Money laundering, its impact and consequences

By Bhanu Wijayaratne

Money laundering, which is commonly known as washing “black money,” can be defined as the process of hiding the true origin of illegally made money and giving such proceeds a legitimate outlook. 

The money laundering risk for financial institutions can be defined as the risk of non-detection of laundering of money through bank accounts or by using any products of the bank. It allows drug traffickers, smugglers and other criminals to expand their operations. It has the potential to undermine the financial industry, due to the sheer magnitude of the sums involved. The potential of corruption increases with the vast amounts of illegally made money which are in circulation.

Bankers are subject to compliance, legal and reputation risk owing to non-detection of their bank accounts, other banking products and delivery channels being misused by the criminals to launder money. 

Bankers may be charged with gross negligence when carrying out banking business for non-detection of laundered money as per the international regulatory requirements. Allowing the banking systems to be misused by the money launderers and other criminals could lead towards aiding and abetting money laundering. 

Purpose of Money Laundering

• Enables criminal to “distance” himself from activities which generated such funds
• Enables criminal to “distance” the funds from criminal activities
• Enables criminal to enjoy benefits of such funds without bringing attention to himself
• Enables criminal to re-invest such funds in future criminal activity or legitimate business

Money laundering cycle

The convention type of money laundering has three stages. 

• Placement
• Layering
• Integration 

Placement

Placement can be defined as “the physical disposal of cash and placing it into the financial system”.

Examples: Buy real estate, consumables for cash; deposit into banks, finance companies; give on interest in the bazaar; buy bearer, negotiable instruments/CDs, etc.; buy gold, precious metal, etc.; buy single premium life assurance policies.

Layering

Layering can be defined as “moving the money around and distancing the gains from its illicit source” in order to make the life of the detectors more difficult in tracing the illegal source of such money.

Examples: Transfers between accounts which could even get extended to cross border transaction; use of internet-based “shell banks”; cross-border smuggling of physical cash; Hawala/Hundial; false import/export declarations

Integration

Integration can be defined as “turning the illegally made money into assets and bringing them back into mainstream circulation by realising such assets in order to give such illegal proceeds a legitimate outlook”.

Examples: Purchase and sale of property; encashment of bearer instruments; obtaining loans secured by criminally funded assets; deposit of bank drafts, traveller’s cheques obtained by using tainted money; profit taking from share market, capital gains on investments done by using illegally made money.

The impact of money laundering

If the society and authorities fail to combat money laundering, it could lead to:

• Increased crime and corruption
• Unstable economies
• Weakened financial institutions
• Social impact/unfair competition 
• Compromised economy and private sector
• Threat to territorial integrity and sovereignty of national governments (mainly through terrorist financing)

Terrorist financing

Terrorist financing is the financial support, in any form, towards terrorism or those who encourage, plan or engage in terrorism. The terrorist financing can be done by using illegally made money as well as legally made money.

How Sri Lanka meets AML and CFT global standards

The Anti-Money Laundering (AML) and Combatting Financing of Terrorism (CFT) global standards are based on the recommendations issued by the Financial Action Task Force (FATF) which is treated as the global regulator on Anti Money Laundering and Combating Terrorist Financing initiatives.

The Sri Lankan Parliament has passed three acts to combat money laundering and terrorist financing:

• Convention on Suppression of Financing of Terrorism Act No. 25 of 2005
• Prevention of Money Laundering Act No. 5 of 2006 (PMLA)
• The Financial Transaction Reporting Act No. 6 of 2006 (FTRA)

Through guidelines issued by FIU (Financial Intelligent Unit) which is the local regulator on AML/CFT initiatives. The FIU has been set up under the provisions of Financial Transaction Reporting Act.

Adherence to guidelines issued by Financial Action Task Force (FATF) – The World Governing Body for AML

Money laundering is a crime in Sri Lanka.

The Prevention of Money Laundering Act No. 5 of 2006 has made money laundering an offence (crime) in Sri Lanka.

