Money Laundering and Terror Financing – A Threat to the World
May 2, 2021
The high profit yielding criminal activities have elevated the global problem of Money laundering and terror financing. Although these two phenomena differ from each other in many aspects, they often exploit the same financial systems vulnerabilities in which permit for levels of anonymity and opacity in carrying out transactions are not appropriate. Money laundering on one hand is the processing of assets generated by criminal activity to obscure the link between the funds and their illegal origins. Terrorism financing raises money to support terrorist activities. This article aims at understanding the phenomena independently and in relation and the adverse impacts they are causing to the world.
What is Money Laundering?
It has been defined in many ways by various organizations. The UN defines it as – the conversion or transfer of property, knowing that such property is derived from any [drug trafficking] offense or offenses or from an act of participation in such offense or offenses, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in the commission of such an offense or offenses to evade the legal consequences of his actions. Under another convention in 2002, money laundering is said to be – the concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that such property is derived from an offense or offenses or from an act of participation in such an offense or offenses.
The Financial Action Task Force (FATF) defines money laundering as “the processing of…criminal proceeds to disguise their illegal origin” to “legitimize” the ill-gotten gains of crime. The definition under the Vienna convention while focusing on drug money ignores other offenses like financial frauds. The definition by FATF and similar international instruments further expand the definition to include other serious crimes.
The process of money laundering is basically erasing all the links between the crime and the money. Various methods are available for this purpose especially in the era of technical advancement, the introduction of internet banking, mobile payments, and virtual currencies. This process has 3 fundamental stages namely placement, layering, and integration. Placement refers to the process of introducing the money to be laundered gained from criminal activities into the banking and financial system.
The second stage that is layering “consists of putting the funds that have entered the financial system through a series of financial operations, the purpose of which is to mislead potential investigators and to give these funds the appearance of having a legal origin by creating a web of transactions making it difficult to audit these transactions. Majorly off-shore mechanisms are used for this purpose, especially the tax haven nations or territories like Cayman- Islands through false invoices, false loans, or other devices, ultimately mislead investigators regarding the origin of the money”.
The third and final stage is integration where after layering a garb of legal origin is put on these funds, they are reintroduced in the financial markets through legal sources. This can be done in many ways for ex- consumption of luxury items since the goal of profitable criminal activity is first to be able to “burn” the ill-gotten funds; investments in commonplace assets, including shares in companies, real estate, etc.; investments in economic entities that are themselves susceptible of becoming money-laundering machines including casinos, hotels, restaurants, cinemas, etc., also through businesses which involve large no. of cash payments so that the funds can be easily mixed with the legit money.
As simply these are put in black and white, they are as complex in the real world. Factors at play here can be the law of the native nation, the strategies of the criminal organization, etc. also the fact that should be kept in mind here is that only the criminals are more likely to be engaged in the activity of money laundering which earns more than they could spend resulting in the accumulation of black money.
What is Terror Financing?
Terror financing is the activity of financing terrorist organizations through various means. There is no universally accepted definition of terrorism due to various social, political, and religious factors at play, and thus no conclusive definition of terror financing is there, however under the UN convention even before the 9/11 attack the offense under the International Convention for the Suppression of the Financing of Terrorism (1999) providing fund to any terrorism-related activity as defined under the convention was considered an offense.
Since the terrorist activities take place in different forms, therefore, the forms of financing are also different, these funds are accumulated not only for the purpose of planning an attack but day to day running of the organization too, the maintenance of the members, and so on. The money derived also comes from a wide range of resources consisting of an amalgamation of both illegitimate sources like kidnapping, extortion, robbery, tax control, etc. to legitimate activities like charity (ex. Internationale Humanitäre Hilfs organization in Germany). Unlike money laundering, the main concern is not related to converting the black money into a white but the constant flow of funds to a concealed destination and non-disclosure regarding its purpose. Therefore, the same financial loophole and grey areas are exploited as in the case of money laundering.
