Money laundering and banking practices

Money laundering and banking practices

Tow, Marina Lee Foong

Introduction

Financial markets nowadays are undergoing rapid developments as evidenced by an increase in their number, size, and level of sophistication. A huge rise in the demand for financial products and services results in the emergence of new markets and new computerised trading and settlement systems. However, it is not only legitimate businesses which wish to exploit these markets; money launderers are also actively using the financial markets for their illegal activities.

Money laundering is not a new activity as criminals always need to disguise the illicit origin of their funds. In recent decades, the scale of drug trafficking and money laundering have increased substantially. Over the years, money laundering have been conducted with increasing professionalism and money launderers constantly search for new laundering means which involve financial and non-financial service sectors. This results in an increasing effort internationally to combat the problem of money laundering. Money laundering is recognised as a criminal offence in many countries.

The objective of this study is to provide an insight into the problem of money laundering, the process of money laundering, and the role of the financial institutions and how they deal with this emerging problem. Interviews with bankers in Singapore were conducted to provide a better understanding of this topic.

What is Money Laundering?

The possession of large sums of cash poses several problems for the criminals in view of its bulkiness and susceptibility to theft and suspicions. Hence, criminals want to channel their money into the formal financial system and clean them up as soon as possible. Money laundering can thus be defined as a process by which criminals attempt to conceal the origin of the proceeds of their criminal activities, to maintain control over those proceeds, and to provide a legitimate cover for their money by various means – financial and non-financial. Crimes that were traditionally associated with money laundering include protection rackets, prostitution, extortion, gambling, corruption, fraud, tax evasion and other illicit activities. In recent years, the growth in volume of money laundering and the development of more sophisticated money laundering techniques have been largely linked with drug trafficking. Thus, this article focuses mainly on the laundering of drugrelated money. Many countries believe that criminal activities can be deterred to some extent by pursuing and confiscating illegal money before they enter into the financial system. However, to ensure the success of anti-money laundering practices, there must be a strong international cooperation among nations.

Money Laundering Process

The three-stage process of laundering, namely wash, rinse and tumbledry, is also used by the criminals to clean their dirty money. This is a simple, yet complex, process of converting ill-gotten financial gains into real or financial assets whose origins can be hidden effectively from law enforcement officials and society.

The wash cycle is the placement stage where illegally obtained money is channelled into the financial system to conceal its origin. Placement is frequently carried out by depositing cash or using couriers to purchase monetary instruments with the amount just below reportable thresholds at the branches of a bank. Alternatively, the money may be used to purchase high-value goods such as precious metals and stones, art works, real estate or stocks and bonds. The criminals may also set up legitimate companies such as restaurants, bars, hotels, or supermarkets to mix the dirty money with legal funds through business operations. Money may also be smuggled out of the country of origin. This wash cycle is the weakest link in the money laundering process as illegal proceeds can be most easily detected at this stage. Hence, anti-money laundering authorities are targeting their actions at this stage by pursuing and confiscating the illicit cash before they are taken out from their places of origin.

The rinse cycle refers to the layering process whereby complex, multiple layers of financial transactions are created to separate funds from their illegal sources in order to break their audit trails. Layering might involve the conversion of illicit proceeds into monetary instruments such as travellers’ cheques, letters of credit, money orders, etc, which can be readily transported or deposited into other institutions without being detected. The assets bought may also be sold for cash to further detach the money from its origin. Electronic funds transfer may also be done domestically or internationally. The money launders’ activities become increasingly difficult to detect at this stage as the complicated methods used make the tracing of the illegal proceeds difficult.

The tumble-dry stage is an integration stage where the laundered proceeds are further mixed with funds from legitimate sources, to make them appear as normal business earnings. This stage may involve the sale of property bought with illicit money. Shell companies may be set up as subsidiaries for the holding company of the criminals to remit the funds as inter-company loans. Moreover, false import/export invoices (with overvaluation) may be used to justify remittances as payments. At this stage, it becomes extremely difficult to distinguish between legitimate and illegitimate wealth. Detection is only possible through undercover investigation, informant’s assistance and luck.

Financial Systems, Products and Services at Risk

As more products are being developed in the financial systems, money launderers have more avenues to clean their dirty money.

