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It is important for a company to identify potential money-laundering activities at an early stage and report them to the relevant authorities in accordance with the statutory requirements within the jurisdiction, where applicable. In this article, we shall review the official definitions of money laundering and the common features of money laundering
activities. Official definitions of money
laundering
The global efforts to combat money laundering effectively began with the development of the draft text of what would become the Vienna Convention under the auspices of the United Nations over six sessions held in Vienna between 1986 and 1988. The Vienna Convention defines the following conduct which should be made criminal: concealing or disguising 'the true nature, source, location, disposition or movement of property knowing such property is derived from' a predicate
offence.
The Vienna Convention also requires that 'the conversion or transfer of property, knowing that such property is derived from any offence or offences established in accordance with the Convention or from an act of participation in such offence or offences, for the purposes of concealing or disguising the illicit origin of the property or of assisting any person who is involved in the commission of such an offence or offences to evade the legal consequences of his actions' should also be made an
offence.
The Vienna Convention sets the scene of what activities are deemed to be money laundering and should be made criminal. Various jurisdictions have since enacted anti-money laundering laws more or less based on the Vienna Convention
proposal.
Current position in Hong
Kong
In Hong Kong the key provision is Section 25 of the Organised and Serious Crimes Ordinance (OSCO) which involves 'knowing' that a transaction involves proceeds of crime but extends to situations where a person has 'reasonable grounds to believe' that property is
tainted. The test of knowledge is reduced to having a reasonable belief. If there is some basis for such a belief when any action is undertaken which involves the property in question (which need only indirectly relate to part of the proceeds), an offence has been committed. In Hong Kong the law applies to any
person. However, if someone believes that he or she has committed an offence, he or she must rely on the defences contained in subsection 25(2) of OSCO that allow the defendant to establish that he or she intended to report such knowledge, suspicion or matter as is mentioned in section 25A(1) of OSCO to an authorised officer, and that he or she had a reasonable excuse for not doing
so. Section 25A of OSCO goes further and reduces the level of knowledge to a mere
suspicion. Full discussion of the legal issues is beyond the scope of this article and you are advised to seek your own legal advice when you are in
doubt. Money laundering
methods
As global financial systems have become more developed and complex, so have money laundering methods. Here are some
examples:
Using the internet to facilitate money
laundering
One method of money laundering through the internet is to establish a company offering services payable online. The launderer then 'uses' those services and pays for them using credit or debit cards tied to accounts under his control (located perhaps in an offshore region) which contain criminal proceeds. The launderer's company then invoices the credit card company which, in turn, forwards the payment for the service rendered. The launderer's company may then justify this income as payments for a service
rendered.
In this example, the launderer actually controls only the invoiced accounts. The internet service provider, the internet invoicing service, and even the bank from which the illegal proceeds begin this process would likely have no reason to believe there was anything suspicious about the activity, since they each only see one part of
it.
Use of credit
cards
The simplicity of this approach and the difficulty in detecting it demonstrate how it can be a very effective money laundering method. This is because it manages to overcome one of the vulnerabilities for money launderers in international fund transfers. If one wants to move funds from country A to country B using a normal banking system, one must execute an international funds transfer request to move funds from one bank account (or cash) to another, recipient account in country B. To achieve this one would need to advise the bank concerned of one's identification details and of the name and number of the recipient account which becomes part of the Swift message and can be 'captured' by the anti-money laundering agencies in either country A or B or
both.
The use of credit card transactions either 'on the ground' or via the internet removes the potential for identifying the specific part to the offshore
transaction.
It is highly unlikely that payments to a credit card company would attract any scrutiny within the financial sector and even within the credit card company itself, particularly if the size of the transactions was only increased slowly over
time. The three-stage process of money
laundering
There are two reasons why criminals have to launder money. The money trail is evidence of their crime and the money itself is vulnerable to seizure and has to be
protected.
In the traditional analysis, money laundering is seen as a dynamic three-stage process that
requires:
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Placement or moving the funds from direct association with the
crime;
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Layering or disguising the trail to foil pursuit;
and
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Integration or making the money available to criminals once again with its occupational and geographical origins hidden from
view. |
Let us look in more details at these three stages of the money laundering
cycle. Placement
While the normal analysis suggests that the placement stage involves the activities of placing funds into the financial system, many of the examples of placement do not really involve placement into the financial system at
all.