The sources for this kind of funding are majorly the drug business, the trading of weapons, human trafficking, business, charity, and criminal activities which may range from low-scale petty offenses to large-scale organized crimes. However, there are constantly emerging new methods for example Da’esh recurred to new methods of funding which could be considered more inherent for a state, such as levering taxes or exploiting natural resources (such as in this case natural gas and oil) as identified by FATF.
The funding of terrorist activities often requires funds to be moved within or across jurisdictions. This might be done through official channels of the financial market and money remittances, through unregulated channels, or with the use of cash couriers.
The International Monetary Fund in the year 1998 stated that the aggregate size of money laundering in the world could be somewhere between two and five percent of the world’s gross domestic product, which is close to the above report by UNODC, when converted into numbers would estimate the actual amount of money laundering ranged between USD 590 billion and USD 1.5 trillion. At the time, the lower figure was roughly equivalent to the value of the total output of an economy the size of Spain.
These activities have serious implications on the world at large. Be it the business sector where the functioning of the financial institutions within the legal boundaries is very relevant for the integrity of the market, as integrity being the most important asset to the market. The corruption of these institutions for the purpose of laundering to turn a blind eye towards the criminal activities makes them part of the network itself. The unchecked laundering of money in terms of macroeconomics leads to inexplicable changes in money demand, prudential risks to bank soundness, contamination effects on legal financial transactions, and increased volatility of international capital flows and exchange rates due to unanticipated cross-border asset transfers.
The economic environment of the nation is disturbed due to discouraging foreign investment and distort international capital flows. The country suffers from welfare losses, draining resources from more productive economic activities, and even has destabilizing effects on other countries. This is the era of globalization and the world is referred to as a global community. As a result, these impacts on a national economy somewhere impact the other countries and international markets too, especially when the international routes are preferred due to loopholes in the international market attributed to the ineffective cross-border controls.
The society at large due to the encouragement of organized crimes and corruption lacks behind in development and the people suffer, the socio-economic costs are generally ignored but if calculated would be devastating to witness.
However, the most serious impacts are faced by the developing nation in the forms of –
Increased Crime and Corruption
International Consequences and Foreign Investment
Weakened Financial Institutions
Compromised Economy and Private Sector
Damaged Privatization Efforts
Laws in Place
There are many programs, institutions, and programs internationally along with individual national statutes that are in place for example- Global Programme against Money Laundering, The Strasbourg Convention, and The OECD Convention on Corruption. However, the most significant institution is the Financial Action Task Force on Money Laundering (FATF) which gave International standards guide effective AML (Anti Money Laundering)/CFT (Combatting the Financing of Terrorism) regimes
FATF is a 37-member inter-governmental body established in the year 1989 in Paris by G7 Summit, primarily responsible for developing a worldwide standard for AML/CFT. It works in close cooperation with other key international organizations, including the IMF, the World Bank, the United Nations, and FATF-style regional bodies (FSRBs). A list of recommendation was issued by the FATF to help the countries to set up effective AML/CFT regimes domestically, which set out a framework which is universally applicable thus making tracing of money easier and transit of black money for either purpose, more difficult which covers criminal justice system, the financial sector, certain non-financial businesses and professions, transparency of legal persons and arrangements, and mechanisms of international cooperation.
In the year 2013, these recommendations were revised to assess the technical Compliance with the FATF Recommendations and the Effectiveness of AML/CFT Systems.
Money laundering and the financing of terrorism can, and do, occur in countries across the world, especially those with complex financial systems. Countries with lax, ineffective, or corrupt AML and CFT infrastructures are also likely targets for such activities. No country is exempt. The object is different in both the phenomenon as one being the conversion of black money into white and another being obscuring of assets of a legal origin (such as public funding or so-called charities), the distinction in terms of impact is not significant as the issue at hand is not the processing of funds but the funds themselves and their objective. In this regard, it has been established that the methods used for curbing money laundering can be applied mutatis mutandis for curbing terror financing.