Money Laundering in the USA and Australia

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Table of Contents

Introduction
Money laundering in Australia
Anti-Money Laundering in Australia
Money laundering in the USA
Conclusion
Summary
References

Introduction

Money laundering is an illegal money transaction process. It involves transferring money through several countries in order to conceal its origin. Through this process criminals disguise the origin money gotten through illegal processes to appear to come from legal sources. The money transferred through this process also conceals its ownership and use. (Donald2006) This type of money transfer is common with criminals such as drug traffickers, fraud, corrupt politicians and public officials and terrorists.

The drug traffickers require a very complex money laundering system to detect them, as most of their activities are cash money-oriented which brings a lot of logistics problems. The International Money Fund has established that the aggregate size of money laundering in the World is approximately four percent of the world’s gross domestic product. Money laundering is a diverse and often complex process that is not wholly dependant on cash. In some situations money laundering involves transfer of money informs of products. (Donald2007)

Money laundering basically comprises of three processes. These are:

Placement-This is introducing through depositing illegal proceeds into the financial system.

Layering-This involves filtering criminal activities proceeds from their origin through the use of layers of complex financial transactions. Integration-This involves the carrying out additional transactions to make these dealings appear genuine by buying assets. In the past money laundering was only restricted only to financial transactions that were linked to organized crime, but nowadays money laundering also encompasses the evasion of taxation. (Donald2007)

Money laundering in Australia

In Australia money laundering is very high a survey conducted in 2006 revealed that an estimate of $3.8b was the total proceeds of crime generated in all the crimes in the country. Offenses involving fraud and illicit drug trafficking headed the list of crimes generating income for laundering, but when the amounts of money involved were compared, fraud exceeded drug crime by a significant margin. The best estimate for drug proceeds was $382m while frauds collectively totaled $3.16b. (Margaret2004)

The survey showed that on average over 80 percent of drug proceeds, and around 70 percent of the proceeds of fraud were laundered. The estimates of proceeds of crime and estimates of the percentages being laundered were combined to provide an estimate of the total amount of $2.8b laundered, either within Australia or overseas, from the proceeds of Australian crime. Fraud at around $2.3b was by far the largest component of money generated and laundered in Australia; illicit drugs were second, at around $300m.

The banking sector, casinos, the real estate market and the accountancy profession are most commonly utilized for money laundering in Australia, sending money overseas or receiving it from overseas. (Margaret2004) The money laundering to, from, or within Australia is characterized by the frequent use of structuring transactions to avoid reporting requirements, accounts in false names, and cash smuggling. It is likely that launderers frequently use cash and wire transfers to effect money laundering involving Australia. The use of credit cards, payable through accounts, and other electronic payments are common.

The launders occasionally use gold and precious metals, cheques and other instruments. The use of stored value cards is not very common. The estimated $2.8b laundered in Australia in 2006 was believed to be invested in a range of activities: The investments were as follows 23 percent ($651m), in real estate investment, 21 percent ($600m), in further criminal activities, 16 percent ($449m) in gambling, 15 percent ($424m) in luxury goods, 12 percent ($345m), in legitimate business, 7 percent ($191m), in professional services. In Australia, it has been established that fraud and drug crime are the most common money laundering.. (Margaret2004)

Anti-Money Laundering in Australia

As we have seen money laundering is very vibrant in Australia and thus this calls for Australian government to respond accordingly to curb this problem. This can be ensured by Australian businesses campaigning for customers’ acceptance of the processes and checks to verify the identity of customers’ Background to Australia’s fight against money laundering. Historically, Australia has been a global leader in the fight against money laundering.

However, its Anti-Money Laundering (AML) regime based primarily on the reporting of financial information and suspicious transactions is no longer sufficient to meet the current risks from money laundering and terrorist financing activity. In 1990, the Financial Action Taskforce (FATF) an inter-governmental body whose purpose is the development and promotion of national and international policies to combat money laundering and terrorist financing established a series of recommendations that set out the basic framework for anti-money laundering efforts.