The securities market is exposed to the greatest risk in view of its high degree of sophistication, the anonymous nature of the transactions and a high liquidity in this market. Dirty money can be converted to securities which can then be sold for clean money. Money launderers can conceal their identities by trading in this market through their agencies and nominees such as companies, solicitors, financial advisers or bankers. The same stock may be traded between two offshore companies controlled by the same criminals for laundering purpose.

The foreign exchange market provides an efficient laundering facility as there is no single exchange or a centralised system of operation. Currencies are international commodities and can be traded anywhere easily. If the foreign exchange market in one country is too strictly regulated, traders can always shift their transactions to another country which is less regulated.

The futures market is also exploited by the money launderers. Individual members who trade at the futures exchanges can be conveniently used by money launderers to channel their dirty money through their trading accounts as a settlement of “hedged” losses while the profits can be paid out as clean money.

The insurance industry is equally at risk too. Single premium insurance policies have been increasingly targeted by criminals for laundering purposes because of their simplicity, acceptability and negotiability. The life assurance can be arranged by an agent or intermediary and the insurance companies would readily accept the money based on agent’s information. The policy can then be used as security or collateral for another financial deal.

Other non-traditional intermediaries such as travel agents, money changers and international money transmitters are also widely used for money laundering. For example, air tickets which are negotiable and transferable can be used for value transfer, money transmitters can be used to send money by wire, draft, cheque or by courier with anonymity.

Other assets such as fine art,jewellery, antiques and expensive designer goods, which are valuable and highly portable are commonly purchased by the money launderers too. Gold and precious metals may also be traded in the form of paper, futures or physical metal. For example, Hong Kong police unfolded a scheme in which over HK$ 13 million cash from sales of heroin in Australia was used to purchase gold ingots. These ingots were then smuggled into Hong Kong and sold in small quantities through banks and precious metal brokerages. The proceeds were subsequently wire transferred to their shell companies. In another case, police in Paris uncovered a money laundering scheme when many illegal Chinese and Vietnamese immigrants queued to buy expensive Louis Vuitton and Hermes luggage from retail outlets. The luggage was delivered to a central collecting agency and then shipped to Japan for resale.

Casinos and other licensed gambling clubs have been a highly effective cover for money laundering too. Cash can be deposited with a casino and the player is supplied with chips or tokens. After a few turns on the tables, the guest can then redeem his tokens for cheques to be deposited in any account or negotiated through third parties. In addition, all gambling establishments provide full credit facilities for established clients, together with safe deposit facilities, which can also be exploited by money launderers.

Cyber-banking products such as cash card, smart cards, on-line banking and other high-tech consumer payment services are also increasingly exploited by money launderers. Cash card and smart cards can be used to store cash value for payments at the accepted outlets. On-line banking and payment systems are also ideal for money laundering in view of their speediness, sophistication, efficiency and little audit trail.

Services provided by professionals such as accountants, solicitors, money brokers, may also be solicited by money launderers. For a huge fee, professionals may provide professional support and facilitation for them. They may help to set up shell companies for the collection and handling of large sums of money, sign cheques with a power of attorney and give instructions to third parties. Usually, the name of the law firm alone is enough to give immense credibility to a commercial undertaking.

Measures against Money Laundering

In view of the increasing problem in drug trafficking, there are international efforts to combat money laundering. In 1988, the Vienna Convention endorsed the international cooperation to fight money laundering. Agreement was reached on criminalising the money launderers, international cooperation in investigation and extradition and non-interference of banking secrecy on criminal investigations. Also in 1988, the Basle Committee on Banking Regulations and Supervisory Practices issued the “Statement on Prevention of Criminal Use of the Banking System for the Purpose of Money Laundering”. The Statement outlines some basic policies and procedures that banks should have: know your customers, compliance with laws, cooperation with law enforcement authorities and adherence to the Statement.

The Financial Action Task Force (FATF) was established in 1989 by the leaders of the G7 nations and the President of the Commission of the European Communities (CEC) during the Paris Economic Summit, 1989. It was set up, with the headquarters at Paris, to examine measures to combat international money laundering relating to drug trafficking and all other serious crimes. Its members include some 26 countries, the CEC and the Gulf Co-operation Council. Similar to the Vienna Convention agreement and the Basle Committee’s Statement, FAFT’s 40 recommendations cover international cooperation, government’s regulatory control and supervision, financial institutions’ measures against the money laundering.

