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Money laundering/terrorist financing activities

General

 

Money laundering

The techniques used by money launderers constantly evolve to match the sources and volume of funds to be laundered, and the legislative/regulatory/law enforcement environment of the market place in which the money launderers operate. In a cash-based society with a legal and regulatory regime that is ineffective or not enforced, little effort is needed to disguise the cash or its ownership. In such circumstances, the launderer will fund his/her lifestyle in cash or, where funds need to be transferred or surplus funds deposited or invested, will deal directly with banks.

Where cash is not the norm and/or the legal and regulatory regime is effective in tackling money laundering, greater effort will be required to disguise the source of criminal cash and other funds and their beneficial ownership. The obligations in the UK to report suspicions of money laundering extend to all crimes. In consequence, as well as seeking to launder funds in his own name (or under a pseudonym), the launderer might well seek to set up corporate structures and fronts for this purpose. He may also resort to more complex structures, sometimes involving trusts (both onshore and offshore), in all cases seeking to present an appearance of legitimate commercial or financial enterprise.

Activities that can lead to criminal property being laundered, and ways in which a range of financial service businesses, relationships and technologies may be used by money launderers are described below, under the following headings:

 

  • Cash and banking services

  • Alternative remittance systems

  • Investment banking and the securities sector

  • Insurance and personal investment products

  • Emerging technologies

  • Companies, trading and other business activities

  • The gold and diamond markets

  • Lawyers, accountants and other intermediaries

  • Correspondent banking

  • Politically Exposed Persons (PEPs)/Corruption

  • Private banking
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    Financing of terrorism

    Terrorist financing is in principle different from money laundering, even although once such funds are in the financial system, they may seek to be laundered in the same sorts of ways. Financial support for terrorist activities may come direct from certain states or jurisdictions, or from organisations large enough to be able to collect and make the funds available to the terrorist organisation. Terrorism may also be funded from sources channelled more directly through the financial system.

    Terrorist organisations may engage in 'revenue-generating' activities of their own, which often in themselves may be, or certainly appear to be, legitimate businesses. Some of these activities, however, may include criminal acts and, to this extent, they may appear similar to 'ordinary' criminal organisations. Unlike other criminal organisations, however, terrorist groups may also derive some of their funding from individuals or entities that have legitimately earned income. How much of a role 'legitimate' funds play in the support of terrorism seems to vary according to the terrorist group. Such a source of funds need not be, and often is not, in the same geographic location as that in which the terrorist organisation commits its terrorist acts.

    Much of the fight against terrorist financing turns on recognising an involvement with persons or entities that have been identified, by governments or other international authorities, as having some connection with terrorism. Given the difficulty in knowing the true beneficiary of transactions, especially cross-border transactions, and the fact that terrorism often involves relatively small individual amounts, patterns of transactions or behaviour that might gives clues to unusual underlying activity, are much more difficult to detect, even with the aid of computer modelling. Identifying the point at which legitimate customer funds are diverted to terrorist financing is well nigh beyond definition. Only by knowing their customers, and by looking out for every possible clue, can firms have a chance to pick this up.

    There is evidence that terrorists use traditional methods of money transmission such as Hawala to move funds between jurisdictions. Such transactions often involve transfers from the UK through a third country, further obscuring the ultimate destination of the funds.

     

    Money laundering activity

    1. Cash and banking services

    Cash deposits, banking and money transmission services remain the core starting point for laundering criminal property. The small-time launderer will seek the benefits of savings, deposit and current accounts, and personal and mortgage type lending. The more sophisticated launderer will often seek the services of specialist banking facilities serving the needs of the "high net worth" individual.

    Typical mechanisms for using banking services include:

     

  • Deposit structuring/smurfing: this is most relevant in jurisdictions with cash transaction reporting obligations (such as USA, Australia). In countries without cash transaction reporting obligations (such as the UK), the aim of money launderers is to avoid doing something suspicious.
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    This technique entails making numerous deposits of small amounts below a reporting threshold, either by a large number of apparently unconnected depositors, or to a large number of accounts. The money is then generally transferred to another account, sometimes in another country; sometimes several collection accounts are used, and all of them route their funds to another account - and so the money keeps moving. This method is widely used, even in countries which do not require cash transactions above certain thresholds to be reported; in such countries, however, if a large cash transaction can be executed without fear of being reported, then it will be. Countries to which these funds are transferred often find the funds being promptly removed as cash from the recipient accounts.

     

  • Cash deposits followed by telegraphic transfers
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    Large cash deposits may be made by drug traffickers or others who have smuggled criminal property out of the country where the crime originated. Often the cash deposit is quickly followed by a telegraphic transfer to another jurisdiction (which may or may not be the original country where the crime was committed), thus lowering the risk of seizure. In considering the likelihood of transfers abroad being suspicious, it is important to take account of the nature of the anti money laundering regime in the other country; for example, it would make little sense to a money launderer to transfer funds from the UK to another, well regulated jurisdiction.

