Rationale for the study
Money laundering in Vietnam is a significant public concern, as criminals engage in diverse and substantial financial activities to conceal the origins of their illegal assets This process aims to transform illicit funds from criminal activities into legitimate assets, allowing offenders to disguise their illegal income Ultimately, money laundering not only obscures the source of these funds but also facilitates further criminal endeavors by providing a means for criminals to enjoy their laundered money.
Vietnam's growing economy, prevalence of cash transactions, and developing legal system create a conducive environment for money laundering activities, as highlighted by the 2013 research from the Institute of Advanced Legal Studies at the University of London Currently, suspects involved in money laundering often have connections abroad or receive assistance from foreign criminals, which facilitates their illicit operations The expanding international transaction system further equips these criminals with additional means to execute their schemes To address these issues, I have explored the topic: “Money Laundering: International Experience and Recommendations for Vietnam.”
Objectives of the study
With this approach, the study aims to achieve the following goals:
• Reorganize the fundamental theories of money laundering
• Cite some international experiences on this issue and draw out some lessons
• Introduce suggestions of anti - money laundering for Vietnam
• Cite some international experiences on this issue
Scope of the study
To implement the topic, the author will first focus on comprehensively studying the theoretical issues related to money laundering and anti-money laundering.
The content of anti-money laundering was then analyzed through specific data in the prevention of money laundering in some typical case studies from Afghanistan and Italy `
Between 1990 and 2010, a significant surge in white-collar crime, particularly money laundering, prompted governments to take action This study examines the responses of various nations during this critical period The author highlights key international lessons derived from the analysis, aiming to guide future research in effectively addressing and combating financial crimes.
Methodology of the study
Analyzing secondary data from online sources, economic textbooks, and scientific reports involves collecting and filtering essential information Utilizing tools like Excel for data processing and employing basic manipulation techniques allows for the calculation of key economic indicators The processed data is then organized to align with specific analytical objectives.
Structure of the study
This thesis consists of 4 chapters:
Chapter 2: Overview of Money Laundering and Anti-Money Laundering Chapter 3: Overview of Money Laundering in the World
Chapter 4: Recommendations for Anti-Money Laundering in Vietnam
LITERATURE REVIEW
Money laundering
The concept of "money laundering" has evolved significantly throughout the development of the global economy According to Freidrich and Ursula (2010), money laundering is defined as the process by which illegal funds, often associated with organized crime, are transformed into legitimate cash flows through various shell businesses, such as beauty salons However, it is now clear that money laundering is not limited to the mafia; it encompasses a wider range of individuals and organizations.
Money laundering is defined as the process of concealing and transforming illegally obtained proceeds to make them appear legal This definition, established in 2014, aligns closely with contemporary interpretations, including the one found in the Webster dictionary The practice of money laundering has existed alongside illegal assets for many years, with historical documents tracing its roots back to 2000.
Merchants in China often conceal their assets and invest in remote provinces or abroad to evade government expropriation The term "money laundering" emerged during the 1973 Watergate Scandal, which led to President Richard Nixon's resignation It is frequently linked to Al Capone, a gangster who used his laundry business to disguise the origins of his illegal income Individuals engaged in crimes for financial gain must navigate the challenge of making their illicit earnings appear legitimate to avoid scrutiny from authorities Various definitions of money laundering exist across international conventions and specialized documents.
The U.S Department of Justice's National Drug Threat Assessment (2008) highlights that international money transfers play a crucial role in money laundering due to the ease of moving funds across borders while limiting the information available to officials Governments face challenges in communication due to privacy and sovereignty issues, and enforcement is hindered by inadequate mechanisms to monitor international cash flows Criminals exploit these vulnerabilities, allowing laundered money to go undetected as long as government information does not keep pace with illicit cash movements Strengthening border protection to include monetary barriers is essential for effective governance Additionally, the concept of "source crime" refers to the legal revenue streams that facilitate money laundering, with all criminal offenses in Vietnam qualifying as potential sources for this illicit activity.
Research by David Scott in the World Bank journal (May 1995) highlights that money laundering typically consists of a complex series of transactions, which can be categorized into three fundamental steps: placement, layering, and integration.