The Monetary Authority of Singapore Notice 626 issued in 1994 requires banks in Singapore to comply with certain guidelines to prevent money laundering. The required measures include customer identification, record keeping, reporting of suspicious transactions, cooperation with law enforcement authorities, compliance and staff training. Besides, the Association of Banks in Singapore (ABS) and the Stock Exchange of Singapore (SES) also issued general guidelines of the same nature to their members in 1990 and 1994 respectively.

Recent Trends

The prevention of money laundering has evolved into an important national policy and financial management priority in the financial centres throughout the world. Many governments have been stepping up their control to counter a potential threat to the integrity and stability of their financial systems, and the political and social stability in their countries. Many countries adopted the recommendations of the Financial Action Task Force (FATF), Vienna Convention and the Basle Statement.

On the other hand, the money laundering activities have been on the rise internationally. Money launderers usually seek financial centres in countries with weak banking supervisory authorities, strong bank secrecy practices, limited capital or foreign exchange controls. They are also attracted to countries with a critical need for foreign or hard currency and a lack of substantive money laundering legislation and law enforcement. Despite strong anti-money laundering legislation and practices, money laundering still continues to take place in major financial centres. Even financial institutions can be used for money laundering. For example, the Bank of Credit and Commerce International (BCCI) was found to be involved in laundering of drug-related money. The recent trends in money laundering are towards more sophisticated techniques and practices, more establishment of legitimate businesses to shield the schemes, and further internationalisation of money laundering networks. It was reported that up to US$500 billion of dirty money is hidden offshore around the world and barely a tenth of that is ever recovered.

According to the recent report by FAFT, gold, casinos and real estates (especially in the leisure and tourism industries) are increasingly used for laundering substantial sums of dirty money as traditional channels are clogged by tight regulation. The improved global co-operation and a more transparent banking industry pushed up the cost of money laundering, thus causing the criminals to explore other nontraditional means. It is warned that the modem technologies such as the Internet and electronic banking cards might become ideal camouflage for criminals to turn their ill-gotten gains into respectable funds. These show that the anti-laundering methods are working, but it also means that the authorities involved would have to constantly think of counter-measures to meet the new realities.

The managing director of the International Monetary Fund, Michel Camdessus, informed FAFT Committee that dirty money accounted for 2 to 5 per cent of annual global gross domestic product. FAFT said that it could never halt the big business of money laundering. However, its goal is not to eliminate it but to raise the risk for the criminals. It also pointed out that more attention should be directed to Persian Gulf states, Indonesia and Malaysia in the battle against international money laundering.

Banking Practices

The increasing liberalisation and integration of world financial markets and the speed and efficiency of transferring money electronically between countries have made the task of money laundering easier. Hence, it is becoming more difficult for the authorities to trace the flow of illicit funds. Within the banking system, there are a number of points of vulnerability or “choke points” which make the banking system attractive to the money launderers. These choke points include the entry point of cash into banks, cross-border flows of cash from one bank to another; and transfers within and from the banking system. It is at these points that banks typically concentrate their monitoring techniques to identify suspicious transactions.

Banks need to exercise more care in differentiating between suspicious transactions and the customers’ legitimate desire for financial secrecy. Banks would need to rely on an appropriate level of diligence or “Know Your Customer” procedures to differentiate them. The impact of the various international and domestic initiatives to combat money laundering on bank operations is significant. It produces a significant shift in the way banks interact with their existing and potential customers. There are changes in customer interaction, identification, internal policies and procedures and training requirements to ensure compliance with the local laws and regulations. In order to combat the problem of money laundering, banks and financial institutions are required to develop policies, procedures and systems such as “Know Your Customer”, record-keeping and retention, internal reporting for suspicious transactions, and staff training programmes on its detection and prevention.

