Understanding Money Laundering

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UNDERSTANDING

MONEY LAUNDERING


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PrefaceIn light of the international concerns growing on money laundering and the financing of terroristactivities, many countries have taken rigorous measures to curb money of this nature. Manyorganizations and union bodies have been seeking solutions on the dirty money being freelymoved in the international financial system. Since the terrorist attacks in New York on Sept 11/2001,

new regulations and laws have been passed. The United Nations, the FATF (Financial Action TaskForce, an intergovernmental body), European Union and many other major bodies have taken aserious view and have revised the framework of combating money laundering and financing ofterrorism to make it easy to detect proceedings derived from criminal activities or funds that are orwill be used for illegal acts.

Singapore, as a developed nation and as a financial centre is no different in its stand against moneylaundering activities. With Singapore, relying much on foreign investment and as a country fortourism and hosting of international conventions, it cannot afford to be lax on the loopholes in theFinancial System where it can be exploited by individuals or groups wanting to launder money orfinance any illegal activities. The Monetary authority of Singapore has thus implemented very

stringent guidelines to banks and other financial institutions to combat money laundering and tocounter the financing of terrorism and the government of Singapore has passed new laws toadminister more transparency in the countrys financial system.

Arcade Plaza Traders while being proud of being a part of Singapores financial system and offeringForeign Money exchange and International Money transfer services to local customers andforeigners is legally and morally obliged to support the efforts of the Monetary Authority ofSingapore.

In carrying out operations in accordance with the specifics outlined, the company hopes this

AML/CFT Booklet which is created solely by the company, will be a simple guide to customers onunderstanding on the basics of Money laundering and how it is carried out. The booklet givesexamples on the criminal activities, stages and the main reasons behind the successfullegitimization of illegal funds.

The book further goes to talk about the measures taken to combat money laundering. In addition abrief outlook on how terrorist organizations can also use money laundering strategies to gainfinancial benefit to fund their illegal activities is also outlined.

Lastly a short summary is given on the operational guidelines by the Monetary Authority ofSingapore to licensees, followed by the legislative framework on Money Laundering and its

supporting activities.


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1. UNDERSTANDING MONEY LAUNDERING.

A. What is Money-Laundering?

i. Definition.

There are many definitions of Money-Laundering but it is basically the process oflegitimizing the proceedings (cash) from criminal activities.

ii. Who is involved in money laundering activities?

Usually individuals or a group who get involved in criminal activities and deriveproceedings (cash) from that said activities want to find ways to legitimize the mostcommonly referred black money.

iii. How is money laundered generally?

Most of the time, to legitimize or to washthe black money, criminals often attempt to flowthe money back into the financial system. These are usually in the forms of bank-ins,buying of money orders, bank drafts, or other financial instruments and internationalmoney transfers.

iv. What are the various types of criminal activities?

There are a lot of criminal activities in which criminals get proceedings from and below aresome of the examples:

Drug trafficking; Human trafficking; Sexual exploitation including children; Illegal arms sales; Illegal trafficking in stolen and other goods; Bribery and corruption; Fraud Counterfeiting currency; Kidnapping; Murder and theft and Insider trading and market manipulation.


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B. The Process of Money-Laundering.

i. Step 1: Placement

The placement is the first and initial stage of money laundering. The launderer hoping tolegitimize his illegal or black money tries to get the funds into a bank or a financial

institution.

This is usually and preferably carried out in a country or territory where there are weak orineffective anti-money laundering measures where detection of funds is of low risk for thelaunderer.

What are the most common ways for Placement?

Deposit cash into one or more bank accounts in broken up amounts in severalbranches in one financial institution or different financial institutions.

Purchase money orders, bank drafts and other financial instruments. Commingle the funds with legitimate ones. Exchange the funds into foreign currencies through a private foreign exchange

dealer. Exchange large denominations for smaller ones. Cash purchase of a security or a form of an insurance contract.

ii. Step 2: Layering

The layering is the second stage to the money laundering process. In this stage the fundshave already entered the financial system and at this point the funds, securities orinsurance contracts are converted or moved to other institutions, thus further segregating

the funds from the criminal activities.

In layering the launderer might chose an offshore financial centre, a large regionalbusiness centre or a world banking centre or a place which offers adequate financial andbusiness infrastructure.

How does the launderer further segregate his funds from its illegal origin?

Purchase other securities, insurance contracts or other easily transferableinvestment instruments and then sold yet through another institution.

