Author: Nafisatu Wiafe Ansah, LLB University of Padova, 2015-2016
Legal Editor: Bader Kabbani, LLM International Commercial and Economic Law, SOAS, University of London, 2020-2021
Abstract
Where there is money, there is likely to be a crime. Some of the most common crimes associated with the financial or economic market are money laundering and terrorism financing. These crimes have many negative effects on the economy of the countries affected and these negative effects are also extended to the final consumer. This article takes a look at the crimes of money laundering and terrorism financing and the measure taken by the European Union to combat them.
Money Laundering
Money laundering (ML) is the process through which the illicit origin or identity of proceeds of profit-generating criminal activities such as corruption, embezzlement, drug trafficking, tax evasion etc. are disguised and made to appear legitimate so that the culprits may benefit from these illegal earnings without attracting the attention of the authorities and compromising their source. The laundering process happens through the introduction of the “dirty money” into the financial system (Placement stage), and then subsequently by moving the money through a series of financial transactions to distance it from the source and make it undetectable (Layering stage). Finally, the layered funds are integrated into the financial system (integration stage) whereby the launderer tries to integrate the illegally obtained funds into the legitimate economy by engaging in business without attracting the attention of legal authorities, such as investment in business ventures or in real estate.
Effects of money laundering
Money laundering produces many direct and indirect negative effects and poses a serious threat to a country’s political and economic stability. Such negative effects include the effect on growth rates (with real sectors suffering from the decrease of foreign investor investment due to the lack of financial credibility and stability arising from money laundering), the effect on money demand (due to the rapid and unchecked flow of money, relevant authorities may have difficulties to correctly assess the money in circulation and therefore control the demand and supply of money in the market), effect on income distribution, the effect of tax revenues (money laundering may result in loss of government revenue which may, in turn, affects the government’s spending power) and effect on financial institutions. The problem of the negative effects of money laundering on financial institutions is of great importance because not only does it negatively impact the capacity of financial institutions to properly carry out their assigned duties – especially the supervisory duties – but it also causes loss of reputational integrity to the banking and financial marketplace (considering that the banking and financial market depends immensely on the public perception and that the trust placed by customers is fundamental to maintaining a good financial system, the perceived risk to the financial sector, caused by this crime, constitutes an obstacle to customer’s trust).
Terrorism Financing
Similarly, terrorism financing (TF), is a financial crime that consists of providing financial support to terrorists to allow them to carry out acts that are violent in nature or benefit terrorists. The funds used in financing terrorist groups may be sourced from both legitimate (such as charitable organizations, profits from legitimate businesses etc.) and illegitimate (such as smuggling of weapons, drug trafficking etc.). Terrorism financing also happens in 3 stages (raising, moving and using funds) which share many similarities with money laundering methods – sometimes terrorism may be directly linked to money laundering when the proceeds of crimes are used as funds -. In as much as the methods used in TF may be similar to the ones used in ML, the schemes used in the former are simpler and provide higher levels of anonymity.
The main effect of TF is the proliferation of terrorism which impacts the socio-economic sanity of the country. Thus, the effects are the destruction of property and lives and the plunge of the economy into a state of disarray.
The competent authorities: the EBA and the Commission
Apart from banks and other financial institutions, the main players in curbing the ML/TF menace are the European Banking Authority and the European Commission.
The European Banking Authority (EBA), in its supervisory role, is mandated to ensure that the financial system is not exploited for money laundering and terrorism financing. The EBA fulfils its duty by leading the establishment of an AML/CTF (Anti-money laundering and Counterterrorism financing) policy and endorsing its implementation across the EU and by fostering effective cooperation and exchange of information amongst competent authorities, such as monitoring the implementation of said policies to identify the vulnerabilities and ways to mitigate them. Furthermore, the European Commission carries out risk assessments to identify risks to the EU internal market and propose solutions in response to these risks. The commission also ensures that AML/CTF laws are effectively implemented by “reviewing transposition of EU acquis and working with networks of competent authorities”.
