Library Briefing Library of the 24/10/2012

Combating money laundering EU law in an international context

SUMMARY Money laundering is a global In this briefing: phenomenon, the scope of which cannot be  Context reliably estimated. It takes a plethora of forms, characterised by varying degrees of sophistica-  How money is laundered tion.  Elements of the global AML regime Prevention is a crucial element of anti-money  International AML efforts laundering (AML) actions, which are not only in the domain of the state, but have  EU legal framework increasingly involved the private sector.  Further reading Checks on the identity of customers, keeping relevant records and reporting suspicious Context transactions to competent authorities are the cornerstones of modern AML systems. As long as the proceeds of remain Having started with offences related to the outside the regular financial system, tracing proceeds of trading in illegal drugs, regulators them is very difficult for law enforcement have gradually criminalised money laundering agencies. However, as soon as use is made with respect to a now extensive catalogue of of such funds - e.g. the perpetrator pays . cash into a bank account or buys a car – the Their collaborative efforts within such fora as money becomes visible to the state which the , the and may then intervene by seizing or the Financial Action Task Force (an informal confiscating the assets. organisation set up by the G7 countries) have For this to happen, however, money has to led to the drafting of widely acknowledged be attributed to the crime it originated from. AML standards. These principles have been To avoid this, perpetrators "launder" illicit complemented with various sets of self- funds to disguise their original source and imposed rules established by financial make them appear legitimate. institutions. The exact scope of this phenomenon at The EU has taken part in elaborating interna- global or EU level is not known and cannot tional AML norms and standards. They have be reliably assessed. The International been incorporated into EU law by the three Monetary Fund's (IMF) estimates range from successive AML directives. The revision of the 600 to 1 800 billion dollars laundered each third, Directive 2005/60/EC, is currently under year. A 2010 report by Eurostat and DG way. Home Affairs was the first compilation of European statistics concerning this issue which "has barely begun to be explored at international level".1 In the policy-making discourse, money laundering is often associated with organised crime. However, some crimes committed by non-affiliated individuals may also involve considerable sums of "tainted"

Image Copyright Lisa S. 2012. money, especially in the area of corporate and bank fraud.2 Used under licence from Shutterstock.com Author: Piotr Bąkowski 120360REV1 Contact: [email protected] Page 1 of 6

Library Briefing Combating money laundering

Money laundering schemes – complex ones three-stage process, a description first in particular – often include trans-border proposed by US customs and law elements, such as transfers to bank accounts enforcement practitioners which has since located in offshore centres. The assumption come into wide use: that money laundering can thus be  In the placement stage the illicit assets addressed efficiently only at an international are introduced into the legal economy or level has underscored a wide variety of AML the formal financial system, e.g. money is initiatives around the world. These paid into a bank account. Money numerous actions have arguably led to the launderers normally focus on the least emergence of a global AML regime. EU law controlled areas, as most AML tools are in this area is part of this regime and can applied at this stage. only be understood alongside measures adopted by or in concert with other  In the layering stage the first attempts international organs. are made to disguise the origin of the funds. This is done in various ways How money is laundered including moving assets between a series of accounts, including foreign ones, Money laundering takes various forms, changing their physical condition if they some very basic and others highly sophisti- have a tangible form (e.g. banknotes or cated.3 Fictitious transactions (such as the bearer bonds), exchanging them for real purchase of non-existent or overvalued or imaginary servi- services), false lottery Example of a money-laundering technique ces, as well as and gambling gains, mixing them with "smurfing" or "struc- The sham court claim (faux procès) technique legally acquired turing" (placing many shows how the legal system can be used to assets. small deposits below launder money. A criminal organisation which the amount that would owns two companies places "dirty" money in  In the integration an offshore account outside the jurisdiction raise warning signs in stage the assets, and control of the country into which it wants the bank), and self- which now appear to bring the money. One company initiates to be legitimate are financing loans court proceedings against the other for non- (whereby "dirty" mo- fulfilment of a fictitious transaction and claims reintroduced into ney transferred to an damages corresponding to the amount to be the legal economy. offshore bank serves as laundered. It wins the case and is awarded They may then be collateral for a domes- damages, which, moreover, are tax-free in invested or used to tic loan) are but a few many countries. The amount of damages is acquire luxury of the well-established transferred by the losing company from the objects.4 techniques of money offshore account and the money is thus laundered. This description has laundering. The de- been criticised how- velopment of electro- ever for over- nic payment systems simplifying an often and online banking very complex process, services means new as well as failing to techniques are cons- reflect the reality of tantly emerging. "white collar" crime This variety of forms (e.g. VAT or invest- makes money laun- ment fraud).5 In such dering difficult to cases, the assets do define. It has typically not normally need to been presented as a Based on Techniques de blanchiment et moyens de lutte / E Vernier, 2008. be "placed" in the

