Money Laundering and the Role of Financial Institutions and Regulated Businesses

31.OCT.08

Contributed by the Financial Intelligence Unit

Money laundering is the process by which the proceeds derived from a criminal activity, such as drug trafficking, murder for hire, theft, robbery, embezzlement and fraud are disguised in an effort to conceal their illicit origins and to legitimize their future use. Criminals attempt to “clean” or legitimize the said proceeds by placement, layering and integration through financial entities such as banks, credit unions, building societies, insurance companies, money remittance business, investment businesses, companies and front businesses, car dealerships, real estate agents, Jewellers, casinos among other businesses.{{more}}

Money laundering is the part of most criminal activities that generates proceeds for the criminal. Most criminals and criminal organizations, regardless or their crime or structure, have three objectives in relation to the proceeds of their illicit activity. These objectives are: to pay expenses connected to their illegal activity; to invest their proceeds in furtherance of the illegal activity and to generate and enjoy the profits of their criminal activity. Laundering the illegal proceeds accomplishes these objectives.

Money laundering by a criminal or criminal organization can expose the criminal to investigations and prosecution. It can also expose the higher echelons of a criminal organization. These are often the ones who make the profit but are the controlling minds at the top of the criminal syndicate. They do not need to get their hands dirty, instead relying on foot soldiers to do the dirty work.

What is Terrorist Financing?

The financing of terrorism is the financial support, in any form, of terrorists or those who encourage, plan or engage in terrorism. Terrorists need money to operate. They must purchase weapons, equipment, supplies and services. Financing for terrorist activity may come from public (Government sponsored terrorism) or private individuals, charities, businesses and non-government organizations. This support may often be in the form of small donations.

The funds for terrorism may be generated from lawful or criminal activity. This is unlike money laundering where a perquisite is criminal activity from which funds are then generated. The two activities are linked because the techniques used to launder money are essentially the same as those employed to conceal the sources of terrorist financing.

Legislation

In an effort to ensure that St. Vincent and the Grenadines has an effective anti-money laundering and counter financing of terrorism regime the crown passed a plethora of legislation and regulations in 2001 adding to the Proceeds of Crime Act No. 12 of 1997 and other legislation such as the Drug Trafficking Offences Act No. 45 of 1993 which allowed for forfeiture and confiscation of cash or conveyance connected with such offences. The updated package of legislations include the Proceeds of Crime and Money Laundering (Prevention) Act 2001 which was designed to be a draconian piece of legislation targeting the proceeds generated from criminal conduct. This piece of legislation meant that criminals were no longer able to merely serve a custodial sentence and upon completion of the sentence return to the monies generated from their nefarious and criminal pursuits. Now a custodial sentence is married with a financial penalty which serves to hit the criminals where it hurts hardest, in their pockets, effectively putting an end to the financing of the criminal enterprise. Other pieces of legislation in this package includes the United Nations Anti-Terrorism Measures Act 2002, the Proceeds of and Money Laundering Regulations and the Financial Intelligence Unit Act, 2001.

Stages of Money Laundering

The placement stage of money laundering, is the first in the three part process and is often targeted at financial institutions and other regulated entities. These entities are therefore positioned to be gatekeepers in the fight against money laundering and terrorist financing by being vigilant in the detection, deterrence and reporting of suspicious transactions which may constitute or relate to money laundering, terrorist financing or other criminal conduct.

To play the role of gatekeeper effectively financial institutions and other regulated entities are mandated to implement a comprehensive, all encompassing and effective anti money laundering and counter financing of terrorism compliance program. This program is constructed on five pillars, namely, knowing the customer (KYC) also known as customer due diligence (CDD), recognition of suspicious transactions, reporting suspicious transactions, keeping records and conducting AML/CFT training on an ongoing basis.

An Effective Compliance Program

An effective compliance programs means that a financial institution or other regulated entity has a strong culture of compliance with its genesis from the top down, that is, from the board and management to the front line staff of the entity. Effective compliance is further demonstrated by implementation of policies and procedures along with checks and balances which are targeted at detecting suspicions transactions which may constitute or be related to money laundering, terrorist financing or other predicate criminal activity. These compliance mechanisms are also targeted at deterring those intent on exploiting any weaknesses in the system to legitimize their ill-gotten proceeds.

Know Your Customer (KYC)

An effective Know Your customer (KYC) or Customer Due Diligence (CDD) policy means that as a customer of a financial institution or other regulated business, your identify must be verified using reliable, independent source documents, data or information.

The financial institution or other regulated body should request that a customer provide any of the following pieces of identification, a passport, a national identification card, the new drivers licence or where the person is a non national similar pieces of identification. In addition, depending on the nature of the transaction a customer would also be required to provide a proof of address by means of a utility bill, a bank statement or letter from landlord or head of household, proof of employment by means of a salary slip or letter of employment and information on the purpose of account and the potential account activity. As a law abiding citizen, the Proceeds of Crime and Money Laundering (Prevention) Act, 2001 and the regulations affect you, and you are required to act in compliance with the legislation.

Reporting Suspicious Transactions

A financial services provider or other regulated business also has a duty to report suspicious transaction to the financial Intelligence Unit (FIU). The FIU is the autonomous national centralized unit charged with receiving, analyzing, investigation and disseminating information relating to Money Laundering and terrorist financing. When a suspicious activity report (SARs) is made in good faith, the financial institutions or persons engaged in relevant business activity and their employees, staff, directors, owners or other representatives as authorized by law, shall be exempted from criminal, civil or administrative liability as the case may be, for complying with this legislation or for breach of any legislative, regulatory or administrative provision, regardless of the result of the communication.

The duty to report a suspicious transaction is a legal obligation imposed on all financial entities and regulated businesses. These obligations are in keeping with the highest international standards. Failing to comply with this requirement as prescribed in the Proceeds of Crime and Money laundering (Prevention) Act is a criminal offence. Should an entity or person be found guilty of failing to file a suspicious activity report (SAR) the penalties for this offence range from imprisonment for three years or a fine of $500,000 or both on summary conviction and on conviction on indictment, to imprisonment for ten years or an unlimited fine or both.

The responsibility for observing the law rests entirely with the financial institutions, regulated businesses and their employees.