It was realized in 2003 that these measures were not sufficient to stop money laundering in the country, as they were much below the international standards. Therefore in 2004 Australian Australian government reviewed its measures after extensive international consultation. Key revisions areas include obligations for financial institutions to perform customer due diligence have been strengthened with the introduction of a four-step process that requires financial institutions:

be required to verify the identity of customers
be required to take reasonable measures to identify the beneficial owner of accounts
be required to obtain information on the purpose and intended nature of the business relationship
be required to perform ongoing monitoring of the business relationship in order to ensure that the financial transactions are consistent with the institution’s knowledge of the customer’s activity, including source of funds.

Although even at presently Australian government is facing a great challenge to stop money laundering in the country. The introduction of these anti-laundering measures to reinforce the existing anti-laundering processes in the country to measure up to international standards has greatly boosted its efforts in the fight against money laundering in the country. Though the Australian government needs to strengthen its anti-money laundering program to effectively address this problem in the country.

Money laundering in the USA

Money laundering in the US is facilitated by the correspondent accounts bank accounts provided by the local banks to the foreign banks. U.S. banks, through the correspondent accounts they provide to foreign banks, have become conduits for “dirty money” flowing into the American financial system and have, as a result, facilitated illicit enterprises, including drug trafficking and financial frauds.

Correspondent banking involves one bank providing services to another bank to move funds, exchange currencies, or carry out other financial transactions. Foreign banks can establish U.S. correspondent accounts with any bank that is authorized to conduct banking activity in the United States, whether or not the bank’s parent company is domiciled here. These accounts give the owners and clients of poorly regulated, poorly managed, sometimes corrupt, foreign banks that have weak or no anti-money-laundering controls direct access to the U.S. financial system and the freedom to move money within the United States and around the world.

Many banks in the United States have established correspondent relationships with high-risk foreign banks. These foreign banks include: shell banks with no physical presence in any country for conducting business with their clients, offshore banks with licenses limited to transacting business with persons outside the licensing jurisdiction, or banks licensed and regulated by jurisdictions with weak anti-money-laundering controls that invite banking abuses and criminal misconduct. Some of these foreign banks are engaged in criminal behavior, some have clients who are engaged in criminal behavior, and some have such poor anti-money-laundering controls that they do not know whether or not their clients are engaged in criminal behavior. (Tim2005)

The high-risk foreign banks typically have limited resources and staff, and they use their correspondent bank accounts to conduct operations, provide client services, and move funds. Many of the banks reviewed by the subcommittee deposit all of their funds in, and complete virtually all transactions through, their correspondent accounts, making correspondent banking integral to their operations. Once a correspondent account is open in a U.S. bank, not only the foreign bank but also its clients can transact business through the U.S. bank. In many cases, high-risk foreign banks have been able to open correspondent accounts at U.S. banks and conduct their operations through these accounts because U.S. banks fail to adequately screen and monitor foreign banks as clients. (Constance2004)

The prevailing principle among U.S. banks has been that any bank holding a valid license issued by a foreign jurisdiction qualifies for a correspondent account because U.S. banks should be able to rely on the foreign banking license as proof of the foreign bank’s good standing. U.S. banks have too often failed to conduct careful due diligence reviews of their foreign bank clients, including obtaining information on the foreign bank’s management, finances, reputation, regulatory environment, and anti-money-laundering efforts.

The frequency of U.S. correspondent relationships with high-risk banks, as well as a host of troubling case histories uncovered by the minority staff investigation, belie banking industry assertions that existing policies and practices are sufficient to prevent money laundering in the correspondent banking field. For example, several U.S. banks were unaware that they were servicing foreign banks that had no office in any location, were operating in a jurisdiction where the bank had no license to operate, had never undergone a bank examination by a regulator, or were using U.S. correspondent accounts to facilitate crime. (Constance2004)

In other cases, U.S. banks did not know that their client banks lacked basic fiscal controls and procedures and would open accounts without any account-opening documentation, would accept deposits directed to persons unknown to the bank, or would operate without written anti-money-laundering procedures. There are still other cases in which U.S. banks lacked information about the extent to which respondent banks had been named in criminal or civil proceedings involving money laundering or other wrongdoing.

