New Delhi (ABC Live): Model Money Laundering Legislation :This model law on money laundering and the financing of terrorism is the outcome of a joint effort of the United Nations Office on Drugs and Crime (UNODC) and the International Monetary Fund (IMF). It contains a comprehensive set of legal measures that a domestic law should include in order to prevent, detect, and sanction effectively, money laundering and the financing of terrorism and to enable international cooperation against these crimes.
Impact of money laundering and the financing of terrorism
Money laundering Money laundering can be described as the process by which a person conceals or disguises the identity or the origin of illegally obtained proceeds so that they appear to have originated from legitimate sources. Criminals exploit economic and financial globalization and the advances made in technology and communications with a view to concealing the origin of funds that they have gained through illegal activities.
They make extensive use of a broad array of techniques, such as the rapid transfer of money from one country to another or the misuse of corporate vehicles to disguise the true owner of the funds. The activities of powerful criminal organizations can have serious social consequences. Laundered money provides drug traffickers, organized criminal groups, arms dealers and other criminals with the wherewithal for operating and developing their enterprises.
Without effective safeguards or preventive measures, money laundering can strike at the integrity of a country’s financial institutions. The removal of billions of dollars from legitimate economic activities each year constitutes a real threat to the financial health of countries and affects the stability of the global marketplace. Money laundering undermines international efforts to establish free and competitive markets and hampers the development of national economies.
It distorts the operation of markets transactions, may increase the demand for cash, render interest and exchange rates unstable, give rise to unfair competition and considerably exacerbate inflation in the countries where the criminals conduct their business dealings. Small countries are particularly vulnerable to money laundering. The gains from illegal activities can provide criminal organizations with potentially huge economic power which in turn can give them leverage over small economies. In any country, the lack of suitable control mechanisms, or the inability to apply them, provides criminals with the opportunity to pursue their illegal activities.
Laundering the proceeds of illicit activities in countries that do not have an effective antimoney laundering/combating the financing of terrorism (AML/CFT) system in place has one purpose only – to make use of structural weaknesses or to exploit the gaps in the institutional and law-enforcement machinery in order to benefit from the proceeds of crime with impunity.
Money laundering is an essential aspect of any profit-generating criminal activity and is an inevitable corollary of organized crime.
The operations of criminal organizations, directed as they are towards the accumulation of illegal profits, create a need for laundering in direct proportion to the extent that such activities are developed and concentrated in the hands of a small group. Colossal amounts of cash generated by certain types of criminal activity, such as drug trafficking, leave trails, which are more difficult to hide than the traces left by the crimes themselves.
Terrorist Financing The financing of terrorism can be described as the process by which a person tries to collect or provide funds with the intention that they should be used to carry out a terrorist act by a terrorist or a terrorist organization as defined in the International Convention for the Suppression of the Financing of Terrorism as well as in any one of the treaties listed in the annex to that Convention.
Like money launderers, those who finance terrorism misuse the financial system. In order to achieve their objectives, they have to obtain and channel funds in an apparently legitimate way. However, while the money involved in the money laundering process always stems from a crime and is therefore always “dirty”, funds channeled to terrorist groups or individuals may originate from crime and/or from legitimate sources. Terrorism may therefore be supported by either “dirty” and/or “clean” funds.
Regardless of the origin of the funds, terrorists or terrorist organizations use the financial system in a similar way to criminal organizations in order to obscure both the source and the destination of their funds.
International response to money laundering and the financing of terrorism International efforts to curb money laundering and the financing of terrorism are the reflection of a strategy aimed at, on the one hand, attacking the economic power of criminal or terrorist organizations and individuals in order to weaken them by preventing their benefiting from, or making use of, illicit proceeds and, on the other hand, at forestalling the nefarious effects of the criminal economy and of terrorism on the legal economy.
The 1988 United Nations Convention against the Illicit Traffic in Narcotic Drugs and Psychotropic Substances, the first international legal instrument to embody the money laundering aspect of this new strategy, expresses in its preamble the recognition by States that “illicit traffic generates large financial profits and wealth enabling transnational criminal organizations to penetrate, contaminate and corrupt the structures of government, legitimate commercial and financial business, and society at all its levels” and affirms that the international community is henceforth “determined to deprive persons engaged in illicit traffic of the proceeds of their criminal activities and thereby eliminate their main incentive for so doing”.
In September 2003 and December 2005, the UN Convention against Transnational Organized Crime and the UN Convention against Corruption respectively came into force. Both instruments widen the scope of the money laundering offence by 2 stating that it should not only apply to the proceeds of illicit drug trafficking but should also cover the proceeds of all serious crimes. Both Conventions urge States to create a comprehensive domestic supervisory and regulatory regime for banks and non-bank financial institutions, including natural and legal persons, as well as any entities particularly susceptible to being involved in a money laundering scheme.
The Conventions also call for the establishment of financial intelligence units. The International Convention for the Suppression of the Financing of Terrorism came into force in April 2002. It requires Member States to take measures to protect their financial systems from being misused by persons planning or engaged in terrorist activities. Following the events of September 11, 2001, Member States and jurisdictions underlined the links between terrorism, transnational organized crime, the international drug trade and money laundering, and called on countries that had not done so to become parties to the relevant international conventions.