Figure 1.1 The process of money laundering
The money laundering process begins with the placement stage, where criminals aim to separate illicit funds from their source by introducing them into the financial system or converting them into assets This can involve depositing cash in banks, purchasing bonds, insurance, real estate, or luxury items, or transferring funds to foreign banks in jurisdictions with lax anti-money laundering regulations Organizations handling cash transactions must closely monitor these activities, as this stage poses significant risks, especially in countries with robust anti-money laundering laws Despite the movement of funds, the money remains "dirty" and traceable to its criminal origins, although it takes on a less liquid form, preparing it for the next phase of laundering.
The layering stage of money laundering involves creating a series of complex transactions to obscure the illicit source of funds, making it challenging to trace their origin This process often includes transferring ownership and executing various financial transactions, both domestic and cross-border, depending on the criminal's risk tolerance, financial knowledge, and patience The effectiveness of detecting and prosecuting money laundering relies on financial institutions' ability to identify suspicious activities and collaborate with law enforcement Ultimately, the goal is to integrate the laundered money into the legitimate economy, often through methods such as salaries, loans, or overpricing goods, making the cash flow appear legitimate.
Money laundering is a constantly evolving crime, adapting to new investigative and enforcement techniques Each time law enforcement disrupts a laundering method, a new one emerges, making it a persistent challenge Effective anti-money laundering strategies aim to push these criminals out of the financial system, increasing their risks and diminishing the rewards of their illicit activities By heightening the dangers associated with economic crime, the prevalence of such "white collar" crimes can ultimately be reduced This article will explore the money laundering process through two examples of international transactions, providing a clearer understanding of this complex issue.
Source Crime Drug and trafficking Various Russian crimes
- Deposit in BCCI Colombia money under Peso Colombia and US dollars generated from drug trade
- Open shell banks in Nauru for only $25,000
- Open an account in that Nauru bank
- Deposit money (When money is deposited in Nauru’s banks, it will become ‘liberate’ and no law enforcers are allow to touch it)
- Wire transfer to the US
- Bribed world leaders and political figures
- Humiliated the press and those who dare to speak the truth
- Organize anonymous trading activities worth billions of dollars
- Generated 160,000 transactions with the total value of $7 billion.
- Accrued interest paid to BCCI executives and Arabian owners expenditures
- Payments in form of interest and investment return
Table 1.1 Examples of the money laundering process
Money laundering is a multifaceted issue characterized by various intricate methods, each with unique complexities and degrees of severity Below, the author outlines several common techniques employed in money laundering activities.
• Structuring (smurfing): This method involves splitting the money into different small amount and then deposit the subset The reason behind the action is to avoid suspicion from authorities.
Bulk cash smuggling involves transferring large sums of money to another continent under a different jurisdiction, where the cash is then deposited in financial institutions like offshore banks that offer greater secrecy and less stringent money laundering regulations (Olsen, Selee, and Shirk, 2010).
Cash-intensive businesses often involve front-office or shell entities that primarily generate revenue through cash, much of which is linked to criminal activities These businesses operate openly, earning legitimate cash alongside illicit funds, and typically report all cash received as legitimate income Service-oriented enterprises are particularly suited for this model due to their minimal variable costs and high revenue-to-variable-cost ratios, making it challenging to identify discrepancies between earnings and expenses Common examples include parking structures, strip clubs, tanning salons, car washes, arcades, bars, restaurants, and casinos.
Trade-based money laundering is a sophisticated and emerging method of laundering money, characterized by the manipulation of invoices This technique involves either undervaluing or overvaluing invoices to obscure the actual flow of funds, making it a complex challenge for regulatory authorities.
Shell companies and trusts can obscure the identities of actual money owners, as highlighted by the FATF in 2011 Depending on the jurisdiction, these corporate structures may not be required to reveal their true ownership, allowing for potential financial anonymity.
Round-tripping involves depositing funds into a controlled foreign corporation located in a tax haven with minimal record-keeping These funds are then returned as foreign direct investment, allowing them to be exempt from taxation.
Casinos can be exploited by purchasing chips with illegal cash and then cashing them out, allowing individuals to present receipts that falsely claim the money was earned from gambling winnings.
