To combat money laundering and terrorist financing, governments and financial institutions have implemented a range of measures, including know-your-customer (KYC) regulations, anti-money laundering (AML) laws, and financial intelligence units (FIUs). These measures are designed to identify and track suspicious financial transactions and to prevent criminals and terrorists from using the financial system to fund their activities.
Money laundering is the process of concealing the proceeds of illegal activities, such as drug trafficking or fraud, in order to make the funds appear legitimate. The goal of money laundering is to create a paper trail that makes it difficult for law enforcement agencies to trace the money back to its criminal origins.
Terrorist financing, on the other hand, involves providing financial support to individuals or organizations engaged in terrorist activities. This support may include providing money, weapons, or other resources that are used to carry out acts of terror.
Money Laundering and Terrorist Financing
Simply spoken, the term money laundering describes the activity of concealing or disguising the identity of illegally obtained proceeds. This activity has the goal of making the illegally obtained proceeds appear to have originated from legitimate sources.
The precise definition of money laundering varies slightly in each country where it is recognized in criminal law, and it varies according to relevant organizations and standard-setting bodies, which are covered later on.
Money laundering is the processing of criminal proceeds to disguise their illegal origin. The money laundering process enables criminals to enjoy profits and funds without jeopardizing their source. When a criminal activity generates substantial profits, the individual or group involved must find a way to control the funds without attracting attention to the underlying activity or the persons involved. Criminals do this by disguising the sources, changing the form, or moving the funds to a place where they are less likely to attract attention.
When criminals derive funds from illegal activities, that money must be disguised before it can be introduced into the legitimate financial system. Money laundering is the illegal process of disguising the profits of financial crime, typically by using the services of banks and businesses. Criminals transfer their illegal funds from one place to another, through the use of a financial system of the country such as banking channels. The transfer of illegal money may be to support other criminals in various other jurisdictions or countries.
Criminal activity is usually undertaken to generate revenue or provide a benefit to those undertaking the activity. Significant criminal activity is undertaken by organized groups and laundering is the process of disguising the illegal origins and ownership of the criminal property to enable the criminals to use and enjoy it without jeopardizing themselves or attracting unwelcome attention, such as from law enforcement. The main purpose of money laundering is to take advantage of criminal activities. Money laundering is the result of almost all profitable crimes.
To give you a few examples of different definitions of money laundering, the German Criminal Code keeps it rather simple and describes money laundering as “concealing unlawfully acquired assets.”
The Financial Action Task Force describes money laundering “as the processing of […] criminal proceeds to disguise their illegal origin.”
Common between all definitions of money laundering is that they contain two key elements:
- Funds or assets that were obtained through criminal or illegal activities
- Disguising the illegal origin of these funds are assets
- For the first element, it is, therefore, necessary to conduct a crime first and to make money from it. These crimes that build the basis for money laundering are called predicate offenses.
- Predicate offenses vary in each country and are usually codified in a country’s criminal code.
- Exemplary predicate offenses may include crimes such as narcotrafficking, tax evasion, murder, grievous bodily harm, corruption, fraud, smuggling, human trafficking, illegal wildlife trafficking, and forgery.
- If one conducts such a predicate offense, makes money from it, and tries to hide the illegal origin of the funds, this makes for money laundering.
Predicate offenses in ML refer to a crime component of a larger crime. In a financial context, the predicate offense would be any crime that generates monetary proceeds. The larger crime would be money laundering or financing of terrorism.
A predicate offense is a crime that is a component of a more serious crime. For example, producing unlawful funds is the primary offense, and money laundering is the predicate offense.
In money laundering, a predicate offense that generates funds or assets is required as an entry condition. Predicate offenses vary in each country and are usually codified in a country’s criminal code. Since 2004, the FATF has updated the 40 Recommendations to expand the list of predicate offenses.
Financial intelligence units in the European Union and the United States have created legislation to mirror or expand these offenses.
