The Mauritius Financial Services Commission (FSC) which is the regulatory authority for all non-bank

financial services has issued three Codes on the prevention of money laundering and terrorist financing,
namely:

• Code on the Prevention of Money Laundering and Terrorist Financing intended for Management
Companies;
• Code on the Prevention of Money Laundering and Terrorist Financing intended for Investment
Businesses; and
• Code on the Prevention of Money Laundering and Terrorist Financing intended for Insurance
Entities.

Says the FSC:

'These Codes aim to preserve high standards of practice and the integrity of Mauritius as a reputable
financial services center. Mauritius is fully supportive of international initiatives to combat money
laundering and terrorist financing and so the Codes take account of international standards.

'These Codes state minima criteria to be followed by companies and market intermediaries to prevent the
exploitation of the financial services industry in Mauritius by money launderers and terrorist financiers.

'Economies with emerging financial centers and inadequate controls are particularly vulnerable. Money
laundering poses a serious threat to the integrity and soundness of the financial system of all countries. It
affects economic development, and foreign investors' perception that the financial services industry
functions within a framework of high legal, professional and ethical standards.

'It is therefore vital that all operators in the financial industry in Mauritius avoid exposure to the risk of
involvement in relationships concerning money laundering or terrorist financing.

'The Codes issued by FSC describe the regulatory anti money laundering practices that operators
involved in these three disciplines are expected to consistently follow and include:

• The "Know Your Customer" procedures;

• The obligation for operators to check the identity of clients;
• The need to retain records; and above all
• The need to comply with the legal provisions of the Financial Intelligence and Anti Money
Laundering Act 2002, particularly as regards Suspicious Transaction Reporting.

'The Codes will come into force on 2nd May 2003.'

Money Laundering
1.1 What is Money Laundering?

Taken at its simplest, money laundering is a process by which the origins and ownership of
money, generated as a result of criminal activity, can be concealed. In effect, the money is
‘cleaned’ or ‘laundered’ through legitimate means and, as a result, the proceeds lose their
existing criminal identity and appear to have originated from a legitimate source.

This process is usually completed several times. It is common for this process to occur in respect
of the proceeds of drugs/human trafficking, prostitution, corruption, bootlegging, racketeering
and illegal arms smuggling.

The process allows the money to be controlled, without the fear that the transaction will lead
back to the originator(s) of the proceeds. Criminal organisations utilise this process to enable
them to exploit further criminal opportunities in a systematic and large scale manner.

1.2 The History of Money Laundering

The phrase “money laundering” was first coined at the beginning of the 20th Century. The
criminalisation of the actual or attempted laundering of proceeds of crime is also quite recent.
However, the practice of disguising income derived from illicit activities can be traced back to
the 13th Century B.C, when the oceans and seas were originally used as international trade
routes. Rife with pirates, the shipments were often purged and plundered for valuable
commodities and assets. Pirates were arguably pioneers in the practice of laundering such articles
as they and even the empires they served sought to profit from their treacheries in a way that did
not attract any ramification.

As the profile of money laundering has heightened, it has become an increasingly expensive,
time-consuming process to undertake and ultimately dangerous. By placing proceeds into a bank
account or other negotiable, redeemable or saleable instrument or object, the originator is
attracting tax liability and other obligations, which if not fulfilled, can ultimately lead to the
illicit origins of the proceeds being discovered.

Alphonse “Al” Capone or Scarface, probably the most famous mob gangsters, created a criminal
organisation in America in the 1920s, during the US Prohibition Era, grossing an estimated
$100,000,000 of illegally gained proceeds annually, which he laundered through a series of
businesses. However, his subsequent incarceration in the 1930s was not as a result of money
laundering or his criminal activities such as bootlegging, prostitution and gambling, but in fact
was as a result of being found guilty of a $1,000,000 tax evasion. His imprisonment in Alcatraz
ultimately brought an end to his Chicago based operations.

Al Capone’s incarceration, however ultimately backfired on the authorities as it forced criminals

to become more “organised” in order to profit financially from their illicit activities. Later
gangsters such as Meyer Lansky grasped the importance of creating businesses, not only as
mechanisms to launder money, but also to provide “fronts” for their illegal activities. Casinos are
notorious business “fronts” for illegal activities. Las Vegas was infamous in the 1940s for being
a tool of money laundering, especially by the likes of Lansky and Benjamin “Bugsy” Seigel.

