Internet‐based Financial Services: A New Laundry?
| Pages | 134-152 |
| Date | 01 April 2001 |
| DOI | https://doi.org/10.1108/eb026014 |
| Published date | 01 April 2001 |
| Author | Neil Munro |
| Subject Matter | Accounting & finance |
Journal of Financial Crime — Vol. 9 No. 2
Internet-based Financial Services: A New Laundry?
Neil Munro
INTRODUCTION
The purpose of this paper is to determine whether
Internet-based services, used by those individuals or
organisations seeking to launder monies derived
from illegal sources, will pose a greater risk to finan-
cial institutions than more traditional financial ser-
vices.
The use of the financial services sector by
criminals seeking to 'launder' money has become a
business risk that financial institutions cannot
ignore, with governments and regulators increasing
the legislation and regulation designed to prevent
money laundering. Financial institutions have both
a moral and a legal obligation to assist in preventing
criminals from obtaining benefits from their
activities. Simultaneously, the development of
Internet-based financial services continues at a rapid
pace,
with new technologies such as Wireless
Application Protocol (WAP)-enabled telephones
and interactive televisions empowering customers,
allowing them the flexibility to carry out transactions
without the direct involvement of the institution.
It is the intention, therefore, to examine the rela-
tionship between the provision of Internet-based
financial services and money laundering. The paper
will:
(1) highlight the risks that money laundering poses
and the legal obligations that the financial ser-
vices industry has to prevent money laundering;
(2) discuss the recent developments in Internet-
based technology in the banking, insurance
and investment markets;
(3) assess whether the risks that this new technology
and the services it allows pose a greater risk of
a financial services institution being used to
launder money; and
(4) finally, and where considered appropriate, make
recommendations to address any increase in risk.
REPORT ANALYSIS
What is money laundering and what
impact does it have?
When individuals or organisations commit criminal
offences they usually do so for material benefit.
Thus an individual who sells drugs, commits black-
mail, extortion or fraud, evades tax or robs a bank
does so to benefit from this crime in the same way
that the ordinary man in the street seeks to benefit
from his daily labours. The key difference is, how-
ever, that the ordinary man in the street does not
need to hide or disguise where he obtained his
money from; the criminal does.
In order for the criminal to be able to benefit fully
from his crimes, he must ensure that he is not caught
by the law enforcement agencies. He must, therefore,
be able to give the impression that the money that he
has available to him was derived from legitimate
sources. Indeed, the term money laundering comes
from the use of launderettes by Al Capone to disguise
the source of his illegal smuggling activities. The
criminal will, therefore, seek to integrate the proceeds
of his illegal activities into the mainstream financial
system in an attempt to disguise the source of funds
and thus benefit from them.
It is generally accepted that in order to successfully
launder money there are three main stages:
'(1) placement, which involves the depositing of
ill-gotten gains, most frequently cash, into the
regular or alternative banking systems;
(2) layering, which encompasses the use of financial
transactions, often involving monetary instru-
ments or wire transfers, to create baffling layers
between the criminal source of the funds and
their ultimate disposition; and
(3) integration, which involves the use of business
and financial transactions to reintegrate the
funds into the economy and provide an
acceptable explanation for the wealth.'1
While these three stages can be carried out sepa-
rately, they are often closely interlinked and may
take place almost simultaneously. Of the three
stages, the criminal is at the most risk of being discov-
ered at the placement stage. In crimes such as drug
trafficking, smuggling and prostitution, the medium
of exchange is cash, since the criminal's customers
are,
understandably, reluctant to pay using such
methods as cheques or drafts, which will tie them
to a criminal activity. The placement of cash by a
Journal of Financial Crime
Vol.
9.
No.
2,
2001,
pp. 134-152
© Henry Stewart Publications
ISSN 1359-0790
Page 134
Internet-based Financial Services: A New Laundry?
criminal is further complicated by the fact that in
many developed countries, such as the UK, the
economy is not cash driven: i.e. most transactions
are conducted using banking services such as cheques,
debit or credit cards etc.
It is clear that criminals, either as individuals or as
organisations, will wish to disguise the proceeds of
their crimes and launder money; however, what is
less clear is the extent to which money is laundered.
In June 1998, The Times reported that:
'At a special session of the United Nations General
Assembly, officials of the Vienna-based UN Drug
Control Programme will submit the conclusions of
a six-month investigation showing that more drug
cash is being laundered than ever. Valuing the
annual drugs trade at S400 billion (£244 billion)
— bigger than the world oil and gas industry —
the report says that $200 billion is successfully
laundered every
year.'2
William Bruton also noted that:
'It has been estimated that the Colombia drug
cartels may have generated as much as US$10bn
of profit which they need to get back to their con-
trol. They need an efficient mechanism to deliver
the profits to them in a means and method that
makes them available to enhance their
wealth.'3
These figures, however, focus solely on the money
derived from the sale of drugs and take no account
of the monies derived from other criminal activities,
such as blackmail, prostitution, human trafficking or
extortion. In March 2000 the United States Treasury
Secretary, Lawrence Summers, commented that:
'Former IMF Managing Director Camdesses has
estimated the amount of laundering at two to
five per cent of the world's gross domestic product
— almost $600 billion even at the lowest end.
Having said that, it is hard to be confident about
any estimates owing to the secretive nature of the
process of money
laundering.'4
One of the most scientific investigations undertaken
into the scale of global money laundering was con-
ducted by John Walker, an independent consultant
crime trends analyst. In an article in the Journal of
Money Laundering Control, Walker presented a paper
which:
'describes a logical crime-economic model, resem-
bling an interregional input-output economic
model which uses a range of publicly available
crime statistics to estimate the amount of money
generated by crime in each country around the
world, and then uses various socio-economic
indices to estimate the proportions of these funds
that will be laundered, and to which countries
these funds will be attracted for laundering. By
aggregating these estimates, an assessment can be
made of the likely extent of global money launder-
ing, and comparisons can be made of each coun-
try's contribution to the overall global problem.'5
Walker notes: 'Initial output from the model
suggests a global money-laundering total of $2.85tn
[$2,850,470,000,000] per year, heavily concentrated
in Europe and North America.'6 While Walker
acknowledges weaknesses in his model, largely due
to the secretive nature of money laundering that
Secretary Summers alluded to, it is nevertheless a
useful assessment of the flow of criminal money and
provides an indication of the scale of the problem.
The estimates of the sums of money being laun-
dered provide some indication of the issues involved;
however, they do not fully describe the underlying
socio-economic problems that are generated by
criminals laundering funds. It is relatively easy to
understand the impact that a crime such as the sale
of drugs will have on the individuals directly
involved. The users pay the 'pusher', in many cases
committing petty crime or turning to prostitution
to fund their addiction. While this undoubtedly
affects the socio-economic environment of the coun-
try in which the transaction took place, it is the effect
of organised, large-scale crime that will make the
greatest impact.
Perhaps the best way to explore the impact that
money laundering can have on the socio-economic
environment is to use an example. Imagine an
island whose inhabitants are relatively prosperous
and whose main source of income is tourism. The
economic infrastructure of the island is relatively
basic,
there are no laws against laundering funds
and the police force uses its very limited resources
to deal with the minor crimes that occasionally occur.
On to the island moves a man whose main source
of income is derived from the sale of drugs and who
wishes to use the island's economy to launder his
money. He starts by buying a number of public
houses and restaurants, businesses which naturally
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