Cardiff Metropolitan University

WRITING COURSEWORK

GLOBAL FINANCIAL SERVICES

STUDENT’S NAME:
Le Thi Phuong Thao – CMU10512
TABLE OF CONTENTS
A. Introduction
B. Literature review
I. Concept
II. Money laundering may occur in private banking
1. Why is it possible to launder money using private banking?
2. In what ways is money laundered through private banking?
3. The impact of money laundering on the economy

C. Conclusion

D. Reference

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My name is Thao. I declare that I am the sole author of this assignment and
the work is a result of my own investigations, except where otherwise stated.
All references have been duly cited

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 A. Introduction
The issue of money laundering has had an impact on the economy.
Criminals use extremely sophisticated techniques to launder money,
particularly when using private banking services. In order to better
understand the money laundering and develop some solutions to help
banks steer clear of dubious transactions, I decided to write this article.
B. Literature review
I. Concept
1. Private banking
As Thorsten Hens, Kremena Bachmann wrote in "Behavior Finance for
Private Banking", private banking offers exclusive wealth-related
services to high net worth individuals. Although high net worth is not
defined, it generally refers to individuals with high net worth greater than
$1 million. The term “private” prefers to the more personalized and
exclusive nature of the offer as compared to the mass-market services
accessible for other individuals such as retail clients and also as
compared to services offered to institutional clients. Private banking
services can be offered by any financial intermediary whose main
activity is the supply of exclusive financial and advisory services to
wealthy private clients. Such financial intermediaries call themselves
either “private banks” or they can have separate “private banking” or
“wealth management” department serving the needs of wealthy private
clients
2. Money laudering
According to the United States Treasury Department:
Money laundering is the process of making illegally-gained proceeds
(i.e., "dirty money") appear legal (i.e., "clean"). Typically, it involves
three steps: placement, layering, and integration. First, the illegitimate
funds are furtively introduced into the legitimate financial system. Then,
the money is moved around to create confusion, sometimes by wiring or
transferring through numerous accounts. Finally, it is integrated into the
financial system through additional transactions until the "dirty money"
appears "clean".

II. Money laundering may occur in private banking

1. Why is it possible to launder money using private banking?

Because it has the potential to generate substantial profits through the

provision of value-added services, the private banking sector attracts
businesses. Although these services are attractive to legitimate clients
with significant assets and relatively complex financial affairs, they
frequently have characteristics that make them attractive to criminals
with large sums of money to launder. Private banking has
several characteristics that can increase the inherent risk of money
laundering in this sector, such as the ability to facilitate cross-border
transactions, knowledge of offshore investment and related services,

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 and a track record of providing excellent, discreet clientele. Privacy is a
key feature of private banking services, which are often not publicly
available. People with large assets also often prefer the privacy and
security of banks, as it helps them hide personal investments. It's like a
double-edged sword that money launchers target to commit illegal acts.

2. In what ways is money laundered through private banking?

A wide range of benefits, privileges, and specialized services are
provided to clients by private banking. Money transfers, deposit
account, mortgage and other lending options, insurance, trust and
estate planning, as well as tax and other advisory services are services
offered by private banking. Private banking services like currency
exchanges and international transfers are frequently in demand. Many
high-net-worth individuals need to transfer money between offshore and
on-shore bank. Others might run their small businesses abroad and
require the ability to convert the receivables into their local currency.
Then, they must be able to change foreign currencies into the currency
of the nation. By offering a variety of foreign exchange services, private
banking services frequently exist to make the process as simple as
possible for customers. For financial services, the majority of
customers must visit a bank location, but private banking customers
have a dedicated relationship manager who frequently accepts
transaction instructions by email or phone. Through the benefits
services provided by private banks, criminals can find loopholes and
launder the dirty money they earn.

Capital market investments—The launderer can invest the money into

financial
assets so as to avoid having large amounts of cash. These assets, such
as shares
and bonds, are generally low risk and so the chances of losing money
are small.
Furthermore the assets are highly liquid, which means they can be
converted
back into cash very easily. Laundered funds are co-mingled with lawful
transactions.

