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More Definitions of Money Laundering

The Financial Action Task Force (FATF) is a Paris-based multinational or inter-governmental body formed in 1989 by the Group of Seven industrialized nations to foster international action against money laundering. According to FATF, crimes such as illegal arms sales, narcotics trafficking, smuggling and other activities of organized crime can generate huge amounts of proceeds. Embezzlement, insider trading, bribery and computer fraud schemes can also produce large profits, creating the incentive to “legitimize” the ill-gotten gains through money laundering.

When a criminal activity generates substantial profits, the individual or group involved must find a way to use the funds without drawing attention to the underlying activity or persons involved in generating such profits. Criminals do this by disguising the sources, changing the form or moving the money to a place where it is less likely to attract attention.

The United Nations 2000 Convention Against Transnational Organized Crime, also known as the “Palermo Convention,” defines money laundering as:

  • The conversion or transfer of property, knowing it is derived from a criminal offense, for the purpose of concealing or disguising its illicit origin or of assisting any person who is involved in the commission of the crime to evade the legal consequences of his actions.
  • The concealment or disguising of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property knowing that it is derived from a criminal offense.
  • The acquisition, possession or use of property, knowing at the time of its receipt that it was derived from a criminal offense or from participation in a crime.

One of FATF’s early accomplishments was to dispel the notion that money laundering is only about cash transactions. Through its several money laundering “typologies” exercises, FATF has shown that money laundering can be achieved through virtually every medium, financial institution or business.

Another important concept in the definition of money laundering is “knowledge.” In all three of the bullet points mentioned above, we see the phrase “…knowing that it is derived from a criminal offense.” Generally, a broad explanation of “knowledge” is used for the definition of money laundering. FATF’s 40 Recommendations on Money Laundering, its 9 Special Recommendations on Terrorist Financing and the 3rd European Union Directive on the Prevention of the Use of the Financial System for the Purpose of Money Laundering and Terrorist Financing state that the intent and knowledge required to prove the offense of money laundering includes the concept that such a mental state may be inferred from “objective factual circumstances.” In a number of jurisdictions, the term “willful blindness” is a legal principle that operates in money laundering cases. Courts define “willful blindness” as the “deliberate avoidance of knowledge of the facts” or “purposeful indifference.” Courts have held that willful blindness is the equivalent of actual knowledge of the illegal source of funds or of the intentions of a customer in a money laundering transaction.

In October 2001, FATF expanded its mandate to cover the financing of terrorism. Whereas funds destined for money laundering are, by definition, derived from criminal activities, such as drug trafficking and fraud, terrorist financing may include funds from perfectly legitimate sources used to finance acts of terrorism. Concealment of funds used for terrorism is primarily designed to hide the “purpose” for which these funds are used, rather than their source. Terrorist funds may be used for operating expenses, including such things as paying for food, and rent, as well as for the actual terrorist acts. Terrorists, similar to criminal enterprises, covet secrecy of transactions and access to funds.

Both terrorists and money launderers use the same methods to move their money in ways to avoid detection, such as structuring payments to avoid reporting and underground banking, such as the ancient system of hawala.

What is a money laundering offence?

The offence of Money Laundering is defined as:

Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime and projecting it as untainted property shall be guilty of offence of money-laundering.

“Proceeds of crime” means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property

What is the International standard for AML & CTF activities?

The Financial Action Task Force (FATF) is an inter-governmental body which sets standards, and develops and promotes policies to combat money laundering and terrorist financing.

The Forty Recommendations and Nine Special Recommendations of FATF provide a complete set of counter-measures against money laundering covering the criminal justice system and law enforcement, the financial system and its regulation, and international co-operation. These Recommendations have been recognised, endorsed, or adopted by many international bodies as the international standards for combating money laundering.

Website of FATF – www.fatf-gafi.org

What Is Terrorist Financing?

The United Nations (UN) has made numerous efforts, largely in the form of international treaties, to fight terrorism and the mechanisms used to finance it. Even before the September 11th attack on the United States, the UN had in place the International Convention for the Suppression of the Financing of Terrorism (1999), which provides:

  1. Any person commits an offense within the meaning of this Convention if that person by any means, directly or indirectly, unlawfully and willingly, provides or collects funds with the intention that they should be used or in the knowledge that they are to be used, in full or in part, in order to carry out:
  2. An act which constitutes an offence within the scope of and as defined in one of the treaties listed in the annex; or
  3. Any other act intended to cause death or serious bodily injury to a civilian, or to any other person not taking any active part in the hostilities in a situation of armed conflict, when the purpose of such act, by its nature or context, is to intimidate a population, or to compel a government or an international organization to do or to abstain from doing an act.
  4. For an act to constitute an offense, it shall not be necessary that the funds were actually used to carry out an offense referred to in paragraph 1, subparagraph (a) or (b).

The difficult issue for some countries is defining terrorism. Not all of the countries that have adopted the convention agree on specifically what actions constitute terrorism. The meaning of terrorism is not universally accepted due to significant political, religious and national implications that differ from country to country.

FATF, which is also recognized as the international standard setter for efforts to combat the financing of terrorism (CFT), does not specifically define the term financing of terrorism in its nine Special Recommendations on Terrorist Financing (Special Recommendations) developed following the events of September 11, 2001. Nonetheless, FATF urges countries to ratify and implement the 1999 United Nations International Convention for Suppression of the Financing of Terrorism. Thus, the above definition is the one most countries have adopted for purposes of defining terrorist financing.

The Link Between Money Laundering and Terrorist Financing

The techniques used to launder money are essentially the same as those used to conceal the sources of, and uses for, terrorist financing. Funds used to sup-port terrorism may originate from legitimate sources, criminal activities, or both. Nonetheless, disguising the source of terrorist financing, regardless of whether the source is of legitimate or illicit origin, is important. If the source can be concealed, it remains available for future terrorist financing activities. Similarly, it is important for terrorists to conceal the use of the funds so that the financing activity goes undetected.

For these reasons, FATF has recommended that each country criminalize the financing of terrorism, terrorist acts and terrorist organizations, and designate such offences as money laundering predicate offences. Finally, FATF has stated that the nine Special Recommendations combined with The Forty Recommendations on money laundering constitute the basic framework for preventing, detecting and suppressing both money laundering and terrorist financing.

Efforts to combat the financing of terrorism also require countries to consider expanding the scope of their AML framework to include non-profit organizations, particularly charities, to make sure such organizations are not used, directly or indirectly, to finance or support terrorism. CFT efforts also require examination of alternative money transmission or remittance systems, such as hawala. This effort includes consideration of what measures should be taken to preclude the use of such entities by money launderers and terrorists.

As noted above, a significant difference between money laundering and terrorist financing is that the funds involved may originate from legitimate sources as well as criminal activities. Such legitimate sources may include donations or gifts of cash or other assets to organizations, such as foundations or charities that, in turn, are utilized to support terrorist activities or terrorist organizations. Consequently, this difference requires special laws to deal with terrorist financing. However, to the extent that funds for financing terrorism are derived from illegal sources, such funds may already be covered by a country’s AML framework, depending upon the scope of predicate offences for money laundering.

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