Lecture 29 min.
Money laundering — giving a lawful appearance to the possession, use or disposal of funds or other property obtained as a result of committing a crime[1], that is, moving them from the shadow, informal economy into the official economy so as to be able to use these funds openly and publicly. In official documents this is referred to as "legalization (laundering) of monetary funds or other property obtained by criminal means."
In the process, the form of the funds may change either from cash to cashless (for example, through instant-payment terminals) or the other way around (for example, by winning a lottery or buying a winning lottery ticket from its lawful owner, including for an amount exceeding the winnings).
Money laundering is the process of substituting fictitious lawful sources for real but illegal sources of funds.
You may not have known that:
Laundering involves concealing the true source of income,[2] substituting real transactions with formal ones, and distorting their economic substance; at the initial stage of laundering, documents may be forged or the documents of third parties used, while for the final legalization of the funds the rules on bona fide purchasers and many others are relied upon.
It is often claimed that the term appeared in the United States in the 1920s, when the American mafia began buying up and opening large numbers of coin laundries to legalize cash obtained through crime. In a broad network of small, low-priced establishments with machines and a large number of customers, it is very difficult to control revenue, which makes it possible to add large volumes of illegally obtained cash to the real takings[3].
However, the American author Jeffrey Robinson points out that this is not so. He says that the term "money laundering" was first used by the British newspaper The Guardian during the Watergate scandal, in connection with the illegal financing of Richard Nixon's election campaign.
According to other accounts, the concept of "money laundering" comes from the well-known Italian gangster Al Capone. In the 1930s, the mafia under his leadership set up laundries where several criminal dollars were added to every legal one. However, the illegal proceeds were so large that they did not manage to launder all of them, which is why, as is well known, Capone was sent to prison for tax evasion.
Amid globalization, offshore jurisdictions — "tax haven" countries whose banking systems provide anonymity and confidentiality to beneficiaries — are often used for money laundering.
Money laundering comprises three stages:
Some of these steps may be omitted, depending on the circumstances. For example, there is no need to place funds that are already in the financial system.
1 Committing the crime whose proceeds need to be concealed (corruption, drug trafficking, fraud, terrorism, etc.).
2 Placement. Illegal proceeds are introduced into the financial system, placed with a bank or fund, or used to buy company shares or real estate. Criminals place dirty money into legitimate financial institutions in the form of cash bank deposits.
3 The laundering itself. Various operations are carried out with the criminal money. Dishonestly acquired capital is transferred to "clean" accounts, converted into another currency, and used to buy expensive items (cars, gold, real estate) or other assets. This is done to cover the tracks of the "dirty" money and prevent its true source from being established. Many schemes have been devised that involve several chains of transactions, which are hard to untangle. Through electronic transactions the money is moved between various accounts and converted into another currency, which is then used to buy expensive goods in order to change the money's form.
4 Final "integration". The illegal funds are irrevocably legalized – criminals sell the shares or real estate they acquired and invest the proceeds in fully legal assets, add them to "clean" bank accounts, or spend them. This is the final stage, at which the laundered money is introduced into the economy as legitimate, either through a bank transfer to the accounts of companies used for laundering, or through the sale of expensive goods that were purchased at the second stage.
(English: anti-money laundering, abbreviated AML)
Building an effective system for combating money laundering requires cooperation among the following bodies:
In addition, cooperation is needed between private institutions, in particular banks and other financial institutions[5].
To coordinate international efforts to combat money laundering, the international Financial Action Task Force on Money Laundering (FATF) was created in 1989 at the G7 summit in Paris.
After Russia was placed on the FATF "blacklist" in June 2000[6], a bill strengthening anti-laundering measures in the country's financial system was finalized, and in 2001 a dedicated body — the Committee of the Russian Federation for Financial Monitoring (KFM) — was created within the Ministry of Finance, headed by Viktor Zubkov. As a result, Russia was removed from the "blacklist" in October 2002, and in June 2003 was itself admitted to FATF.[7]
In 2004 the KFM was reorganized into the Federal Financial Monitoring Service (FSFM).