Bank transactions—The launderer can deposit small amounts of cash

into a
bank account. The small deposits will fall beneath the reporting
thresholds.
This is known as smurfing. These funds can then be transferred to a
bank in a
different country, ideally in one which has a high level of banking
secrecy.
These funds can be transferred again to any bank in the world. The
process of
making money transactions to different banks is known as layering, the
more
layers the harder it is to trace the origins of the money.
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Correspondent banking— Correspondent banking is the provision of
banking
services by one bank (the “correspondent bank”) to another bank (the
“respondent bank”). By establishing multiple correspondent
relationships
globally, banks can undertake international financial transactions for
themselves and for their customers in jurisdictions where they have no
physical
presence. Respondent banks obtain a wide range of service through the
correspondent relationship, including cash management (for example,
interest
bearing accounts in a variety of currencies), international wire transfers
of
funds, cheque clearing, payable-through accounts and foreign
exchange
services. These relationships are vulnerable to misuse for money
laundering.
This indirect relationship means that the correspondent bank provides
services
for individuals or entities for which it has neither verified the identities
nor
obtained first-hand knowledge of the respondent’s customers. In
correspondent
banking therefore, the correspondent institution must rely on the
respondent
bank’s having performed all of the necessary due diligence and
continuous
monitoring of its own customers’ account activity
Capital market investments—The launderer can invest the money into
financial
assets so as to avoid having large amounts of cash. These assets, such
as shares
and bonds, are generally low risk and so the chances of losing money
are small.
Furthermore the assets are highly liquid, which means they can be
converted
back into cash very easily. Laundered funds are co-mingled with lawful
transactions.

Bank transactions—The launderer can deposit small amounts of cash

into a
bank account. The small deposits will fall beneath the reporting
thresholds.
This is known as smurfing. These funds can then be transferred to a
bank in a
different country, ideally in one which has a high level of banking
secrecy.
These funds can be transferred again to any bank in the world. The
process of

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making money transactions to different banks is known as layering, the
more
layers the harder it is to trace the origins of the money.

Correspondent banking— Correspondent banking is the provision of

banking
services by one bank (the “correspondent bank”) to another bank (the
“respondent bank”). By establishing multiple correspondent
relationships
globally, banks can undertake international financial transactions for
themselves and for their customers in jurisdictions where they have no
physical
presence. Respondent banks obtain a wide range of service through the
correspondent relationship, including cash management (for example,
interest
bearing accounts in a variety of currencies), international wire transfers
of
funds, cheque clearing, payable-through accounts and foreign
exchange
services. These relationships are vulnerable to misuse for money
laundering.
This indirect relationship means that the correspondent bank provides
services
for individuals or entities for which it has neither verified the identities
nor
obtained first-hand knowledge of the respondent’s customers. In
correspondent
banking therefore, the correspondent institution must rely on the
respondent
bank’s having performed all of the necessary due diligence and
continuous
monitoring of its own customers’ account activity
Capital market investments—The launderer can invest the money into
financial
assets so as to avoid having large amounts of cash. These assets, such
as shares
and bonds, are generally low risk and so the chances of losing money
are small.
Furthermore the assets are highly liquid, which means they can be
converted
back into cash very easily. Laundered funds are co-mingled with lawful
transactions.

Bank transactions—The launderer can deposit small amounts of cash

into a
bank account. The small deposits will fall beneath the reporting
thresholds.
This is known as smurfing. These funds can then be transferred to a
bank in a
different country, ideally in one which has a high level of banking
secrecy.

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These funds can be transferred again to any bank in the world. The
process of
making money transactions to different banks is known as layering, the
more
layers the harder it is to trace the origins of the money.

Correspondent banking— Correspondent banking is the provision of

banking
services by one bank (the “correspondent bank”) to another bank (the
“respondent bank”). By establishing multiple correspondent
relationships
globally, banks can undertake international financial transactions for
themselves and for their customers in jurisdictions where they have no
physical
presence. Respondent banks obtain a wide range of service through the
correspondent relationship, including cash management (for example,
interest
bearing accounts in a variety of currencies), international wire transfers
of
funds, cheque clearing, payable-through accounts and foreign
exchange
services. These relationships are vulnerable to misuse for money
laundering.
This indirect relationship means that the correspondent bank provides
services
for individuals or entities for which it has neither verified the identities
nor
obtained first-hand knowledge of the respondent’s customers. In
correspondent
banking therefore, the correspondent institution must rely on the
respondent
bank’s having performed all of the necessary due diligence and
continuous
monitoring of its own customers’ account activity
Bank transactions: The option exists for the money launderer to make
modest cash deposits into a bank account. Small deposits won't count
toward reporting requirements. This is known as smurfing. The funds
can then be transferred to a private bank in another country, ideally one
with a high level of banking secrecy. These funds can be transferred
again to any bank in the world. Sending money through multiple banks
is a practice known as layering; the more layers, the harder it is to trace
the money's origins.

