Money Laundering: What Is Money Laundering (Explained) – Schemes & Regulations

Overview of Money-laundering

Table of contents

• Introduction of money laundering
• Stages of money laundering
• Methods of money laundering
• Causes of money laundering
•  Effects of money laundering
•  a.Economic impacts
•  b. Social impacts
•  International Anti-money laundering organization
•  Money laundering in Pakistan
•  Channels of money laundering
• A prominent case in Pakistan
•  Suggestion
•  Conclusion     
•  Money laundering

Introduction:

Money laundering can be prosecuted by different kinds of capital and commercial activities which include apparently legal actions such as cash transactions, and digital money transfers. Money is also laundered in different ways like smuggling, trading and drug trafficking. Money laundering is declared as an illegal activity by the domestic and international legal authorities. 

Exceptionally money laundering is a source of financing for the terrorist and other criminal organization The United States Treasury Department (USTD) defines money laundering as disguise financial transactions and funds that are used by terrorists or other criminals for their evil purpose.

 According to the United Nation Office on Drug and Crime (UNODC):-

“Money laundering is a process which disguises illegal profits without compromising the criminals who wish to benefit from the proceeds. It is a dynamic three-stage process that requires: first, moving the funds from direct association with the crime; second, disguising the trail to foil pursuit; and third, making the money available to the criminal once again with the occupational and geographic origins hidden from view.”

Why Money laundering?

The aim of Money laundering is to originate a profit for a single or group that carries out this unlawful act. This process has analytical importance because it gives the permit to the criminal to enjoy these profits without threatening their sources. When an illegal activity originates significant profits, the individual must discover a method to control the funds without eye-catching to the underlying activity or the person involved. Criminals do this by incognito the sources, diversifying the forms, or moving the funds to a place where they are less probably to attract attention.

Stages of Money Laundering

There are many ways to launder money but each method has a certain level of complication related to it. However, money launderers always doing these three steps which are interconnected to each others

Placement: The initial step of money laundering is related to cash depositing in the blank of a foreign country, this step is known as placement. Money is placed in other countries without eye-catching of state authorities.

Layering: The next step is linked to carrying out financial transactions, cash withdrawals, and wire transfer and hiding the original means of money, this step is called layering. As launderer performs many financial transactions, which act as layers of cash.

 Integration: At this stage, the money launderer used the money for investment or other purposes. When money reached this stage it becomes legal assets or legal possessions. Now the money earned through the illegal way is converted into legal assets.  

THE METHODS OF MONEY LAUNDERING. 

There are several methods that money launderers use to perform the crime of money laundering without bringing it to the attention of any Anti Money Laundering (AML) authorities.

a. STRUCTURING OF MONEY

This method comprises the division of large amounts of cash, which need to be laundered, into smaller amounts. Each divided amount is then transferred, through money orders, online transactions, cash deposits, etc. to foreign banks. The nontaxable sum, which can be legally traveled with, can also be taken to the foreign country by traveling legitimately. The scheme of dividing a sum of money into smaller portions and transferring the portions is also termed “smurfing.” It generally includes the first stage of money laundering—the placement of funds in foreign banks—either through online transfers, wire transfers, money order, or traveling as a group but pretending to be individuals, with each person having the maximum but different amount of cash to legally travel with.

b. SMUGGLING

This method involves taking bulk cash to a foreign country by deceiving the airport or border authorities of the actual amount of money being displaced. This amount is then deposited into a bank of that foreign country, where the money laundering laws might be weaker or not strictly enforced. This is considered to be the most common method of money laundering.

c. LAUNDERING THROUGH TRADE

Money laundering through trade happens when invoices are either undervalued or overvalued, depending upon the cash inflow/outflow or costs, respectively. Traders often accomplish this by providing fake invoices and accounts.

d. NGOs.

