As shocking and tragic as it was, September 11, 2001, marked the beginning of a new era in the fight against money laundering and terrorism financing. For some, this day was considered as the fall of the giant; for others, a wakeup call. But for the worldwide financial sector, it signaled the start of a fierce war against financial crime.
To simplify things, money laundering is the process of making dirty or illicit money look clean by concealing its illegal source. Illicit money includes proceeds from illegal activities such as illegal arms sales, drug trafficking and smuggling.
The three stages of money laundering start with "placement", which usually involves the disposal of illicit funds in banks or financial institutions. The second stage is "layering", in which the money launderer tries to hide the illegal sources of the funds by performing several operations such as wire transfers, check issuances and investment in stocks. The third stage is "integration". At this stage, it is very difficult to trace the origin of funds since the money launderer engages in activities such as buying real estate and luxury goods, which covers the source of funds and creates a perception that the operations performed are normal and perfectly legal.
Although money laundering and terrorism financing are usually used simultaneously, there is one major and important difference between the two. Money laundering is based only on the use of illicit money, whereas funds used in the financing of terrorism can also be derived from perfectly legal activities and businesses. This fact increases the challenges faced by financial institutions worldwide in their fight against terrorism financing.
To counter the threats of money laundering and terrorism financing, an intergovernmental body called the Financial Action Task Force (FATF) was formed by the G7 countries in 1989. In 1990, FATF issued 40 recommendations for fighting money laundering which were revised and updated in 1996 and 2003. In 2001, FATF issued an additional eight special recommendations covering terrorism financing. Recommendation No. 9 was added in 2004 to make the 49 recommendations a cornerstone and a reference for all countries in their fight against money laundering and terrorism financing. Currently, FATF includes 34 countries as members in addition to two regional organizations.
Other initiatives in the field include both UN conventions held in Vienna and Palermo; EU third directive on the prevention of the use of the financial system for the purpose of money laundering and terrorism financing; the Basel Committee paper on customer due diligence for banks; the formation of the Egmont Group for financial intelligence units; the Wolfsberg papers on AML for private banking and the suppression of the financing of terrorism; and the USA Patriot Act enacted in 2001 which enabled the US Treasury, in particular the Office of Foreign Assets Control (OFAC), to impose sanctions on all financial institutions working in the US and on all US financial institutions located abroad.
Although most of the international initiatives for fighting money laundering and terrorism financing are not legally binding and are merely recommendations and guidelines, most of the countries and financial institutions are making tremendous effort to abide by them. In doing so, countries and financial institutions will be able to mitigate the reputational and legal risks of being sanctioned.
The author is a Certified Anti Money Laundering Specialist (CAMS)
Zawya 2012