“Know Your Customer” policies and procedures are the banks’ most effective weapon against money laundering. Knowing customers and being alert to unusual or suspicious transactions can help deter and detect laundering schemes. It is strongly encouraged by the regulatory authorities as it is consistent with sound business principles. As a result, it helps detect suspicious activities in a timely manner, thereby reducing the risk of a bank being used for illicit activities and protecting the bank’s reputation. “Know Your Customer” policies involve knowing the identities of the bank’s customers and the beneficiaries of the accounts, knowing their businesses and professional activities, sources of their income and funds, and wealth or assets. In addition, the customers’ transactions should be monitored so as to detect any irregularities. On this, the banks are advised to comply with the recommended account opening procedures which entail information collection, identification and verification. The banks should not accept customers whose character, integrity, and business legitimacy, are questionable and who refuse to provide the required information. Other practices under these policies include customer visitation and continuous monitoring.

Apart from “Know Your Customer” policies, banks should retain records relating to both customer’s identity and transactions for potential use in any investigation into money laundering cases by the enforcement agencies. The banks should also develop appropriate internal procedures for reporting suspicions to the relevant enforcement authorities. There should preferably be an internal point of reference linking the internal departments with external enforcement agency. It is important for every department to know who is the internal point of reference (the reporting officer) in the bank. Staff training is also essential to ensure that the bank’s staff have good communication skills when interacting with customers. The skills include how to ask difficult questions, to apply listening techniques, and to manage customers’ resistance. The bank should also train its employees to recognise and handle suspicious transactions. Practical and refresher training programmes are also recommended. This could be in the form of annual reviews, training or reviews of internal literature and practice codes.

It is difficult to predict the impact of these procedures on banks and other financial institutions in the medium term, as the laws and regulations in many countries are relatively new and legal precedents have been rare.

Experiences of Banks in Singapore

Since Singapore is a reputable financial centre in the world, it would be interesting to know if there are any money laundering activities and how the banks here deal with this issue. To gain a better insight on this, a survey was conducted in the form of interviews with two local banks and four foreign banks in Singapore. The banks’ names are withheld to maintain confidentiality. The persons interviewed include a manager of a business development and priority banking department, an assistant vice president of an internal control and compliance department, a senior director of corporate banking department, a deputy branch manager, a manager of corporate banking department, an assistant manager of a public relations department of the respective banks. Information was collected through question-and-answer sessions during the interviews. The survey findings from the banks are summarised below.

a) Local Bank A

Though the interviewee has not come across any case of money laundering in Singapore, the bank has been instilling an awareness of money laundering through staff training. It also produced a manual on this matter for its staff. Moreover, it is currently developing a system where transactions exceeding a threshold figure will be recorded and reported. When a large amount of money is transferred, the bank would find out the origin of the funds through discussions with the customer. It believes that such a probe would not affect the banker-customer relationship, if done tactfully. With the advice of its legal department, the bank would deny assistance to a suspicious customer (with explanation). This would protect the bank from any possible legal problems subsequently. The interviewee believes that money laundering may become a serious problem in Singapore if it is not controlled.

b) Local Bank B

The interviewee indicated that money laundering cases in Singapore are rather rare. He believes that many criminals may use other means instead of banks to launder their dirty money, for example, buying stock and cars, using invoices and letters of credit for purchase/sale transactions, buying single-premium insurance, and through gambling. Nevertheless, the bank has a monitoring system against money laundering. If the aggregate deposits or remittances of an account exceeds the threshold figure, the bank will be alerted and may make the necessary enquiry. Also, its foreign customers are required to submit their personal particulars with photographs and an introducer. Their accounts are monitored over a period of time and identity checks are made with the respective embassies. If the information given is negative, the bank reserves the right to close the accounts. Its internal control and compliance department is the internal coordinator through whom any suspicious cases may be reported to the MAS. Besides, seminars are conducted for all its branch managers and officers to create an awareness and to learn to detect suspicious transactions. Its front-line staff are also trained to ask customers questions in a subtle way to get information. Case studies and video programmes are used during its training sessions. Since it has its own guidelines, only the relevant FATF recommendations are adopted. ABS’ guidelines are also followed by the bank. The interviewee considers some of the drug-related countries and tax havens, for example, Colombia, Pakistan, Thailand, Myanmar, and the Caribbean, as high-risk countries. Though Singapore may also be used for money laundering, it is not expected to be a serious problem as there is sufficient regulatory control. In conclusion, he feels that it would be good to create an awareness of money laundering among undergraduates too.

