The Role of Banking Sector in the Prevention of Money Laundering in Bangladesh
Chapter One Introduction 1.0 INTRODUCTION Besides of development of Economic activities, monetary related crimes are also increasing in both developed and underdeveloped countries.Almost in each country illegal transaction of money has been increased & these illegal money has been also used on various illegal activities.
Money laundering process refers to illegal receipt or transfer of fund from one place to another. This process involves not only the banking system of the country but also non-banking system.
Bangladesh is moving towards an open economy with a small-magnetized sector by liberalizing the financial and economic policies. However, the money laundering mechanisms are creating problem for a country like Bangladesh. Bangladesh Bank as the Central bank of Bangladesh Supervise all the banking and non-banking financial transactions on behalf of Bangladesh Government. Money laundering process is a great obstacle to the execution of monetary policy adopted by Bangladesh bank to stable the economy of the country.
To prevent money laundering, money laundering prevention bill 2002 was passed in the National Assembly of Bangladesh on 5 April 2002 and Gazette Notification was made on 7 April 2002. And Bangladesh Bank has been designated to act as the main preventive agency. Money Laundering has serious adverse effect on Economical, Political & Social condition of a country. It increases unequal distribution of income and as a result, the employment level, output level of the country, price stability as well as economic development and growth can be hampered.
So it is immediately required to prevent it. I believe it is a matter of great opportunity for me to study on this topic, as Money laundering, is a manifestation and a facilitator of organized crime, and has attracted increasing interest in our country. Due to money laundering process, desirable investment of the country cannot be done, national income declines and economic growth of the country hampers. 1. Background of Money Laundering
The mafia mobster Al Capone is most often credited with coining term “money laundering” because he used investments in coin-operated Laundromats to disguise or “wash” the millions he made from bootlegging and other illegal enterprises during the Prohibition in the US-the banning of alcoholic drinks in the 20th century. It is also said that the term “laundering” is used because, years ago, the cash proceeds (in U. S. dollars) from drug sales were actually washed with soap and water to appear old and worn. Launderers would then go to the Federal Reserve Bank and exchange the “laundered” bills in for new bills.
Along with the new bills came a fed receipt, which served to support the “legitimate” origin of the cash. The scam was finally identified when someone at the Fed realized that the serial numbers on the bills indicated that they should not be as old and worn as they appeared to be. The term first appeared in newspapers reporting the Watergate scandal in the US in 1973 and in judicial/legal contest in the US in 1982. Whilst the term “money laundering” was coined in the 20th century, it has been going on for several thousand years.
The history of money laundering is interwoven with the history of trade and of banking. In 1986, the U. S. became the first country in the world to criminalize the “laundering” of the proceeds of criminal activity when it passed the U. S. money laundering law. The silk road which scholars say first became a real link around 100 BC, ran for 12,000 kilometers and linked some of the greatest civilizations the world has ever seen – the Chinese, Mongolian, Indian, Persian, Greek, Byzantine, Mesopotamian and Egyptian – transporting goods, people, ideas, religions and Money.
Chinese inventions like gunpowder and paper first traveled to Europe in this manner. Along with many other things, Syrian jugglers and acrobats, cosmetics, silver, gold, amber, ivory, carpets, perfume and glass from Europe, Central Asia, Arabia and Africa traveled to the east. It lasted until the 15th century when newly discovered sea routes to Asia opened up. Traditional method of moving money evolved before Western banking became established in the region protecting early merchants along the Silk Road against robbery.
In ancient China it was known as “fei qian” or “flying coins”. The system spread throughout the world – to other Asian regions, the Indian Subcontinent, the Middle East, eastern and southern Africa, Europe and North and South America – following immigration patterns. These traditional money transfer systems are called as Chop, Hawala, Hundi, etc. 1970-The US Congress enacted the Bank Secrecy Act (BSA) in October 1970 following increasing reports of people bringing bags full of illegally – obtained cash into banks for deposit.
The BSA is simply a reporting and record-keeping statute. Although willful violations of its terms are a crime; it does not criminalize money laundering as such. BSA requires banks –retain financial details, -report cash transactions over $ 10,000/-. Thus in 1986, the U. S. became the first country in the world to criminalize the “laundering” of the proceeds of criminal activity. Thus made money laundering a crime in its own right, and strengthened the BSA in several respects, most importantly by prohibiting “structuring”. 990 – The Financial Crimes Enforcement Network (FinCEN) created by the US Treasury on April 25, initially to focus on the detection of financial crimes by providing analytical support to law enforcement investigations. In 1994, the agency would be given BSA regulatory responsibilities. 1992 – Annunzio-Wylie Money Laundering Act amended the BSA in several respects. Perhaps most important, required any financial institution, and its officers, directors, employees and agents, “to report any suspicious transaction relevant to a possible violation of law or regulation. The Annunzio –Wylie Act, require all financial institutions to put in place, not only BSA compliance programs, but also anti-money laundering programs. At a minimum, the programs would be required to include: 1) The development of internal anti-money laundering policies, procedures and controls; 2) The designation of a compliance officer; 3) An ongoing employee training 4) An independent audit functions to test the program. At first U. S. A. has taken initiative to money laundering but now most of the countries of the world are aware about it. 2. Origin of the Report
This Research Paper has been prepared for the partial fulfillment of Masters of Business Administration (MBA) Programme. For this purpose honorable teacher and supervisor Mr. Md. Nazrul Islam, Head of the Department of Business Administration, Shahjalal University of Science & Technology, Sylhet asked to submit a proposal. After discussing with him about various issues of money laundering I have submitted a proposal on “The Role of Banking Sector in the Prevention of Money Laundering in Bangladesh ” was submitted and then the final research paper is prepared. 3.