The Egmont Group is an informal association of the world's financial intelligence units (FIUs), which is involved, among other things, in combating money laundering.
In 2006 the authorities explained the need for citizens crossing the borders of the European Union and the United States to declare cash holdings as part of the fight against terrorism and money laundering[8].
On May 7, 2012, Vladimir Putin signed Decree No. 596 "On the Long-Term State Economic Policy"[9], which called for the drafting of a bill aimed at de-offshorizing the Russian economy. Drafting the bill was assigned to Rosfinmonitoring.
Many banks, including Russian ones, actively apply the Know Your Customer principle. This allows a bank to reduce the risk of its clients being involved in transactions related to the legalization (laundering) of proceeds or the financing of terrorism, which would threaten the bank's reputation. The bank inquires into the origin of a client's funds to make sure that the capital is not of criminal origin and is not being used for criminal purposes[10].
Since the late 1980s, in the USSR and later in the Russian Federation, "money laundering" schemes as such have been considerably less popular than so-called "cashing out"; banking specialists attribute this to the fact that the origin of illegally obtained capital has drawn little interest from the state, from Russian law enforcement agencies, or from citizens, so that legalization (laundering) of the capital is not required either.[11]
The main financial instrument for countering the legalization of funds is financial monitoring. Financial monitoring involves mandatory internal control procedures regarding the legality of financial transactions, as well as the activity of organizations carrying out transactions with property or funds in identifying transactions subject to mandatory control and other transactions with funds or property connected with countering the laundering of money and the financing of terrorism.
The State Financial Monitoring Service of Ukraine (Financial Intelligence Unit, FIU) is the central executive authority implementing state policy in the field of preventing and countering the legalization (laundering) of criminally obtained proceeds, the financing of terrorism, and the financing of the proliferation of weapons of mass destruction, whose activity is directed and coordinated by the Cabinet of Ministers of Ukraine through the Minister of Finance.
The Financial Action Task Force on Money Laundering (FATF)[1] is an intergovernmental organization engaged in developing global standards for combating the laundering of criminal proceeds and the financing of terrorism (AML/CFT), and in assessing the compliance of national AML/CFT systems with these standards. FATF's main instrument for carrying out its mandate is the 40 Recommendations in the field of AML/CFT, which are revised on average once every five years, and the 9 Special Recommendations on combating the financing of terrorism, developed after September 11, 2001. In 2012 FATF amended and revised the 40+9 Recommendations, creating 40 new Recommendations governing the AML/CFT/CPF process.
The President of the Financial Action Task Force on Money Laundering (FATF) is Marshall Billingslea.
FATF was created in 1989 by decision of the G7 countries and is the leading international institution engaged in developing and implementing international AML/CFT standards. As of 2019, FATF has 37 member countries and two international organizations, with 23 organizations and one state (Indonesia) as observers.
FATF's main decision-making body is the Plenary session, which meets three times a year, along with FATF working groups:
FATF pays significant attention to cooperation with international organizations such as the IMF, the World Bank, and the UN Office on Drugs and Crime. These structures carry out their own programs aimed at countering money laundering and the financing of terrorism. One of the main tools for implementing FATF recommendations at the national level is the Financial Intelligence Units (FIUs), which are responsible for collecting and analyzing financial information within each individual country in order to identify flows of funds obtained by illegal means.
States:
International organizations:
Since 2004, the Federal Financial Monitoring Service (Rosfinmonitoring) has represented the Russian Federation in FATF activities.
FATF documents, in particular the 40 Recommendations, constitute a comprehensive set of organizational and legal measures for establishing an effective regime in each country to counter the legalization of criminal proceeds and the financing of terrorism; their comprehensiveness and universality are expressed in:
The FATF Recommendations do not duplicate or replace the corresponding provisions of other international instruments; rather, where necessary, they supplement them and bring them together into a single system of organizational principles and legal norms, thereby playing an important role in the process of codifying norms and rules in the AML/CFT sphere. Under UN Security Council Resolution No. 1617 (2005), the FATF's 40 Recommendations are binding international standards to be implemented by UN member states.
