The Autonomy of Modern Global Financial System

The autonomy of modern Global Financial System is widening steadily with the support of Information and Communication Technology (ICT) and it embraces imminent edges and opportunities for countries however these opportunities have conjointly their own vulnerabilities. “Terrorist Financing” or “Financial Crimes” includes among these threats wherever economy linked crime is seen as a snowballing source of distress within the Financial Community. The earnings from these crimes are masked to give it a legal form and turn into “Money Laundering” which is the driver of criminally-oriented funds for the purpose of concealing true source, ownership, or use of funds.

In this process, criminals shift, conceal and legitimize their illegal money. The purpose of ML is to render it almost impossible for evidence to be obtained which allow a court to establish the derivation of money.

The basic objective of this paper is to relinquish an overview& discuss the events, International Initiatives against ML/TF. It evaluates the functions of National and International Regulatory and Professional Bodies.

Despite enormous efforts and frequent co-operation by the Governments, law enforcement agencies, Regulatory Bodies (local and international), ML/TF still now remain a threat. It is understood that for a FI, it is really very difficult to discover TF/ML and prove the earnings of crimes without the assistance of International Regulations and without co-ordination of professional ethics. This paper correspondingly scrutinizes the development of diverse measures against ML across the globe based on historical case studies of crucial financial crunches in which ML may have had a role in disrupting the financial system.

Key Words: Anti Money Laundering, Crime, Financial Action Task Force (FATF), Terrorism Financing, KYC, Laws and Legislation, PMLA, Financial Intelligence Unit (FIU), Offences, Terrorism Finance, Money Laundering (ML), Enforcement Directorate (ED), United Nation (UN), Combat of Financial Terrorism(CFT) .

INTRODUCTION

Money laundering is very precarious and diverse types of systematized crime, however the scale and scope of this have faded but ML still remnants a National and an International concern. Businesses specifically bars, currency exchange houses, stock brokerage houses, casinos, automobile dealership, restaurants, underwriters, travel agencies, car dealers, Insurance companies and construction firms involve huge Cash dealings can launder much of their earnings of racketeering, gambling and drug dealing. Moreover, bankers, lawyers, accountants, tax officials and other persons may be indirect money launderer if they allow their business to launder the proceeds of a crime . Criminals transport their money among banks, different financial instruments and in and out of tangible assets such as business or property. Criminals also use” Shell Companies” to launder money. Which further take place within the global Financial System.

“Terrorist financing” or “Financial crimes” include among these intimidations and economy related crime is perceived as swelling source of sufferings within the financial community. The paychecks from these crimes are veiled to stretch it into a legal form and this process is called “money laundering”. The use of private banking facilities, offshore banking, wires systems, shell corporations and trade financing all have the ability to mask illegal activities. It is the process used by criminals to shift, conceal and legitimize their income of crime. The purpose of money laundering is to render it almost impossible for evidence to be obtained which allow a court to establish the derivation of the money .

Black money is put through on a cash transaction cycle or laundered and curved in to legitimate money. The money launderers then use their earnings for future legal or illicit transactions without any criminal or civil alarm. However the money laundering process “will inexorably involve resort to transactions, genuine or illusory, which will be premeditated to blur the onlooker and confound the inquirer” .

Distortion is consequently the fundamental to the laundering process which encompasses three stages as designated by the Drug Enforcement Administration namely Placement, Layering and Integration.

In placement stage, money is entered into a Financial Institution through a front operation that provides a forged legitimate source for the money, further layering stage comprises a transmission of proscribed income through international wire transfers channel across different accounts. Eventually integration is accomplished by reinstating the funds in legitimate economic activities.

