Money laundering involves taking criminal proceeds and disguising their illegal source in anticipation of ultimately using the criminal proceeds to perform legal and illegal activities. Simply put, money laundering is the process of making dirty money look clean.
When a criminal activity generates substantial profits, the individual or group involved must find a way to use the funds without drawing attention to the underlying activity or persons involved in generating such profits.
Criminals do this by disguising the sources, changing the form or moving the money to a place where it is less likely to attract attention.
Financial Action Task Force (FATF)
FATF is a Paris-based multinational or inter-governmental body formed in 1989 by the Group of Seven industrialised nations to foster international action against money laundering.
According to FATF, crimes such as illegal arms sales, narcotics trafficking, smuggling and other activities of organised crime can generate huge amounts of proceeds. Embezzlement, insider trading, bribery and computer fraud schemes can also produce large profits, creating the incentive to “legitimise” the ill-gotten gains through money laundering.
One of FATF’s early accomplishments was to dispel the notion that money laundering is only about cash transactions.
Through its several money laundering “typologies” exercises, FATF has shown that money laundering can be achieved through virtually every medium, financial institution or business.
United Nations 2000 Convention Against Transnational Organised Crime (CATOC)
CATOC, also known as the “Palermo Convention”, defines money laundering as:
- The conversion or transfer of property, knowing it is derived from a criminal offense, for the purpose of concealing or disguising its illicit origin or of assisting any person who is involved in the commission of the crime to evade the legal consequences of his actions.
- The concealment or disguising of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property knowing that it is derived from a criminal offense.
- The acquisition, possession or use of property, knowing at the time of its receipt that it was derived from a criminal offense or from participation in a crime.
Intent and Knowledge
Another important concept in the definition of money laundering is “knowledge.”
In all three of the bullet points mentioned above, we see the phrase “…knowing that it is derived from a criminal offense”.
Generally, a broad explanation of “knowledge” is used for the definition of money laundering.
FATF’s 40 Recommendations on Money Laundering and Terrorist Financing and the 3rd European Union Directive on the Prevention of the Use of the Financial System for the Purpose of Money Laundering and Terrorist Financing state that the intent and knowledge required to prove the offense of money laundering includes the concept that such a mental state may be inferred from “objective factual circumstances.”
In a number of jurisdictions, the term “willful blindness” is a legal principle that operates in money laundering cases.
Courts define “willful blindness” as the “deliberate avoidance of knowledge of the facts” or “purposeful indifference.”
Courts have held that willful blindness is the equivalent of actual knowledge of the illegal source of funds or of the intentions of a customer in a money laundering transaction.
Financing of terrorism
In October 2001, FATF expanded its mandate to cover the financing of terrorism. Whereas funds destined for money laundering are, by definition, derived from criminal activities, such as drug trafficking and fraud, terrorist financing may include funds from perfectly legitimate sources used to finance acts of terrorism.
Concealment of funds used for terrorism is primarily designed to hide the “purpose” for which these funds are used, rather than their source.
Terrorist funds may be used for operating expenses, including such things as paying for food, and rent, as well as for the actual terrorist acts.
Terrorists, similar to criminal enterprises, covet secrecy of transactions and access to funds.
Both terrorists and money launderers use the same methods to move their money in ways to avoid detection, such as structuring payments to avoid reporting and underground banking, such as the ancient system of hawala.