Money laundering is the process of concealing or disguising the existence, source, movement, destination, or use of illicitly-derived property or funds to make them appear legitimate.
Money launderers often are sophisticated criminals, who quickly change their modus operandi to cope with stricter anti-money laundering laws/regulations and more focused initiatives by law enforcement and financial institutions.
Money laundering is not just about cash; neither is it a problem isolated to conventional deposit-taking and lending institutions. Money launderers have greatly diversified their operations across financial services sectors.
In 2009, the UNODC (United Nations Office on Drugs and Crime) estimated the total amount of money laundered was $1.6 trillion.
Three Stages
Generally, money laundering occurs in three stages: placement, layering and integration.
Placement: Disposal of the initial proceeds derived from illegal activity (e.g. into a bank) cash first enters the financial system at the placement stage.
Layering: The money is moved through the system in a series of financial transactions in attempt to disguise the origin of the cash with the purpose of giving it the appearance of legitimacy. This is done by a variety of routes, including moving funds into other accounts or other financial institutions, buying and selling properties, companies or assets.
Integration: having obscured the origins of the funds, criminals are free to use the funds as they choose once it has been removed from the system as apparently “clean” funds or assets.
The relevant money laundering offences can be found in Proceeds of Crime Act 2002 and are as follows:
Principal Offences
It would be a criminal offence to:
conceal, disguise, convert, transfer or remove criminal property from the United Kingdom (section 327);
enter into or become concerned in an arrangement which you know, or suspect facilitates the acquisition, retention, use or control of criminal property (section 328); or
acquire, use or possess criminal property (section 329).
These are the primary money laundering offences and are therefore prohibited acts under the legislation. There are also two secondary offences: failure to disclose any of the three primary offences and tipping off.
Failure to Report Offences
It is awould also be a criminal offence to fail to make a money laundering report in circumstances where:
you know or suspect, or there are reasonable grounds for suspecting, that another is engaged in money laundering;
that knowledge or suspicion came to you in the course of business in the regulated sector; and
you can identify the suspect or whereabouts of any laundered property or it is reasonable to believe that the information will or may assist in identifying the suspect or the whereabouts of the laundered property
This offence carries a maximum sentence of five years' imprisonment and/or a fine.
Tipping-off Offence
Under POCA, it is an offence to make a disclosure that is likely to prejudice an anti-money laundering investigation, where you know or suspect that a disclosure to the authorities has been or will be made.
The punishment on conviction for ‘Tipping-Off’ or prejudicing an Investigation is a maximum of 5 years imprisonment and/or an unlimited fine.
Red Flags
We have provided some red flags that your team should remain cognisant of:
Situations where clarification of a client’s identity is difficult
Establishment of overseas subsidiaries or branches, that do not seem necessary to the business, and subsequent manipulation of transfer prices
Transactions that appear inconsistent with a customer’s known legitimate activities or means (business or personal)
Unusual deviations from the normal account or transaction patterns
Transactions that appear to be intentionally structured to evade applicable government reporting requirements
Client makes cash transactions of consistently rounded-off large amounts (e.g., £9,900, £8,500)
Transactions passed through intermediaries for no apparent business reason
Uncharacteristically premature redemption of investment vehicles, particularly when accompanied by requests to remit proceeds to apparently unrelated third parties
We are releasing a series of articles on Financial Crime, but if you have any questions please reach out to the team.