Anti-money laundering
Anti-Money Laundering (AML) encompasses various definitions, each highlighting different aspects of its purpose Chelsea Allison (2019) describes AML as a system of controls designed to prevent, detect, and report money laundering activities, emphasizing the three F's: finding, freezing, and forfeiture of criminal assets The Association of Certified Anti-Money Laundering Specialists defines it as the process of creating a system to combat money laundering and terrorist financing However, the U.S Securities and Exchange Commission (SEC) provides the most widely recognized definition, stating that AML includes laws, regulations, and procedures aimed at preventing criminals from concealing illegally obtained funds as legitimate income, with implications that extend beyond a limited range of transactions and criminal behaviors.
The first line of defend is the financial action task force (FATF) The Financial
The Financial Action Task Force (FATF) was established in 1989 by a coalition of countries to enhance global cooperation in the fight against money laundering As of 2015, the FATF consists of multiple member countries dedicated to this critical mission.
The Financial Action Task Force (FATF), headquartered in Paris, France, currently comprises 34 member countries and is actively pursuing membership expansion to additional regions Focused on combating money laundering and the financing of terrorism, the FATF has established key recommendations and implements three essential functions to address these criminal activities effectively.
• Reviewing trends and techniques in money laundering, reporting these, as well as new countermeasures, to member countries
The Bank Secrecy Act (BSA), enacted in 1970, aims to combat money laundering by requiring financial institutions to report transactions over $10,000 and file Suspicious Activity Reports (SARs) for potentially illicit transactions While the BSA has established the Financial Crimes Enforcement Network to aid global criminal investigations, banks often neglect their reporting duties despite severe penalties This oversight allows criminals to obscure the origins of illegal funds, making the BSA a crucial barrier against financial crimes Experts advocate for governments to eliminate obstructive regulations and enhance the sharing of financial information to effectively combat money laundering Striking a balance between financial confidentiality and secrecy is essential to improve the detection of fraudulent transactions Given that money laundering operates on a transnational scale, international cooperation is vital in addressing this issue, especially as significant amounts stem from bribery and corruption, often funneled through banks to maintain relationships with influential individuals.
• The Money Laundering Control Act of 1986, which prohibits engaging in any transactions involving proceeds generated from illegal activities.
The 1988 Anti-Drug Abuse Act broadened the definition of "financial institution" to encompass car dealers and real estate professionals, mandating the reporting of transactions that involve significant sums of cash.
• The 1992 Annunzio-Wylie Anti-Money Laundering Act, which requires sanctions for violations of the BSA, and requiring additional verifications, recordkeeping, and reporting for wire transfers.
• The Money Laundering Suppression Act of 1994 requires banks to develop and institute training in anti-money laundering examination procedures.
• The Money Laundering and Financial Crimes Strategy Act of 1998 requires banking agencies to develop training for examiners.
The last line of defense are bank’s internal control and policies According to
The reform of regulations to align with anti-money laundering (AML) measures remains a critical issue, with banks in Zambia largely adhering to the Bank of Zambia's AML directives and implementing their own internal policies, including Know Your Customer (KYC) and Customer Due Diligence (CDD) measures (Ai, 2012; Simwayi & Wang, 2011) Training employees to handle various scenarios is essential, as highlighted by Awad Allah (2005), and is exemplified by Al-Ajis (2008), who noted that bank clerks in the Gaza Strip cannot open accounts or conduct transactions without proper identification However, this strict adherence can have negative implications for banking activity, as suggested by Shaheen (2009) and Masciandaro (1999), who argued that while increased transaction costs from training may impact profitability, the potential costs of allowing money laundering are far greater Furthermore, Idowu and Obasan (2012) demonstrated a strong positive correlation (0.881) between bank performance and the adoption of AML policies.
Delston and Walls (2009) highlight the necessity for coordinated external efforts to combat money laundering, particularly in trade-based activities Baity (2000) advocates for banks and non-banks to take on greater responsibilities in promoting transparency to prevent crime and protect their reputations, as damaged reputations hinder capital raising and market operations Zagaris and MacDonald (1992) recommend external measures such as enhancing audit trails, increasing non-bank sector regulations, reinforcing KYC requirements, monitoring cash at borders, and improving state supervision of banks In the context of rising money laundering activities, the KYC policy has become a critical strategy, mandating that banks verify client identities and the legitimacy of financial transactions to ensure customers are not engaged in illegal activities However, this approach should be supplemented with various monitoring techniques, as continuous transaction monitoring alone may not suffice to detect manipulations.
