Editorial»
Money laundering & risk
DEC 17 - Money Laundering is perhaps the most talked about phrase in the financial world today. But this is not a new thing that has cropped up overnight. This has been known to bankers for quite sometime now. Most of the developed countries have set up a legal framework to control money laundering over the past two decades. But it is only recently that the issue has assumed paramount importance, owing to the links between money launderingand terrorism in the present day world. To be precise, the issue of money laundering has come to the forefront of global importance after the September 11 incident in the US.
So, what is money launderingand why has it become so important? Money Laundering is the process of disguising the origin and ownership of funds so that it looks like genuine money earned from legitimate activities. In more simple form it is also called the process of converting Black Money (ill-gotten money) into White Money (clean legally-earned money).
The goal of a large number of criminal activities is to generate money for the individual or group that carries out crimes, terrorism or illegal businesses. Money laundering is the processing of these funds generated through criminal activities to disguise their illegal origin. This process enables the criminals to use the money for whatever use they wish without revealing their source. Illegal arms sales, smuggling, and the activities of organized crime, drug-trafficking and prostitution rings are a few examples that can generate huge sums of illegal money. Embezzlement, insider trading, bribery and fraud schemes can also be categorized under this. The large amount of money earned provides the incentive to criminals to resort to these criminal activities. Then their ultimate goal will be to “legitimize” the criminal proceeds through Money Laundering.
When a criminal activity generates substantial ‘Black Money’, the individual or group involved will find a way to control the funds without attracting attention to the underlying activity or the persons involved. Criminals do this by disguising the sources, changing the form, or moving the funds to a place where they are less likely to attract attention. There are some fundamental steps in the process of Money Laundering. The Money launderingprocess can be categorized into three distinct stages. The initial stage is called placement in which illegal money is put into the financial system by breaking dowm the huge amount of cash into less suspicious smaller sums that are deposited directly into a bank account, or by purchasing a series of monetary instruments (cheques, money orders, shares etc) that are then collected and transferred into accounts at another location.
After the funds have entered the financial system, the second stage, Layering, takes place. In this phase, the launderer engages in a series of conversions or repeated movements of the funds to distance them from the actual source. The funds might be channeled through the purchase and sales of investment instruments, or simple transfer of the funds through a series of transactions to accounts at various banks across the globe. In some instances, the launderer might disguise the transfers as payments for goods or services, thus giving them a legitimate appearance.
Having successfully processed his criminal profits through the first two phases of the money laundering process, the launderer then moves them to the third stage, Integration. In this phase the scattered funds are integrated and re-enter the legitimate economy. At this stage the money appears as clean as any legitimate funds and can be used for any purpose without suspicion.
Currently, there is no law in Nepal that deals with Money Laundering. Many banks and financial institutions do not take this issue seriously and many bankers do not even have the knowledge of Money Laundering. This is a very serious situation.
The integrity of the banking sector depends on functioning within a framework of best financial practices and ethical standards. A reputation of integrity is one of the most valuable assets of any financial institution. Money Laundering, if not checked properly, will serve as incentives to those people who resort to crimes and illegal activities. For a country like ours the issue of money laundering is of critical importance. We must use anti-Money launderinglaws as a deterrent to financial irregularities, bribing, tax evasion, terrorism and business of contrabands etc. It should become one of the major tools to fight these social ills so that those involved should stop recognizing financial benefits through these activities. This is the reason why the need of Money launderingLaws in the country is highly felt. Further, international criminals are constantly looking for ‘soft’ places to place their illegal money where there is very little or no restriction at all. If such funds are used for crimes and terrorism in other countries, then the situation could be more grave as the institution and our country itself could be accused of sponsoring international crimes or terrorism.
The Financial Authority Task Force (FATF) is an international organization that monitors members’ progress in implementing anti-money laundering measures; reviews and reports on laundering trends, techniques and counter-measures. FATF drafted a comprehensive blueprint for action against Money launderingin 1990, whcih was revised in 1996 and i salso known as Forty Recommendations.
The Forty Recommendations are recognized as the international standard for the anti-money laundering movement. These are the forty points that cover the financial system and its regulation, criminal justice system and law enforcement and international co-operation.
Given to the seriousness of the issue, many countries have already committed to regulating Money Laundering. Many sensible developed or developing countries have already established an anti-Money launderingmechanism within their financial and regulatory systems. One of the major points to note is that the act of Money launderinghas been recognized internationally as a crime; giving the concerned authority the power to seize and ultimately confiscate such assets and provide the necessary framework for permitting the government to prosecute the people involved in it.
Large-scale Money launderinginvariably contain cross-border elements. Local banks must comply with international ethical practices as well.Given the global concern over the issue of Money Laundering, Nepal, without adequate domestic legal system to counter Money launderingcannot expect to attract foreign direct investment also.
Hence, it is critically important that government gather all its expertise in developing a national anti-money laundering policy. They should bring law enforcement and financial regulatory authorities together with the participation of the private sector to control Money Laundering. This will guide financial institutions in establishing a practice of financial transaction reporting systems, customer identification, understanding the customer’s business, record keeping standards and realizing importance of compliance of regulatory laws, among other things.Posted on: 2003-12-17 02:37
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