c) Foreign Bank A

The interviewee is of the view that money laundering can also be done through many means, for example, sale of property, cash cheque depositing, purchases/sales between shell companies, bank loans application secured by fixed deposits, and private banking through Swiss bank accounts under anonymity. To prevent money laundering, the bank has its own system in place. Its staff are also trained on this through seminars conducted by ABS, banks and audit firms. The bank follows the “Know Your Customer” guidelines closely. If there is any suspicion, it may investigate the case and report to the authority if necessary. The banks requires a new customer to be introduced by an existing customer for current account opening. Relevant questions are also asked to solicit needed information of the customers. The accounts may be considered “suspicious” if there is a significant change in the amount or pattern of transaction. Though it may be difficult to detect money laundering, the bank does pay more attention to huge remittances from certain risky countries. Its computer system can also monitor all transactions based on an internal threshold figure and churn out exception reports for review. As per the MAS guidelines, the bank has set up an antimoney laundering committee which consists of officers from the business development, training, and bills department. The committee would meet to discuss and share the new information and experiences on money laundering and update the staff accordingly.

The interviewee feels that banks in Singapore became more concerned about money laundering after the issue of the MAS Notice 626 and the revision of the Drug Trafficking Act. In view of the confidentiality involved, there is no data on the money laundering cases reported to the MAS. It is considered necessary to keep the cases confidential so as not to jeopardise the reputation of the bank and the customer involved. If a bank fails to comply with the MAS guidelines, the interviewee feels that the bank may be held liable for negligence. Besides, the Drug Trafficking Act may also hold the bank officer concerned personally liable. If convicted, the bank and the officer may be fined and the officer imprisoned. However, since this is not tested yet, it is still unclear as to how the convicted bank and officer would be penalised. In conclusion, the interviewee thinks that Singapore may not be immune from the money laundering in view of its efficient network for banking transactions. He also reckons that money laundering issue should be incorporated into the curriculum for the banking and finance students in universities.

d) Foreign Bank B

The interviewee has heard of a case of money laundering in Singapore which involved S$5.4 million. Since drug-related money laundering is classified as a criminal offence under the MAS Notice 626, it becomes the responsibility for banks to report any case of money laundering to the authority. However, it is difficult for banks to detect money laundering as some customers may move substantial amount of their funds, for simple reasons, for example, to avoid foreign exchange control, or to evade tax.

Nevertheless, the bank has a training programme for its staff. Some of its staff have attended seminars conducted by the Republic National Bank of New York. There is also a training programme for its front-line staff and an induction course for its new staff to create an awareness about money laundering. Apart from adopting the “Know Your Customers” guidelines, the bank also monitors all the transactions closely using the threshold figure. Its on-line system may signal “Hold” to alert the staff about suspicious transactions. An anti-money laundering committee has been set up in the bank to monitor this issue. Its members comprise the legal consultant, the accountant, the head of systems and methods and the interviewee (a deputy branch manager).

If there is a walk-in customer with a large sum of money to be deposited into the bank, the bank would get the necessary information from the customer and judge if it is desirable to serve him. A suspicious transaction may be reported to the MAS to discharge the bank’s responsibility. The bank may reject any dealings with some dangerous countries such as Nigeria and Sri Lanka. It is also very cautious in dealing with countries with poorly regulated banking systems, for example, Vietnam and China. However, the interviewee feels that money launderers are increasingly using the reputable financial centres in the world, including Singapore, to get better disguise. Sometimes the bank may find it difficult to get the needed information from the account holder and the remitting bank as they may want to protect their own or their customer’s interest. On the bank’s liability, he feels that a bank may be liable for negligence if it fails to comply with the MAS guidelines. Other possible offences may include failure to comply with the court order, obstruction to the investigation order and failure to keep record of the transactions. In conclusion, he thinks that the undergraduates should be aware of money laundering, the relevant MAS Notices, and how banks should be run in Singapore.

e) Foreign Bank C

The interviewee has not heard of any serious case of money laundering in Singapore as banks here are very tightly regulated by the MAS. When handling a large amount of funds, the bank normally would not question the source of the fund but would require its customers to furnish their particulars. It may also reject the request for account opening if suspicion arises. The bank may report suspicious transactions to the MAS too. Besides, it organises internal seminars on money laundering, especially for credit department staff, as the bank focuses on credit business.