Founding a nongovernmental organization (NGO) and registering it in another country and providing funds to it can lead to money laundering if the NGO is not making use of the funds for a noble cause for the local public. Some businessmen create trust organizations and give their money to them as a charity payment so that the charitable amount is not taxed; this, therefore, avoids taxation. Some NGOs have also been reported to be linked with terrorist or anti-state elements. For instance, in Pakistan after the attack on the Army Public School children in Peshawar, several NGOs were banned from Pakistan by the Interior Ministry because those NGOs were reportedly involved in anti-state activities and were also diverting their funds to finance terrorism.

e. FOREIGN EXCHANGE

Uncertified and unregulated foreign exchange gathers remittances and then supplies the relevant quantity of remittance to the families of the senders without notifying authorities' government. these foreign exchange businesses have a couple of currencies with them and that they commonly switch funds abroad upon the requests of the locals. hence, the authorities are deprived of the collection of remittances, in addition to the taxes that it is able to get from the cash, this is sent overseas. As a result, this method of foreign exchange or remittances, which is likewise associated with Hawala or Hundi, is unlawful.

f. MONEY LAUNDERING THROUGH REAL ESTATE

Some criminals buy the property with cash earned through illegal means and then sell the property to reacquire the cash, so as to justify it as legitimate money. As the illegitimate money is converted into legitimate earnings, it is considered laundered money. It is also possible that the price of that property may be underrepresented to reduce the taxable amount. This hides the exact amount of money spent on buying the property, and it is mainly done to evade tax.

Causes of Money Laundering

There are different types of factors which give rise to money laundering, these factors may be present within the state or outside of the state. Some of the main causes are the following:

a. Corruption

Corruption is unethical behavior geared toward gaining personal blessings by the usage of either authority or bribery. Politicians, statesmen, ministers, etc. disguise the monetary and nonmonetary assets that they earn illegitimately, i.e., through the way of corruption. as an example, they could take bribes and might choose to transfer the bribe money into foreign banks or other investments. They could, for this reason, keep away from moving it to nearby or private bank money owed so that local economic auditing authorities do no longer discover the bribe amount. for this reason, their corruption reasons a glide of cash to overseas banks or reasons them to cover their economic belongings as well as the assets of incomes, which ends up in cash laundering. it's far of paramount importance we diminish corruption which will prevent this form of crime.

b. Nature of Borders

Online financial transactions and the smuggling of cash through airports are not the only means of laundering money. Cash is also smuggled physically through borders, particularly in those countries where there is weak or no vigilance over cross-border trafficking. For instance, this practice is more common across the international borders of countries where the border area is either mountainous or too long to control and monitor strictly and continuously, e.g., across the Afghanistan– Pakistan border. The money launderers, in such a case, act as smugglers and either cross the border themselves or assign the chore to their loyal followers. Drug lords prefer to launder money by smuggling cash in return for drugs and vice versa. This is the quickest and safest mode of money laundering for them as they do not have to create any bank accounts and never have to show their identity during online transactions. They remain undercover and get money through furtive sources of money laundering.

c. Failure of Banking System

 is another cause for the untracked facilitation of cash laundering is the failure of banks to hit upon and record the cash of their reserves that are being laundered. massive sums of cash are transferred by using cash launderers to foreign banks, and some accept without sporting out any powerful inspection as to their supply. sadly, there's no automated mechanism devised international to accurately track down the supply of money; neither do maximum banks usually pay any interest to it due to the costs associated with it. moreover, there is no incentive to use resources to research the cash that has been located in their monetary reserves. therefore, the problem stays untouched and unrestrained, and reasons banks no longer to carry out enough scrutiny over the funds that attain their branches via cord transfers or some other method, which consequently encourages cash launderers to switch funds to overseas banks with none risk of being liable for the actual supply of the money.

d. Weak Financial Regulation

Another cause of money laundering is the weakness and inadequacy of financial regulations and relevant authorities within a country. For instance, if the tax department is not strong enough to question the politicians, elites, and general public about their earnings and “monetary and nonmonetary” assets, then it is not difficult for people to hide taxes and perform money laundering by buying property in relatively more stable but offshore economies.

BRIBERY

Bribery is also linked to weak financial regulations as financial regulatory authorities or airport officials might be bribed by money launderers to allow them to transfer funds abroad without paying the applicable taxes and by not tracking down the sources or destinations of the money. This paves the way for secured money laundering facilitated by the officials of airport authorities. As a consequence, the money illegally moves out of the country.