International money transfers: In this context, it appears that

international correspondent banks are the weak link in the system
because, typically, little effort is made to assess the legitimacy of
foreign, frequently growing, correspondent banks, and because the
system depends mostly on autonomy.

Capital market investments: To avoid having massive amounts of

money, the money launderer is able to put the funds in financial assets.
Since these investments, like shares and bonds, typically carry minimal

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 danger, there is little chance of losing money. The assets are also very
easily convertible back into cash due to their high level of liquidity.
Money used in shady transactions is mixed in with legitimate ones.

Online service: Private banking makes it simpler for victims to carry out
transactions because victims can avoid going to banks, being observed,
or filling out a lot of paperwork. Furthermore, if the owners of these
accounts never visit banks, it is much more challenging to identify them.

Get consumer goods for export: Because it is simple and covert to buy
consumer goods across borders, the launderer will invest in them.
These goods can then be sold overseas to make what appear to be
legal business profits.

Forgery price in international trade: With overcharging for imports, a

buyer could request a 20% price increase so that, upon payment of $2.4
million, the additional $400,000 would be deposited into his personal
bank account in the exporter's country. A handicraft exporter may agree
to sell his products to a foreign dealer for, say, 30% lower than their
agreed-upon price if the additional 30% is paid into the exporter's
foreign bank account in the dealer's country. This is known as
underpricing exports.

In addition to the above methods, there are many sophisticated tricks

such as through insurance market, bank cheques, bank drifts, etc.

3. The impact of money laundering on the economy

3.1Consumption, investment and saving

Money laundering can distort consumption. When the money moves

from victim to criminal, the purpose of the money is changed. The
consumption of money laundering criminals is different from ordinary
people, who often convert dirty money into high-value assets, high-end
products to hide the money. This has a multiplier effect on the economy
as a whole because of the decreased and distinct consumption of the
victims and the increased and distinct consumption of the criminals.
Walker, who attempts to quantify this effect, cites the collateral damage
to the national economy as the overall effect: “those industries supplying
goods and services to the superannuates will suffer a reduction for
demand for their services, and this will ripple through their suppliers and
their supplier and so on. At the same time, the industries supplying
goods and services to the launderer will experience an increase in
demand, which will ripple through their suppliers and so on. The
economy is distorted”. Due to money laundering activities, both of these
types of ripples lead to a net loss to an economy.. Similar to
consumption, in terms of investment and saving, criminals and victims
have different choices. Money laundering criminals will aim for
investments that will help them hide their dirty money as much as
possible (the investment may not generate profits or low returns) and
victims often aim for investments that bring profits to themselves. Money
can move from countries with good economic policy and higher

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profitability to countries with lower economic policy and lower
profitability. This means that world capital is invested less optimally than
without money laundering. Money laundering redirects income from high
savings to low savings or from healthy investment to venture, low
quality.

3.2 Changes in import and export

Participants in money laundering activities frequently import luxury

goods. The balance of payments will consequently be problematic.
These imports have no positive economic or employment effects on the
nation and may drive down domestic prices, which would hurt domestic
businesses' profitability. Money laundering also raises the cost of
imports and exports. Surpassing import prices and lowering export
prices is one of the most widely used strategies for money laundering
and the creation of illegal flying capital.

3.3 Growth rate

Growth rates are significantly harmed by money laundering. Economic

growth may be hampered by the transfer of funds from stable
operations to risky ventures and from profitable investments to
sterilization (stabilization) ones, which facilitate crime and corruption.