The first Forty Recommendations of the FATF were developed in 1990 as an initiative to protect financial systems from persons laundering funds obtained from drug sales. In 1996, the Recommendations were revised for the first time to take into account emerging trends and methods of money laundering and to extend their scope far beyond the laundering of proceeds from drug sales. In October 2001, the FATF expanded its mandate to include the problems of financing terrorist acts and terrorist organizations, and adopted Eight (later expanded to nine) Special Recommendations on combating the financing of terrorism.
The FATF Recommendations were revised for the second time in 2003 and, together with the Special Recommendations, have been endorsed by more than 180 countries and constitute the international standard for combating money laundering and the financing of terrorism (AML/CFT). Following the completion of the third round of mutual evaluations of its members in 2012, the FATF, in close cooperation with the FATF-style regional bodies (FSRBs) and observer organizations, including the International Monetary Fund, the World Bank and the UN, revised and updated the FATF Recommendations. The changes take into account new and emerging threats, and clarify and strengthen many of the existing obligations, while preserving the necessary continuity and rigor of the Recommendations.
The FATF Recommendations are divided into the following main groups
A. AML/CFT policies and coordination
B. Money laundering and confiscation
C. Terrorist financing and the financing of proliferation of WMD
D. Preventive measures
E. Transparency and beneficial ownership of legal persons and arrangements
F. Powers and responsibilities of competent authorities and other institutional measures
G. International cooperation
An important role in the global dissemination of international standards for combating the laundering of criminal proceeds and the financing of terrorism is played by groups formed on the FATF model in various regions of the world.
The main task of such structures is to combat money laundering and the financing of terrorism in their respective regions, in particular by conducting mutual evaluations of the national systems of their members for compliance with international anti-money-laundering standards (in particular, the FATF's 40+9 Recommendations) and by researching the trends and methods (typologies) of money laundering and terrorist financing characteristic of the given region.
The FATF and the FATF-style regional bodies together form a single international system (network) for disseminating and implementing international standards for combating money laundering and the financing of terrorism, and for monitoring their implementation at the national level.
There are currently 8 FATF-style regional bodies in the world:
The Offshore Group of Banking Supervisors (OGBS) performs functions similar to those of the FSRBs, which also allows it to be classed among the FATF-style regional bodies.
Another regional group — the Central Africa Anti-Money Laundering Group (GABAC), which has goals and objectives similar to those of the FSRBs — has not yet been recognized by the FATF as a FATF-style regional body.
The EAG conducts research into typologies (the most common schemes) of the laundering of criminal proceeds and the financing of terrorism characteristic of the Eurasian region. The results of these typological studies make it possible to identify the highest-risk zones and sectors and to build an effective risk-management methodology.
The typology-research topics given priority for the region are determined by participants at the EAG's Plenary meetings.
The Eurasian Group disseminates the results of its research to law-enforcement and supervisory authorities, as well as to private-sector institutions.
In addition to its research work, the EAG holds typology seminars, regional forums, training sessions, and joint typology events with the FATF and other FSRBs.
One effective way of responding to the challenges posed by the criminal milieu is to conduct research into, and to identify and publicize, the schemes used to give a legal appearance to criminally obtained proceeds and to finance terrorism. Accordingly, the State Financial Monitoring Service carries out so-called typological studies of money-laundering and terrorist-financing schemes every year. For example, in 2017 the State Financial Monitoring Service, together with entities subject to state financial monitoring and with public authorities, including law-enforcement agencies, prepared two typological studies, "Risks of Cash Use" and "Risks of Terrorism and Separatism." In addition, in 2018 a compendium of the State Financial Monitoring Service's typological studies went to print. These publications examine the most common trends and schemes of money laundering and terrorist financing. In particular, they give examples of real cases involving money laundering and the financing of terrorism relating to corruption, and of the most relevant current money-laundering and terrorist-financing schemes.