The bank has its own set of policies and guidelines which are checked by its internal auditors. Though it has no threshold figure, it has a relay system that is linked to the international anti-money laundering bodies and all the branches of the bank in the world. Thus, the bank can easily retrieve information about a particular customer and avoid dealing with him if suspicion arises. The bank does not classify any countries as “high risk” and would not decline any dealings based on country. However, if the account is suspicious, the bank is willing to forego its potential revenue to prevent money laundering.

The interviewee reckons that banks are unable to do much in the prevention of money laundering as criminals are usually assisted by their own professional financial advisers, private bankers, and fund managers. Law enforcement may not be effective to solve this problem either. However, he is of the view that money laundering may not become a serious problem in Singapore. In conclusion, he agrees that undergraduates should be made aware of the money laundering problem too.

f) Foreign Bank D

The interviewee thinks that money may be laundered through property purchases in cash, investments in stocks and money market instruments, investment in legitimate businesses that are cash-rich, and buying of equity stakes in companies in cash. In view of the efficiency in the fund transfer system, wire transfers and other forms of remittances are increasingly used by criminals.

To prevent money laundering, the bank has started its internal training programmes on money laundering for its staff a few years ago. For any withdrawal or deposit exceeding $10,000, an internal report is filed. “Know Your Customer” guidelines are also observed by the bank. It has its own set of rules that are said to be more stringent than the FATF recommendations. The bank is also willing to forego revenue should any suspicion arise. It would investigate any suspicious transaction and refuse to render any services to the customer if the suspicion is confirmed. It prefers to take a more conservative approach when it is in doubt of the nature of any transaction. A local compliance officer, an area compliance officer (regional) and a head of global compliance officer are responsible for the anti-money laundering practices of the bank. The bank is said to be more advanced than many other banks in dealing with this issue. Apart from these, the bank does not deal with certain businesses, for example, money brokers, which are susceptible to money laundering. Following the US sanction, the bank is not supposed to deal with countries such as Cuba, Iran, Iraq, and Nigeria. Though Singapore is also susceptible to money laundering, it is difficult to predict if it will become a serious problem here. Banks here would have to do their best to detect money laundering. In conclusion, the interviewee feels that undergraduates should be aware of the money laundering problem too.

As envisaged by the above observations, banks in Singapore are taking the money laundering issue seriously by complying with the MAS guidelines. Foreign banks, especially the US banks, seem to be assuming a more active role on this matter as they have to observe the ruling imposed by the US government too. Overall, there is a greater awareness of the money laundering issue among banks here and their banking practices are also geared towards prevention. Hopefully, this will have a deterrent effect on money laundering in Singapore.

Conclusion

Money laundering is becoming a global concern. In order to solve this problem, an international effort and cooperation are needed. Moreover, cooperation and assistance from financial institutions are also extremely important. Unfortunately, some countries seem unwilling to combat it due to corruption or other economic reasons. This could hamper the international effort in countering the money laundering activities. Hence, the success of the control measures would hinge on the support of the international community.

In spite of its strict legal system against drug trafficking, Singapore may not be immune from money laundering as its efficient financial system can be exploited by money launderers. Thus, the authorities require financial institutions to monitor their customers’ accounts and transactions closely to combat money laundering. There has also been an increasing awareness of this problem among the banks in Singapore. Some of the banks, local and foreign, even develop their internal guidelines and procedures to deal with this matter and provide training for their staff. Although it is not an easy task to solve the problem of money laundering, an international effort and strategies against it may make it more difficult for the criminals to launder their dirty money.

The limitation of this study mainly lies in the limited coverage of our interviews. In view of the time constraint and limited responses from banks, the interviews cannot be extended to more banks. Moreover, the information was collected through detailed discussions with the interviewees and the questions asked were rather open-ended in nature. Thus, a questionnaire survey method which can achieve a wider coverage may not be applicable to this case. Besides, the statistics and information on money laundering cases in Singapore, if any, are not available due to the confidentiality involved. However, a further research on money laundering may perhaps be carried out on a larger scale with the assistance of say, ABS. It may cover more banks and other financial and non-financial institutions such as finance companies, securities houses and real estate companies.

Note:

References are available from authors.

Copyright Singapore Institute of Management Jan 1999

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