(2000) argued that when a financial institution is in compliance, it is hard to fully
The research papers on money laundering present a complementary perspective, detailing both the methods of laundering and the global community's response David Scott emphasizes the need to understand the laundering process to establish an effective anti-money laundering (AML) system, highlighting that prevention requires collective action rather than individual efforts Peter Quirk's findings reveal the severe economic impact of money laundering, particularly due to its connection with cross-border transactions that affect multiple economies simultaneously Donato Masciandaro provides a thorough analysis aimed at enhancing the efficiency of AML regulations, suggesting that increasing the cost of money laundering activities could serve as a viable solution However, Hans Geiger and Oliver Wuensch's research indicates that various factors influence the incentives for money laundering beyond just costs, pointing out that current regulations often fail to achieve optimal effectiveness.
Money laundering is a complex process that involves concealing the origins of illegally obtained money, typically by passing it through a complex sequence of banking transfers or commercial transactions Effective money laundering prevention involves implementing measures and strategies to detect and deter these illicit activities, ensuring that financial systems remain secure and transparent.
Criminals seeking illicit financial gains often face the challenge of making their illegal activities appear legitimate to avoid detection by authorities According to the SEC, anti-money laundering encompasses laws, regulations, and procedures designed to prevent the concealment of illegally obtained funds as legitimate income Both definitions highlight the core issue of money laundering originating from unlawful actions.
OVERVIEW OF MONEY LAUNDERING AND ANTI-MONEY LAUNDERING
Money laundering
2.1.1 Definition: Structuring and transaction laundering
Money laundering, as defined by van Duyne (2003), involves concealing and converting illegal assets into legitimate ones without detection by authorities This report focuses on two primary methods of money laundering: structuring and transaction laundering, particularly in the context of remittance Structuring, described by Sarah N Weiling (1993), involves breaking transactions into smaller amounts—typically below $10,000—to evade bank scrutiny This method, one of the oldest forms of money laundering, emerged during a time of rampant white-collar crime, allowing individuals to bypass bank control limits Similarly, transaction laundering involves executing financial transactions in a calculated manner to avoid triggering mandatory reporting requirements, such as those outlined in the Bank Security Act.
Day 1 Deposit Day 2 Deposit Day 3 Deposit
Figure 2.1 An example of the process of structuring
The selection of these two money laundering methods is rooted in their strong connection to criminal origins, aligning with van Duyne's (2003) definition of money laundering A report from Basel highlights that unofficial remittance, despite its straightforward process, is widely utilized in countries like Vietnam This method circumvents regulated channels and is often linked to high-profile individuals, gambling proceeds, and tax evasion.
Figure 2.2 An example of the process of transaction laundering
The reason for remittances to be expose to money laundering risk is because illicit funds transfer may be undetectable due to large volume distributed among a large number of players.
These are the two most common money laundering activities However, in the new century, new methods of money laundering began to appear.
Recent changes in the institutional landscape have blurred the distinction between retail and investment banks, while technological advancements have simplified international transactions and facilitated the creation of offshore accounts Various types of bank accounts, including current, deposit, savings, joint, foreign, trust, and foreign currency accounts, are now accessible Transactions can be conducted through direct access channels like ATMs, bank branches, correspondence, and mobile phones However, these advancements also increase the vulnerability of the international payment system to money laundering, with certain instruments being particularly susceptible to exploitation by money launderers.
Credit and debit cards are widely used banking services that facilitate virtual transactions without the need for immediate cash Debit cards allow users to access their funds directly, while credit cards enable purchases on credit, linked to a credit account that requires periodic payments of principal and interest Credit cards can also be utilized for international transactions, including cash withdrawals However, these payment methods can lead to transaction laundering, a practice estimated to exceed $200 billion annually in the US This occurs when an entity purchases a product on credit or debit terms, often for items that may not even exist, making it challenging for regulators to monitor such transactions effectively due to their small-scale nature.