Lansky also understood and appreciated the usefulness of foreign countries that provide havens
for criminal activities. Later in life, Lansky would hold untold millions in Swiss bank accounts
and in banks and corporations in Hong Kong, Israel and throughout South America. He was an
expert at exploiting flexible governments and their officials and was never convicted of any
charges brought against him.

Today, Lansky can be credited for establishing the modern form of money laundering (described
below) and tax evasion. Ironically, the extent and sophistication of his operations may never be
fully understood as most of them still remain undetected.

As mentioned above, money laundering is certainly not a new concept. Those who conduct
criminal activities for financial gain have always attempted to profit from their efforts without
drawing attention to their criminal activities. As demonstrated by Lansky’s pioneering
operations, methods of concealment and money laundering have become increasingly
sophisticated. There are a number of reasons for this:

• The globalisation of the financial system: Advancements in communications and

transportation have allowed the concealment of crime and its proceeds to become a much
easier task in today’s world. Proceeds can be wired from one financial institute to another
instantaneously;

• Crime has become more global. It is no longer sufficient for enforcement authorities to
merely be aware of what is occurring within their own jurisdiction. They must anticipate
and cooperate with other authorities and jurisdictions as criminal activities can become
widespread in a matter of minutes;

• Also, criminals no longer have the desire to remain or limit their activities to one country.
If fact, Lansky proved that it is safer for them to move their property and business
between countries to avoid detection by local authorities. As a result, international
criminal organisations have become skilled and experienced at moving property from one
country to another, taking advantage of the notoriously lax legislation existent in some
countries that provides safe havens for foreigners seeking to conceal their wealth. Many
of these countries provide “dead ends” for investigators who attempt to follow the trail
left by the proceeds.

Money laundering has ultimately become a successful tool for criminals because the financial
system does not prevent the possibility of money laundering. In fact, if criminals are prepared to
make concessions, the system can be most accommodating. The financial transaction system was
set up to provide a safer exchange system for businesses all over the world. It generates detailed
and often permanent records of all financial transactions. However, the standards of scrutiny,
regulation and law are not consistently and universally applied. Flexibility is the key to success
for money laundering. The lower standards and lax legislation afforded by many countries
provide the necessary flexibility to allow criminals to exploit the system to launder their
criminally obtained profits.

1.3 The Money Laundering Procedure

Money laundering, at its simplest form, is a three stage process:

1. Placement or “Smurfing”

This is where the criminal proceeds are converted, through a succession of small and
anonymous transactions or deposits, into bank accounts or other negotiable, redeemable
or saleable instruments or objects.

The bank account is generally opened in the name of a corporation especially set up, with
the assistance (either willingly or subconsciously) of professionals such as lawyers, for
the purpose of laundering money. These corporations or businesses are known as
“fronts”, as their legitimate appearance conceals the illicit activities which generate the
criminal proceeds.

Small cash deposits are then repeatedly made into the bank account by a series of
individuals. The amounts are always small enough to fall below the declaratory
thresholds of the bank, thus ensuring that no further due diligence checks are made. The
cash, being now in a legitimate entity, loses some of its original illicit origins when it is
subsequently withdrawn or used to purchase further assets.
2. Layering

“Layering” is the second stage of the money laundering process. Here, the proceeds are
converted or moved further from the original source by purchasing legitimate assets, such
as property. The asset is then sold on to an independent, and often unsuspecting,
legitimate third party. This stage is often repeated several times, with the proceeds
appearing a little more legitimate than they really are on each occasion.
3. Integration

Some argue that integration, the final stage of the money laundering process, was the
only stage that Meyer Lansky failed to successfully achieve in his operations. On this
stage, the proceeds are injected into a legitimate economy. The most common example is
where the proceeds are injected into a legitimate business that has a high percentage of
cash sales (ie, a casino). The result is that the proceeds are ultimately cleaned and they
supposedly lose all of their original illicit origins. A profit can ultimately be made from
the original activity.

There are arguments, however, that “dirty” money, money associated with criminal
activities, can never lose its criminal origins no matter how many times the three-stage
process is implemented. The reason is that proceeds never disappear. They just change
their appearance and form, making it harder to trace them. Ultimately, money generated
from criminal activity is more restrictive than normal “clean” money. It can only be
 invested in or spent on less visible and profitable activities. There always is a risk that the
proceeds will lead authorities back to the initial criminal activity, and/ or the
originator(s).

The Financing of Terrorism

The link between money laundering and the financing of terrorism is, perhaps, not one which
immediately comes to mind. Criminal and terrorist assets represent the same threats to financial
and public stability. Criminal organisations benefit from the damage created as a result of
militant actions and, as a consequence, subsidise such terrorist and guerrilla activities.