In September 2001, the UN Security Council adopted resolution 1373 through which it imposed certain obligations on Member States, such as the prevention and the suppression of the financing of terrorist acts, the criminalization of terrorism-related activities and of the provision of assistance to carry out those acts, the denial of funding and safe haven to terrorists and the exchange of information to prevent the commission of terrorist acts. In the same resolution, the Council also established the Counter-Terrorism Committee (CTC) to monitor the implementation of the resolution. In April 1990, the Financial Action Task Force on Money Laundering (FATF) issued a set of 40 Recommendations for improving national legal systems, enhancing the role of the financial sector and intensifying cooperation in the fight against money laundering.
These Recommendations were revised and updated in 1996 and in 2003 in order to reflect changes in money laundering techniques and trends. The 2003 Recommendations are considerably more detailed than the previous ones, in particular with regard to customer identification and due diligence requirements, suspicious transactions reporting requirements and seizing and freezing mechanisms.
They also include measures to be taken in order to avoid the misuse of corporate vehicles and apply to several designated non-financial businesses and professions. These last measures were adopted in response to the increasingly sophisticated money laundering techniques, such as the use of legal persons to disguise the true ownership and control of illegal proceeds, and to the increased use of non-financial professionals to provide advice and assistance in money laundering schemes. The FATF extended its mandate in October 2001 to cover the fight against terrorist financing and issued 8 Special Recommendations on combating the financing of terrorism.
A 9th Special Recommendation was adopted in October 2004. These new standards recommend the criminalization of the financing of terrorism in accordance with the UN Convention for the Suppression of the Financing of Terrorism, address practices 1 The FATF was established by the Summit of Heads of State or Government of the seven major industrialized countries (G-7) in 1989 to recommend measures to improve the effectiveness of the fight against money laundering. FATF now has 33 members and several observer members.
used by terrorists to finance their activities (such as the misuse of wire transfers, alternative remittance systems and non-profit organizations) and call for the implementation of specific asset freezing, seizing and confiscation mechanisms.
Taken together, the FATF 40+9 Recommendations provide a comprehensive set of measures for an effective legal and institutional regime against money laundering and the financing of terrorism. Other fora such as the Basel Committee on Banking Supervision (BCBS) and regional bodies such as the Council of Europe3 and the European Union4 have adopted a number of measures and standards have been laid down with a view to preventing the use of financial, banking and non-banking systems as well as designated non-financial businesses and professions for laundering criminal proceeds and financing terrorism.
Using the Model Law An initial model law on money laundering for civil law countries was issued by the UNODC in 1999 as part of its efforts to assist States and jurisdictions prepare, or upgrade, their own legislative framework in conformity with international standards and best practices in the implementation of anti-money laundering measures.
This updated model law replaces the initial one. It is based, to a large extent, on the relevant international instruments concerning money laundering and the financing of terrorism and incorporates the FATF 40+9 Recommendations.
It is a legislative tool designed to facilitate the drafting of specially adapted legislative provisions by countries intending to enact a law against money laundering and the financing of terrorism or to upgrade their legislation in those areas. The model law incorporates the requirements contained in the above-mentioned international instruments and the FATF 40+9 Recommendations in particular, and strengthens or supplements them in light of the actual practice of a number of countries.
It also proposes innovative optional provisions aimed at strengthening the effectiveness of their AML/CFT regimes and offers States appropriate legal mechanisms to engage in international cooperation. It will be up to each individual country to adapt the proposed provisions in order to bring them, where necessary, in line with the constitutional and fundamental principles of its legal system, and to supplement them with whatever measures it considers best
This Committee adopted in 1988 a Statement on Prevention of Criminal Use of the Banking System for the Purpose of Money Laundering, which urges financial or banking institutions to put in place mechanisms for preventing even the involuntary implication of the banking system in criminal activities.
Other relevant publications include the BCBS’s 2001 paper on customer due diligence for banks and the joint initiatives to combat money laundering and the financing of terrorism which were conducted in 2003 and updated in 2005 by the BCBS, the International Organization of Securities Commissions (IOSCO) and the International Association of Insurance Supervisors (IAIS).
The Council of Europe Convention of 16 May 2005 on laundering, search, seizure and confiscation of the proceeds from crime and the financing of terrorism.
Directive 2005/60/EC of the European Parliament and of the Council of 26 October 2005 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing.
suited to contribute towards effectively combating money laundering and the financing of terrorism. However, the model law constitutes in itself a coherent legal whole. By incorporating these provisions into their legal apparatus, countries must ensure that all elements of this model are adopted. Some provisions are intrinsically linked and would not have the desired degree of effectiveness if they were adopted in isolation or out of context.
The comprehensive scope of the model law would also be lost if paragraphs were removed. In order to facilitate its adaptation to national legislation, the model law presents some of its provisions in the form of variants or options.
A variant allows for the adjustment of a provision which should not be left out of any legislation against money laundering and the financing of terrorism, whereas an option denotes a provision which is not deemed essential under the current standards but may improve the effectiveness of a given AML/CFT system and which can therefore be included or not at the discretion of a particular State. The model law comprises six titles: Title I: “Definitions” Title II: “Prevention of money laundering and financing of terrorism” Title III: “Detection of money laundering and financing of terrorism” Title IV: “Investigation and secrecy provisions” Title V: “Penal and provisional measures” Title VI: “International cooperation” The provisions of this model law have been drafted, reviewed and finalized by an informal group of international experts, which met in Vienna in May 2004, in Brussels in June 2004, and in Washington in September 2004 and March 2005. This group consisted of AML and CFT experts including representatives from the UNODC, the IMF, the World Bank and the Organization of American States.