Prepaid cards function similarly to debit cards but are not linked to a personal bank account; instead, they draw from a separate account each time they are used While they do not store value directly, they maintain identification information associated with the central account Although ownership details are often limited due to non-direct sales, prepaid cards can still be linked to user information When the associated account is depleted, the card becomes unusable These cards can be loaded at various ATMs, banks, and retail locations, typically sold at face value Their growing popularity for employee payments and government cash benefits raises concerns, as their anonymity and ease of acquisition may attract money laundering activities, making prepaid cards a new risk for cash smuggling.
Non-banking financial institutions, such as casinos, investment firms, and private entities, are considered weak links in money laundering prevention efforts, according to the FATF These entities often lack the rigorous oversight that banks face, creating potential loopholes for criminal activities Various non-bank platforms, including e-payment systems like MoMo and PayPal, as well as traditional remittance systems like Hawala, can be exploited for money laundering The modern financial sector is large and evolving, with new products emerging from technological advancements and regulatory changes This article will briefly explore two specific non-bank instruments that are increasingly being used for money laundering purposes.
The Hawala system, which originated in South Asia, has gained global prominence as a crucial method of money transfer, particularly for expatriates and gold merchants in Eastern countries While it is deemed illegal in certain nations, its significance persists, especially in connection with issues such as drug smuggling and trafficking in Afghanistan, as highlighted by the UN General Assembly.
Hawala, established in 1998, offers a cost-effective alternative to traditional banking for transferring funds, requiring minimal paperwork and providing reliable service Money, including gold, is efficiently transferred from one country to another through Hawala operators, known as hawaladars The operations are often challenging to trace due to the absence of formal records, or when records do exist, they are often encoded in obscure languages Additionally, the ethnic nuances associated with this method further complicate tracking efforts.
The Black Market Peso Exchange, initially established in Latin America, serves as a parallel financial system facilitating both legitimate trade and smuggling between North and South America According to Mobius (1992), this system evolved alongside immigration patterns and was later exploited by the narcotics trade Today, it remains a vital tool for immigrant workers sending money home and for businesses seeking quicker payments for both legal and illegal goods In cases involving illegal funds, the process typically starts with U.S dollars obtained from narcotics sales in the United States Since narcotics traffickers cannot use financial institutions for international transfers without attracting the attention of U.S authorities, they rely on brokers who accept the U.S funds and coordinate with partners in Colombia to convert and deliver the money to local suppliers.
At this point the broker has successfully transferred the funds abroad without physically moving them.
In today's technologically advanced landscape, money laundering has increasingly evolved to incorporate various transactional methods, including prepaid cards and e-payment systems The 2006 FATF report highlights several common transaction techniques that are frequently exploited by criminals engaged in money laundering activities.
The report highlights several non-bank transaction methods, including e-payment systems, e-wallets, game cards, mobile cards, and e-coins, which allow users to conduct transactions anytime and anywhere without the need for bank personnel or monitoring systems However, these electronic payment systems are susceptible to hacking, and even minor attacks can compromise the integrity of the entire system.
Anti-money laundering
Anti-money laundering refers to a set of laws, regulations, and procedures intended to prevent criminals from disguising illegally obtained funds as legitimate income (SEC)
An anti-money laundering system is usually composed of complex parts But ultimately, an AML system aim for the following three purposes (Kevin Sullivan, 2015):
• To prevent money laundering and terrorist financing
• To notify suspicious activities to authorities
• To train staff and improve internal processes
As described in the book “Anti-money laundering in a nutshell” by Kevin Sullivan
(2015), to achieve the three goals, an effective anti-money laundering must have these following characteristics: Fit internal policies and procedures, designated compliance officer, independent audit function, regular training.
To develop effective internal policies for Anti-Money Laundering (AML), organizations must identify and address all potential money laundering risks they may encounter The comprehensive plan should encompass all products, services, and branches of the institution Additionally, it is crucial to include a dedicated section outlining the implementation of due diligence procedures, clearly defining the process, timing, and locations involved The strategy must also provide explicit instructions for managing these risks effectively.
“know your customer” program More importantly, the policies must be designed independently and unique because each firms face different problems therefore it
All financial institutions should have a well-trained and experienced AML manager This position will ensure everything works smoothly and avoid any other legal risks.