Author: Piotr Bąkowski 120360REV1 Contact: [email protected] Page 2 of 6

Library Briefing Combating money laundering formal banking system, as they are already Record keeping within it. The laundering instead consists of Detailed customer identification and concealing these funds e.g. through transaction records should be maintained so transferring them abroad, as happened with that they may be available, if need be, for Russian privatisation funds following the inspection by competent authorities. Five Soviet Union's collapse. years is a standard minimum period. Elements of the global AML regime Suspicious transaction reporting Any suspicious or unusual transaction, A series of instruments elaborated since the having no apparent economic or lawful 1980s have laid the foundations of modern purpose, should be reported immediately to AML systems. These systems are the so-called Financial Intelligence Unit (FIU) characterised most of all by a preventive – the national agency responsible for approach to money laundering. This has analysing such disclosures and transferring shifted a large part of the responsibility for them to law enforcement authorities. detecting transactions which may involve Most jurisdictions require institutions money laundering to non-state actors, and exposed to money laundering to provide financial institutions in particular. their employees with AML training and have Customer due diligence (CDD) an AML officer, responsible for reporting to Entities susceptible to money laundering are FIUs. Once a report has been made, the under the obligation to properly identify institution is not obliged to investigate their customers and establish further to verify whether the the source of their funds. The Egmont Group suspicion was grounded. It Banks are thus no longer The Brussels-based Egmont Group, has been recommended that allowed to hold anonymous founded in 1995, is a worldwide, informing the customer accounts. Moreover, if the informal organisation set up to concerned that a report has customer is a company or facilitate information exchange and been filed should be sharing of expertise between states' prohibited. Moreover, the appears to act in somebody FIUs. It was set up to eliminate else's interest, the actual obstacles in these areas resulting institution making a report in owner (the so-called inter alia from differences in the good faith should be immune "beneficial owner") needs to standing and nature of FIUs around from liability regardless of be identified. the world. whether illegal activity actually occurred.6 The CDD obligation continues throughout the business relationship, as the customer's Over the years, CDD, record-keeping and transactions have to be monitored for reporting obligations have been extended suspicious or unusual elements. to cover professions outside the financial sector (e.g. casinos, lawyers, notaries, real Enhanced due diligence is applied to estate agents, and art dealers). This politically exposed persons (PEPs) – development has met with resistance from prominent public figures whose position the groups concerned, which tend to makes them more susceptible to attempts consider it costly, time-consuming and at corruption. Such procedures are also difficult to implement. applied when dealing with foreign correspondent and offshore banks. International AML efforts Recent years have seen a shift towards a more individual risk-based approach which The evolution of AML policies makes the extent of CDD dependent on the In the 1980s, the first US-led AML efforts risk represented by a particular customer, targeted profits from drug-related crime. product or transaction. The idea was to weaken powerful drug