The money laundering schemes can be more complex or more basic, may involve any number of intermediaries and utilize both traditional and non-traditional payment systems, offshore financial centers (OFC’s) and overseas companies, non-financial sectors and international trade system . The seriousness of money laundering is reflected in the aggregate volume of funds laundered which has been estimated by the International Monetary Fund (IMF) to be around 2-5 percent of global gross domestic product which is between US $600 million and US $1.5 trillion. In 1987 the UN estimated drug trafficking worldwide at $300 billion, much of which would be laundered. Other estimates have been made that $300-$500 billion of dirty money is placed into world financial systems each year or roughly 2 percent of Global GDP. Money laundering is regarded as the world’s third largest industry after international oil trade and foreign exchange .

There is no doubt that money laundering and terrorist financing can threaten a country’s economic stability, which is why the International Monetary Fund (IMF) has become increasingly active in supporting and promoting the AML/CFT efforts of our member countries, based on the [Financial Action Task Force (FATF)] standard. What started as a small endeavor some 20 years ago has become part of our core work from analysis and policy advice, to assessing the health and integrity of financial sectors, to providing financial assistance when needed, to helping countries build institutions and increase operational effectiveness. (Christine Lagarde, Managing Director of the IMF)

Therefore, it is indeed difficult for a Financial Institution to discover terrorist money laundering without help of international regulations, coordination and practices of professional ethics. For this reason, domestic, international and private initiatives have been established to combat money laundering and financing of terrorism. In this paper, we will discuss both national and international legislation and examines the activity of regulatory and professional bodies and their relationship on this common spectacle.

ORIGIN

The origins of Money Laundering can be traced back to as early as 1930s in organized criminal activities . Strictly speaking, money laundering is the age old process but lately this activities get momentum and became a worldwide crisis debated generally. In response of this growing concern, an increasing number of authorities at international level contribute to the world wide effort against money laundering and terrorist financing. The UN was the first International Organization that initiated the combating of money laundering globally. Successively, the Financial Action Task Force (FATF) recognized as an international standard determinant for anti-money laundering efforts to implement and supervise effective anti-money laundering programs.

The main strand of the literature on money laundering is concerned with the legal framework that includes legislation and regulatory issues and can be traced back to the US “War on Drugs” in the 1980s .

The ICT (Information Communication and Technology) has introduced new ways for banks to offer products and services through new delivery channels. However, the products and services, which

include electronic banking and the introduction of e-money technologies have made money-laundering activities even more prevalent .

Moreover, the FATF (2001) report on money laundering Typologies identifies online banking Internet as major money laundering vehicle. Philippsohn (2001) and Vargas & Backhouse (2003) argued that legislation and regulation implemented to combat money laundering activities needs to deal with the use of new technology. As such a sound financial system to monitor and control transactional activities compounded with strong anti-money laundering regimes are vital to curb money laundering activities .

Besides the FATF, other international organizations such as the UN, the IMF and World Bank and the Basel committee on Banking Supervision have been more recently involved in this direction.

In addition the Wolfs berg group, Egmont group, Interpol, GPAML etc. has published some standards on specific fields of activities such as private banking and corresponding banking.

‘Money laundering’ as an expression is one of fairly recent origin. The original sighting was in newspapers reporting the Watergate scandal in the United States in 1973. The expression first appeared in a judicial or legal context in 1982 in America in the case US v $4,255,625.39 (1982) 551 F Supp.314 . Since then, the term has been widely accepted and is in popular usage throughout the world. Another version is that the term “money laundering” is said to originate from Mafia ownership of Laundromats in the United States. Gangsters there were earning huge sums in cash from extortion, prostitution, gambling and bootleg liquor. They needed to show a legitimate source for these monies. One of the ways in which they were able to do this was by purchasing outwardly legitimate businesses and to mix their illicit earnings with the legitimate earnings they received from these businesses. These gangsters choose Laundromats because they were cash businesses and this was an undoubted advantage to people who purchased them. A criminal smuggles out money abroad for dealing in arms and ammunition, drug trafficking, financing terrorist activities. Evasion of taxations, evasion of exchange Regulations, disguise or remove proceeds of theft, fraud, bribe, making blackmail payments and paying ransom for kidnappers .