A Report Paper: Money Laundering

This posting is based on my individual paper in "Financial Market and Long Term Funding" - semester 1 course. The main ideas is focused on the roles of supranational bodies in fight against money laundering practices, 40 recommendations from FATF on Money Laundering as well as its implementation in US and Hungary. The article is a report paper where I got 17 out of 20.

***

Introduction

The globalisation of the world’s financial system has produced many impacts. However, like a double edge sword, the impacts are not only in a positive way but also in a negative. One of the latter is money laundering practice. Money laundering is considerably causing serious macro economic effects like distortion in the interest rates and exchange rate volatility (Quirk in Russel, 2004). Others believe that money laundering may create fiscal problems since they tend to destabilise money demand, not only in domestic but also in global economy. Considering such threats, international community now has taken some initiatives to combat against it and still maintain high commitment to continue the crusade.

The initial section of this article highlights the process and areas of money laundering. The second part observes the 40 recommendations against money laundering issued by FATF (Financial Action Task Force). The following section examines policies and practices which have been implanted in two international countries, the United States of America and Hungary, together with the areas of success achieved and the current deficiencies. The final section concludes.

Money Laundering: Meaning, Process and Areas.

Meaning
There are many definitions of money laundering but simply put “…money laundering is the process of integrating illegally obtained funds into the legal system so that they can be accessed freely” (Russel, 2004). In other words, the term ‘money laundering’ simply refers to the efforts of criminal organisation to “wash” dirty money through a legal business system, so that the illegal money could be combined with the legitimate income of business.

Process
According to Cooper & Deo (2006), money laundering is achieved through three stages: (a) Placement (b) Layering and (c) Integration. Placement refers to the disposition of illegal money, either through the local economy or foreign market. The purpose of layering is to cover up the source of money through complex transactions that will effectively successfully camouflage and eliminate the audit evidence. The final stage is frequently established through integrating the illegal money to finance a domestic business or by using the money as a deposit to obtain loan then transferred back to the bank owned by the money launderer.

Areas
Financial Action Task Force (FATF) - an inter-governmental body whose works on development and promotion of national and international policies to combat money laundering, in their recent report ‘Money Laundering & Terrorist Financing Typologies 2004 – 2005’ outlines 4 areas of money laundering that are subject to international attention; first is alternative remittance system (ARS), second is insurance and money laundering vulnerabilities, the third is money laundering associated with human being trafficking and illegal immigration and the fourth is money laundering and terrorist financing trends and indicators (FATF, 2005).

The Role of Financial Action Task Force (FATF) in Fight against Money Laundering

FATF

The follow-up action from the Viena convention 1998 was the establishment of the Financial Action Task Force (FATF) in September 1989 in Paris during the G-7 summit by members of 15 industrialized countries. The list currently includes 29 countries and territories and 2 regional organizations: European Commission and Gulf Co-operation Council. The objective of the task force is to examine the trends on money laundering and fight against the growing threat of money laundering by setting up international cooperation in policing, preventing and punishing money laundering activities (FATF, 2006). In April 1990, FATF published 40 recommendations that address different areas of money laundering. Later on, these recommendations were revised in 1996 and 2003.

40 Recommendations

FATF has issued the 40 recommendations against money laundering practice around the globe. As an illustration of the acceptability of the FATF guidelines, it is approximately 130 jurisdictions representing 85 per cent of the total world population and about 90-94 percent of world economic outputs have made at least a political commitment to implement such recommendations in combating the dirty money (Shehu, 2005).

Basically 40 recommendations are categorised into four main parts: Part one outlines recommendation 1 – 3 as regards to the legal systems to curb money laundering activities. It focuses on the application of the Viena and the Palermo Convention. Part two provides 22 recommendations that specify the roles and obligations to be taken by financial institutions and non financial business and professions to prevent money laundering and terrorist financing. Part three comprises 9 recommendations for the necessary measures in institutional and system for combating money laundering. Part four stipulates recommendation 35 – 40 in order to strengthen the international cooperation.

The implementation of those recommendations is monitored by FATF using a two-step process: self assessment done by individual countries in the form of a report and an evaluation by the FATF through site visit by a team of expert. Based on the assessment FATF then taking proactive measure by identifying “non cooperative” regions. Furthermore, these regions are then under certain action by the FATF body. The action may involve suspension from membership, sanctions or persuasion. Based on past experience, such actions has been successful in creating pressure and dramatic reforms to support the anti-money laundering campaign more attainable.

The Policies and Practices in Two International Countries

For this discussion the United States of America (US) and Hungary will be our main focus. There are some reasons why the policies and practices in US and Hungary should be discussed. As many people knew, the US is the central of global economy where the latest innovations on financial aspect have been evolved. With their stringent law, strong effort and well-experienced anti-money laundering agencies, the US represents a good example for a continuous war against money laundering. By contrast, Hungary was the first of the former Warsaw Pact countries of Eastern and Central Europe to adopt regulations against money laundering (Tóth & Gál, 2004). Therefore, Hungary provides an ideal example of a country which just started the campaign against such practice.