In the United States, these offenses were initially created by the Bank Secrecy Act of 1970 and have been expanded by the USA Patriot Act of 2001. With the passage of the 6th EU Money Laundering Directive, the European Union has now adopted a standard set of predicate offenses to mitigate loopholes in member-state AML legislation.
In the European Union, for example, the so-called sixth European Union AML Directive defines and standardizes 22 such offenses for money laundering in all its member states.
Exemplary predicate offenses include narcotrafficking, tax evasion, murder, grievous bodily harm, corruption, human trafficking, illegal wildlife trafficking, and forgery.
The financing of terrorism involves the provision of funds to individuals and groups to commit terrorist acts. Terrorism financing resembles money laundering in the sense that it often requires criminals to conceal the transfer of funds within the legitimate financial system.
Terrorists may use high-profile people in the country, to support them in their terrorist activities and for private gain. Terrorists may use public officials, who may abuse the authority of their public office for personal gain, which interferes with democracy and the rule of law. Corruption also may be committed by private individuals who abuse their positions for personal gain, which can hinder fair market operations and distort competition.
There is a song called “Money makes the world go around” and this is true also for terrorists and terror organizations. Money is the lifeblood of terrorism. Terrorist organizations require significant funding, both for the actual undertaking of terrorist acts, but also for other issues. In particular to maintain the functioning of the organization, provide for its basic technical necessities, as well as to cover costs related to the spreading of their ideologies.
Terrorist financing can be described quite simply as the financing of terrorist acts, terrorists, and terrorist organizations. But terrorist financing is more than just providing money to them. Terrorist financing can also involve the facilitation of terrorist acts using other assets or stores of value such as oil and natural resources, property, legal documents, financial instruments, and others. But terrorist financing does not stop there. Terrorists also make more and more use of modern technologies, including the blockchain and cryptocurrencies. They use channels to help fund attacks more easily than they could ever do with fiat currencies.
Terrorist financing is the provision or collection of funds with the intention that they should be used to carry out acts that support terrorists or terrorist organizations or to commit acts of terrorism. Terrorist financing includes the financing or aiding, abetting, and facilitating of terrorist acts, and terrorists and terrorist organizations. It is a collection of funds, by any means, directly or indirectly, intending to be used, in full or in part, to carry out terrorist activities.
The motivation behind terrorist financing is generally ideological as opposed to profit-seeking, which is generally the motivation for most crimes associated with ML. Terrorism may be financed through illegal activity or the use of legitimately derived and owned funds. The purpose of terrorist financing is not to hide illegal money but to suppress a population or state through violence and coercion and raise funds to finance criminal acts.
Criminals may use the financial system or channels, to perform terrorist financing activities, therefore, organizations are required to ensure that such activities are prohibited, through a robust system of controls. Understanding the sources and methods of money laundering and terrorist financing in a jurisdiction is essential for competent authorities to develop and implement an effective anti-money laundering/counter-terrorist financing (AML/CFT) program. A national money laundering/terrorist financing (ML/TF) risk assessment should be considered the foundation for setting AML/CFT policy priorities and resource allocation.
Financing terrorism, on the other hand, refers to an illegal action in the future; the purpose of terrorism financing is not to collect, profit, or accumulate in the future. Its purpose is to finance terrorist acts, whether legal or illegal, for their terrorist activities; that is, the purpose is purely ideological. At this point, the motivation between the two crimes is completely different.
Money laundering and terrorist financing often go hand in hand. Criminal organizations and terrorist groups both require funding to carry out their activities, and they often use similar methods to conceal their financial transactions. There are several stages to the money laundering process, including placement, layering, and integration. During the placement stage, the illegal funds are introduced into the financial system. This may involve depositing cash into a bank account or purchasing assets such as real estate or jewelry.
During the layering stage, the funds are moved around and mixed with legitimate funds in order to obscure their origin. This may involve transferring money between accounts, investing in financial instruments such as stocks or bonds, or engaging in other complex financial transactions. Finally, during the integration stage, the laundered funds are used to purchase legitimate assets or to pay for goods and services. This effectively “cleans” the money and makes it appear to be legitimate.