Money Laundering EU Law in an International Context
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Library Briefing Library of the European Parliament 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 crime 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 crimes. 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 United Nations, the Council of Europe 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 Author: Piotr Bąkowski 120360REV1 Contact: [email protected] Page 3 of 6 Library Briefing Combating money laundering syndicates by making drug trafficking less Convention was adopted.