Objective of the Paper The objective of the research paper is to help the students be familiar with how the theoretical knowledge obtained in the degree program can be applied in practice. Generally research is either problem identifying or problem solving tool. The objectives of the study are as follows: – 1. To understand the theoretical concepts of money laundering. 2. To show the present scenario of anti money laundering issues in Bangladesh. 3. To observe the policy development and maintenance by Bangladesh Bank as a supervisor of anti money laundering activities. 4.
To figure out core procedures that Bangladesh Bank adopts to supervise the anti money laundering activities. 5. To comment on the existing system and recommend for improvement. 1. 4 Methodology Certain methods and techniques is utilized to collect data for this research paper. This study is mainly based on empirical as well as theoretical analysis. Collected data and information is tabulated, processed and analyzed critically in order to make the report informative. Both primary and secondary sources of data are chosen as effective means of collecting data relevant for this paper. . To prepare first part of the research paper secondary sources were used. Publications and database within Bangladesh Bank and others commercial bank helped me to get data about money laundering and its prevention. Various types of circular of Bangladesh Bank regarding money laundering exist in different commercial banks. This paper also required study of annual report, policy related circulars, and service rules, administrative circulars and other related papers. To get more information, I have also collected some books about money laundering and searched website. 2.
Interview of the personnel from people within these relevant organizations was the basic technique to collect primary data. Informal discussion with executive connected with the planning and control works in the various levels of the Bangladesh Bank was needed. To collect data and to analyze these properly I have to be interviewed face to face with bank officials. . 5. Justification of the Research To prevent money laundering is very complex task especially in a country like Bangladesh where most of the citizens are illiterate and their economic bad condition inspired them to involve in illegal activities.
This increases economic misery of the have-nots and concentrated wealth in the hands of 10% of the total population. The scope and scale of money laundering has increased over time and the process of addressing the problem has become complex because of the global nature of the problem. So cooperation among the law enforcing agencies, awareness of the overall people of the country about its adverse effects, government strictness to avoid political interferences, all these are required to prevent it, that is, creation of wareness against money laundering is of highest importance at the moment. After about three months research with various money-laundering issues with Bangladesh Bank and Commercial Banks this paper is intended to fulfill course requirements of Masters of Business Administration. Bangladesh Bank, which is the authorized Bank to monitor all the banking and non-banking financial institutional activities, so I have worked on it in details. Beside this I have studied other operational areas of the commercial bank, which have enriched the level of my knowledge. . 6 Limitations Though this report provides the insights of Money Laundering in Bangladesh and the mechanisms by which Bangladesh Bank takes steps to prevent Money Laundering, it has some limitations as well. As the activities of money laundering are illegal, all of work is going on behind the sight of general public; it is hard to find out the adequate & real data. The organization on which was studied is the Central Bank of BANGLADESH, which is not a private or public bank of Bangladesh.
The main limitation that faced during conducting the study was lack of access to information considered confidential by employees of central bank based on their policy and strategies. Chapter Two 2. 1 Brief History of Money Laundering The mafia mobster Al Capone is most often credited with coining term “money laundering” because he used investments in coin-operated Laundromats to disguise or “wash” the millions he made from bootlegging and other illegal enterprises during the Prohibition in the US-the banning of alcoholic drinks in the 20th century.
It is also said that the term “laundering” is used because, years ago, the cash proceeds (in U. S. dollars) from drug sales were actually washed with soap and water to appear old and worn. Launderers would then go to the Federal Reserve Bank and exchange the “laundered” bills in for new bills. Along with the new bills came a fed receipt, which served to support the “legitimate” origin of the cash. The scam was finally identified when someone at the Fed realized that the serial numbers on the bills indicated that they should not be as old and worn as they appeared to be.
The term first appeared in newspapers reporting the Watergate scandal in the US in 1973 and in judicial/legal contest in the US in 1982. Whilst the term “money laundering” was coined in the 20th century, it has been going on for several thousand years. It is said that the abuse of Chinese merchants and others by oppressive regimes and despotic rulers led them to find ways to hide their wealth, including ways of moving it around without it being identified and confiscated. Money laundering in this sense was prevalent 4000 years before Christ.
Many minorities in countries down the ages and around the world have taken steps to preserve wealth from the rulers- either from blatant confiscation or from taxation and, indeed, from a combination of both, who have targeted them simply because of their beliefs or colour. It is happening even today. And, of course from those seeking to enforce judgments in civil cases or to follow the money that results from other crime. The history of money laundering is interwoven with the history of trade and of banking. In 1986, the U. S. ecame the first country in the world to criminalize the “laundering” of the proceeds of criminal activity when it passed the U. S. money laundering law. 2. 2 The Silk Road – Once World’s main commercial artery The silk road which scholars say first became a real link around 100 BC, ran for 12,000 kilometers and linked some of the greatest civilizations the world has ever seen – the Chinese, Mongolian, Indian, Persian, Greek, Byzantine, Mesopotamian and Egyptian – transporting goods, people, ideas, religions and Money. Heading west were porcelain, furs, spices, gems and other exotic products of Asia.
Chinese inventions like gunpowder and paper first traveled to Europe in this manner. Along with many other things, Syrian jugglers and acrobats, cosmetics, silver, gold, amber, ivory, carpets, perfume and glass from Europe, Central Asia, Arabia and Africa traveled to the east. It lasted until the 15th century when newly discovered sea routes to Asia opened up. Traditional method of moving money evolved before Western banking became established in the region protecting early merchants along the Silk Road against robbery. In ancient China it was known as “fei qian” or “flying coins”.
The system spread throughout the world – to other Asian regions, the Indian Subcontinent, the Middle East, eastern and southern Africa, Europe and North and South America – following immigration patterns. These traditional money transfer systems are called as Chop, Hawala, Hundi, etc. 2. 3 History of Criminalizing Money Laundering 1970-The US Congress enacted the Bank Secrecy Act (BSA) in October 1970 following increasing reports of people bringing bags full of illegally – obtained cash into banks for deposit. The BSA is simply a reporting and record-keeping statute.
