In This Article
In this article, Head of Compliance, Malta Office Dr Mark Gatt gives a well-defined explanation of money laundering, as well as describes the methods that criminals use to successfully hide their illicit funds.
What is Money Laundering?
Money Laundering is the practice of disguising the source of funds obtained illicitly. It is thus a method in which the proceeds of crime are made to appear legitimate.
This stems from the long-standing collusion of the underground and official economy. The underground economy includes a spectrum of criminal activities which conflict with the legal system, such as organised crime, drug dealing, insider trading, fraud and tax evasion. Criminals, ever since the introduction of monetary systems, the evolution of the mafia and organised crime, have been able to strategically and very cunningly intertwine their illicit activities with the legal financial system.
The fundamental goal of money laundering is to avoid the legal consequences of the crimes from which the funds originate, whilst enjoying the profits of such crimes. When criminal activities generate substantial profits, the individuals or group involved work hard to find a way to control the funds without attracting attention to the underlying activity or the persons involved. Once profits emanating from illegal activities are converted into assets, especially when using layering, it becomes very difficult to trace these assets back to the original crime. Money that is laundered is acquired by cleverly converting and concealing it.
What is Conversion?
Conversion occurs when a transfer of assets or property takes place by an enabler, all the while being aware that such assets or property were earned in the course of illicit activity. This allows for the avoidance of detection from the authorities of the transactions of the assets or property, and permitting the offender to evade the legal consequences thereof.
What is Concealment?
Concealment is the act of purposely hiding or disguising the criminal offence, thereby helping the offender to hide his crimes. The enabler would purposely exclude information such as the source of the funds, location, disposition and the true ownership of the assets of property.
Disrupting markets and Economies
Illegitimate businesses can get so big that they monopolise a large part of the market or wholly control an industry within a sector or a country. In turn, monetary and economic instability can easily spread due to the misallocation of resources from artificial distortions in asset and commodity prices. Moreover, this instability is a breeding ground for tax evasion, further depriving a country of revenue, which is especially detrimental to developing countries and emerging markets.
What is Acquisition?
Acquisition is the act of receiving, possessing or using funds or property whilst knowing full well that these funds or properties were obtained through illegal means.
How Money is Laundered
No matter how sizable and well-developed your firm or business centre is, it will always be prone to dishonest transactions amid the flow of fraudulent money passing through the convenient provisions of a legal, stable financial system.
But how does money, fraudulently or criminally-generated, get to pass through legal financial doorways? There are three steps or stages which criminals undertake in various forms, when they want to ‘wash’ or launder their dirty money and disguise its true source of origin. The three stages of money laundering are as follows:
Placement
The ‘placement’ stage is when illegally-obtained funds are placed into the financial system. The intention is to transform the funds as quickly as possible into other types of legal assets and thus avoid detection, with the use of banks or using legitimate businesses (airports, ship ports, casinos, shops, restaurants, exchange businesses, etc) to disguise the funds’ true origin.
Examples:
Layering
The next step is ‘layering’, in which money launderers obscure the source of the illicit funds. The aim is to make the source of the illicit money as untraceable as possible by diversifying the channels of money flow and through the use of ‘shell’ companies or various accounts within different jurisdictions and any other means possible to give the impression that the funds have originated from legitimate sources.
Examples:
Integration
‘Integration’ occurs when the newly laundered funds are successfully integrated into legitimate business operations and/or assets. The money is now ‘clean’, ready to be used within the official economy.
Examples:
Structuring
Structuring is done when one obscures a financial transaction by transferring low amounts of money at incongruent times. In this way, the offender would avoid the detection of a large amount of money being transacted, circumventing the bank’s procedure to conduct a Currency Transaction Report (CTR) or a Suspicious Activity Report (SAR).
Smurfing
Smurfing usually includes the act of structuring, but it also includes further steps. Adding complex manoeuvres, smurfing requires the deposit and movement of funds into multiple geographically-disseminated accounts. The various transactions are usually executed by ‘smurfs’ (runners who knowingly conceal the funds), who transfer the amounts from one institution to another, ultimately veiling their source of origin, using the above-mentioned tools; such as placement and layering.
This makes detection even harder, often including a longer series of transactions from one institution to another, as well as from one jurisdiction to another.
You can read more as to the Socio - Economic effects of money laundering here.
How We Can Help
One of the best ways to ensure you or your business do not fall foul of attempts to facilitate money laundering is to ensure that your organisation has a compliance culture embedded in its core. If you have any questions on how to make your organisation more compliant and avoid unnecessary legal and financial risks, you can get help from our professional Advocates at Michael Kyprianou Advocates – Legal Consultants. We keep abreast of all relevant updates and procedures, making us an ideal choice in assisting your business. Contact us at infomalta@kyprianou.com or by telephone at +356 2016 1010
The content of this article is valid as at the date of its first publication. It is intended to provide a general guide to the subject matter and does not constitute legal advice. We recommend that you seek professional advice on a specific matter before acting on any information provided. For further information, please contact us at MK Fintech Partners via email at infomalta@kyprianou.com or by telephone +356 2016 1010.
