You might have heard about the term ‘money laundering’, especially when you go to a bank. The officer asks you to submit the KYC (Know Your Customer) documents like identity proof and address proof. Additional documents like call report, enhanced due diligence report etc may be demanded from non-resident customers. All these measures are taken to prevent the incidences of money laundering.
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Money laundering is an activity wherein a person tries to legitimize his funds that have been obtained from illegal activities. This is done in order to hide the illicit source and show that the funds have come from a legitimate source or activity.
§ Stages of money launderingi. PlacementThe first stage of money laundering is called as the placement stage. As the name suggests, the funds are injected into the financial system of a country.
ii. LayeringThis stage involves conducting multiple transactions that are specially designed in a manner such that their complex nature makes it difficult to locate the origin of funds.
iii. IntegrationAfter creating a complex matrix of transactions, the funds are directed back to the money launderer. Now that the funds have traveled through the financial system, they seem to be a part of legitimate funds.
§ Volume of money laundering
According to the findings of the International Monetary Fund (IMF), the annual amount of funds involved in the process of money laundering can be as huge as up to 5% of the global GDP, i.e., $600 billion to $1.6 trillion. The sources of such illegal funds are drug trafficking, cyber crimes, illegal sales of arms and ammunitions, evasion of taxes, corruption, illegal gambling, violation of FOREX control, financing of terrorism, etc.§ Key AML laws and regulations
- The Bank Secrecy Act, 1970 is an important AML law of the United States. The financial institutions must help the U.S. government to detect and prevent the crimes pertaining to money laundering. According to this act, the financial institutions must keep a track of financial activities of the customers. If the amount of any transaction or aggregate of transactions carried out in one day exceeds $10, 000; such transactions must be reported to the concerned authorities.
- The terrorist attack on USA on 11th September, 2001 led to the enactment of the USA PATRIOT (Providing Appropriate Tools Required to Intercept and Obstruct Terrorism) Act on 26th October, 2001, under the presidency of George W. Bush.
- Title III of the US PATRIOT Act, talks about money laundering and terrorist financing. Significant changes were introduced in the money laundering regulations and the non-banking financial institutions were included under the umbrella of this law. It revamped the procedures followed by financial institutions by making it compulsory for them to establish AML programs. These AML programs included training, making necessary changes in compliance policies and reporting, appointment of compliance officer and periodical review. It also made it mandatory for banking and non-banking institutions to conduct customer identification procedures for the opening of new accounts. Procedure of Enhanced Due Diligence was introduced for monitoring the activities of Private Banking Clients, especially those of the non-U.S. persons.
The investigation of the financial crimes is conducted by the Federal Bureau of investigation (FBI). The Title 18 of US Code 1956 states that money laundering is a criminal offense. If found guilty of money laundering, a fine of $500, 000 or twice the amount of money laundered whichever is greater, is imposed. In addition to the fine, the court shall have the authority to subject the defendant to 20 years of federal imprisonment.