Transfer through cheque, money order or bearer bond. Wire or remit the funds to various accounts and jurisdictions and disguise the

transfer as a payment for goods or services.

iii. Step 3: Integration

The final and last stage in money laundering is integrating the funds into the legitimateeconomy. This involves:

Purchase of assets, properties and luxury goods.


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C. In Short

Money from Criminal Activities.

Placing the funds in a low risk country where funds are least likely to be detected either bybank-ins or buying of financial instruments.

Layering the funds so that originality of funds are disguised and made difficult to be traced byfurther purchase and sales of investment instruments etc in a country where there is stablefinancial infrastructure.

To be able to get hold of the funds and flow it back into the economy, purchase of propertiesor luxury items are made.

Placement

Layering

Integration


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D. Other Points in Money Laundering

i. Non-Cooperative Countries & Territories. (NCCT)

Non-Cooperative Countries & Territories implies to countries or territories that may not bewilling or accommodating to the recommendations drawn up by the FATF to combat

money laundering. While reviewing each country, FATF placed countries on the NCCT listas a warning to other members in the body.

As of 13th October 2005, there are two countries currently placed on the NCCT list. 1

Myanmar. Nigeria.

ii. Politically Exposed Person (PEP)

The term "politically exposed persons" ("PEP") applies to persons who perform importantpublic functions for a state.

The following are examples:

Heads of state, government and cabinet ministers; Influential functionaries in nationalized industries and government administration; Senior judges; Senior party functionaries; Senior and/or influential officials, functionaries and military leaders and people with

similar functions in international or supranational organizations; Members of ruling royal families;

Senior and/or influential representatives of religious organizations (if thesefunctions are connected with political, judicial, military or administrativeresponsibilities) 2

When a person is one of the above and he involves in money laundering activities, then itwould be often very difficult to track his funds because of his political influence.Furthermore the person can also use close relations or associates to launder the moneyon his behalf. It is why therefore FATF has recommended establishing the backgroundinformation of all customers.

1FATF, NCCT FAQ, Current NCCT list, http://www.fatf-gafi.org

2Wolfsberg AML Principles, www.wolfsberg-principles.com/faq-persons.html


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E. Measures to Combat Money Laundering

i. What is the FATF and its role in anti money-laundering?

The Financial Action Task Force (FATF) is an inter-governmental body whose purpose isthe development and promotion of policies, both at national and international levels, to

combat money laundering and terrorist financing. The Task Force is therefore a "policy-making body" which works to generate the necessary political will to bring about nationallegislative and regulatory reforms in these areas. The FATF has published 40 + 9Recommendations in order to meet this objective.

The work of the FATF focuses on three principal areas:

Setting standards for national anti-money laundering and counter terrorist financingprogrammes;

Evaluating the degree to which countries have implemented measures that meetthose standards;

Identifying and studying money laundering and terrorist financing methods and

trends. 3

ii. What are the 40 recommendations?

The 40 recommendations were originally drawn up in 1990 as an initiative to combat themisuse of financial systems by persons laundering drug money. By 1996, theserecommendations were revised to reflect evolving money laundering typologies and wereendorsed by more than 130 countries and are the international anti-money launderingstandard.

To deal with the issue of terrorism, the FATF expanded its mandate and created the NineSpecial Recommendations and these were complementary to the FortyRecommendations.

3FATF, Homepage, www.fatf-gafi.org


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F. Terrorism & Money Laundering

i. International concern for Terrorism

Terrorism had always been an agenda for UN and the concern led the organization toplace the International Convention for the suppression of the Financing of Terrorism

(1999), which provides the way to prosecute individuals or groups who collect funds toharm national interests.

After the September 11 attacks in New York, countries became very concerned on thefinancial capabilities of terrorists who may make use of it for terrorist activities. Thetechniques used to launder money are more or less the same as those used to concealthe sources of and uses for terrorist financing.

ii. Measures to combat Terrorism Financing.

The FATF has recommended that each country criminalize the financing of terrorism,

terrorist acts and terrorist organizations and designate such offences as money-launderingpredicate offences. Thus, came the special nine recommendations along with the original40 recommendations to constitute the basic framework for preventing, detecting andsuppressing both money-laundering and terrorist financing.

iii. Similarity & difference between money laundering & Terrorism Financing

Basically money laundering can also be a means for individuals and groups wanting tocarry out acts of terror affecting a population or compelling a government to do or not to doa certain act.

In financing of terrorism, the funds may arise from:

Legitimate sources Criminal acts.

Through the same process of money laundering, the funds may be disguised anddistributed for terrorist activities. One major difference between money laundering andterrorism financing is that:

Funds used for money laundering arises from a criminal act and ends as alegitimate fund whereas terrorism financing can be from legitimate source and in

the end is used for terrorist (criminal) activities.


