How did the term "money laundering" originate?
The origins of the term "money laundering", which defines the process of converting illicit proceeds into seemingly legitimate assets, are often associated with the dealings of the notorious Chicago gangster Al Capone. Legend has it that proceeds from bootlegging – alcohol contraband in the USA during prohibition – were mixed with revenue from a chain of self-service laundries owned by Al Capone to make them look legitimate.
Subsequently, the term "money laundering" was used by news reporters during the Watergate scandal of 1973. The scandal erupted when the public learned of 200,000 dollars US in donations sent to Mexico to be later used to finance illegal dealings as part of President Nixon’s election campaign.
This expression first appeared in the USA within a legal and legislative context in 1982. Since then, it has been widely used on a global scale. Still, this term is believed to be rooted in the 1930s, when American gangsters would legalize cash proceeds from racketeering, prostitution, and sales of drugs and alcohol via a chain of laundries. Cash payments were allegedly made for clothes cleaning services.
As a criminal act, money laundering attracted attention in the 1980s, mainly within the context of drug trafficking. Many governments were forced to admit that criminal groups and their tremendous profits from the drug business could rapidly contaminate and corrupt government structures at all levels. To prevent this, a decision was made to develop an appropriate legislative framework. A brief definition of money laundering describes it as the process of concealing a dubious source of funds and converting them into legitimate funds.
The "official" definition of money laundering follows from the provisions of international and regional conventions that obligate states signatories of these conventions to recognize money laundering as a criminal offence:
- UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances of 1988 (Article 3)
- Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime of 1990 (Article 6)
- UN Convention against Transnational Organized Crime of 2000 (Article 6)
- UN Convention Against Corruption (Article 23)
Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime and on the Financing of Terrorism of 2005 (Article 9)
What is the global scale of money laundering?
According to International Monetary Fund experts, the volume of money laundered annually is 2 to 5% of the global GDP which (calculated using the purchasing power parity) was $ 72.5 trillion in the pre-crisis year 2007. Simple calculations show that $ 1.45-3.62 trillion was laundered in the world in 2007.
What are the dangers of money laundering to the public?
Money-laundering crimes are not obvious to the man in the street. However, any of us can become a victim of financial fraud. Ponzi schemes, bank card fraud, illegal foreign exchange dealings, deliberately engineered bankruptcies, and forced takeovers of urban-forming enterprises. All of these are widespread forms of economic crimes that can affect anybody.
The result of such crimes are proceeds, usually in cash, which have to be "laundered" in order to make them look legitimate. Laundered proceeds of crime provide financial resources for organized crime and corruption and frequently are the main source of funding for extremist groups. The criminal economic system thriving on this basis damages the economy, undermines the country’s financial stability, and lets organized crime establish control over the country’s economic system. Therefore, this phenomenon can be viewed as a threat to economic and even national security of the country.
Money laundering creates serious obstacles for market transformations in all segments of public activity, disrupting the normal course of the economy and all core economic institutions, undermining the ability of government agencies to control and manage the country’s financial system.
The heightened public danger of money laundering is due not only to its direct link to the operation of organized crime groups and terrorist activity, but also to the fact that it is markedly transnational in nature.
Money laundering has spread on a scale where it can be a source of financial and economic disturbances for any country, while the damage from terrorist financing comes in the form of both financial losses and irreparable losses of thousands of human lives.
What is the national organizational system for combating money laundering and terrorist financing?
From the organizational viewpoint, the national AML/CFT system comprises the following elements:
- The financial intelligence unit (FIU), which collects, processes, and analyses information on suspicious and unusual transactions. In some cases, the FIU can request additional information from the monitored organizations. When there are sufficient reasons to believe that a transaction was carried out with the purpose of money laundering, the FIU reports this information to the law enforcement.
- Monitored organizations (banks, insurance companies, other financial institutions, etc.), which send suspicious or unusual transaction reports to the national financial intelligence unit.
- Oversight bodies, which supervise the monitored organizations, among other things, for compliance with national AML/CFT laws and submit to the FIU (and receive from the FIU) information about any violations by monitored organizations.
- Law enforcement agencies, which receive reports of possible money laundering from the FIU, investigate the reports, and refer criminal cases to court. In some countries, the FIU operates as part of the law enforcement, in which case the law enforcement agencies are not singled out as a separate element.
- The judicial system, which hands down rulings in criminal cases.
Foreign FIUs, which request and receive from FIUs of other nations the information needed for financial investigations, and carry out joint investigations.
What does AML/CFT stand for?
AML/CFT stands for anti-money laundering and combating terrorist financing. The term is conventionally used to refer to the existing international system for combating the legalization of criminal income and the financing of terrorism, including national financial intelligence units and oversight and law enforcement bodies as well as intergovernmental structures and organizations. An important link in the AML/CFT chain is the collection of information about suspicious transactions and shady customers by banks’ internal monitoring departments, insurance companies, securities dealers and other organizations subject to regulation.
The international AML/CFT system is an important component of the international law enforcement system.
What are the FATF and the 40 recommendations?
The Financial Action Task Force on Money Laundering (FATF) is an intergovernmental organization tasked with developing international standards in the area of combating the legalization of criminal income and terrorism financing. The FATF was created in 1989 by a decision of the Group of Seven countries. The group currently includes 37 states and 2 regional organizations. Observer organizations include the World Bank, the International Monetary Fund, the UN Office on Drugs and Crime, Interpol, the Offshore Group of Banking Supervisors and others.
The FATF main document is its list of 40 recommendations, which is an exhaustive list of organizational and legal steps that are taken in order to establish an effective system for combating money laundering and terrorist financing in each country. The 40 recommendations to combat the legalization of illegal income were first presented in February 1990. In 2001-2003 the list was expanded to include 9 special recommendations on combating terrorist financing.