The EU’s Anti-money laundering and Terrorism financing directives
In 2017, the commission published the first of many “Supranational Risk Assessment Reports” (as determined by the 4th anti-money laundering Directive) assessing the risks of ML/TF affecting the internal market and relating to cross-border activities by identifying the products, services and professional sectors that are at the greatest risk. The report also provides recommendations to Member States to deal with the risk affecting identified areas.
Banks and competent authorities, acting as gatekeepers of the internal EU financial market, take necessary measures to prevent ML/TF.
With the first EU legislation that attempted to fight ML/TF being enacted in 1990, the union has promulgated multiple successive directives intended to expand the scope and adapt to the ever-changing ML/TF schemes: the 4th AML Directive, the 5th AML Directive and the 6th AML Directive.
The 4th AMLD
The 4th AMLD entered into force in 2015 and amended Regulation no. 648/2012 and introduced an evidence and risk-based approach to AML/CFT compliance. This Directive aligned the EU policy with the International Financial Action Task Force (FATF) and, among other things, it expanded the definition of politically exposed persons, lowered the relevant cash threshold to € 10.000 and enhanced customer due diligence. This directive also empowers the Commission to adopt delegated acts (DA) and implementing acts (IA) to better specify how competent authorities can comply with the obligations in the directive.
The 5th AMLD
The 5th AMLD came into force in 2020 and brought transparency to improve the fight against ML/TF and tighten controls, especially on virtual currency exchanges, art dealers and real estate.
This directive allows for public access to centralized public registers of companies and their beneficial owners, without the need to show legitimate interest to access the information. An obligation is also posed on banks to report any discrepancy between the information in public registers and beneficial ownership information.
The transparency sought after by this directive is also achieved by mitigating the anonymity that often characterizes ownership in prepaid cards and trade in crypto and/or virtual currencies.
The 6th AMLD
The 6th AMLD which also came into effect in 2020 extend even more criminal liability, providing tougher punishment and expanding regulatory scope. This directive also extends criminal liability to organizations and increases cooperation among Member States.
Conclusion
In conclusion, money laundering and terrorism financing are global threats, and the methods used in committing these financial crimes keep evolving as society advances and to escape the legislative measures adopted by various legislators. These crimes pose serious threats to the socioeconomic sanity of various jurisdictions, especially in developing countries where the economy is less formal.
The EU has definitely preoccupied itself with the fight against ML/TF by taking extensive measures as seen in the many risk assessment reports of the commission) and improving internal and external transparency in the marketplace, ultimately strengthening cooperation between domestic and international entities.
However, it is imperative that more preemptive action be taken to anticipate the innovative ways criminals launder their funds and fund terrorism, with much more emphasis on the use of cryptocurrency to commit such crimes, due to its elusive nature.
BIBLIOGRAPHY
- Friedrich Schneider, Ursula Nierderlander, Money laundering: Some facts, 2010.
- Vandana Ajay Kumar, Money laundering: Concept, Significance and its Impact, 2012
- Milind Tiwari, Adrian Gepp, Kuldeep Kumar, A review of money laundering literature: the state of research in key areas, 2020.
- Michael Freeman, Moyara Ruehsen, Terrorism financing methods: An overview, 2013.
- Angela Samantha Maitland Irwin, Kim-Kwang Raymond Choo, Lin Liu, An analysis pf money laundering and terrorism financing typologies, 2012.
- Tim Krieger, Daniel Meierrieks, Terrorism: causes, effects and the role of money laundering, 2013.
- European Banking Authority, Anti-money laundering and countering the financing of terrorism factsheet, 2020.
CITOGRAPHY
- https://www.fatfgafi.org
- https://amlcft.bnm.gov.my/what-is-terrorism-financing
- https://sanctionscanner.com/blog/negative-effects-of-money-laundering-on-the-economy-132
- https://www.imf.org/external/np/leg/amlcft/eng/aml1.htm
- https://www.unodc.org/unodc/en/money-laundering/overview.html
- https://finance.ec.europa.eu/financial-crime/eu-context-anti-money-laundering-and-countering-financing-terrorism_en
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