Fighting Money Laundering

Article excerpt

Are Australian Financial Institutions doing enough?

Whether it's the proceeds of a robbery, drugs trading or tax evasion, banks and financial institutions still rank among the top conduits for money laundering, a global problem which involves as much as $US1 trillion a year. Yet a new survey of the officers who are required to report suspicious transactions suggests that training by Australian banks and financial institutions is lax indeed. Not only would the skills deficiencies be of concern to regulatory authorities, but there may well be a failure by Australian institutions to meet their international legal obligations.

Almost daily we read of money being laundered through the world's banking system. It appears to be reaching epidemic proportions, due mainly to the increasing profit from the sale of illegal drugs -- estimated at nearly $US400 billion a year -- and the continuing growth of organised crime, particularly in Russia.

Money laundering is said to be the world's third-largest business, behind foreign exchange trading and oil,(1) with estimates of funds involved ranging from $US300 billion to $US1 trillion.(2)

So what constitutes money laundering? Quite simply, it is the conversion of profits derived from illegal activities into financial assets which subsequently appear to have a legitimate origin. The money laundering process is typically done in three stages: placement, layering and integration.

Placement is the task of getting the currency into the financial system undetected. Layering involves disassociating the money from its illicit source. This often involves moving the money between as many accounts and companies as possible, through as many jurisdictions as possible, and relying on bank secrecy and attorney-client privilege to hide the launderer's identity.

The last stage is integration when the money is brought back into circulation. Then the funds appear to come from a legitimate source, and may even be taxable.

Banks and other financial institutions are essential to the money laundering process, and may be willingly or unwittingly used as intermediaries. While there has been some shift of laundering into non-traditional areas such as bullion dealing, casinos and underground or alternative remittance systems such as hawala, hundi or chit operations, banks or bank-like institutions are still the `linch-pin' for most money laundering operations and fraudulent money transfers, for they add an air of legitimacy.(3)

Recent examples include the involvement of some Mexican banks in laundering drug money (brought to light in Operation Casablanca(4)), Citibank's handling of its private accounts,(5) and the Bank of New York's alleged involvement in laundering money for the Russian Mafia.(6) These cases portray a close relationship between banks and money laundering.

It was in response to the increase in the volume of funds being laundered, and concern for its impact on the stability of the global financial system, that in 1989 the Financial Action Task Force (FATF) was established.

In early 1990, FATF issued a report detailing 40 recommendations designed to fight money laundering.(7) They cover the criminal justice system and law enforcement, the financial system and its regulation, as well as international co-operation. The recommendations are not binding, but each member country is expected to make a commitment to combat money laundering, and is expected to implement these recommendations.

FATF currently has 26 member countries. Australia is a member country and its response to the increase in money laundering was the Financial Transaction Reports (FTR) Act, 1988 and the formation of the Australian Transaction Reports and Analysis Centre (AUSTRAC).

The FTR Act places a number of obligations on cash dealers(8) who must:

* report to AUSTRAC, suspicious transactions of any size, cash transactions of A$10,000 or more (or the foreign currency equivalent) and international funds transfer instructions. …