The FATF is currently a crucial international institution in the AML/CFT sphere.
In 2012, the FATF amended and revised 40+9 recommendations, creating 40 new recommendations that monitor the ML/TF/PF process.
Why are FATF-style regional bodies necessary?
Nine FATF-style regional bodies that unite countries geographically have been created in different regions of the world to spread and effectively enforce these and other international standards.
Covering the majority of regions, FATF-style regional bodies represent a core element in the implementation of mechanisms of the international AML/CFT policy.
One of them is the Eurasian Group on combating money laundering and financing of terrorism or EAG.
EAG is the largest of such groups in terms of coverage and population of its member states.
Why is EAG necessary?
The key EAG objective is assisting the countries in the region in creating and developing national AML/CFT systems.
The Group’s efforts are directly aimed at ensuring public safety in the region by creating conditions for combating serious economic crimes, including the ones perpetrated at the cross-border level. Meanwhile, the introduction of effective AML/CFT systems in EAG member states increases the region’s potential for economic growth and sustainable development. This is accomplished thanks to such positive factors as a reduced crime rate (including crimes of corruption), the economy leaving the shadows, favorable conditions for legitimate private business, and improved manageability of the economy in general and the financial sector in particular. This results in higher investor appeal of economies in the Eurasian region thanks to a stronger financial system and improved image of the countries in the eyes of the international community.
What is the EAG structure?
EAG pursues its activities as part of three working groups:
- Working group on mutual evaluations and legal issues.
- Working group on typologies and combating financing of terrorism and crime.
- Working group on technical assistance.
The supreme governing body of the Eurasian Group on combating money laundering and financing of terrorism is the EAG Plenary, which approves the key decisions and initiatives and shapes the policy of continued development of EAG.
The Plenary is held twice a year.
What is the composition of EAG?
EAG members are Belarus, India, Kazakhstan, China, Kyrgyzstan, Russia, Tajikistan, Turkmenistan and Uzbekistan. 16 states and 23 international and regional organizations have observer status with EAG.
What is the history of EAG creation?
Established in 2004, today EAG unites some 40 states and international organizations. EAG is an observer with FATF and is working actively to form and develop in the Eurasian region an effective AML/CFT system in line with international standards.
EAG was originally created in the Eurasian space in order to unite countries outside then existing FATF-style regional bodies. Interaction mechanisms within the Group have enabled these states to become involved more actively in the efforts of the global financial community. Simultaneously, efforts were launched to create conditions for the establishment and development of effective anti-money laundering systems in these countries.
The establishment of EAG was meant to play a major role in reducing the treat of terrorism and ensuring transparency, reliability, and safety of financial systems of the region’s countries, mainly taking into account the specifics of the Eurasian space as regards its involvement in the zone of Islamic bank financing and risks of laundering of the proceeds from Afghan drug trafficking.
How does the EAG cooperate with Rosfinmonitoring? Who reports to whom?
The EAG is an international organization involved in working out a single set of standards in the sphere of AML/CFT taking into account the national specifics of its member countries. Rosfinmonitoring, Federal Financial Monitoring Service of Russia, is Russia’s financial intelligence unit, which combats money laundering and the financing of terrorism in Russia. Neither of these two organizations reports to the other.
What is the structure of EAG activities?
EAG, much like other FATF-style regional bodies, conducts mutual evaluations of its member states’ AML/CFT systems for compliance with international standards and works out recommendations for the elimination of any shortcomings. To raise the effectiveness of the fight against economic crimes and implement a system of preventive measures, EAG researches typologies and trends of money laundering and terrorist financing, which are typical of the Eurasian region, as well as studies best international practices in this area. Based on its typology research findings, the Group holds consultations with private sector representatives to work out recommendations of the most effective ways for the region’s financial institutions to comply with international standards. The priority line of EAG efforts is implementing technical and advisory assistance programs for the region’s countries, which involve sponsorship from other member states and donors. A leading role in this matter is played by Russia, which currently provides the bulk of funding for EAG and its Secretariat.
What are FIUs?
FIU stands for financial intelligence unit. Their main task is to combat the legalization of illegal proceeds and the financing of terrorism. FIUs actively cooperate with banks and insurance companies as well as with other organizations that are potentially vulnerable to penetration by shadowy capital. Reports of suspicious operations and transactions by lending institutions and other organizations serve as material for financial investigations.
The definition of the FIU concept was developed by the Egmont Group, which unites the financial intelligence units of the world.
What are typologies and what role do they play in the AML/CFT system?
Typologies in the sphere of AML/CFT are the most widespread (standard) schemes for the legalization of criminal proceeds and terrorist financing. The determination of typologies is based on the materials of investigations and research conducted by financial intelligence units, law enforcement bodies, international organizations and others. The FATF, EAG and other FSRBs devote much attention to typology research. The work includes conducting seminars and publishing compilations of works on typology.
What are the statistics on the recovery of stolen funds?
The EAG regularly conducts mutual evaluations of its member states that partially take into account the statistics on the recovery of stolen funds. Reports on mutual evaluations can be found on the Eurasian group’s official website.
Where can one find statistics on financial crime solving rates?
The main tasks of the EAG are to develop the national AML/CFT systems of its member states and disseminate international FATF standards in the Eurasian region. Financial crime solving rates fall under the purview of law enforcement. The EAG is tasked with studying separate aspects of law enforcement, cooperating with financial institutions and law enforcement bodies. Unfortunately, it has no statistics on financial crime solving rates, which in most cases is confidential. We recommend contacting an appropriate statistical service or law enforcement body to obtain such information.