3.4Output, income and employment

By shifting resources away from high additional productivity sectors (like

apparel and footwear) and toward non-productive ones (like real estate,
jewelry, and the arts), money laundering also lowers output and
employment. Regardless of where the money would have been spent
otherwise, the latter has the lowest multipliers in terms of output,
income, and employment, leading to a net loss to the overall economy.

3.5 Lower revenues for the public sector

Money laundering may cause a decrease in government revenue

because it lowers tax revenue. Money laundering also represents
earnings from tax evasion. Inadequately or incorrectly reporting income
is one of the most common ways to launder money. As a result, money
laundering hinders efforts to collect taxes.

According to the report THE AMOUNTS AND THE EFFECTS OF

MONEY LAUNDERING, money laundering also affects many aspects
such as changes in the demand for money, exchange in the volatility of
rates and interest rates, changes in foreign direct investment, etc.

Walker, J. (1995). ‘Estimates of the Extent of Money Laundering in and

Walker, J. (1995). ‘Estimates of the Extent of Money Laundering in and
Analysis Centre, September 1995, Queanbeyan: Jonh Walker
Consulting
Services
Analysis Centre, September 1995, Queanbeyan: Jonh Walker
Consulting

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 Service
III. Some anti-money laundering measures for banks

Through their private banking operations, bankers can protect their

institutions from getting involved in shady financial transactions. Firstly,
banks need to secure remittance and payment records in accordance
with foreign exchange management regulations and money laundering
prevention. In addition to the anti-money laundering measures that the
2022 Law on Prevention and Anti-money Laundering requires financial
institutions to take such as customer identification, updating and
verification of customer identification information, participating banks
that provide payment services need to review internal procedures and
procedures for prevention. Anti-money laundering and "tightening gaps"
of international remittance, remittance, and remittance procedures to
prevent criminals from taking advantage of money laundering.
Accordingly, for records of payment or remittance to foreign countries,
customers must provide all prescribed documents, including contracts,
invoices, invoices, and customs declarations, whether made in any way
(payment before or after goods) by receipt of certificates or by letter of
credit. For prepaid payment methods, customers must make a
commitment to supplement documents including invoices and customs
declarations after receiving the goods. For the method of postpaid,
customers must make a commitment to add customs declarations after
receiving the goods. Secondly, all banks need to have a software
program to monitor and remind customers to supplement on time. In
case a customer fails to supplement intentionally and shows suspicious
signs of money laundering, the bank needs to verify and report to the
State Bank as stipulated. Thirdly, banks need to check the invoice,
check the validity of the invoice. For transactions by collection of
payment or letter of credit with suspicious signs, the bank should
investigate the bill or check the authenticity of the relevant bill to ensure
that the bill is genuine and not fake, thereby also knowing information
about the ship's shipment, route, etc. Fourthly, all banks need to identify
relevant customers and partners. In the event of remittance
transactions, revenue, letter of credit and other financial transactions
such as guarantees, reserve letters of credit, especially transactions of
unusually high value, the bank must follow the principles: identify the
customer, including the customer's partner, the banks concerned;
identify the source of the customer's money; identify the progress of the
customer's account operations; identify suspicious signs and carry out
the report in accordance with regulations. Finally, strengthening internal
inspection is an important step. Internal inspection of banks should
strengthen regular inspection of records of international remittance and
payment transactions to ensure that bank operations comply with
internal procedures of banks and the law on prevention of Money
Laundering.

C. Conclusion

Money laundering is a problem that we need to prevent. I hope that this

article will aid readers in better understanding money laundering,
particularly as it pertains to private banking services. Hopefully, the

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 government and banks will soon come up with the best way to stop this
issue.

D. Reference
Hens, Thorsten, and Kremena Bachmann. Behavioural finance for
private banking. John Wiley & Sons, 2011.

Walker, J. (1995). ‘Estimates of the Extent of Money Laundering in and

through Australia’. Paper Prepared for the Australian Transaction
Reports and Analysis Centre, September 1995, Queanbeyan: Jonh
Walker Consulting Services

"History of Anti-Money Laundering Laws". United States Department of

the Treasury. 30 June 2015. Retrieved 30 June 2015.

THE AMOUNTS AND THE EFFECTS OF MONEY LAUNDERING

Report for the Ministry of Finance February 16, 2006

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