Although willful violations of its terms are a crime, it does not criminalize money laundering as such. BSA requires banks –retain financial details, -report cash transactions over $ 10,000/-. 1974 –although the BSA is accepted now, its constitutionality was originally challenged in the courts by elements of the banking community and some civil libertarians. BSA was challenged on a number of grounds. In California Bankers Assn . v. Shultz, 416 U. S. 21 (1974) Supreme Court rejected claims that various parts of the BSA violated constitutional rights. 986 – Growth, seriousness of the problem of Money Laundering, and of widespread non-compliance with the BSA, led to the enactment of the Money Laundering Control Act of 1986. Thus in 1986, the U. S. became the first country in the world to criminalize the “laundering” of the proceeds of criminal activity. Thus made money laundering a crime in its own right, and strengthened the BSA in several respects, most importantly by prohibiting “structuring”. 1990 – The Financial Crimes Enforcement Network (FinCEN) created by the US Treasury on April 25, initially to focus on the detection of financial rimes by providing analytical support to law enforcement investigations. In 1994, the agency would be given BSA regulatory responsibilities. 1992 – Annunzio-Wylie Money Laundering Act amended the BSA in several respects. Perhaps most important, required any financial institution, and its officers, directors, employees and agents, “to report any suspicious transaction relevant to a possible violation of law or regulation. ” The Annunzio –Wylie Act, require all financial institutions to put in place, not only BSA compliance programs, but also anti-money laundering programs. At a minimum, the programs would be required to include: ) the development of internal anti-money laundering policies, procedures and controls; 2) the designation of a compliance officer; 3) an ongoing employee training 4) an independent audit functions to test the program. 2. 4 Why Money Laundering is done? Criminals engage in money laundering for three main reasons: First, money represents the lifeblood of the organization that engages in criminal conduct for financial gain because it covers operating expenses, replenishes inventories, purchases the services of corrupt officials to escape detection and further the interests of the illegal enterprise, and pays for an extravagant lifestyle.
To spend money in these ways, criminals must make the money they derived illegally appear legitimate. Second, a trail of money from an offense to criminals can become incriminating evidence. Criminals must obscure or hide the source of their wealth or alternatively disguise ownership or control to ensure that illicit proceeds are not used to prosecute them. Third, the proceeds from crime often become the target of investigation and seizure. To shield ill- gotten gains from suspicion and protect them from seizure, criminals must conceal their existence or, alternatively, make them ook legitimate. 2. 5 Why we must combat Money Laundering Money laundering has potentially devastating economic, security, and social consequences. Money laundering is a process vital to making crime worthwhile. It provides the fuel for drug dealers, smugglers, terrorists, illegal arms dealers, corrupt public officials, and others to operate and expand their criminal enterprises. This drives up the cost of government due to the need for increased law enforcement and health care expenditures (for example, for treatment of drug addicts) to combat the serious consequences that result.
Crime has become increasingly international in scope, and the financial aspects of crime have become more complex due to rapid advances in technology and the globalization of the financial services industry. Money laundering diminishes government tax revenue and therefore indirectly harms honest taxpayers. It also makes government tax collection more difficult. This loss of revenue generally means higher tax rates than would normally be the case if the untaxed proceeds of crime were legitimate. We also pay more taxes for public works expenditures inflated by corruption.
And those of us who pay taxes pay more because of those who evade taxes. So we all experience higher costs of living than we would if financial crime—including money laundering—were prevented. Money laundering distorts asset and commodity prices and leads to misallocation of resources. For financial institutions it can lead to an unstable liability base and to unsound asset structures thereby creating risks of monetary instability and even systemic crises. The loss of credibility and investor confidence that such crises can bring has the potential of destabilizing financial systems, particularly in smaller economies.
One of the most serious microeconomic effects of money laundering is felt in the private sector. Money launderers often use front companies, which co-mingle the proceeds of illicit activity with legitimate funds, to hide the ill-gotten gains. These front companies have access to substantial illicit funds, allowing them to subsidize front company products and services at levels well below market rates. This makes it difficult, if not impossible, for legitimate business to compete against front companies with subsidized funding, a situation that can result in the crowding out of private sector business by criminal organizations.
No one knows exactly how much “dirty” money flows through the world’s financial system every year, but the amounts involved are undoubtedly huge. The International Money Fund has estimated that the magnitude of money laundering is between 2 and 5 percent of world gross domestic product, or at least USD 800 billion to USD1. 5 trillion. In some countries, these illicit proceeds dwarf government budgets, resulting in a loss of control of economic policy by governments. Indeed, in some cases, the sheer magnitude of the accumulated asset base of laundered proceeds can be used to corner markets — or even small economies.
Among its other negative socioeconomic effects, money laundering transfers economic power from the market, government, and citizens to criminals. Furthermore, the sheer magnitude of the economic power that accrues to criminals from money laundering has a corrupting effect on all elements of society. The social and political costs of laundered money are also serious as laundered money may be used to corrupt national institutions. Bribing of officials and governments undermines the moral fabric in society, and, by weakening collective ethical standards, corrupts our democratic institutions.
When money laundering goes unchecked, it encourages the underlying criminal activity from which such money is generated. Nations cannot afford to have their reputations and financial institutions tarnished by an association with money laundering, especially in today’s global economy. Money laundering erodes confidence in financial institutions and the underlying criminal activity — fraud, counterfeiting, narcotics trafficking, and corruption — weaken the reputation and standing of any financial institution. Actions by banks to prevent money laundering are not only a regulatory requirement, but also an act of self- interest.
A bank tainted by money laundering accusations from regulators, law enforcement agencies, or the press risk likely prosecution, the loss of their good market reputation, and damaging the reputation of the country. It is very difficult and requires significant resources to rectify a problem that could be prevented with proper anti-money-laundering controls. It is generally recognized that effective efforts to combat money laundering cannot be carried out without the co-operation of financial institutions, their supervisory authorities and the law enforcement agencies.
