Overview of Money Laundering and Terrorism Financing

What is money laundering?

‘Money laundering’ describes the way some criminals use the legitimate financial system to try to hide or disguise the proceeds of crimes. Money laundering enables criminals to frustrate attempts to prosecute them or to recover the illegal gains of their crimes by distancing themselves and the money from the criminal activity that generated them. It also enables criminals to use the money for future criminal activity or in legitimate business.

How is money laundered?

There are three stages to laundering money. First, the criminal or money launderer places illegal money in the financial system (called placement). This can be achieved in a variety of ways for example by splitting large amounts of cash into smaller sums for direct deposit into bank accounts, or by buying instruments such as cheques or money orders, which are then deposited into accounts at other locations.

Once the funds are in the financial system, the money launderer might carry out a series of conversions or transfers to distance the sums from their original source (called layering). The criminal might also try to disguise the transfers as payments for goods or services.

In the final stage, the money launderer attempts to move the funds into the legitimate economy, for example by investing the funds in real estate, luxury assets, or business ventures (called integration).

Money Laundering – A simplified illustration

What are the core requirements of AML/CFT Programs?

The Financial Action Task Force (FATF) currently comprises 180+ country members representing most major financial centres in all parts of the globe.

FATF has developed 40 Recommendations on money laundering and 9 Special Recommendations regarding terrorist financing. FATF assesses each member country against these recommendations in published reports. Countries seen as not being sufficiently compliant with such recommendations are subjected to financial sanctions.

The core components of most AML/CFT Programs includes:

  • Customer Identification / Know Your Customer (KYC)
  • Enhanced Customer Due Diligence (ECDD)
  • Know Your Employee (KYE) / Employment Screening
  • Ongoing Customer Due Diligence (OCDD)
  • Transaction Monitoring Program (TMP)
  • Board and Senior Management Oversight
  • Independent Review
  • Staff Awareness Training
  • AML Programs and Policy

What is counter-terrorism?

Counter-terrorism is the practices, tactics, techniques, and strategies that governments, militaries, police departments and corporations adopt to attack terrorist threats and/or acts, both real and imputed.

What is terrorism financing?

The term terrorism financing includes the financing of terrorist acts, and of terrorists and terrorist organisations. The financing of terrorism may include the provision of any kind of asset in any form, including but not limited to, bank credits, travellers cheques, bank cheques, money orders, shares, securities, bonds, drafts, and letters of credit.

The United States Department of Defense defines terrorism as “the calculated use of unlawful violence or threat of unlawful violence to inculcate fear; intended to coerce or to intimidate governments or societies in the pursuit of goals that are generally political, religious, or ideological.”

Outside the United States Government, there are greater variations in what features of terrorism are emphasized in definitions. The United Nations produced this definition in 1992; “An anxiety-inspiring method of repeated violent action, employed by (semi-) clandestine individual, group or state actors, for idiosyncratic, criminal or political reasons, whereby – in contrast to assassination – the direct targets of violence are not the main targets.” The most commonly accepted academic definition starts with the U.N. definition quoted above.

What are the differences between money laundering and terrorism financing?

Often linked in legislation and regulation, terrorism financing and money laundering are conceptual opposites. Money laundering is the process where cash raised from criminal activities is made to look legitimate for re-integration into the financial system, whereas terrorism financing cares little about the source of the funds, but it is what the funds are to be used for that defines its scope

Terrorists use low value but high volume fraud activity to fund their operations. Money launderers are more commercial motivated and deal with huge sums of cash resulting from the proceeds of related crimes, for example, drug or human trafficking.

Terrorists also continue to move monies through MSBs/Hawalas, and through international ATM transactions. Charities also continue to be used in countries where controls are not so stringent.

What is history of terrorism financing legislation?

Terrorism financing came into limelight after the events of terrorism on 9/11. The United States passed the USA PATRIOT Act to, among other reasons, attempt thwarting the financing of terrorism (CFT) and anti-money laundering (AML) making sure these were given some sort of adequate focus by US financial institutions. The act also had extraterritorial impact and non-US banks having correspondent banking accounts or doing business with US banks had to upgrade their AML/CFT processes.

Initially the focus of CFT efforts was on non-profit organisations, unregistered money services businessess (MSBs) (including so called underground banking or ‘Hawalas’) and the criminalisation of the act itself. The Financial Action Task Force on Money Laundering (FATF) made nine special recommendations for CFT (first eight then a year later added a ninth). These nine recommendations have become the global standard for CFT and their effectiveness is assessed almost always in conjunction with AML.

What are the different motivations for terrorism?

There are many different categories of terrorism and terrorist groups that are currently in use. These categories serve to differentiate terrorist organizations according to specific criteria, which are usually related to the field or specialty of whoever is selecting the categories. Also, some categories are simply labels appended arbitrarily or redundantly, often by the media. For example, every terrorist organisation is by definition “radical”, as terror tactics are not the norm for the mainstream of any group.

  • Separatist – Separatist groups are those with the goal of separation from existing entities through independence, political autonomy, or religious freedom or domination. The ideologies separatists subscribe to include social justice or equity, anti-imperialism, as well as the resistance to conquest or occupation by a foreign power
  • Ethnocentric – Groups of this persuasion see race as the defining characteristic of a society, and therefore a basis of cohesion. There is usually the attitude that a particular group is superior because of their inherent racial characteristics
  • Nationalistic – The loyalty and devotion to a nation, and the national consciousness derived from placing one nation’s culture and interests above those of other nations or groups. This can find expression in the creation of a new nation, or in splitting away part of an existing state to join with another that shares the perceived “national” identity
  • Revolutionary – Dedicated to the overthrow of an established order and replacing it with a new political or social structure. Although often associated with communist political ideologies, this is not always the case, and other political movements can advocate revolutionary methods to achieve their goals
  • Political – Political ideologies are concerned with the structure and organization of the forms of government and communities. While observers outside terrorist organizations may stress differences in political ideology, the activities of groups that are diametrically opposed on the political spectrum are similar to each other in practice
  • Religious – Religiously inspired terrorism is on the rise, with a forty-three percent increase of total international terror groups espousing religious motivation between 1980 and 1995. While Islamic terrorists and organizations have been the most active, and the greatest recent threat to the United States, all of the major world religions have extremists that have taken up violence to further their perceived religious goals. Religiously motivated terrorists see their objectives as holy writ, and therefore infallible and non-negotiable
  • Social – Often particular social policies or issues will be so contentious that they will incite extremist behavior and terrorism. Frequently this is referred to as “single issue” or “special interest” terrorism. Some issues that have produced terrorist activities in the United States and other countries include animal rights, abortion, ecology/environment, and minority rights
  • Domestic – These terrorists are “home-grown” and operate within and against their home country. They are frequently tied to extreme social or political factions within a particular society, and focus their efforts specifically on their nation’s socio-political arena
  • International or Transnational – Often describing the support and operational reach of a group, these terms are often loosely defined, and can be applied to widely different capabilities. International groups typically operate in multiple countries, but retain a geographic focus for their activities. Hezbollah has cells worldwide, and has conducted operations in multiple countries, but is primarily concerned with events in Lebanon and Israel