It is not the placement of the funds into the financial system, but the conversion of the cash (i.e. the actual proceeds obtained from criminal activity) into some other form by which value can be held which is crucial. Some examples
are:
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Deposits of cash
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Usually the cash from criminal activity will be deposited into an account of a name which is unrelated to the parties involved in the criminal
activity.
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Gambling
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Gambling, particularly the use of casinos, is often referred to as a common money laundering technique and one which is described as part of the placement process. Of course, many casinos now operate very effective Anti-Money Laundering (AML) regimes. The purchase of a large volume of chips for cash will be notified to casino management. So too will the fact that the ostensible gambler has in fact not gambled at all or very little with purchased chips. When the gambler seeks to convert the chips into a casino cheque this will, in most cases, alert the casino management who should lodge a suspicious transaction report if that is required in the relevant
jurisdiction.
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Commingling
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Commingling is the term which is used to refer to the process of mixing criminal and legitimate funds in order to hide the origin of the criminal funds. One of the most common processes is to use a legitimate business, particularly one which relies on high volumes of cash transactions, and inflate actual cash receipts with the funds which are to be laundered. Examples of high cash flow businesses are restaurants, fast food outlets, tourist operators in resort locations, and retail outlets which specialise in relatively low value
goods.
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Currency smuggling
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The primary purpose of currency smuggling is to move funds from a high risk jurisdiction to a low risk jurisdiction. That is, to take cash from a country where there is likely to be close scrutiny of attempts to place the funds within the financial system to a jurisdiction where that risk is much lower and the funds can be laundered and returned to the originating jurisdiction with little
risk.
The much greater scrutiny now afforded to air travellers as a result of concerns about possible terrorist attacks, or even those travelling through other modes of transport, has increased the risks for currency
smugglers.
There is a long list of other means of placement, e.g. purchasing assets, works of art, gemstones, gold, etc. and it is not intended to describe each one of them in this
article.
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Layering
There are slightly different versions of the definition of 'Layering' among regulators. The one given by FINTRAC, Canada's Financial Intelligence Unit, is simple but effective. It states that layering: 'involves converting the proceeds of crime into another form and creating complex layers of financial transactions to disguise the audit trail and the source and ownership of funds (e.g., the buying and selling of stocks, commodities or
property).'
The common understanding of layering is that once criminal funds have been placed within a financial institution the funds will be moved through a number of transactions in various countries before returning to the point of origin or to another jurisdiction where the funds are readily accessible and untraceable. It is well known that offshore financial centres and countries with relatively lax anti-money laundering regulations, or financial centres with very high value and volume of transactions when coupled with the use of corporate entities, trusts, shell banks and other devices, provide a successful means of laundering
funds.
Integration
The FINTRAC website says that integration 'involves placing the laundered proceeds back into the economy under a veil of
legitimacy'.
The distinction between the processes of layering and integration is just as blurred as are the distinctions between placement and layering. Many people refer to the use of shell corporations as a means by which integration is achieved. Others talk about the use of artificial loan arrangements where funds are actually moved offshore and 'borrowed' back by the criminal who then remits further funds offshore as purported repayment of the loan
funds.
The purchase of prime real estate is often seen as an integration process as are the use of fake invoice schemes involving both imports and
exports.
At least in theory, integration is that stage of the money laundering process at which the funds can be used for legitimate purposes without attracting any scrutiny because the source is apparently legitimate. If you closely analyse the process, much of the discussion of integration techniques really belongs as part of the layering
process.
Conclusion
We have attempted in this article to explain in broad terms the definitions of money laundering, the relevant laws in Hong Kong relating to money laundering and the three-stage process of money laundering. AML is now a major worldwide issue. International regulators, e.g. the US Treasury Department, have proven that they will take immediate sanctions against those entities, in particular financial institutions, that do not establish sufficiently rigorous AML procedures. It is important for all companies and financial institutions to comply with applicable anti-money laundering laws within their jurisdictions in order to avoid any inconvenience or disruption to their normal
business.
peter.wong@gthk.com.hk
Correction notice:
Article 'The new PRC anti-money laundering law and ancillary regulations' in our last issue (Insight Spring 2007) stated incorrectly that Financial Institutions Anti-Money Laundering Regulations was effective from 1 July 2007. The correct effective date should be 1 January 2007.
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