Accordingly, in order to address the concerns and obligations of these three parties, these Guidance Notes were drawn up. 2. 6 Techniques in Money Laundering There are diversified method of money laundering which ranges from the purchase and resale of a luxury item (e. g. a house, car, or jewelry) to passing money through a complex web of legitimate businesses and ‘shall’ companies (i. e. those companies that primarily exist only as named legal entities without any trading business activities). Basically 3 stages, which may comprise numerous transactions by the launderers-
Placement—the physical disposal of the initial proceeds (derived from illegal activity). 1. Breaking up of large amounts of cash into smaller amounts. 2. Depositing the cash in bank and subsequently transferring the same amount from one bank to another, preferably, in abroad. 3. Exchanging into a foreign currency and subsequently conversion into local currency. 4. Cash purchase of single premium insurance policy or other investment. 5. Cash purchase of costly items like jewelry, diamond, car, aircraft, and boats etc as an alternatives to cash. 6.
Injecting the cash in business like hotels, restaurants, bars, casinos, bookmakers, travel agency, taxi firm etc. which handle considerable cash in day-to-day operation. Layering—creation of complex layers of financial transactions for disguising the audit trail and provide secrecy. 1. Purchase & sale of securities and commodities via brokers. 2. Conversion into monetary instruments like BCD, TC, BONDs. 3. Electronic funds transfer-very frequently. 4. Making deposit in outstation bank branches or overseas banking system. 5. Sale & purchase of material assets between some fictitious persons/associates.
Integration – the laundered proceeds are set back into the economy in such a way that they re-enter the financial system appearing as normal business funds/legal money. Identification of illicit source becomes next to impossible. 1. Falsification (over/under invoicing) of invoicing/export. 2. Deployment of fund in ‘shell’ company and recoup the as legitimate profit. 3. Taking aid of corrupt bank employees and obtaining bank loan by depositing illicit money as security. 4. False loan repayment. 5. Taking aid of E-cash, which enables to move vast amount of money instantly with just a few keystrokes. . 7 Moving Money Abroad Legitimate purposes-are for moving money abroad: (1) to invest, (2) to speculate, (3) to lend, (4) to meet trading/personal obligations and (5) to safeguard assets against theft or seizure by repressive regimes. But a criminal moves money abroad for- (1) Dealing in arms & ammunition, (2) Drug trafficking, (3) Financing terrorist activities, (4) Evasion of exchange regulations/control, (5) Evasion of taxation, (6) Disguise or remove proceeds of threat/fraud/bribe, (7) Making blackmail payments and (8) Paying ransom for kidnappers.
The banking system remains one of the most important avenues for money launderers. The use of bearer certificate of deposit, bank drafts, wire transfers to transmit funds internationally and establishment of loan back scheme are commonly used as banking instruments around the world. New methods are constantly being used to avoid detection. These may include simple measures as “Smurfing” or Structuring that is making numerous small deposits which would fall below a suspicious cash transaction report, using relatives, third party or false names on accounts or more sophisticated measures such as use of shell companies.
A recent study by FATF found increasing use of non-bank financial institutions (Money Changers, remittance business etc. ) to provide services attractive to launderers since these institutions are subject to fewer regulatory requirements than banks. Because of increasing profit from the drug trafficking and other criminal enterprises, money launderers are adopting new techniques, employing specialized expertise who can provide sophisticated methods of laundering and various other financial services.
Techniques used include false invoicing (over- invoicing, under- invoicing), commingling of legal and illegal money, the use of bank loan arrangements (whereby the launderer transfers proceeds to another country and use them as security for a bank loan, which is sent back to original country) and layers of transactions through off-shore shell companies. In addition, a significant amount of illegal proceeds has been invested in real estate. However, because of the introduction of anti-money laundering counter measures in different countries, money launderers constantly seek new ways to circumvent regulation.
Methods that work tend to be replicated in different locations or may be used with some modifications. 2. 7. 1 Underground Banking (Alternative Remittance System) There has also of under ground or alternative banking system commonly known as ‘Hawala’ or Hundi in the sub-continent. This system works without a paper trail. A ‘Hawala’ bankers issue neither a written receipt for the sum received nor an order for payment. What he does, make a firm verbal commitment to the seller of dollars to make an equivalent taka payment at the agreed rate of exchange, through his agent in the particular country.
Then he sends a coded message to his agent containing the designated recipients name and time, date and address for the payment. Why people resort to underground banking a. Socio-economic & political reasons b. Higher returns c. Anonymity d. No available banking channel e . Avoidance of local taxes f. Illiteracy/Semi-literacy Advantages of Hundi/Hawala: a. No paper trail b. No bureaucracy c. Cost effective d. No body is the loser and e. No holiday-very fast delivery [pic] Figure 1. Basic sequence of communication and payment in an alternative remittance
The Chinese have a similar system known as ‘fie chien’ or flying money. This system, sometimes known as ‘Chit’ system involved depositing money in one country in exchange for chit or a chop (i. e. a seal) and remittance of this money in another country on presentation of the chit. It is fast and convenient, does not involve the transportation of bank cash, leaves little trail for investigators, has virtue of anonymity and the costs are fairly low. The main negative consequence of money laundering can have on the financial system.
A large-scale money laundering operation may put at the risk of smaller nation’s financial system through loss of credibility and investor’s confidence. The victims of the bank’s malpractice were the depositors and the government in developing countries. 2. 7. 2 Electronic Money Laundering Criminals are always looking for “a new type of detergent which allows for cleaner laundry” (Bortner, 1996). They have been quick to exploit each new method of financial transfer. In the 1980s and 1990s wire transfers became a popular method for moving money in both the legal and illegal sectors.
By 2000 we may see the same situation with e-money. The abuse of e-money by money launderers may become a significant problem in the future because e-money systems will be attractive to money launderers for two reasons: 1. Transactions may become untraceable; and 2. Transactions are incredibly mobile. Untraceability |E-money systems may provide Organized Crime with untraceable, | |mobile wealth. | The use of e-money systems will mean fewer face-to-face financial transactions.
