International money laundering is an illegal multimillion-dollar activity that spans the entire globe. Various criminal syndicates operating within the EU as well as other parts of the world, are able to funnel ‘dirty money’ gained through a wide variety of illegal activities including drug trafficking, prostitution, human trafficking, arms dealing and other illicit means, through legitimate businesses for the sole purpose of ‘laundering’ the money.
The European Union, along with countries around the world, are committed to ending money laundering activities through the AML or Anti-Money Laundering directives. This article examines how money laundering works as well as the evolution of the AML to directly combat these activities.
The Three Stages of Money Laundering
Money laundering is a sophisticated operation, perfected over years of trial and error. Like many enduring criminal activities, a system has been developed in response to the evolving efforts of law enforcement to combat these activities. As such, there are three main stages that go into money laundering.
Placement processes are varied and can include banking or financial institutions that are actually accomplices in the placement of these funds. This usually is the result of a bank or financial service being partly or wholly controlled or owned by criminals or unscrupulous persons. Currency exchanges are also a popular method for placement of dirty money. Other means includes smuggling currencies from one country to another, blending illegal funds with legal funds through financial institutions and services, purchasing assets, investing in business enterprises and so on.
Layering is a crucial step in money laundering as it is designed to disguise laundering of illicit funds, thereby making it as difficult as possible for law enforcement and anti-money laundering operations to uncover. This can include converting illicit cash into other forms including money order or banker’s drafts and purchasing material assets such as property, vehicles, artworks and so forth with cash and then selling these assets again.
Once the money has been successfully laundered, it needs to be put into the economy through banking systems, giving it the appearance of legitimate revenue. Methods to accomplish this can include shell companies, fake loans, fake import or export invoices, property sales and complicity of foreign banks.
The Evolution of the Anti-Money Laundering Directive
The AML or Anti-Money Laundering directives can trace their roots back to the late eighties. In 1989, several countries including those in Scandinavia, Western Europe, North American, South America, parts of Asia and others, formed the Financial Action Task Force or FATF. The main purpose of FATF, was to come up with a number of international standards that could be used to combat or prevent global money laundering. FATF expanded its mandate in October 2001, barely two months after the World Trade Centre bombings, to now include combating the funding or financing of terrorism around the globe.
The European Union play a vital role in the implementation of international Anti-Money Laundering initiatives and have put several AML directives in place over the years. In 2015 the EU published AMLD IV, its fourth anti-money laundering directive. The main purpose of this particular directive was to bring EU AML directives more in line with what the US had already created. AMLD IV made it easier for financial services and institutions operating in both jurisdictions to institute a more cohesive and consistent AML policy directive.
However, AMLD IV is not without its flaws and shortfalls, which includes several areas of weakness within the EU’s AMLD IV directive. As a result, the EU will be launching its latest iteration of their AML/CFT directives, namely the Fifth Money Laundering Directive, known simply as 5MLD. This is set to take place on January 10 2020 and is designed to strengthen several key areas of the EU’s current Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT).
That said, AMLD IV certainly improved on the earlier AMLD III, most notably improving the alignment of AML regimes and practices and allowing both US and EU-based institutions to create a more standardised approach to KYC (Know Your Customer) requirements and CDD practices. By all accounts 5MLD is set to expand current requirements and will more than likely impose a number of new challenges on financial institutions, expanding the scope of the AML directive to include more public officials than ever before.