Combating Money Laundering

Till some time back I was not fully aware of “Money Laundering and it’s affect on financial institutes”. But thanks to one of the projects that I was invlolved in recently. This project helped me to understand the black “Money Laundering” clouds that is constantly hovering over the financial industries of the world.

How “Money Laundering” was named?
There is a myth that the term “Money Laundering” came from Laundromats. To wash the dirty money, the mafias bought the legitimate cash businesses of laundromats to mix their illicit earning with the clean legitimate earnings.

“Money Laundering” Process?
There are three steps to basic money laundering process:
1. Placement - Stage where the launderer inserts the dirty or black money into a legitimate financial institution like banks. This is the riskiest stage as banks keep close watch on transactions with larger amount of cash.
2. Layering - Most complex stage, where the launderer send money through various financial transactions to change its form and to obscure its origins. It’s all about making the original dirty money as hard to trace as possible.
3. Integration - Stage where the money re-enters the mainstream economy in legitimate looking form - it appears to come from a legal transaction. During this stage, it is very difficult to catch a launderer if they are not watched during previous stages.

Ripple effect of Money Laundering!
The global effect of money laundering is staggering in social, economic and security terms. Successfull money laundring means more fraud -> more corporate loot -> more workers lose their pensions when the corporation collapses -> more drugs on the streets -> more drug-related crime -> drug lords earning more $$$ -> loss of moral for legitimate business owners.

AML - Anti-Money Laundering
Money laundering happens in almost every country in the world, and it’s very difficult task to trace the origins of any deposit and to differentiate between dirty and clean money. The United States has employed countless legislative acts to counter money laundering. Most important of these are:
- Bank Secrecy Act (1970) - eliminates all anonymous banking in the United States.
- 1986 Money Laundering Control Act - makes money laundering a crime in itself.
- 1994 Money Laundering Suppression Act - orders banks to establish their own money-laundering task forces.
- 2001 U.S. Patriot Act - sets up mandatory identity checks for financial institutes.
The international community is also fighting against money laundering through various means, including the Financial Action Task Force on Money Laundering (FATF). The FATF issued the “40 Recommendations” for banks which has become the anit-money laundering standards.
The recommendations include:
* Identify and do background checks on depositors.
* Report all suspicious activity.
* Build an internal taskforce to identify laundering clues.
In an insurance sector, the insurance companies are making sure that they are having proper controls and checks to minimze frauds. New AML processes are implemented to verify the client details by checking the fraud list provided by government and by checking the client credentials in their own system or doing some third party credit checks. These processes helps the companies to identify any suspicious activies by flagging the large investment initiated by individuals.

A simplified example: Mr. X invests a big chunk of dirty money ($5m) in Annuities. If our insurance companies don’t have any control to raise a red flag, Mr. X will enjoy the big and clean yearly returns on his annuities.

I think every financial organization should adhere to the recommendations issued by FATF and strictly put AML controls to save a debacle. Hope this article helped you in undertanding the basics of money laundering and how can it be controlled.