The anonymity of e-money will make “knowing your customer” much more difficult. E-money systems also allow the parties to the transaction to deal with each other directly, without the assistance of a regulated financial institution. Thus, there may not be a traditional audit trail. Mobility Hypothetically, e-money could come from anywhere in the world, and be sent anywhere in the world. Thus, e-money systems may offer instantaneous transfer of funds over a network that, in effect, is not subject to any jurisdictional restrictions.
The problem may be illustrated by separating the process of money laundering into three basic steps – placement, layering and integration – and then comparing traditional money laundering systems with cyber-systems. The first step in money laundering is the physical disposal of cash. Traditionally, placement might be accomplished by depositing the cash in domestic banks or other kinds of financial institutions. Or the cash might be smuggled across borders for deposit in foreign accounts, or used to buy high-value goods, such as artwork, airplanes, or precious metals and gems, that can then be resold with payment by cheque or bank transfer.
With e-money laundering, cash may be deposited into an unregulated financial institution. Placement may be easily achieved using a smart card or personal computer to buy foreign currency, goods, etc. Powerful encryption may be used to guarantee the anonymity of e-money transactions. The second step, layering, involves working through complex layers of financial transactions to distance the illicit proceeds from their source and disguise the audit trail. This phase traditionally involves such transactions as the wire transfer of deposited cash, the conversion of deposited cash into monetary instruments (e. . , bonds, stocks, travelers’ cheques), the resale of high-value goods and monetary instruments, and investment in real estate and legitimate businesses, particularly in the leisure and tourism industries. Shell companies, typically registered in offshore havens, are a popular device in the traditional layering phase. These companies, whose directors are often local attorneys acting as nominees, protect the identity of the real owners. These owners also benefit from restrictive bank secrecy laws and attorney-client privilege In an electronic-money system, layering can be done through a personal computer.
There is usually no audit trail. In addition, e-money systems allow for instantaneous transfer of funds over a system that, in effect, has no borders. The last step is to make the wealth derived from crime appear legitimate. Traditionally, integration might involve any number of techniques, including using front companies to “lend” the money back to the owner or using funds on deposit in foreign financial institutions as security for domestic loans. Another common technique is over-invoicing, or producing false invoices for goods sold – or supposedly sold – across borders.
In e-money laundering the criminal may be able to achieve integration by using a personal computer to pay for investments or to buy an asset, without having to call on the services of an intermediary financial institution. In short, the temptation of electronic forms of money for the criminal may be the potential for untraceable, mobile wealth. 2. 8 Vulnerability of the Financial System to Money Laundering Money laundering is often thought to be associated solely with banks and moneychangers. All financial institutions, both banks and non-banks, are susceptible to money laundering activities.
Whilst the traditional banking processes of deposit taking, money transfer systems and lending do offer a vital laundering mechanism, particularly in the initial conversion from cash, it should be recognized that products and services offered by other types of financial and non-financial sector businesses are also attractive to the launderer. The sophisticated launderer often involves many other unwitting accomplices such as currency exchange houses, stock brokerage houses ,gold dealers, real estate dealers, insurance companies, trading companies and others selling high value commodities and luxury goods.
Certain points of vulnerability have been identified in the laundering process, which the money launderer finds difficult to avoid, and where his activities are therefore more susceptible to being recognized. These are: ¦ entry of cash into the financial system; ¦ cross-border flows of cash; and ¦ Transfers within and from the financial system. Financial institutions should consider the money laundering risks posed by the products and services they offer, particularly where there is no face-to-face contact with the customer, and devise their procedures with due regard to that risk.
Although it may not appear obvious that the products might be used for money laundering purposes, vigilance is necessary throughout the financial system to ensure that weaknesses cannot be exploited. Banks and other Financial Institutions conducting relevant financial business in liquid products are clearly most vulnerable to use by money launderers, particularly where they are of high value. The liquidity of some products may attract money launderers since it allows them quickly and easily to move their money from one product to another, mixing lawful and illicit proceeds and integrating them into the legitimate economy.
All banks and non-banking financial institutions, as providers of a wide range of money transmission and lending services, are vulnerable to being used in the layering and integration stages of money laundering as well as the placement stage. Electronic funds transfer systems increase the vulnerability by enabling the cash deposits to be switched rapidly between accounts in different names and different jurisdictions. However, in addition, banks and non-banking financial institutions, as providers of a wide range of services, are vulnerable to being used in the layering and integration stages.
Other loan accounts may be used as part of this process to create complex layers of transactions. Some banks and non-banking financial institutions may additionally be susceptible to the attention of the more sophisticated criminal organizations and their “professional money launderers”. Such organizations, possibly under the disguise of front companies and nominees, may create large scale but false international trading activities in order to move their illicit monies from one country to another.
They may create the illusion of international trade using false/inflated invoices to generate apparently legitimate international wire transfers, and may use falsified/bogus letters of credit to confuse the trail further. Many of the front companies may even approach their bankers for credit to fund the business activity. Banks and non-banking financial institutions offering international trade services should be on their guard for laundering by these means.
Investment and merchant banking businesses are less likely than banks and moneychangers to be at risk during the initial placement stage. Investment and merchant banking businesses are more likely to find them being used at the layering and integration stages of money laundering. The liquidity of many investment products particularly attracts sophisticated money laundering since it allows them quickly and easily to move their money from one product to another, mixing lawful and illicit proceeds and integrating them into the legitimate economy.
Although it may not appear obvious that insurance and retail investment products might be used for money laundering purposes, vigilance is necessary throughout the financial system to ensure that non traditional banking products and services are not exploited. Intermediaries and product providers who deal direct with the public may be used at the initial placement stage of money laundering, particularly if they receive cash. Premiums on insurance policies may be paid in cash, with the policy subsequently being cancelled in order to obtain a return of premium (e. . by cheque), or an insured event may occur resulting in a claim being paid out. Retail investment products are, however, more likely to be used at the layering and integration stages. The liquidity of a mutual funds may attract money launderers since it allows them quickly and easily to move their money from one product to another, mixing lawful and illicit proceeds and integrating them into the legitimate economy. Lump sum investments in liquid products are clearly most vulnerable to use by money launderers, particularly where they are of high value.