 Effect of Money Laundering

The effect of money laundering is socioeconomics in nature. Money laundering affects the national economy, as well as rise to several social costs. On the one hand, it spoil the strength of the economy by causing a corrosive impact; on the other hand, it acts as a social evil. Some of the major impacts of money laundering are the following.

a. ECONOMIC IMPACTS

Money laundering reduces the control of the government over economic policy. It also raises the risk of the potential failure of banks, businesses, and government to implement economic policies. Furthermore, due to globalization, the impacts reach international monetary systems and can adversely affect international currencies and economies, depending upon the volume of money laundering.

b. Damage to the Private Sector

Damage to the private sector is another adverse effect that the money launderers cause to the economy of a nation. Money launderers often act through front companies, which acquire their funds. By acquiring large amounts of funds they can lower the prices of their services or products to a large extent to penetrate the market. They gain a competitive advantage when other companies are not able to match their prices.  Hence, intense competition can devastate existing small and medium-sized private companies because smaller companies usually lack sufficient capital to bear the brunt of price competition.

c. The decline in Tax Revenues

Money laundering directly affects the government’s tax revenue as huge sum of currency that could have been taxed is moved abroad. This loss of revenue must be covered by the government by collecting more taxes from other taxpayers by increasing the tax rate. This hurts honest taxpayers, as well as making tax collection tougher for the government as the public may retaliate by protesting against the hike in tax rates.

SOCIAL IMPACTS

Money laundering gives birth to a number of social costs and dilemmas. It also affects the reputation of a country at the international level if it appears that the financial institutions of that country might be involved in money laundering. Furthermore, it can expose or encourage the people of a country to smuggling, drug trafficking, etc. Money laundering can also contribute to other crimes, as criminals, drug lords, smugglers, black money owners, etc. have to hide their source of income; moreover, they have to employ money-laundering techniques to conceal their black money under the cloak of legality or safety from law enforcement agencies. Hence, money laundering gives a safe haven to criminals and terrorists to hide their illegally earned money and, therefore, motivates others to enter the criminal world as they might consider any of the methods of money laundering to be a promoter and cover to their criminal activities.                

INTERNATIONAL A.M.L. ORGANIZATIONS

There are several organizations that work to curb money laundering activities at the international level. The most prominent among them are mentioned below.

a. FINANCIAL ACTION TASK FORCE (FATF): In 1989, the G7 countries founded the F.A.T.F., headquartered in Paris, France. At present, thirty-six countries are members of F.A.T.F. The main purpose of F.A.T.F. is to devise an intergovernmental response for curbing money laundering; however, in October 2001, after 9/11, it took on another essential goal in order to accomplish the combating the financing of terrorism. It creates policies and strategies and gives advice to the governments for A.M.L. and Combating Financing Terrorism (C.F.T.) laws and policy reforms. It also monitors the government’s financial activities to track any misappropriation related to money laundering regulations and provides suggestions to the governments upon identifying any irregularities. It can also suggest financial sanctions against countries that do not obey international regulations and policies.

b. UNITED NATIONS OFFICE ON DRUGS AND CRIME: The United Nations Office on Drugs and Crime (hereinafter U.N.O.D.C.) maintains up-to-date data related to drug trafficking, smuggling, money laundering, and terrorism financing. It was founded in 1997 to create a combined mechanism to curb money laundering and the illegal trafficking of drugs. It also offers technical and financial assistance to governments to devise effective mechanisms for curbing money laundering.

c. FINTRACA: Financial Transactions and Reports Analysis Centre of Afghanistan (FINTRACA) was founded in 2004 as an AML agency. It is a semiprivate organization that works within the Da Afghanistan Bank. Its core function is to prevent access to the Afghan financial system to money launderers and those who are suspected of using the money to finance terrorism. It works as a financial intelligence unit (F.I.U.), gathering information and performing data analysis to track down the sources and destinations of money that come to or leave the Afghan financial system.  

MONEY LAUNDERING AND PAKISTAN.