U.S Practices
The US government started the campaign with the establishment of the Bank Secrecy Act (BSA) in October of 1970. Senguder (2002) believes that the BSA plays a crucial part of the United States’ war against money laundering since it governs the monitoring process on the bank transactions. The BSA authorized the Secretary of the Treasury to require banks to report cash transactions over $10,000 to the Department of the Treasury. The Bank Secrecy Act (BSA) also requires any transaction exceeding $10,000 to be reported in the form of Currency Transaction Report (CTR). This requirement not only for banks but also applied to credit unions and other financial institutions. Moreover, the banks are also asked to report any suspicious transaction in the form of Suspicious Activity Report (SAR). This form is not only targeted to the traditional financial institution but now has expanded to the non-traditional financial institution such as currency dealers, casinos, mutual funds, insurance companies as well as hedge funds.

In 1986 ‘The Money Laundering Control Act’ was enacted where one of the important provisions is that the money laundering is a federal crime. Afterwards, the government continue to support a comprehensive cooperation among law enforcement authorities, federal agencies, banking and professionals as well as the Treasury Department. In 1990, they formed Financial Crime Enforcement Network (FinCEN) in order to provide intelligent source for domestic and international financial crimes, including money laundering.

Nowadays, the US is not only fighting domestic money laundering practice but has expanded to the international efforts. The efforts include proposing “International Money Laundering Act”, releasing anti-money laundering strategy, signing several multilateral agreements on money laundering investigation as well as strengthening the cooperation with multinational agency.

The Success Achieved and Current Deficiencies
The success achieved from such numerous efforts is still in progress. Between 1987 and 1996 a total of 77 million currency transaction report were filed, in which 3000 reports lead to money laundering cases where 580 under convictions (Bauer and Ullman in Russel, 2004). One may argue that the number is insignificant; however, we can make an educated guess that without such efforts, the number of money laundering case would be higher. One of The drawbacks of this campaign is about the compliance cost. Bank and financial institution often complaint on the excessive compliance cost and conflicting privacy of their customers in which created a burden for them (Bauer and Ullman in Russel, 2000).

Hungary Practices
In 1994 Hungarian Parliament passed Act IX about money laundering prevention as well as the revision of Penal Code 303 to take into account the definition and sanction of money laundering. Additionally in 2000 Hungary committed itself to fight against money laundering with the establishment of Act CI of 2000. From the time on, the war against money laundering has just began. Nevertheless, such efforts were not enough to convince the international financial organisations. In 2001, Hungary has put on the FATF’s blacklist of countries failing to cooperate. The rationale was because Hungary still has a policy to allow the opening of bank account that payable to the bearer as well as allowing withdrawing money from any existing account without any identification (Tóth & Gál, 2004).

In response to the situation, the government and legislative passed the Act LXXXIII of 2001 stipulating various restrictive actions against money laundering and terrorism. As Tóth & Gál (2004) outline, the legislation attempted to address the problem and weaknesses found by the FATF in the following ways: by making impractical to open a savings account without identification as well as in opening circulate multiple bonds, the requirement to make a custom declaration and identification details for those who crossing the border into the country carrying money to the value of one million forints and a restricted policy in opening currency exchange services in which only credit banks and their agency allowed to do so. Those prompt efforts had brought Hungary being removed from FATF’s list of countries failing to cooperate. Additionally, Hungary has updated the legislation with the introduction of Act XV of 2003 in order to strengthen the existing legislation.

The Success Achieved and Current Deficiencies
To sump up the Hungary’s success to prevent money laundering, FATF noted that over 90 per cent Hungary’s anonymous saving deposits have been turned into named accounts and states that Hungary’s has high level of cooperation with them. However, they also recognized some problems in the implementation. Tóth & Gál found at least two current deficiencies. First is concerning with cross-border money laundering. As Hungary is bounding in the European Union system, the cross-border capital inflow and outflow are inevitable. Difficulties were raised since the fact that different countries have different regulations governing crimes on money laundering. Secondly, is the objection from business and market sectors because the obligation to report such suspicious transaction has put them in a difficult situation – one part, they has to report to authorities but they could infringe their client interest and privacy or on the other side, they may breach the law and face the risk of being prosecuted.


Further Recommendations
The fight against money laundering requires greater coordination and cooperation of intelligence, law enforcement work, amongst countries in the world. Therefore one of the suggestions is to improve the coordination and cooperation among global communities. It is also imperative for the communities to implement the anti-money laundering commitments such as the 40 recommendations by FATF, Viena Conventions and Basel Declarations.

Moreover, in some countries like in the US, money laundering monitoring activities is involving millions of suspicious reports. Consequently, special attention should be addressed to improve the effectiveness of the process. This may include the implementation of neural system network or sophisticated information technology to crack down the flow of dirty money particularly in wire transfers transaction. Lastly, in an almost boundless world, it is also important for law enforcer to enhance monitoring of cash at the cross-country border since the criminals still use such conventional method to launder their dirty money.

***