Payment in cash should merit further investigation, particularly where it cannot be supported by evidence of a cash-based business as the source of funds Insurance and investment product providers and intermediaries should therefore keep transaction records that are comprehensive enough to establish an audit trail. Such records can also provide useful information on the people and organizations involved in laundering schemes. Corporate vehicles trust structures and nominees are firm favorites with money launderers as a method of layering their proceeds. Providers of these services can find themselves much in demand from criminals.
The facility with which currency exchanges can be effected through a bureau is of particular attraction especially when such changes are effected in favor of a cheque or gold bullion. 2. 9 Money Laundering-Bangladesh Scenario Bangladesh is neither a drug producing nor a major consumer country for drugs. However, our country’s proximity to Golden Triangle in the East and Golden crescent in the West rendered her vulnerable to drug trafficking and drug related problems. In Bangladesh, no drug cartel, drug syndicate or organized groups of drug dealers have been intercepted till to day.
At present, phensedyl, heroin and cannabis rank first, second and third in order of prevalence in the country. The influence of the drug money is not yet felt to pose a major concern for us. However, Money laundering is no less then significant in our economy. Both black money and dirty money are being laundered in various ways as under: 1. Conversion of local currency into foreign currency from black market. Smuggle it out of the country and deposit it to any foreign bank; 2. The use of hundi to send money overseas; 3. The use of bearer instruments (drafts, cheques, stock certificate etc) 4.
Operating business enterprises, which hardly makes profits, but shows large profits and pays taxes to cover and legalize their dirty money; 5. The use of third party or false name accounts at financial institutions; 6. The purchase of items of value (such as luxury goods, gold, vehicles real estate); 7. Create investment companies in which fictitious persons deposit money invest in shares, stock and bonds; 8. Financing the political groups by other country; 9. Excess greediness; 10. No proper way to determine the amount of income on assets; 11.
Dishonesty of customs, defense and government employee; 12. Problems of illegal immigrant; 13. Lack of co-operation from the Bangladesh embassy with Bangladeshi people living in the foreign country; 14. Lack of co-operation from the foreign branches of banks and foreign exchange organization with Bangladeshi people living in the foreign country; 15. Bureaucratic complexity & extra payment; 16. Lack of providing temporary debt privilege; 17. Smuggling; 18. Under invoicing; 19. Transfer pricing & over invoicing; 20. Illegal transaction of capital; 21. Terrorist financing; 22.
Lack of potential political figure; 23. Demonstration. 1. Money Laundering Effects on Society 1. Laundered money may be used to corrupt national institutions. Bribing of officials and governments undermines the moral fabric in society, and by weakening collective ethical standards, corrupts our democratic institutions. 2. Money laundering erodes confidence in financial institutions and the underlying criminal activity—fraud, counterfeiting, narcotics, trafficking, and corruption—weaken the reputation and standing of any financial institution. 3. Governments need to increase health care expenditures e. . treatment of drug addicts, treatment of victims of violence, etc. 2. 9. 2 Economic Effects of Money Laundering Because crime, underground activity, and money laundering take place on a large scale, macroeconomic policymakers must take them into account. But, because these activities are hard to measure, they distort economic data and complicate governments’ efforts to manage economic policy. In addition, the ability to identify statistically the country and currency of issuance and the residency of deposit holders key in understanding monetary behavior.
To the extent that money demand appears to shift from one country to another because of money laundering-resulting in misleading monetary data—it will have adverse consequences for interest and exchange rate volatility, particularly in dollarized economies, as the tracking of monetary aggregates becomes more uncertain. The income distribution effects of money laundering must also be considered. To the extent that the underlying criminal activity redirects income from high savers to low savers or from sound investments to risky, low-quality investments, economic growth will suffer.
For example, there is evidence that funds from tax evasion in the United States tend to be channeled into riskier but higher-yielding investments in the small business sector, and also that tax evasion is particularly prevalent in this sector. Fraud, embezzlement, and insider trading seem likely also to be more prevalent in rapidly growing and profitable businesses and markets, because “that’s where the money is. ” Money laundering also has indirect macroeconomic effects. Illegal transactions can discourage legal ones by contamination.
For example, some transactions involving foreign participants, although perfectly legal, are reported to have become less desirable because of an association with money laundering. More generally, confidence in markets and in the efficiency-signaling role of profits is eroded by widespread insider trading, fraud, and embezzlement. And, money that is laundered for reasons other than tax evasion also tends to evade taxes, compounding economic distortions. Moreover, contempt for the law is contaminating—breaking one law makes it easier to break others.
Accumulated balances of laundered assets are likely to be larger than annual flows, increasing the potential for destabilizing, economically inefficient movements, either across borders or domestically. These balances could be used to corner markets—or even small economies. The above effects are to some extent speculative; however, the Quick study (1996) also conducted empirical tests on the relationship between GDP growth and money laundering in 18 industrial countries for the first time.
It found evidence that significant reductions in annual GDP growth rates were associated with increases in the laundering of criminal proceeds in the period 1983-90. 2. 9. 3 How money is laundered in regional basis in Bangladesh. It has found by the research team from both the different secondary & primary sources that, there are regional trends of money laundering in our country. Such as- In Sylhet region there are a lot of people lived in foreign countries. So there are great chances of illegal money transfer in this region i. e. hundi or hawala.
This system works without a paper trail. A hawala banker issues neither a written receipt for the sum received nor an order for payment. What he does, make a firm verbal commitment to the seller of dollars to make an equivalent taka payment at the agreed rate of exchange, through his agent in Sylhet region. Then, he sends a coded message, to his agent containing the designated recipients name and time date and address for the payment. As well as chance of gold smuggling in this region from foreign lived people and their local relatives.
