Tricks of the trade

Financial planners will know by now that the new anti-money laundering (AML) regime takes a risk-based approach, requiring designated service providers to implement their own risk framework for identifying and treating AML risks.

Money laundering tools

Money laundering techniques evolve to avoid detection. Any example that you read about will, self-evidently, be examples of money laundering techniques that have not avoided detection. The most successful techniques are those that have. If I could suggest what they were I am sure that I would be more lucratively engaged at this moment than writing this article — hopefully on the right side of the law.

Some money laundering techniques will be favoured over others by different criminal sectors.

The net result of criminal activity for the criminal is, most usually, money. It follows that if you trace the money trail back you will find the criminal — simple in theory.

Organised criminals therefore go to extraordinary lengths to disconnect the money from the source of the activity.

Their task is made easier by banks in some countries that sell ‘secrecy’.

The Swiss banking system has been most well known for this over the years, but the Caribbean Islands, the Channel Islands, Nauru and other places also offer ‘safe havens’ for the depositor if you don’t want anyone to know whose account it is.

Many of these banks have correspondent relationships with banks in Western countries, like Australia.

Another tool that is commonly used is that of the shell company.

The company may, or may not, have a real function. Whatever its apparent function, its true purpose is as a separate legal entity that can receive proceeds from illegal activity and pay it out, disguised as the proceeds of a legitimate business. The names of the actual criminals will not appear as shareholders or officers. Shareholders may be other companies, friends or associates. Ultimately, however, the controller is organised crime.

Not all countries have the same compliance, accounting and financial reporting requirements that Australia does.

The amount of criminal money in the world economy is enormous and has been estimated by the United Nations at over $500 billion each year.

If we were talking in terms of a country’s gross domestic product and the amount of money from illegal drug activity alone, it would be the world’s third largest economy.

There is, therefore, a lot of money to be made by banks that offer secrecy and for countries that offer lax AML and company financial reporting laws.

Thus, money obtained from criminal activity is deposited into different branches of banks, or through other financial intermediaries, usually in different denominations and by businesses apparently unconnected with the criminal activity.

The money itself may have been physically transported great distances away from the crime before it is divvied up and placed into the financial system.

Once in the system it will typically be transferred to other accounts. It may well end up in an account owned by a shell company with a secret account in an offshore jurisdiction. From there, it could be transferred anywhere else in the world and used to benefit the criminal masterminds behind it — now virtually untraceable.

Verifying the identity of the client and obtaining some basic information about the business structure, or corporate structure, and the transaction are basic steps that can be taken to cut through the anonymity and structures that are such useful tools to the money launderer.

However, this needs to be carried out on a wide scale internationally.

Hence, the Financial Action Task Force’s recommendations and Australia’s response.

As you may know, the key obligations for reporting entities will be:

> verification of client identity (Part 2);

> ongoing risk-based customer due diligence (Part 10, Division 6);

> reporting suspicious matters and specified high value transactions (Part 3);

> ensuring appropriate originator information is provided with domestic and international funds transfer instructions (Part 4);

> keeping records of dealing with clients (Part 10); and

> developing, maintaining and complying with AML/ counter-terrorism financing programs (Part 7).

The reasons for these obligations are evident from the above description of money laundering tools and techniques.

Confidentiality versus secrecy

Of course, there is a legitimate place for confidentiality in lawful personal and commercial activity.

Confidentiality is important and should be protected.

But ultimate secrecy to facilitate criminal activity is another matter altogether. The two should not be confused.

As professionals in the financial services industry our relationships with our clients are based on trust and we must take our obligations of confidentiality seriously.

There is, however, nothing necessarily inconsistent with these obligations and some intelligent prodding can help make an assessment about whether particular transactions or arrangements could suggest criminal activity.

A money laundering example

Drugs are sold on the street for cash. Millions of dollars in cash are collected. First, the money is placed into the financial system by being deposited into bank accounts. There will be several individual deposits made to different branches of different banks.

The amounts deposited would be less than any reportable cash transaction amounts (for example, $10,000 in Australia). If the money can be deposited into banks with lax reporting and identification requirements then so much the better for the criminal.

Second, the funds are layered by transferring the monies, over a period of time, into a number of other accounts held at different banks and in different countries.

Once again, if the transfer is to countries with lax identification and reporting requirements, the chances of being detected are much less.

These accounts may be in the names of fictitious individuals or company shells.

Third, the funds are integrated into the legitimate economy. They are transferred into the accounts of companies that apparently conduct legitimate businesses, just more profitably than most.

In the Jurado case, where Franklin Jurado laundered $50 million for a Colombian drug cartel, these ‘legitimate’ businesses in Europe were restaurants, construction companies, real estate companies and pharmaceutical enterprises.

There was no reason for bankers, lawyers or financial advisers in Europe to query the accounts of those businesses.

There was no apparent connection with the Cali drug cartel or with Colombia.

Examples of suspicious transactions

> Transactions that don’t make economic sense. For example, a customer may have a large number of accounts with the same bank and may have frequent transfers between different accounts. Why?

> Transactions that you wouldn’t expect having regard to the customer’s usual business activity, for example, moving money between countries, where the customer’s usual business is a local business supplying locally manufactured products.

> An account sits dormant for a long period of time and then has large amounts deposited and/or withdrawn without apparent connection to the customer’s other affairs such as, for example, the sale of a house.

> A client of modest means seeks advice on an investment strategy for a large amount of money from an unknown source.

> Buying securities or other investment products with large amounts of cash.

> Payments being made to, or being received from, numbered accounts.

> A customer who normally uses bank cheques to purchase securities or investment products.

Perhaps one of the most helpful things financial intermediaries can do in preparation for designing their risk management system for AML is to think about their client profiles and to obtain an understanding of money laundering risk for their business.

A visit to the AUSTRAC website and reading as many examples of suspicious transactions and money laundering activities as you can will help you in thinking about what type of activities to look for in your business.

Books that you might like to read if you have an interest in the area include: The Laundrymen and The Sink by Jeffrey Robinson (Editor, Constable & Robinson) London.

Grant Holley is partner at Holley Nethercote Commercial Lawyers .