Establishing effective internal policies and having a skilled manager are essential, but they alone are insufficient for evaluating the success of internal activities Continuous monitoring is crucial for assessing these methods, highlighting the importance of an independent internal audit that remains free from influence by other departments.
To ensure the effectiveness of a money laundering prevention system, it is crucial to provide regular training for employees Even the most advanced systems require skilled human resources to operate effectively Ongoing training keeps staff informed about the latest legal and policy updates, ensuring cohesive and efficient compliance efforts.
Globalization has facilitated a rise in international crime and transnational money laundering, enabling criminals to transfer funds across borders to finance and expand their illicit activities Utilizing both formal and informal financial systems, these criminals exploit the challenges governments face in sharing information about international transactions Consequently, borders act as a protective barrier for money laundering operations, allowing illicit funds to flow freely while obstructing efforts to trace their origins.
In response to the increasing threat of transnational crime, the United Nations has facilitated the negotiation of several key international conventions These include the Convention on Money Laundering, Search, Seizure, and Confiscation of Money and Property (EST Strasbourg, November 8, 1990), the International Convention on Countering Terrorist Financing (New York, December 9, 1999), and the United Nations Convention against Transnational Organized Crime, signed in 2000.
The Palermo Convention establishes regulations that hinder the transfer of illicit money and assets across borders, thereby preventing the concealment and use of illegal funds globally The Financial Action Task Force (FATF) has created an international framework based on these conventions, which all countries are expected to adopt according to their national money laundering risk assessments Countries undergoing significant economic transitions, such as shifts between public and private ownership, often face challenges in implementing these standards Vietnam is among those nations working to develop laws that align with international requirements, ensuring that all signatories to the convention will ratify or integrate these standards into their domestic legislation.
The Financial Action Task Force (FATF) is composed of 34 countries and territories, along with 9 regional organizations that encompass most of the world's major financial centers Notably, Vietnam is a member of the Asia Pacific Group on money laundering, highlighting its commitment to combating financial crimes in the region.
In 1990, the Financial Action Task Force (FATF) published a report outlining 40 recommendations aimed at helping governments establish laws and regulations to combat money laundering This comprehensive framework focuses on two key pillars: prevention and enforcement, facilitating the identification, investigation, and prosecution of money laundering offenses worldwide.
The prevention pillars aim to thwart criminal exploitation of individuals and organizations in illegal money laundering, whether intentional or accidental A key aspect of this framework is customer understanding, which involves verifying the identity of customers—both individuals and legal entities—through official documentation This process includes authenticating identities and establishing expected behaviors, which are then compared to actual operations Any significant unexplained discrepancies necessitate enhanced supervision and the activation of internal risk management processes, potentially resulting in the filing of suspicious transaction reports (STR).
The enforcement pillars are designed to facilitate criminal investigation and prosecution Penalties must include imprisonment and confiscation of property derived and related to criminal acts.
The Financial Intelligence Unit (FIU) serves as a crucial link between various financial pillars by receiving reports of large and suspicious cash transactions from institutions like banks, securities firms, and insurance companies, as mandated by law Additionally, the FIU collects data on significant cash movements from customs By analyzing these reports alongside other pertinent information, the FIU provides law enforcement with actionable insights for criminal investigations when sufficient data is available.
Most countries have their own tools for anti-money laundering In this section, I will highlight some typical organizations in the prevention of money laundering.
The European Union's AML Directives, EU5AMLD and 6AMLD, are crucial tools in the fight against money laundering among member states, periodically updated to reflect the latest trends in criminal financing While 5AMLD emphasizes the monitoring of e-payments and cryptocurrencies, it also introduces new definitions and legal requirements for prepaid cards, alongside a clear outline of criminal activities and stricter sanctions for money laundering offenses.
The Bank Secrecy Act (BSA) serves as the primary anti-money laundering (AML) law in the USA, overseen by the Financial Crimes Enforcement Network Financial institutions are required to implement comprehensive compliance programs that include regular reporting and meticulous record-keeping tailored to their specific risk profiles Essential components of an effective AML system include documented policies, ongoing employee training, scheduled audits, and the appointment of a dedicated AML manager Institutions must submit Suspicious Activity Reports (SAR), Currency Transaction Reports (CTR), and Form 8300 for significant transactions, ensuring that all reports and customer information are thoroughly documented for potential audits.