In Chittagong region there are a lot of cases of drug smugglings and arm smugglings occurring in front of the eye of different law enforcing agencies. In Khulna region there are many incidents of forest materials & other goods of laundering. In Comilla region a lot of suger, sharies, and fensdils are smuggled every year in our country. In the Rajshahi region the occurrence of cattle smuggling are very common, and it has a network to supply cattle all over the country especially in the season of Eid . How money is laundered Smurfing involves the use of multiple cash deposits, each smaller than the minimum cash-reporting requirement. • Misinvoicing of exports and falsification of import letters of credit and customs declarations can conceal cross-border transfers of, say, the proceeds of drug trafficking. • Barter: stolen property (e. g. , antiques or automobiles) can be exchanged, across national borders or domestically, for illegal substances. • Parallel credit transactions can be used to avoid the formal economy, except for the final use made of the net proceeds of illegal activity to purchase legally marketed goods or services. Interbank wire transfers may not be subject to reporting on money laundering; bribery of bank officials can thus make it easier to conceal large illegal transfers between accounts. • Derivatives that replicate insider trading opportunities (e. g. , a synthetic version of a company stock subject to merger or takeover) can be used to avoid detection of an unusual change in a listed stock price. 2. 11 International Anti-Money Laundering Initiatives Money laundering has become a global problem as a result of the confluence of several remarkable changes in world markets (i. . , the globalization of markets). The growth in international trade, the expansion of the global financial system, the lowering of barriers to international travel, and the surge in the internationalization of organized crime have combined to provide the source, opportunity, and means for converting illegal proceeds into what appears to be legitimate funds. In 1986, the U. S. became the first country in the world to criminalize the “laundering” of the proceeds of criminal activity with the enactment of the Money Laundering Control Act of 1986.
Since enacting the law, the U. S. Congress has increased its coverage, reach and scope, making it the broadest, strongest and most far-reaching money laundering law in the world. The U. S. law is a weapon of enormous breadth and power wielded by U. S. prosecutors in that country. Those convicted under the law face a maximum prison term of 20 years and a fine of $500,000 per violation. A legal entity such as a bank or business that is convicted under the law faces fines and forfeitures.
In addition, a bank that is convicted of money laundering can lose its charter and federal deposit insurance. Persons and entities also face civil money penalties. Concerted efforts by governments to fight money laundering have been going on for the past fifteen years. The main international agreements addressing money laundering are the 1988 United Nations Vienna Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (the Vienna Convention) and the 1990 Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime.
And the role of financial institutions in preventing and detecting money laundering has been the subject of pronouncements by the Basle Committee on Banking Supervision, the European Union, and the International Organization of Securities Commissions. The Vienna Convention, adopted in December 1988, laid the groundwork for efforts tocombat money laundering by creating an obligation for signatory states (including Bangladesh) to criminalize the laundering of money from drug trafficking.
It promotes international cooperation in investigations and makes extradition between signatory states applicable to money laundering. It also establishes the principle that domestic bank secrecy provisions should not interfere with international criminal investigations. During the past twenty years there have been a number of resolutions passed by the ICPOInterpol General Assembly, which have called on member countries to concentrate their investigative resources in identifying, tracing and seizing the assets of criminal enterprises.
These resolutions have also called on member countries to increase the exchange of information in this field and encourage governments to adopt laws and regulations that would allow access, by police, to financial records of criminal organizations and the confiscation of proceeds gained by criminal activity. In December 1988, the G-10’s Basle Committee on Banking Supervision issued a “statement of principles” with which the international banks of member states are expected to comply.
These principles cover identifying customers, avoiding suspicious transactions, and cooperating with law enforcement agencies. In issuing these principles, the committee noted the risk to public confidence in banks, and thus to their stability, that can arise if they inadvertently become associated with money laundering. Over the past few years, the Basle Committee has moved more aggressively to promote sound supervisory standards worldwide.
In close collaboration with many non-G-10 supervisory authorities, the Committee in 1997 developed a set of “Core Principles for Effective Banking Supervision”. Many important guidelines issued by Basle Committee for worldwide implementation for all banks among which, “Prevention of the Criminal Use of the Banking System for the Purpose of Money Laundering”, December 1988 “Customer Due Diligence for Banks”, October 2001“Sound Practices for the Management and Supervision of Operational Risk “, February 2003; Shell banks and booking offices “, January 2003; relate to money laundering controls.
In 1989, the G-7 countries recognized that money laundering had become a global problem, not least due to the increase in drug trafficking. The G-7 Summit in Paris in 1989 took a great step forward in combating international money laundering with the creation of the Financial Action Task Force (FATF) to develop a coordinated international response to mounting concern over money laundering. One of the first tasks of the FATF was to develop steps national governments should take to implement effective anti-money laundering programs.
The experts within FATF came up with a list of 40 Recommendations, built on the firm foundations of the 1988 UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances and the Statement of Principles of the Basle Committee on Banking Regulations. The FATF 40 Recommendations set out the basic framework on what countries need to do — in terms of laws, regulations and enforcement — to combat money laundering effectively and were designed with universal application in mind.
Over time, they have been revised to reflect new developments in money laundering and experience. The 40 Recommendations have now become the global blueprint in anti- money laundering best practice and set the international standards for money laundering controls. Setting those standards meant that all participating governments committed to moving in the same direction at the same pace, a requirement for success. Through FATF’s peer-review process, the participants have pushed each other into implementing the standards.
Even the IMF regards the anti-money laundering actions advocated by the FATF as crucial for the smooth functioning of financial markets. In joining FATF, every member nation makes a political commitment to adopt the recommendations and allows itself to be evaluated by the other member nations on whether it has fulfilled that commitment. Today FATF has grown to an organization of thirty-one member countries and has representatives from the Gulf Cooperation Council and the European Commission.
