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Concepts of Money laundering

Is to conceal criminal activity associated with it, including crimes it generated such as drug trafficking, tax evasion, corruption, extortion, circumventing regulations etc Process by which criminals attempt to hide and disguise the true origin and ownership of the proceeds of criminal activities, thereby avoiding prosecution, conviction and confiscation of criminal funds(IBA definition) Process by which dirty money appear clean or profits of criminal activities are made to appear legitimate.

Concepts - contd..
Organized criminal groups use money laundering as a means to reinvest money. The main objective is to get the illegal funds back to the individual or group of individuals who generated them. Financial intermediaries (banks, financial institutions) are used to change money gained from illegal businesses into acceptable and transferable units, turning illegal gain into legal tender

Concepts - contd..
ML generally refers to washing of the proceeds or profits generated from: Drug trafficking South Asian People smuggling African Countries Financial frauds Arms, Antique and gold smuggling Illegal sale of wild life products and others. Prostitution rings Corruption

Concepts - contd..
ML every year $600 Billion to $2 Trillion.
Financial powers Big time criminals Use professionals to create legal structure/ entities which act as a front

Debit/Credit Cards Deposit structuring (or smurfing) Connected accounts Connected to each other Alternative Remittance services the hawala route Loan back arrangements Forex money changers Investment banking and the securities sectors Insurance and personal investment products Correspondent banking Lawyers, Accountants and other intermediaries Mis-use of non-profit organizations Use of Payable through accounts by international launderers

Types/Techniques Contd
Use of legal persons Corrupt Politicians/Public officials Underground banking /alternative banking
Countries in asia - well established legal alternative banking systems that allow undocumented deposits , withdrawals & transfers. Are trust based systems and often have ancient roots, leave no paper trail and operate outside government control. Eg. Hawala system in Pakistan and India and Fie Chen system in China.

Shell companies (fake companies)

Take in dirty money for payment of supposed goods or services but actually provide no goods and services. Create the appearance of legitimate transactions through fake invoices and balance sheets

Money laundering through electronic systems/cross border activities

Computers/Electronic systems can be used as at tool for perpetrating illegal or criminal activities .
Organized criminals can break security in electronic systems more easily and more cheaply by forcing employees who have legitimate access to the system to furnish them with passwords.

Easier to corrupt an individual in a country where average salary is low.

Money launderers look for countries where there are highly educated well trained banking personnel on a low salary to corrupt them.

Legal Sources of terrorist financing:

Collection of membership dues Sale of publications Cultural of social events Door to door solicitation within community Appeal to wealthy members of the community Donation of a portion of personal savings

Illegal Sources
Kidnap and extortion Smuggling Fraud including credit card fraud Misuse of non-profit organisations and charities Fraud, thefts and robbery and Drug trafficking

Use of shell companies by lawyers

A prominent attorney Ml network 16 FIs-US and abroad offshore locations Charged flat fee to money launder funds Funds of clients were wire transferred to his offshore accounts Moved to Carribbean destinations and USA Issued credit cards in false names to help clients withdraw money through ATMs

Reports/Facts on Money Laundering

Rough estimate - 2 to 5% of GDP (1996) $600 bn to $2 trillion every year. Principal sources of illegal proceeds-Drug trafficking single largest generator of illegal funds Banking sector- smurfing common Shell companies-tool widely used by lawyers and accountants Smaller banks and NBFCs used as channelsPrivate banking assistance-Help given in restructuring accounts-

Impact On Economy
Unpredictable changes in money demand Risks to banking system - Reputational risk, legal risk, operational risk, concentration risk. Increased volatility of international capital flows Increased volatility of exchange rates due to unanticipated cross asset transfers. Economic and political influence of criminals can change social systems, ethical standards Crime can infiltrate financial bodies, public officials/ governments Macro economic situations Money laundering poses a serious threat to the international community and financial systems in countries the world over


Manipulation of primary market by financers and market players using fictitious names. Sole person authorized to operate all the accounts. The person was also director in all the companies Current accounts opened in multiple companies on the same date at the same bank branch Failure to identify the identity and address of all directors of the companies Identity disguised by using different spellings for the same name in different companies. Proper introductions nor obtained Risk profiling not done Objective for opening large number of accounts in the names of large number of joint account holders not questioned Transfer of huge funds from companies account to individuals account which was used to invest in IPO Poor monitoring and reporting system

SATYAM - Issue
The Enforcement Directorate has registered a case against Satyam Computer and its tainted founder-chairman B Ramalinga Raju for alleged money laundering. The ED sources alleged that Raju had diverted funds of Satyam into purchasing nearly 50 plots in Medchal and Qutbullahpur near Hyderabad The ED alleged that several hundred crore rupees had been diverted from the Satyam Computer accounts and had been invested in purchasing land and other infrastructure for Maytas. The Directorate will go through deals of the IT company and ascertain their genuineness including payments made to acquire companies abroad. The ED will also send a team to a few countries to investigate and get documents of bank accounts opened in violation of Indian laws

Hasan Ali Khan - Issues

India's lone banking regulator, Reserve Bank of India,

recently blocked the application of Swiss bank UBS for a banking license in India on the ground that it was involved in $8 billion money-laundering racket RBI said it put the UBS application on hold because the bank failed to cooperate in a money-laundering case in which controversial Bombay-based businessman Hasan Ali Khan was involved. Khan is charged with large-scale breaching of India's currency controls. _ RBI investigators found the link between UBS and Khan, as the businessman had deposited $8 billion at a Zurich branch of UBS. _ They cited it as direct evidence for blocking the license of the bank.

Risk Factors
Entities may not be regulated Customer anonymity(Secrecy) No face to face relationship Anonymous funding(Promissory notes) Cross border transfers access to cash globally through ATMs

Possible risk mitigants

Verification of customer identity Limit funding options Limit card value Monitor transactions Reporting of suspicious activity No direct cash via ATM