How dirty money is cleaned

Dirty money is cleverly ‘washed’ in order to conceal its criminal origins and make it appear ‘clean’. (Bloomberg pic)

By Akhbar Satar

One of the ways to turn dirty money into legitimate money is through money laundering. This is the process of converting dirty money derived from illegal means so that it appears legal. Basically, it is the introduction of illegally obtained currency or proceeds into the banking system, and the use of the system to hide currency that was unlawfully obtained.

Money is the prime reason for engaging in almost any type of criminal activity. Dirty money is cleverly cleaned in order to conceal its criminal origins and make it appear “clean” instead of being derived from illegal activities such as drug trafficking, terrorism, corruption, robbery, prostitution, illegal gaming, arms trafficking, bribery, corruption and cigarette smuggling.

The modus operandi of money launderers is getting more sophisticated, and concealment is getting harder to uncover. Money launderers are generally educated, smart, intelligent, egoistical, and risk takers. These fraudsters’ ultimate goal is to get their dirty money into the financial system by using various techniques.

Money laundering is a multi-billion dollar business. According to PwC’s Global Economic Crime Survey 2016, global money laundering transactions are estimated at 2-5% of the global GDP, or roughly US$1-2 trillion annually. Yet, based on the United Nations Office on Drugs and Crime, less than 1% of global illicit financial flows is seized by authorities.

In Malaysia, the police’s Commercial Crime Department reports that “any criminal activity that generates significant profit creates a need for money laundering. Organised crime and financial crime together cost the country between RM15 billion and RM25 billion per annum”.

In 2016, the Malaysian Anti-Corruption Commission froze and seized approximately RM320 million while a total of RM350 million was seized in 2017, including cash, gold bars, luxury cars, branded handbags and jewellery. The rule of law must prevail. The seized assets from corruption cases should be liquidated and channelled towards social programmes or infrastructure for the public as there are so many people in need while the corrupt live it up.

In early 2018, it was reported that the Saudi Arabian government had seized more than US$124 billion in a corruption purge. Crown Prince Mohammed appeared to have won widespread approval among ordinary Saudis for this purge, partly because the government had promised it would use some of the money it seized to provide social benefits. This was a good move, and the Malaysian government may consider adopting this approach as well.

In order for illegal money to be fully cleaned, three steps are involved. The first is known as placement, and is considered the most difficult step where money launderers will try to place the ill-gotten proceeds in legitimate financial institutions.

Once the criminally derived funds are introduced into the financial system, the next step is layering. This process occurs when the money is separated from the illegal funds obtained from the original sources. The launderers will create complex layers of financial transactions to make sure the links between the money launderers and the illegal money cannot be easily seen or traced. They will normally make bank-to-bank fund transfers, especially to different accounts under different names and in different countries.

After the second stage of the money laundering process in which the property is “washed” and its ownership and source disguised, the final step is known as integration. Here, the money enters the financial system and is placed back in the economy, appearing as clean and legally earned funds. At this stage, it is difficult to differentiate between legal and illegal money. The money launderers will purchase expensive houses, hotels, apartments and other real estate; diamonds, gold bars and fine art for this purpose.

Casinos are also becoming popular in money laundering, in part because of the large-scale exchange between cash and chips. After gambling, the launderer cashes in the chips, taking payment in a cheque. He then deposits the cheque into a bank account, claiming it as gambling winnings. Placement can also be carried out through many other processes, including cash smuggling, insurance policies and securities.

Gold and real-estate dealers have also been identified as being vulnerable to money laundering. Lately, these industries have been linked to the financing of terrorist organisations and activities. Some high-powered, large-scale, sophisticated laundering operations purchase real estate or expensive condos with illegal proceeds, then sell the property. Proceeds from the sale look to outsiders like legitimate income.

Alternatively, the price of the property is manipulated: the seller agrees to a contract that under-represents the value of the property, and receives criminal proceeds to make up the difference.

Besides residential real estate, money launderers have also been using luxury vehicles such as cars, yachts, boats and private jets as part of the “layering” process.

Artworks are one of the asset classes that obviously lends itself to money laundering. Buying an expensive piece of art with illegal money is an effective way to launder money. An expensive art piece could make more profit with less risk and is normally used to transfer money across the border and hide illicit gains.

Money laundering is considered a serious crime. Any person who engages in it is committing an offence under Section 4(1) of the Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001, and faces imprisonment not exceeding 15 years and a fine of not less than five times the sum or value of the proceeds, or RM5 million, whichever is higher.

As long as the process looks realistic, reasonable and logical, criminals will use their creativity to launder money which needs a hiding place. Indeed, money laundering is always needed when there is something to hide.

Akhbar Satar is president of Transparency International Malaysia.

The views expressed are those of the author and do not necessarily reflect those of FMT.