Have you ever left some of your currency in your pants pocket and thrown it into the washing machine along with a load of clothes? Well, that is one form of money laundering! However, this month, we will discuss the less scrupulous versions of money laundering as a follow up to last month's TPAtlanta column about the practice of Hawala.

If you shop with a major bank, chances are that all the transactions in your account are scrutinized by some form Anti Money Laundering (AML) software. Billions of dollars are being invested in these applications. They are supposed to track suspicious transfers, deposits, and withdrawals based on overall statistical patterns. Bank directors, exposed, under the Patriot Act, to personal liability for money laundering in their establishments, swear by it as a legal shield and the holy grail of the on-going war against financial crime and the finances of terrorism.

Celent Communications, a major banking industry research firm, estimates that future investments in compliance-related activities and products by American banks alone will be close to $15 billion in the next 3 years. The United State's Treasury Department's Financial Crimes Enforcement Network (FinCEN) receives over 15 million reports each year. The Bank of America recently hired a former FinCen Director to be its Senior Compliance Executive.

This, my friends, is serious stuff!

However, all the AML efforts of FinCen and those of the major US banks are but a drop in the seething ocean of illicit financial transactions, sometimes egged on and abetted even by the very Western governments ostensibly dead set against them.

Israel has always turned a blind eye to the origin of funds deposited by Jews from South Africa to Russia. In Britain it is perfectly legal to hide the true ownership of a company. Underpaid Asian bank clerks on immigrant work permits in the Gulf States rarely require identity documents from the mysterious and well-connected owners of multi-million dollar deposits. Hawaladars continue plying their paperless and trust-based trade - the transfer of billions of US dollars around the world. American and Swiss banks collaborate with dubious correspondent banks in off shore centers. Multinationals shift money through tax free territories in what is euphemistically known as "tax planning". Internet gambling outfits and casinos serve as fronts for narco-dollars. British Bureaux de Change facilities launder up to 2.6 billion British pounds annually.

The 500 Euro note makes it much easier to smuggle cash out of Europe. A French parliamentary committee accused the City of London of being a money laundering haven in a 400 page report. Intelligence services cover the tracks of covert operations by opening accounts in obscure tax havens, from Cyprus to Nauru.

Money laundering, its venues and techniques, are unfortunately an integral part of the economic fabric of the world. But, is this business as usual?

Not really. In retrospect, as far as money laundering goes, September 11th may be perceived as a watershed event as important as the precipitous collapse of Communism in 1989. Both events have forever altered the patterns of the global flows of illicit capital.

So, just what is Money Laundering?

Strictly speaking, money laundering is the age-old process of disguising the illegal origin and criminal nature of funds (obtained in sanctions-busting arms sales, smuggling, trafficking in humans, organized crime, drug trafficking, prostitution rings, embezzlement, insider trading, bribery, and computer fraud) by moving them untraceably and investing them in legitimate businesses, securities, or bank deposits. But this narrow definition masks the fact that the bulk of money laundered is the result of tax evasion, tax avoidance, and outright tax fraud, such as the "VAT carousel scheme" in the EU (moving goods among businesses in various jurisdictions to capitalize on differences in VAT rates). Tax-related money laundering nets between 10-20 billion US dollars annually from France and Russia alone. The confluence of criminal and tax averse funds in money laundering networks serves to obscure the sources of both.

According to an estimate from the International Monetary Fund (IMF), the total amount of money laundered annually amounts to 2-5% of world GDP, which equates to between 800 billion and 2 trillion in US dollars. That lower figure is considerably larger than an average European economy, such as that of Spain.

So how does this money laundering system work? It many ways, it is basic banking, and in other facets, money laundering has all the characteristics of a CSI television show.

It is important to realize that money laundering takes place within the banking system. Big amounts of cash are spread among numerous accounts, sometimes in free economic zones, off-shore financial centers, and other tax havens, converted to bearer financial instruments such as money orders or bonds, or placed with trusts and charities. The money is then transferred to other locations, sometimes as bogus payments for "goods and services" against fake or inflated invoices issued by holding companies owned by lawyers or accountants on behalf of unnamed beneficiaries. The transferred funds are re-assembled in their destination and often "shipped" back to the point of origin under a new identity. The laundered funds are then invested in the legitimate economy. It is a simple procedure - yet an effective one. It results in either no paper trail or too much of one, making it nearly impossible for government entities to decipher in a timely manner. The accounts involved are invariably liquidated very quickly and all traces erased.

You might be asking yourself why is money laundering a problem and why should I be concerned about it. After all, criminal and tax evading funds are idle and non-productive assets. However, the injection of these monies, regardless of how surreptitiously, into the economy transforms them into a productive and cheap source of capital.

Money laundering has a negative impact on the economy because it corrupts government officials, banks and their officers. It contaminates legal sectors of the economy, crowds out legitimate and foreign capital, makes money supply unpredictable and uncontrollable, and increases cross-border capital movements, thereby enhancing the volatility of exchange rates.

A multilateral, co-coordinated effort involving the exchange of information, uniform laws, extra-territorial legal powers is required to counter the international dimensions of money laundering. Many countries have opted in to fight money laundering because money laundering has also become a domestic political and economic concern. The United Nations, the Bank for International Settlements, the Organization for Economic Cooperation and Development's FATF (Financial Action Task Force), the European Union, the Council of Europe, the Organization of American States have all published anti-money laundering standards. Regional groupings were formed or are being established in the Caribbean, Asia, Europe, southern Africa, western Africa, and Latin America.

Next month, in this space, we will explore in a little more depth just what initiatives are underway in the AML space, both from governments and from the private sector.

Until then, please check your pockets before you wash your pants. We do not want you to get caught laundering money!

Calvin D. Johnson, Publisher
publisher@tpatlanta.com
Trans Atlantic Systems, Inc.