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Library Briefing Combating money laundering syndicates by making drug trafficking less Convention was adopted. The Convention profitable, as well as detecting their patterns set numerous obligations for combating of behaviour through tracing drug-money money laundering, including: movements in the financial sector.  criminalising it for all serious predicate However, since the beginning of the 1990s, crimes (not only drug-related ones); policy-makers have expanded the scope of  setting up regulatory and supervisory money laundering provisions to cover an regimes for institutions susceptible to increasing number of "predicate crimes" money laundering, based on customer (crimes in relation to which money identification, record-keeping and the laundering is criminalised). reporting of suspicious transactions;  ensuring the cooperation and exchange As a consequence of 9/11, the international of information among various authorities AML regime was extended to terrorist at both national and international levels. financing. More recently corruption, tax crimes and the financing of the proliferation In 2001, straight after 9/11, the UN Security of weapons of mass destruction have been Council adopted resolution 1373, requesting among threats attracting the particular that UN members prevent and suppress the attention of AML policy-makers. financing of and criminalise it. Security Council resolutions are not Regulatory bodies and AML instruments supposed to mandate general legislative International cooperation developed actions and therefore the resolution has simultaneously within several organisations. been subject to criticism.7 It has led to a series of instruments, of which the most widely acknowledged are four Council of Europe (CoE) international conventions, 49 recom- In Europe the CoE has played a leading role mendations issued by the FATF, and a UN in the field of money laundering deterrence. Security Council resolution. What is now a It promoted the preventive role of the quasi-global AML regime is a fruit of the banking system in combating money interplay of these instruments, combined laundering as early as 1980 with regional initiatives, as well as (Recommendation No. R (80)10). guidelines and principles adopted by The 1990 Convention on Laundering, private-sector representative bodies. Search, Seizure and Confiscation of the The United Nations Proceeds from Crime (Strasbourg In 1988, the UN Convention against Illicit Convention) expanded the money Traffic in Narcotic Drugs and Psychotropic laundering definition laid down by the UN Substances was adopted in Vienna. The Vienna Convection to all serious crimes, Convention, to a large extent based on encouraging the state parties to follow this concepts developed in the USA, was the first approach long before the UN Palermo international act to define money Convention was adopted. laundering (although without naming it as The 2005 Convention further such). This legal definition served as the developed the system established by its basis for money-laundering definitions predecessor, in particular with respect to subsequently adopted at international level. prevention and cooperation between The Convention obliged the parties inter alia financial and law enforcement institutions. to criminalise the conversion, transfer and The Convention – the provisions of which concealment of property derived from drug- also apply to terrorist financing – contains a related crime. minimum list of crimes which must be In 2000, the Convention against Transnatio- treated as predicate offences. nal Organised Crime, known as the Palermo

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Library Briefing Combating money laundering

Financial Action Task Force (FATF) Nonetheless, the recognition they have The FATF is an inter-governmental body gained among world-leading economies established in 1989 by the G7. At present means these standards are much more the FATF has 36 members, as well as authoritative than would be assumed given numerous associate members and the informal nature of FATF. international organisations with observer Private sector involvement status. Over 180 jurisdictions have joined Banks and other financial institutions may the FATF or an FATF-style regional body (e.g. willingly or unwillingly be used as the CoE's MONEYVAL). intermediaries for the transfer or deposit of The FATF has a ministerial mandate to illicit assets. Any involvement in money establish international AML standards. In laundering represents a serious risk for 1990, it issued 40 recommendations which them, as it may lead to the loss of reputation came to be recognised as arguably the most or even to direct financial losses. Therefore widely acknowledged standards in this field. in addition to requirements resulting from The FATF Recommendations were revised in government instruments, leading financial 1996, 2001, 2003 and in February 2012. The institutions have subjected themselves to most recent revision addressed new priority self-imposed standards. areas such as corruption, tax crime and the One such initiative was the so-called Basel spread of weapons of mass destruction. Statement of Principles elaborated by the Moreover, in October 2001, the FATF issued central bank governors of G7 states in 1988. eight Special Recommendations as an The Basel Statement enshrined several basic immediate response to the 9/11 attacks, ethical principles for banks. It aimed to followed by a ninth recommendation in ensure that their customers are properly 2004. These extended the 40 identified, that transactions which seem recommendations to the financing of illegitimate are discouraged, and that banks terrorism, as well as setting new cooperate with law-enforcement agencies. requirements regarding non-profit In 2000, eleven global banks joined forces to organisations and services considered create the Wolfsberg Group. The Group has vulnerable to terrorist financing due to a elaborated AML guidelines for Private lack of regulation (alternative remittance Banking, most recently revised in June 2012. systems, cash couriers and wire transfers). The adoption of the guidelines in 2000 The FATF assesses and monitors compliance represented a radical change of perspective, with its standards. Countries and territories favouring the individual risk assessment of risk being blacklisted as "non-cooperative", transactions based on precisely defined and consequently rejected as partners in the objective parameters (risk-based approach). international payments system. Such The high profile of the financial institutions "naming and shaming" has proved to be involved has guaranteed the Group's effective. However, no countries have been recognition by regulators around the world. listed as non-cooperative since 2007. This is important as their guidelines are FATF recommendations are not legally meant to be translated into binding norms. binding, and may be considered as "soft law". Beside conventions, this product of EU legal framework expert analysis is on the one hand more The EU has played an important role in specific and more easily adaptable to elaborating international AML standards. It changing money-laundering patterns, but has acceded to the relevant UN and CoE on the other hand it raises doubts as to its conventions. Moreover, the Commission has democratic character and accountability.8 been an FATF member since the latter's