U.S. banks’ ongoing anti-money-laundering oversight of their correspondent accounts is often weak or ineffective. A few large banks have developed automated monitoring systems that detect and report suspicious account patterns and wire-transfer activity, but they appear to be the exception rather than the rule. Most U.S. banks appear to rely on manual reviews of account activity and to conduct limited oversight of wire transfers, even though the majority of correspondent bank transactions consist of incoming and outgoing wire transfers. And even when suspicious transactions or negative press reports about a respondent bank come to the attention of a U.S. correspondent bank, in too many cases the information does not result in a serious review of the relationship or concrete actions to prevent money laundering. (Constance2004)

Two due diligence failures by U.S. banks are particularly noteworthy. The first is the failure of U.S. banks to determine the extent to which their foreign bank clients are allowing other foreign banks to use their U.S. accounts. On numerous occasions, high-risk foreign banks gained access to the U.S. financial system not by opening their own U.S. correspondent accounts, but by operating through U.S. correspondent accounts belonging to other foreign banks. (Constance2004)

U.S. banks rarely ask their client banks about their correspondent practices and, in almost all cases, remain unaware of their respondent bank’s own correspondent accounts. In several instances, U.S. banks were surprised to learn from minority staff investigators that they were providing wire-transfer services or handling Internet gambling deposits for foreign banks they had never heard of and with whom they had no direct relationship. In one instance, an offshore bank was allowing at least a half dozen offshore shell banks to use its U.S. accounts. In another, a U.S. bank discovered by chance that a high-risk foreign bank would not have accepted as a client was using a correspondent account the U.S. bank had opened for another foreign bank. (Constance2004)

The second failure is the distinction U.S. banks make in their due diligence practices between foreign banks that have few assets and no credit relationship, and foreign banks that seek or obtain credit from the U.S. bank. If a U.S. bank extends credit to a foreign bank, it usually will evaluate the foreign bank’s management, finances, business activities, reputation, regulatory environment, and operating procedures. The same evaluation usually does not occur where there are only fee-based services, such as wire transfers or check clearing.

Since U.S. banks usually provide cash management services on a fee-for-service basis to high-risk foreign banks and infrequently extend credit, U.S. banks have routinely opened and maintained correspondent accounts for these banks based on inadequate due diligence reviews. Yet these are the very banks that should be carefully scrutinized. Under current practice in the United States, high-risk foreign banks in non-credit relationships seem to fly under the radar screen of most U.S. banks’ anti-money-laundering programs. (Constance2004)

Conclusion

From the discussion of money laundering in the US and Australia we can see that money laundering in these two countries is very high. Hence the corresponding governments from both countries need to address this issue seriously by appropriately putting the right measures in place to compact this problem. This measure includes fighting drug trafficking, ensuring all financial institutions have strong anti-money laundering programs and discouraging US banks from giving correspondent accounts to foreign banks. (Tim2005)

Summary

This report was compiled to report about the extent of money laundering in the US and Australia. It started by defining money laundering as the process by which Money launderers place ill-gotten cash into a financial institution, move it around and then pull it out so that no one is aware of its origin and is hence assumed to be legal money. The report identifies the methods that Australian and US money launderers use to place their illegal money into the financial systems of these countries.

Common manifestations of money laundering are one of the simplest ways money launderers are cleaning cash is by paying a premium for lottery or gaming wins. A money launderer approaches a lottery winner and offers a premium to buy the winning ticket. The money launderer then collects the legitimate winnings and banks the money. In a parallel way, equities and securities markets can also be utilized for money laundering purposes.

Shares are commonly traded rapidly, with high levels of volume and turnover easily disguising the conversion of ill-gotten gain into the proceeds or equities market activity. Identity fraud is an essential element of money laundering. Assumed or stolen identities, or even those manufactured using readily available technologies, are a fundamental part of the mechanism by which money launderers set-up up accounts and channel funds. (Tim2005).

The Australian and US government have responded very effectively in response to this problem by putting into place efficient anti-money laundering programs. This has to be very positive process in their fight against money laundering as indicated in the report. (Tim2005).

References

Constance A. (2004) Global Banking, Money Laundering and International Organized Crime: Prentice Hall: New York.

Donald M (2007 Black Finance, Economic and Money Laundering Oxford University Press: London.

Margaret M. (2004) Money Laundering in Australia: Oxford University Press: London.

Tim K. (2005) Anti-Money Laundering Chicago University Press: Chicago.

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