Money laundering has taken hold in Pakistan. The US State Department's International Narcotics Control Strategy Report released recently estimated around 10 billion dollars per annum money laundering by Pakistanis. India's comparable figure was much higher at 51 billion dollars. In other words, Pakistan's money laundering is about 20 percent that of India. There is a tendency on the part of Pakistani administrations to compare macroeconomic data with India, specifically those indicators where our performance is better. In this context, however, it is relevant to note that Pakistan's nominal Gross Domestic Product as well as purchasing power parity is only 12 percent of India's while our money laundering is 20 percent that of India. Pakistan is 46th on a list of 146 countries that face significant money laundering/terrorism financing risks, says a recent report by a Swiss institute.

There are four Muslim countries among the 10 highest risk countries — Iran, Afghanistan, Tajikis­tan and Mali, which is seventh with 7.97 points. Saudi Arabia is 93rd with 5.43 points. In South Asia, Afghanistan is the highest-risk country followed by Nepal with 7.57 points, Sri Lanka with 7.15 points, Pakistan with 6.64 points, Bangladesh with 5.79 points and India with 5.58. Last year, Bangladesh had 6.4 points while Pakistan had 6.62. India is 88th on the list. This crime has flourished over the last three decades through black money, which the political and elite classes possess alongside having political influence and power in the country. Unfortunately, no government during this period has been successful in effectively implementing laws to curb money laundering and its precursor crimes, such as drug trafficking, smuggling, and corruption neither has the government devised any effective mechanisms to combat tax evasion. People try to evade taxes as tax laws are not strict enough to make them accountable for unpaid taxes. Although new laws have aimed at curbing money laundering, they have lost effectiveness as the government has never discouraged the patterns in society that facilitate money laundering.

CHANNELS OF MONEY LAUNDERING

Money laundering is carried out in Pakistan through different channels, as explained below.

a. DRUG TRAFFICKING: Pakistan is in the Golden Crescent region, an area where opium and its cultivation and trade are widespread, owing to its geographical location. Its neighboring countries, Iran, Afghanistan, and India, have a high volume of opium cultivation and trade origins. Drug trafficking within these countries, as well as across their boundaries, takes place regularly because the borders, especially the Afghanistan–Pakistan, Iran–Pakistan, and Iran–Afghanistan borders, are not strictly protected and monitored. Drug traffickers move the drugs across the border and get cash in return from the drug lords, who are pursuing their activities furtively in Pakistan as well as in its neighboring countries. The cash movement is usually unreported and is surreptitiously carried out, which is in itself money laundering.

Owing to the high prices of the drugs that are trafficked along the borders of Pakistan, the amount of cash moved is usually very high, sometimes in the hundreds of millions of Pakistani rupees. Thus, a high amount of currency is laundered by the drug traffickers as “black money” or “dirty money” and stays unchecked, particularly if the drug traffickers have good contacts within the establishment or government as they can give bribes to the relevant authorities or can also use power to ensure their safe conduct. Pakistan’s northwestern border with Afghanistan is too long to have surveillance over and can be too costly for the government to keep a continuous check over it, whether using manual or automated surveillance systems.

The absence of constant surveillance has assisted smugglers and drug traffickers throughout history and they have been successful in establishing their underground drugs and money laundering empire by smuggling merchandise and drugs in both directions across the border, and by moving cash in a similar fashion. This has strengthened the money laundering and untaxed trade, which has now emerged as a giant market that has the capability to rival the local market economy in Pakistan’s North-West Frontier Province.

b. SMUGGLING OF CASH: Cash is smuggled across the borders of Iran and Afghanistan, as well as through airports. For this, smugglers try to evade the security checks to launder money and they also bribe authorities or someone in the surveillance team to let them move the cash abroad.

c. CORRUPT POLITICIANS AND ADMINISTRATORS: Regrettably, corrupt politicians and administrators are paving the way for major crimes to take hold in the country, for instance, corruption, bribery, money laundering, and “whitening” black money. The corrupt officeholders are promoting these crimes either by becoming directly involved in money laundering, making offshore properties, drug trafficking, smuggling, corruption, misappropriation of funds, bribery, etc. or by taking bribes from those who are involved in such crimes. Reportedly, investigations have also been launched against some politicians accused of having contact with smugglers, money launderers, and drug lords.