After 11 September 2001, the global threat of terrorism and its widespread repercussions were
propelled into both the public and political arenas. Proceeds generated as a result of illicit
activities pose a threat not only to public safety, but also to financial institutions themselves and
global economic development. The reason is that they allow criminal organisations to acquire a
vast economic power.

The events surrounding September 11 proved that terrorist groups, such as Al-Qaeda, are also
increasingly building up financial empires (or war chests) with the specific aim to undermine
public safety and international financial stability [1] .

Up until September 11, it was felt that efforts made to improve the transparency and safety of the
global financial system had been a success. It had enabled criminal money to be tracked. The
severity of the terrorist attack contradicted this belief. It highlighted the obvious: the movements
of suspected laundered funds were still indeterminable. Organisations can still hide the
ownership of suspicious assets behind shell companies and offshore banking facades [1].

At the United Nations Conference on Combating Terrorist Financing in 2005, the Executive
Director of the United Nations, Antonio María Costa, quoted Kofi Annan, the then UN Secretary
General, when defining terrorism. He stated that;

“Any action constitutes terrorism if it is intended to cause death or serious bodily injury to
civilians or non-combatants with the purpose of intimidating a population or compelling a
government or an international organization to do or abstain from doing any act.”
Sources and Acknowledgments
SOURCES:

Reference Articles

Costa, S, Implementing the new anti-money laundering directive in Europe: Legal and
enforcement issues. The Italian Case, Paolo Baffi Centre on Central Banking and Financial
Regulation, “Paolo Baffi” Centre Research Paper Series No. 2008-13.

Dalla Pellegrina, L, and Masciandaro, D, The Risk Based Approach in the New European Anti-
Money Laundering Legislation: A Law and Economics View. Paolo Baffi Centre on Central
Banking and Financial Regulation, “Paolo Baffi” Centre Research Paper Series No. 2008-22.

Fernández Salas, M, The third anti-money laundering directive and the legal profession (2005),
based on a presentation at the European Association of Lawyers made by the author on 27 May
2005 in Brussels.

Goldstein, H.W, “Debate Over Lawyers’ Role in Anti-Money Laundering Enforcement”,

Business Crimes Bulletin.

Katz, E, “Implementation of the Third Money Laundering Directive – an overview”, Law and
Financial Markets Review, May 2007 at page 207.

Komarek, J, “Legal professional privilege and the EU’s fight against money laundering”, C.J.Q
13 (2008).

Scott-Joynt, J, Cash couriers reveal terror fund challenge. (Wednesday 12 May 2004).

Srivastava, A, “Money Laundering: Focus on Lawyers and the EU Directives”, 152 NLJ 760, 17
May 2002

Strafer, R.G, “Money Laundering: the crime of the ‘90’s”, (1989) 27 American Criminal Law
Review 149

Thony, J-F, Money Laundering and Terrorism Financing: An overview.

Tsadiras, A, “The privileged lawyer-client relationship: the Community and Cyprus outlook”,
I.C.C.L.R 106 (2008)

Uribe, R, Changing Paradigms on Money Laundering, The Observer News – Second Quarter,
2003; Inter-American Observatory on Drugs.
Wadsley, J, “Painful perceptions and fundamental rights – anti-money laundering regulation
and lawyers”, Comp. Law. 67 (2008)

Reference Textbooks

Alldridge, P, “Money Laundering Law: Forfeiture, Confiscation, Civil Recovery, Criminal

Laundering & Taxation of the Proceeds of Crime”, (2003, Hart Publishing).

Graham, T, Butterworths International Guide to Money Laundering Law & Practice, (2nd ed.,
2003, Butterworths LexisNexis).

Karsten, K & Berkeley, A, Arbitration: Money Laundering, Corruption & Fraud, (2003,
International Chamber of Commerce Publishing).

Madinger, J & Zalopany, S.A, “Money Laundering: A guide for Criminal Investigators”, (1999;
CRC Press).

Muller, W.H, Kälin, C.H & Goldsworth, J.G, Anti-Money Laundering: International Law and
Practice. (1st ed., 2007, John Wiley & Sons Publishing).

6.2. ACKNOWLEDGMENTS

This introduction to the topic of money laundering was prepared by Lauren A. Evans during her
Internship at the IBA (winter 2008), under the supervision of Gonzalo Guzmán, IBA Project
Lawyer.