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2. Operational Measures & Guidelines.

The Monetary Authority of Singapore has issued guidelines by which money changing andremittance licensees should operate in light of the anti-money laundering measures. Below aresome main points.

i. Know your customer:

Licensees shall obtain satisfactory evidence of the customers true identity, and have effectiveprocedures for verifying the bona fides of new customers.

ii. Compliance with laws:

Licensees shall ensure that business is conducted in conformity with high ethical standards,that laws and regulations are adhered to, and that service is not provided where there is goodreason to suppose that transactions are associated with money laundering activities.

iii. Co-operation with law enforcement agencies:

Within legal constraints relating to customer confidentiality, Licensees shall cooperate fullywith law enforcement agencies. This includes taking appropriate measures allowed by law ifthere are reasonable grounds for suspecting money laundering. Disclosure of information byLicensees for the purposes of the Act (suspicious transaction reports) shall be made to theHead, Suspicious Transactions Reporting Office, Commercial Affairs Department (STRO). Tofacilitate the process, Licensees shall, if applicable, identify a single point in their organisation(usually an officer of the Licensee) to which staff are instructed to report suspected money-laundering transactions promptly.

iv. Policies, procedures and training:

Each Licensee shall adopt policies that are consistent with the principles set out in this Notice,and ensure that its staff, wherever located, are informed of these policies and adequatelytrained in matters covered by this Notice. Attention should be given to staff training in matterscovered by this Notice.


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3. SUMMARY OF KEY PROVISIONS OF THE ACT

1. Money laundering offences:

It is an offence for Licensees to:

i. Enter into or otherwise be concerned in an arrangement knowing or havingreasonable grounds to believe that by that arrangement:

a) It will facilitate the retention or control of benefits of drug trafficking orcriminal conduct by/on behalf of; or

b) the benefits of drug trafficking or criminal conduct are used to secure fundsor acquire property (by way of investment or otherwise) for, another person(whom the licensee knows or has reasonable grounds to believe hasbeen/is involved in, or has benefited from, drug trafficking or criminalconduct);

ii. Conceal or disguise; or convert, transfer, or remove from the jurisdiction, any

property which, in whole or in part, directly or indirectly, represents anotherpersons benefits of drug trafficking or criminal conduct (for the purpose of assistingany person to avoid prosecution for a drug trafficking offence, foreign drugtrafficking offence, serious offence or foreign serious offence or the enforcement ofa confiscation order issued under the Act); or

iii. Acquire any property for no or inadequate consideration, knowing, or havingreasonable grounds to believe, that the property, in whole or in part, directly orindirectly, represents another persons benefits of drug trafficking or criminalconduct.

Offences under this paragraph are punishable by a fine not exceeding $200,000, or

imprisonment for a term not exceeding 7 years, or both.

2. Disclosure of Suspicious Transactions

Licensees shall disclose suspicious transactions to an authorised officer when they knowor have reasonable grounds to suspect that any property:

i. In whole or in part, directly or indirectly, represents proceeds of drug trafficking orcriminal conduct; or

ii. Was used/will be used in connection with drug trafficking or criminal conduct.

Failure to disclose such knowledge, suspicion, or other related information amounts to anoffence which is punishable by a fine not exceeding $10,000.

3. Tipping Off

It is an offence for Licensees, knowing or having reasonable grounds to suspect that aninvestigation under the Act is taking/to take place, to make a disclosure which is likely toprejudice such investigation. This is a tipping off offence punishable by a fine notexceeding $30,000, or imprisonment for a term not exceeding 3 years, or both.


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4. Failure to co -operate with law enforcement agencies

The following acts constitute an offence under the Act:

i. contravening a production order issued by the Court under the Act withoutreasonable excuse;

ii. providing material known to be false or misleading in purported compliance with a

production order, without:

a) indicating that the material is false or misleading, and how it is false ormisleading; or

b) providing correct information which is in the Licensees possession or canreasonably be acquired by them;

iii. Hindering or obstructing an authorised officer in the execution of a search warrantissued under the Act; or

iv. Obstructing or hindering any authorised officer in the discharge of his duty underthe Act.

Offences under paragraphs (i) to (iii) are punishable by a fine not exceeding $10,000, or

imprisonment for a term not exceeding 2 years, or both. The offence under paragraph (iv)is punishable by a fine not exceeding $2,000, or imprisonment for a term not exceeding 6months, or both.

Documents

Understanding Money Laundering