As per Section 3(1) of the said act, any person who, a) engages directly or indirectly in any transaction in relation to any property which is derived from any unlawful activity or from proceeds of any unlawful activity or b) receives, possesses, conceals, disposes of or brings into Sri Lanka, transfers out of Sri Lanka or invest in Sri Lanka, any property which is derived from any unlawful activity or from proceeds of any unlawful activity shall be guilty of an offence of money laundering 

Predicate offences under money laundering

As per the law prevailing in sri lanka, the offence of money laundering relates to engaging in any transaction in relation to any property derived/realised from any “unlawful activity”, whilst knowing or having reasons to know that said property had been derived from such unlawful activity.

Under the act, the term “unlawful activity” has been defined as any act which constitutes an offence under any of the following laws, which are known as “predicate offences”. 

• Poisons, Opium and Dangerous Drugs Ordinance 
• Law related to suppression of terrorism
• Bribery Act
• Fire Arms Ordinance, Explosives Ordinance and Offensive Weapons Ordinance
• Exchange Control Act 
• Laws related to transactional organised crime 
• Laws relating to cyber crimes 
• Laws relating to offences against children 
• Laws relating to offences against trafficking of persons 
• Any other offence punishable with death or imprisonment of seven years or more, whether committed within or outside Sri Lanka. 

Who may commit money laundering?

From the above it is observed that the persons who could commit the offence of money laundering can be categorised into two groups.

• Persons who commit a predicate offence and thereby come into possession or control of the property derived through commission of such predicate offence 
• Persons who transact with or receive, possess or come into control of property derived from the commission of a predicate offence, knowing or having reasons to believe the true nature of such property

Penalties imposed

In the event any person is found guilty for the offence of money laundering by High Court in Sri 

Lanka, such persons would be subject to the following penal sanctions:

(i) to a fine not less than the value of the property in respect of which the offence was committed and not more than three times of the said value

(ii) to vigorous imprisonment for a period of not less than five years and not more than 20 years or 

(iii) to both such fine and imprisonment 

Further, assets of the person convicted including the assets derived from the commission of the offence of money laundering shall be liable to be forfeited. 

In the event, the offence of money laundering is committed by a body of corporate or an entity, the directors, partners, office bearers as the case may be, together with the relevant officers (employees) who were involved, shall be deemed to be guilty of such offence.

Obligations on the part of banks and Financial Institutions (FIs) to prevent money laundering and combat terrorist financing:

• Identification of customers: This refers to carrying out KYC (Know Your Customer) requirements. Under this requirement banks and FIs are obliged to identify all customers including occasional customers. Identification of beneficial owner is important whilst checking against black list and watch list are also required.
• Monitoring/ongoing due diligence: This includes reviewing customer transactions to ensure that they are consistent with the declared/available information particularly in relation to source of funds. In the event activity level of the customer significantly exceeds the declared threshold, the bank should verify the sources of such increase and sources of funds received. 

The above activities would enable the bank/FI to identify suspicious transactions.

• Record keeping: All transactions and the relevant account opening documents need to be retained for future verifications. The extent of such retention period is six years.
• Reporting: Any suspicious transactions identified must be reported to FIU. In addition, there are statutory reporting requirements to be fulfilled by bank and FIs on a fortnightly basis. This refers to the reporting of all cash and electronic fund transfers of Rs. 1 m and above.

Besides the above key activities, the banks and FIs are required to comply with several other regulatory requirements as per the provisions of Financial Transaction Reporting Act and other applicable laws and regulations. Carrying out sufficient training activities to create awareness among staff members on AML/CFT initiatives is one of them.

(The writer is a senior banker who has vast experience in the industry of banking. He is a Fellow Member of the Institute of Bankers, Sri Lanka and holds two Masters Degrees, one from the University of Manipal on Business Administration and the other from University of Colombo on Financial Economics. He was the Past President of Association of Compliance Officers of Banks, Sri Lanka and presently holds the position of Vice President of Association of Professional Bankers, Sri Lanka. He also holds the Fellowship of Institute of Certified Professional Managers. He can be contacted on e-mail via [email protected].)