The Hong Kong Monetary Authority (HKMA) oversees the stability of Hong Kong's banking and financial system while also supervising anti-money laundering initiatives Its primary goal is to combat money laundering activities and uphold the integrity of the financial sector.
Chapter 2 dive into introducing the definition of money laundering and prevention of money laundering being applied in the article for analysis The article also mentioned some typical sources of money laundering crime such as structuring and transaction laundering Accompanied by anti-money laundering instruments are being applied on both international and domestic aspects.
ANTI-MONEY LAUNDERING: CASE STUDY
An overview of money laundering in the world
Money laundering is a covert criminal activity, making it challenging to determine the exact global amount involved Former IMF director Michel Camdessus estimated that money laundered constitutes approximately 2% to 5% of the world's GDP, equating to around $3 trillion in 2019; however, this figure is likely an underestimation The Financial Action Task Force (FATF) stated in 2012 that producing a reliable estimate of laundered money is virtually impossible, highlighting the difficulty in quantifying this illegal practice.
Anti-money laundering: Case study
3.2.1 Anti-money laundering in Italy
In the 20th century, Italy experienced a significant rise in diverse criminal activities closely linked to major organizations like the mafia As noted by Savona (1992), the 1980s marked a period of intensified growth for these criminal groups, characterized by increased membership, a broader range of illegal activities, and expanded territorial influence This era saw a dramatic expansion of the illicit market, highlighting the alarming escalation of organized crime in Italy.
Figure 3.1 Correlation Matrix of GNP, GDP, total amount of bank deposit and total number of crimes in Italy during 1980 - 1990
Figure 4 illustrates the relationship between key economic indicators in Italy and the total crime rate, highlighting a concerning correlation While it is expected that bank deposits correlate strongly with economic metrics like GDP and GNP, it is alarming to note that the crime index also shows an average correlation of 0.6 with these indicators To further explore the effects of criminal activity on Italy's economy during this period, Figure 5 presents findings from Donato Masciandaro's research.
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Figure 3.2 Regression output of bank deposits, economy indexes and criminal activities
From the regression results we can create three regression equations for the three regions of Italy as follows:
North: BankDeposits = -3.37 + 0.75GNP + 0.04Crime - 0.31(R - Rf) Centre: BankDeposits = 6.41 + 0.59GNP + 0.04Crime - 2.41(R - Rf) South: BankDeposits = -0.13 + 0.016NF + 0.03Crime + 0.68(R - Rf)
And with the presence of large criminal organization the equation of the Southern Italy become:
Criminal activities are closely linked to the economy and the Italian banking industry, as evidenced by the consistent positive slope of the crime variable across various regions Research by Bosworth-Davies and Saltmarsh (1994) indicates that rising crime rates lead to increased unintentional involvement of banks in money laundering, with financial tools being exploited for such purposes The data supports this thesis, showing that as the economy expands and bank deposits grow, the correlation with criminal activities intensifies in the absence of robust regulatory measures.
3.2.1.2 Anti-money laundering in Italy
The rapid expansion of illegal markets has heightened the need for effective money laundering prevention, prompting the Italian government to implement stringent anti-money laundering policies since the late 1970s The pivotal Law No 197, enacted on July 5, 1991, marked a significant milestone in Italy's efforts to combat money laundering by requiring financial institutions to actively monitor and report suspicious cash flows This law introduced oversight mechanisms, including the 'ruling cash' system, which temporarily restricts cash usage and mandates the reporting of large cash transactions to authorities While these measures aim to enhance financial integrity, they also impose additional operational costs on banks and compromise their autonomy in handling customer information Disclosing sensitive client data to government agencies can damage a bank's reputation, potentially leading to a loss of customer trust and mass withdrawals, known as a 'bank run.' Furthermore, the risk of retaliation in this environment poses an additional challenge for financial institutions navigating these regulations.
The implementation of law no 197 has faced significant challenges due to a lack of incentives for financial institutions, leading to a paradox that hinders its effectiveness Despite revisions by the Italian government to address this deficiency, the law's inefficiency was evident during its initial 11 months, with only 86 suspicious activity reports filed by banks and financial institutions Alarmingly, Banca d’Italia indicated that 52% of these reports were deemed meaningless, and none originated from regions known for active criminal organizations, suggesting potential corruption or fear of retaliation Ultimately, the law's ineffectiveness stems from its inability to motivate banks to comply, as they incur additional operational costs without any corresponding benefits.