In this regard, it is not only politicians but also personnel in the administrative and anticorruption departments who have been found guilty of taking bribes from money launderers, who have been allowed to take huge amounts of cash out of the country and, in return, took bribes from them. Employees in the anti-narcotics squads and airport authorities have assisted money launderers and drug traffickers in taking currency abroad. There is a need to keep a strict check on personnel, as well as on those who are working in such departments, where money launderers can entice someone by giving large bribes to allow their money laundering activities.

d. TAX EVASION: Many elites in the country avoid paying taxes. For this, they usually bribe the tax office employees to either show their tax status as “paid” or to not notify the tax authorities of the fact that the tax has not been paid. Usually, the bribe is a small chunk of the tax amount, which rich people never hesitate to give and the worker who receives it considers very good, because the salaries of government workers are not sufficiently high to afford a fashionable lifestyle. A large number of incidences of bribery have led Pakistan to have the highest prevalence of bribery in South Asia.          

Money launderers also bribe officials of the relevant A.M.L. authorities to allow the transfer of large amounts of cash abroad and label the transfer as “clean” without paying the applicable tax on it, by either reporting an incorrect amount of transferred cash or not reporting it at all. Hence, money laundering proceeds in two ways, i.e., by evading taxes and by transferring cash to foreign banks successfully for the sake of getting property abroad, and the widespread culture of bribes plays an essential role in supporting this.

e. HUNDI: Hundi has been a major channel of money laundering in India and Pakistan. Through this method, overseas nationals send remittances to their relatives, friends, family, etc. It works like a credit transfer or IOU and transfers money without actually moving it from one region to another. As a result, neither the government nor the economy notices the transfer, which directly makes it a money-laundering channel. Although the government of Pakistan has made this method of money transfer illegal, there are still many Hundi operators working in the country surreptitiously and it might also be possible that some foreign exchange companies use this process to hide their taxable earnings from the government. In addition, a study indicated that the total volume of annual currency transfers through Hundi is around $15 billion, which is a significant amount and indicates the strength of the Hundi channel for laundering money.

f. TERRORISM FINANCING: Terrorists require money to finance their activities. The sponsorship is provided by their patrons, who are usually found to be money launderers and drug traffickers, and sometimes politicians and the elite of society, who support them in a disguised manner. Nonetheless, funding from foreign anti-state elements overshadows all other sources of terrorist funding, which establishes the pathways of money laundering. Terrorist organizations have been found to be involved in money laundering. This has been found to be true particularly in Pakistan, where foreign intelligence agencies, namely RAW, Blackwater, and the CIA,  have been found to be involved with terrorists and to have financed anti-state elements.

PAKISTAN AND INTERNATIONAL A.M.L. STANDARDS AND ORGANIZATIONS

Pakistan has never exercised a leading role in any of the A.M.L. international standards or organizations, although Pakistan has been a member of them and has actively participated in the meetings of these conventions and organizations since their founding.  Pakistan also gets  support  from  the U.N.O.D.C. in terms of technical and advisory assistance for curbing the drug trade  and  money  laundering  through  its  northwestern  border  region Moreover, Pakistan also has a cooperative relation with INTERPOL and can approach it for the arrest of any serious criminal who has escaped its law enforcement agencies but is pursuing criminal activities from a foreign land, or conversely INTERPOL can also inform Pakistan of the activities of a Pakistani person who is suspected to be involved in money laundering. As a result of legislation over the last ten years from Pakistan’s parliament designed to combat money laundering, drug manufacturing and trading, and corruption, the international A.M.L. organizations have taken Pakistan off the list of countries that have a high prevalence of money laundering and drug trafficking. This has also given rise to a chance of establishing cooperation with international A.M.L. organizations with renewed vigor to combat money laundering and related crimes.

 PROMINENT CASES OF MONEY LAUNDERING IN PAKISTAN.