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Library Briefing Combating money laundering inception while the ECB, Eurojust and the area of data protection and cross-border Europol have observer status therein. situations. The preventive philosophy of FATF, whose The Lisbon Treaty opened a new path for EU guidelines the EU has followed closely, AML action: Article 83(1) TFEU enables the enabled the EU to adopt directives instead EU to establish minimum rules regarding the of framework decisions – the third pillar definition of criminal offences and sanctions instruments normally used prior to Lisbon for "Eurocrimes" – serious crime with a cross- for the approximation of national criminal border dimension. A proposal in this law. The EU AML Directives have thus respect, on money laundering, is included in incorporated the FATF standards into EU the Commission's 2013 work programme. law, following the successive revisions of the FATF recommendations. Further reading The scope of the First AML Directive of 1991 The anti-money laundering system in the was limited to proceeds of drug crimes. context of globalisation: a panopticon built on However, the 2001 Second AML Directive quicksand? / L Gelemerova, 2011. expanded the scope of predicate offences to Dirty money: the evolution of international all serious offences. Moreover, it required measures to counter money laundering and the reporting obligations to be imposed on financing of terrorism / W C Gilmore, 2011. non-financial activities and professions. Introduction to money laundering deterrence / The Third Directive (2005/60/EC) contains D W Cox, 2011. inter alia detailed provisions on due diligence implementing the risk-based Disclaimer and Copyright approach. The Directive also extended the This briefing is a summary of published information and scope to terrorist financing. does not necessarily represent the views of the author or the European Parliament. The document is exclusively The Directive's revision is under way with addressed to the Members and staff of the European the Commission expected to present a Parliament for their parliamentary work. Links to information sources within this document may be proposal by the end of 2012. Its consultation inaccessible from locations outside the European has revealed broad support for the Parliament network. © , 2012. All rights proposed alignment to the revised FATF reserved. recommendations and for greater http://www.library.ep.ec clarification of certain issues, in particular in http://libraryeuroparl.wordpress.com Endnotes

1 Money laundering in Europe / Eurostat, 2010, p. 4. 2 The anti-money laundering system in the context of globalisation: a panopticon built on quicksand? / L Gelemerova, 2011, p. 73. 3 For a detailed description of various techniques see: Techniques de blanchiment et moyens de lutte / E Vernier, 2008. 4 Suspicion of money laundering: in the crossfire of international due diligence obligations: Liechtenstein - Austria - Germany - Switzerland / A Insam, ed. 2006, p. 27. See also Dirty money: the evolution of international measures to counter money laundering and the financing of terrorism / W C Gilmore, 2011, p. 34 and Introduction to money laundering deterrence / D W Cox, 2011, pp. 11–14. 5 L Gelemerova, op. cit. p. 75. 6 International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation - the FATF Recommendations, February 2012, recommendation no 21. 7 Promise and perils: the making of global money laundering, terrorist finance norms / M Gallant, JMLC 2010, (available through Westlaw UK: click 'skip' to access full text). 8 Ibid.

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