Participants include representatives from members’ financial regulatory authorities, law enforcement agencies, and ministries of finance, justice, and external affairs. Representatives of international and regional organizations concerned with combating money laundering also attend FATF meetings as observers. This top-down, cooperative approach has been greatly successful in encouraging FATF member nations to improve their money laundering regimes. With expanded membership, FATF has now achieved agreement on money laundering standards and implementation among 31 governments.
More than that, FATF has encouraged development of regional groups to adhere to the same standards. By the last count, about 130 jurisdictions — representing about 85 percent of world population and about 90 to 95 percent of global economic output — have made political commitments to implementing “The Forty Recommendations. ” Another, more controversial initiative that FATF has developed to enhance international cooperation is publication of a list of non-cooperative countries and territories (NCCT) — jurisdictions that lack a commitment to fight money laundering.
Following the June 2000 publication of the first such list, a number of the 15 NCCT jurisdictions have acted quickly to implement FATF standards. . Other UN initiatives, such as the 2000 UN Convention against Transnational Organized Crime, have assisted in complementing the work undertaken by the FATF. However, it was the FATF’s exercise on Non-Cooperating Countries and Territories which brought about a sea change in thinking at the highest political levels.
The exercise, which identifies and evaluates the legal, judicial and regulatory framework of countries whose regulatory systems do not appear to meet international standards, has been a success, despite its unpopularity in many quarters. 1. 8. 16. After 11 September 2001, the tragedy in New York highlighted to all civilized nations the need to look at the finances of terrorists and the methods used to transfer funds around the11 world. The FATF expanded its mission beyond money laundering and agreed to focus its expertise on the worldwide effort to combat terrorist financing.
The FATF, at its Washington meeting in October 2001, came up with 8 Special Recommendations to tackle this threat. Terrorists use similar systems to money launderers and the 8 Special Recommendations complement the 40 existing Recommendations. The United Kingdom was one of the first countries in the world to have signed and ratified the UN International Convention on the Suppression of the Financing of Terrorists through the Terrorism Act 2000. In fact the UK was unique in meeting the requirements of all 8 FATF Special Recommendations immediately.
Several regional or international bodies such as the APG (Asia/Pacific Group on Money Laundering), CFATF (Caribbean Financial Action Task Force), the ESAAMLG (Eastern and Southern Africa Anti-Money Laundering Group), GAFISUD (Financial Action Task Force for South America), the MONEYVAL Committee of the Council of Europe (the Select Committee of experts on the evaluation of anti-money laundering measures) and the OGBS (Offshore Group of Banking Supervisors), either exclusively or as part of their work, perform similar tasks for their members as the FATF does for its own membership.
Bangladesh is a member of APG. This co-operation forms a critical part of the FATF’s strategy to ensure that all countries in the world implement effective counter-measures against money laundering. Thus the APG, the CFATF, GAFISUD, the MONEYVAL Committee and OGBS carry out mutual evaluations for their members, which assess the progress they have made in implementing the necessary anti-money laundering measures. In the same vein, APG, CFATF and the MONEYVAL also review regional money laundering trends.
During the past decade, a number of countries have created specialized government agencies as part of their systems for dealing with the problem of money laundering. These entities are commonly referred to as “Financial Intelligence Units” or “FIUs”. These units increasingly serve as the focal point for national anti- money laundering programs because they provide the possibility of rapidly exchanging information (between financial institutions and law enforcement / prosecutorial authorities, as well as between jurisdictions), while protecting the interests of the innocent individuals contained in their data.
Since 1995, another forum for international cooperation has developed among a number of national financial intelligence units (FIUs), who began working together in an informal organization known as the Egmont Group (named for the location of the first meeting in the Egmont-Arenberg Palace in Brussels). The goal of the group is to provide a forum for FIUs to improve support to their respective national anti-money laundering programs.
This support includes expanding and systematizing the exchange of financial intelligence, improving expertise and capabilities of the personnel of such organizations, and fostering better communication among FIUs through the application of new technologies. The Egmont Secretariat, currently hosted by the UK, is the ideal vehicle for FIUs from various countries to talk to one another once they reach the required standard. Financial Crimes Enforcement Network (FinCEN), the U. S. inancial intelligence unit led by the Department of the Treasury, provides training and technical assistance to a broad spectrum of foreign government officials, financial regulators, law enforcement personnel, 12 and bankers. This training covers a variety of topics, including money laundering typologies, the creation and operation of FIUs, the establishment of comprehensive anti-money laundering regimes, computer systems architecture and operations, and country-specific antimoney- laundering regimes and regulations.
FinCEN also works closely with the informal Egmont Group of more than 50 FIUs to assist various jurisdictions in establishing and operating their own FIUs. Additionally, FinCEN has provided FIU and money laundering briefings and training in many jurisdictions, including Argentina, Armenia, Australia, the Bahamas, Brazil, Canada, China, Costa Rica, Dominican Republic, El Salvador, Germany, Greece, Hong Kong, India, Indonesia, Isle of Man, Jamaica, Jersey, Kazakhstan, Lebanon, Italy, Liechtenstein, Nauru, Nigeria, Netherlands, Palau, Paraguay, Russia, Seychelles, South Africa, Switzerland, St.
Vincent and the Grenadines, Taiwan, Tanzania, Thailand, Tonga, and the United Kingdom. FinCEN has also conducted personnel exchanges with the Korean and Belgian FIUs. The U. S. Department of State’s Bureau for International Narcotics and Law Enforcement Affairs (INL) develops assistance programs to combat global money laundering. INL participates in and supports international anti-money- laundering bodies and provides policy recommendations regarding international money laundering activities.
The U. S. State Department has developed a programmatic approach to assist jurisdictions in developing anti-money-laundering regimes to protect their economies and governments from abuse by financial criminals and stem the growth of international money laundering. This approach integrates training, technical assistance, and money laundering assessments on specific money laundering problems or deficiencies to achieve concrete, operational, institution-bui