Some prominent cases of money laundering have been reported over the last decade, and those occurring in Pakistan are mentioned below.

a. Sharif Brothers-Money Laundering Case: Mian Nawaz Sharif and Mian Shahbaz Sharif were alleged of money laundering and used the Hudaibiya Paper Mills as cover for money laundering during the late 1990s. The Hudaibiya Paper Mills case is still pending in the National Accountability Bureau.

b. Ex.  President Zardari Money Laundering Case: Zardari 1st alleged of misappropriated as much as $1.5 billion. “ NAB opened a fresh case against him: the so-called BMW car reference (a BMW was imported in 1993 allegedly for Zardari and allegedly while evading customs duties). Fast forward to March 2008 and Zardari was cleared of all charges in the BMW case, without recourse to the NRO.   In 1994 Ms. Bhutto, Asif Zardari, and their agent Jens Schlegelmilch were alleged to have received $60 million in kickbacks from SGS in exchange for the award of a pre-shipment inspection contract to the Swiss company. In 2003, Ms. Bhutto and Mr. Zardari were convicted of simple money laundering by a Geneva investigating judge who handed down a six-month suspended sentence.

c. THE CASH SMUGGLING CASE OF AYYAN ALI: The Pakistani model Ayyan Ali was arrested at Islamabad Airport when the U.S.$506,000 was found in her bag, which she was reported to be taking to Dubai. This amount is far higher than the maximum cash limit allowed to be taken out of Pakistan, which was set at $10,000 and $60,000 a year. The amount that Ali had was ten times higher than that Legal action was taken against Ali, who was immediately sent to Adiala jail. Investigations were also held; however, Ali was granted bail and was released from jail after paying heavy fines of around 50.5 million (5.5 crores) Pakistani rupees for her violation of Pakistan’s A.M.L. laws. As a punishment, her name was also added to the exit control list to prevent her from traveling again outside the country.

d. THE CASE OF THE KHANANI AND KALIA FOREIGN EXCHANGE COMPANY: The Khanani and Kalia Company, in Pakistan, operated foreign currency exchange and was involved in money laundering. Javed Khanani and Munaf Kalia were arrested and handed over to the F.I.A. Both were found guilty of illegally transferring around $10 billion out of Pakistan and were charged according to the law by the F.I.A. upon the completion of investigations. U.S. authorities also charged both with involvement in money laundering in the United States and offshore regions.

Suggestion

 There are following recommendations to curtail money laundering

a. Organizations dealing with financial transactions must identify and do background checks on depositors. Report all suspicious activity to law enforcement agencies and anti money laundering organizations as well.

b. Build an internal task force to identify laundering clues. Financial institutions should not keep anonymous accounts or accounts in obviously fictitious.

c. Financial institutions should, in relation to politically exposed persons, in addition to performing normal due diligence measures have appropriate risk management systems to determine whether the customer is a politically exposed person. CI Obtain senior management approval for establishing business relationships with such customers.

d. Organizations dealing with the flow of money must take reasonable measures to establish the source of wealth and source of funds.

e. Strict measures should be taken against the money changers involved in Hawala and Hundi business. 

CONCLUSION

Money laundering recognized as a major crime at the international level. Terrorists, drug traffickers, smugglers, black money owners, etc. use different money laundering methods to finance their activities, to traffic drugs, and to clean their illegitimately earned assets. Although AML organizations in all countries have formulated certain mechanisms, rules, and policies for preventing and curbing money laundering, these policies have been insufficient, whose magnitude has increased up to billions of U.S. dollars at the international level. Money laundering causes negative effects to the economy, such as devaluing capital, lowering the growth rate, affecting interest rates and the CPI causing inflation, and defaming financial institutions, which leads to curbing opportunities for domestic and foreign direct investment.

In addition, the social costs of money laundering are of an adverse nature as it can result in providing safe havens to criminals, i.e., the drug traffickers, terrorists, and other criminals who are benefitting from laundering cash. The primary reasons for the social costs of money laundering are found in the fact that this crime is entwined with other serious crimes, i.e., tax evasion, smuggling, whitening of black money, corruption, terrorist financing, and trafficking of illicit drugs and arms. All of these crimes can cause deep adverse effects on the socio-economic landscape of a society; furthermore, these crimes are considered among the main channels of money laundering, both in Pakistan and globally, as set out above. Therefore, it is essential for law enforcement agencies to curb the crime of money laundering by foiling the channels of money laundering and the tactics that criminals use for laundering cash.