

 Placement (i.e. moving the funds from direct association with the crime)

 Layering (i.e. disguising the trail to foil pursuit)

 Integration (i.e. making the money available to the criminal, once again, from what
seem to be legitimate sources)

The placement stage represents the initial entry of the proceeds of crime into the financial
system. Generally, this stage serves two objectives: it relieves the criminal of holding large
amounts of cash obtained illegally; and it inserts the money into the legitimate financial
system. During this stage, money launderers are most vulnerable to being caught, because
placing large amounts of cash into the legitimate financial system may raise suspicions.

The layering stage comes after the placement stage and it is sometimes referred to as
"structuring." This is the most complex money-laundering stage and often entails moving the
illicit funds internationally. The primary purpose of the placement stage is to separate the
illicit money from its source. This is done through a sophisticated process involving layering
financial transactions, whose final goal is to conceal the audit trail and break the link with the
original criminal activity.
The final stage of the money-laundering process is termed "integration." During this stage the
money is returned to the perpetrators from what seems to be a legitimate source. The criminal
proceeds, that were initially placed as cash and layered through a number of financial
transactions, are now fully integrated into the financial system and can be used for any
legitimate purpose.

Anti-money laundering laws generally require the recipients of funds to exercise the
reasonable care expected in a financial transaction. There have been many significant cases
involving banks moving money internationally without exercising proper due diligence in
knowing their customers or the source of the funds. Given the threats of transnational crime,
corruption, and terrorism, many countries have expanded their money-laundering control
efforts beyond banks, to include other businesses that might exchange or move large amounts
of cash (e.g., check-cashing companies, money transmitters, jewellers, pawnbrokers, casinos,
credit card companies, traveller's check and money order issuers).

The Financial Action Task Force (FATF) is an independent intergovernmental body that
develops and promotes policies to protect the global financial system against money-
laundering. In 2003, the FATF issued an updated set of 40 Recommendations for improving
national legal systems, enhancing the role of the financial sector and intensifying cooperation
in the fight against money-laundering (FATF, 2003).

The FATF's approach of identifying non-cooperating countries and territories proved

successful in forcing improvements in the anti-money laundering and counter-terrorist
financing systems of a number of countries. Through financial incentives, sanctions, and
monitoring, the FATF has successfully encouraged countries to create and enforce money-
laundering laws and to cooperate in international investigations.

Corrupt public officials and money-laundering

A review of cases by the FATF found that corrupt public officials used money-laundering
methods very similar to those used by organized crime. The corrupt public officials
disguised their ownership through corporate vehicles and trust companies, and used
gatekeepers and nominees to launder proceeds through the domestic and foreign financial
institutions. They used their power, like organized crime figures in some jurisdictions, to
acquire state assets, control law enforcement, and capture banks (FATF 2011; FATF,
 2015).

According to the FATF, common indicators of "red flags" of potential money-laundering

activity include:

 Frequent high-dollar cash transactions.

 Use of large amounts of cash when checks would be expected and would be more
convenient.

 Many wire transfers to or from known bank secrecy havens around the world.

 Immediate check or debit card withdrawals of large and frequent sums received by
wire transfer.

 An account holder who pays undue attention to secrecy regarding personal or business
identity.

 Lack of general knowledge about the customer's stated business.

These are the kinds of indicators that financial institutions and businesses dealing in cash
transactions are expected to act on when unusual financial transactions occur. Besides the
above mentioned 40 Recommendations, the FATF has also developed 9 Special
Recommendations to set out the basic framework to detect, prevent and suppress the
financing of terrorism and terrorist acts. These 9 Special Recommendations together with the
40 previously adopted provide a comprehensive set of measures for an effective legal and
institutional regime against money-laundering and the financing of terrorism.

Regional perspective: Pacific Islands Region

Papua New Guinea's efforts to strengthen AML/CFT capabilities

Papua New Guinea (PNG) had a weak legal framework to combat money laundering and
terrorism financing. In early 2014, the Financial Action Task Force (FATF) identified
legislative gaps and included the country in its grey list.
Under the leadership of PNG Department of Justice and the Attorney General, the country
undertook a comprehensive legislative revision to address systemic deficiencies. Relevant
stakeholders such as the Central Bank of PNG, the Office of the Public Prosecutor, PNG
Customs Service, Royal PNG Constabulary, among many others, worked jointly to
strengthen the country's anti-money laundering and counter-terrorism financing system
(AML/CFT).

As a result, several laws were enacted and amended: Anti-Money Laundering and Counter
Terrorist Financing Act 2015; United Nations Financial Sanctions Act 2015; Criminal
Code (Money-Laundering and Terrorist Financing) (Amendment) Act 2015; Proceeds of
Crime (Amendment) Act 2015; and Mutual Assistance in Criminal Matters (Amendment)
Act 2015.

The country met FATF standards and was removed from the grey list in 2016.

Regional perspective: Eastern and Southern Africa

The Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG)

The Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) was
officially established in 1999 in Arusha, Tanzania.

As of January 2020, ESAAMLG membership comprises of 18 countries and a number of

regional and international observers such as AUSTRAC, COMESA, Commonwealth
Secretariat, East African Community, Egmont Group of Financial Intelligence Units,
FATF, GIZ, IMF, SADC, United Kingdom, United Nations, UNODC, United States of
America, World Bank and World Customs Organization.

ESAAMLG’s members and observers are committed to the effective implementation and
enforcement of international accepted standards against money laundering and the
financing of terrorism and proliferation, in particular the FATF Recommendations.

Source: ESAAMLG