These typological studies by the State Financial Monitoring Service indicate that criminals use a considerable number of methods to launder their criminal wealth, which are primarily associated with:
The most popular scheme for legalizing proceeds is the transfer of funds abroad and their subsequent return in the form of investment from offshore jurisdictions. Even today the largest volume of foreign direct investment still comes from Cyprus, which has always been the favorite offshore jurisdiction of Ukrainian oligarchs. In such cases the money is usually taken out in cash by special couriers because of the currency restrictions imposed by the National Bank or the central bank. Import-export operations are also used to move funds out: for example, a Ukrainian company supplies an actual product to a foreign company, but payment for it never reaches the country, remaining abroad instead.
Laundering may also make use of insurance and reinsurance transactions involving false or lost documents, large money transfers through payment terminals, and contracts for the supply of nonexistent goods concluded with fictitious companies.
In addition, transactions by non-residents on the stock market involving shares of fictitious joint-stock companies were used very actively. Such transactions are carried out using securities dealers under common control, moving between "friendly" insurance companies, investment venture funds and companies from the real sector, in order to inflate the price of the shares; however, so-called junk securities will remain part of the historical record.
Schemes related to the legalization of proceeds through public debt using a "Group Report": a "Group Report" is the conclusion of stock-market deals secured by rights to receive money or securities on the basis of counter-obligations. In other words, for example, you buy an OVGZ (domestic government bond) of issue No. X without having money in your account, but you do have in your account an OVGZ of issue No. Y, which someone has undertaken to buy from you for an amount sufficient to purchase the OVGZ of issue No. X, and such a chain can be very long.
A great many schemes have been devised for laundering financial resources. In order to legalize illegally acquired money or money concealed from the tax authorities, criminals, corrupt officials and shadow businessmen:
On the Colombian black market, currency is exchanged: money obtained from drug sales is exchanged for Colombian pesos. The pesos are then used to purchase various expensive goods, which are ultimately sold for cash dollars.
This is one of the most well-established mechanisms for laundering money obtained from drug sales in the Western Hemisphere.
Large sums are broken down into smaller amounts (under $10,000) and deposited in different banks at different times. In the United States, a cash deposit of no more than $10,000 can be made at a bank in a single transaction; otherwise the bank is required to report the transaction to the federal government.
This method uses the shadow (underground) banking system. Illegal sums of money are transferred to offshore accounts in countries where bank secrecy laws are in force - in other words, where it is permitted to deposit money in a bank anonymously. Banks in the Cayman Islands, Panama, the Bahamas, Bahrain, Singapore and Hong Kong are mainly used for this purpose.
In Asia there are banks offering a legal alternative system that allows clients to deposit, withdraw and transfer money without any accompanying documentation, leaving no possibility of tracing it.
A cash deposit is made in the name of a front company and then withdrawn for investment in a legitimate business using fake invoices and balance sheets.
Such companies are set up by criminals solely for laundering money, but sometimes they can also be legitimate businesses into which "investments" are made, for example, brokerage firms, casinos, bars, strip clubs.
All these types of activity involve large amounts of cash, which helps illegal funds simply "dissolve".
Currently, the FATF website has more than 60 different typology publications freely available in English. English-language versions of the publications are available at the link.
Russian-language translations of the typology reports:
2019:
2018:
2017:
2016:
2014:
2013:
2012:
2011:
2010:
2009:
2008:
2007:
2006:
2005:
Russian-language translations of the reports:
There are two main methods used by the government to detect and combat money laundering: legislation and the law.
The main obstacle for law enforcement is the so-called "bank secrecy law".
In the United States, penalties are provided for money laundering. In Russia, the punishment for this is imprisonment for up to seven years, together with a fine.
The main article governing liability in the sphere of laundering dirty money is Article 327 of the Criminal Code of the Russian Federation.
Article 198 or 199, depending on the specific situation, provides for punishment of those involved in schemes for the criminal laundering of illegal income. As a rule, however, these articles are more often applied to those who engage not in laundering but in cashing out money.
Shell companies will be punished under the provisions of Articles 170 and 171 of the Criminal Code of the Russian Federation. If the head or a member of a bank's management organized a criminal scheme, this falls under Article 173 of the Criminal Code of the Russian Federation.
If the investigation identifies criminal groups that organized and carried out the scheme, the case may be classified under Article 210 of the Criminal Code.
Comments