To enhance the effectiveness of anti-money laundering laws, Banca d’Italia has called for a redesign of the legal framework that is optimal and tailored for banks In line with this new approach, Banca d’Italia released the “Decalogue,” which outlines essential features related to reporting duties and anti-money laundering measures This document not only addresses the stability of financial institutions but also tackles the lack of incentives present in law no 197 By following the recommendations in the “Decalogue,” institutions can significantly benefit from improved compliance and operational efficiency.
The updated definition of a "homogeneous plan of action" emphasizes the crucial role of banks in anti-money laundering efforts, aiming to prevent them from inadvertently facilitating criminal activities In November 1994, Banca d’Italia introduced an updated "Decalogue" focused on the costs associated with preventing money laundering, which aligned with the EEC Directive 308/1994 This directive highlights the need for a modernized reporting system utilizing information technology to enhance efficiency without increasing banks' operating costs Additionally, it includes protective measures for reporting institutions against retaliation risks If effectively implemented, this innovative plan can lower operational costs for banks while safeguarding their reputations.
And the effectiveness of these new laws can be seen clearly from 1995 when all the provisions went into effect In 1995, the authorities arrested hundreds of key
CDP Bank Depfι4lfι4lSfι4lt GNP Ị
Figure 3.3 Criminal rate in Italy from 1995 - 2005
Figure 3.4 Correlation Matrix of GNP, GDP, total amount of bank deposit and total number of crimes in Italy during 1995 - 2005
The analysis of the correlation matrix between key economic variables and crime rates reveals a significant reduction in correlation rates following the reform, dropping from 0.65 to below -0.53, particularly regarding deposits in the banking system This negative correlation indicates that changes in one variable lead to opposite movements in another, demonstrating the effectiveness of the reform and the shift in anti-money laundering strategies.
3.2.2 Anti-money laundering in Afghanistan
Afghanistan serves as a crucial strategic and economic hub at the intersection of Central Asia and the Middle East Despite its significance, a 2005 study by Rubin highlighted that Afghanistan ranks among the poorest countries globally, with an average per-capita income below $300 The Soviet Union's 1979 invasion severely impacted the region's economic and human welfare, creating a fertile ground for criminal organizations involved in arms dealing, drug trafficking, and human trafficking During the Soviet-Afghan war, the US military supplied a vast array of weapons, particularly the AK-47, to the Mujahideen, inadvertently facilitating illegal arms trade As conflicts intensified, more advanced military weaponry, such as RPGs and grenade launchers, became prevalent Additionally, following the 1979 Iranian Islamic Revolution, drug traders shifted operations to Afghanistan, which became a significant player in the regional drug trade.
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During the war in Afghanistan, the US served as the primary arms distributor, with the CIA encouraging resistance groups to cultivate opium as a means of funding This opium trade has led to the emergence of significant speculators and criminal organizations within Afghanistan, making it one of the world's largest opium producers The illicit drug trafficking network is deeply interconnected, with a 2012 dissertation by Schewllenbach estimating that around $4.5 billion linked to key Afghan players has been laundered through banks in Dubai This figure is likely much higher, but the true extent remains difficult to ascertain due to Dubai's strict bank secrecy laws.
In this country, cash transactions dominate, with an estimated 90% of the population relying on the Hawala system for money transfers, while only about 10% utilize traditional banking services Hawala, often referred to as "informal financial networks" or "underground banking systems," is an ancient method of transferring money that predates modern banking Despite the convenience and security of contemporary bank transfers, the Hawala system remains widely used, particularly in the Middle East.
Figure 3.6 The process of Hawala remittance system
The sender initiates a money transfer through broker A in their country, providing the necessary funds and a password Once the transaction is completed, broker A contacts broker B to facilitate the transfer to the recipient in another country The recipient then uses the provided password to collect the funds from broker B, minus any applicable commission Notably, there is no recorded debt between the two brokers, as the transaction is purely an exchange between the sender and the recipient.
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