     

  • Connected accounts
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    Identification requirements tend to deter - or at least make it difficult - criminals from opening accounts in false names. However, accounts may still be held in the names of relatives, associates or other persons operating on behalf of the criminal. Other methods used to hide the beneficial owner of property include the use of shell companies, almost always incorporated in another jurisdiction, and professionals such as lawyers or offshore incorporation agents. These techniques are often combined with several layers of transactions and the use of multiple accounts - thus making attempts to follow the audit trail of the funds more difficult.

     

  • Collection accounts
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    Collection accounts are widely used by many different ethnic groups. Immigrants pay a lot of small amounts into a single account, and the accumulated funds are then sent abroad in a single transaction. Often, the foreign account receives payments from a number of apparently unconnected accounts in the source country. Whilst this payment method is often used for legitimate purposes by foreign immigrants and labourers who send money to their home country, it can be, and is, used by criminal groups to launder their illegitimate funds.

     

  • Payable-through accounts
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    Payable-through accounts are demand deposit accounts maintained at financial institutions by foreign banks or corporations. The foreign bank funnels the deposits and cheques of its customers (usually individuals or businesses located outside the country) into a single account that the foreign bank holds at the local bank. The foreign customers have signing authority over the account as sub-account holders, and can thereby conduct normal international banking activities. Many banks offering these types of accounts have been unable to verify or provide any information on many of the customers using these accounts. Payable-through accounts therefore pose a challenge to "know your customer" policies and requirements, and suspicious activity reporting guidelines.

     

  • Bank drafts and similar instruments
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    Bank drafts, money orders and cashiers' cheques, purchased for cash, are useful for laundering purposes because they provide an instrument drawn on a respectable bank or other credit institution, and so break the money trail. Breaking this trail is of critical importance to the money launderer, as it makes it impossible - or at least very difficult - for an investigator to establish where laundered funds have ended up. This reduces the ability of the law enforcement authorities to seek a judicial order to appropriate such funds.

     

  • Back to back loans
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    Back to back loan arrangements can be used for cash smuggling. A money launderer transfers his criminal proceeds to another country as security or guarantee for a bank loan, which is then sent back to the original country. This method not only gives laundered money the appearance of a genuine loan, but often provides tax advantages.

     

  • Bureaux de change
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    Bureaux de change (or equivalent) services - such as telegraphic transfer facilities, and exchange services, which can be used to buy or sell foreign currencies, to consolidate small denomination bank notes into larger ones, or to exchange financial instruments such as travellers' cheques, Euro cheques, money orders and personal cheques - can be attractive to money launderers. Criminals will be attracted to bureaux de change in jurisdictions where they are not as heavily regulated as traditional financial institutions, or where they are not regulated at all. Even when regulated, the degree of regulation is often less stringent than that of traditional financial institutions, and can allow staff training within bureaux de change, and their internal control systems to guard against money laundering, to be less strong than in other financial institutions. This weakness is compounded by the fact that most of the customers of bureaux de change are occasional, making it more difficult for them to "know their customer", and thus making them more vulnerable to money launderers. Many bureaux de change also provide services such as international phone cards, mobile phone services, faxing facilities and internet access, that can be useful to money launderers.

     

  • Remittance services
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    Remittance systems operate in a variety of ways. Often, the remittance business receives cash, which it transfers through the banking system to another account held by an associated company in the foreign jurisdiction. There, the money can be made available to the ultimate recipient. Another technique commonly used by money remitters and currency exchanges is for the criminal organisation to receive the funds at the destination country in the local currency, which is then sold to foreign businessmen who need currency to fund legitimate purchases of goods for export. This attractiveness of this avenue in particular countries is often encouraged by the existence of strict exchange controls. [This correspondent type operation resembles certain aspects of alternative remittance systems (see below)].

    Remittance services are a feature of many ethnic groups; they often charge a lower commission rate than banks for transferring money to another country, and have a long history of being used to transfer money between countries. These services have also been used for money laundering, since they are often subject to few, if any regulatory requirements compared to institutions, such as banks, which offer an equivalent service.

     

  • Credit and debit cards
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    Structured cash payments for outstanding credit card balances are the most common use of credit cards for money laundering, often with relatively large sums as payments and in some instances, by cash payments from third parties. Another method is to use cash advances from credit card accounts to purchase cashiers cheques or to wire funds to foreign destinations. On some occasions, cash advances are deposited into savings or current accounts. A large number of identified scenarios involve the use of lost or stolen cards by third parties.

     

    2. Alternative remittance systems/Value transfer systems

    Alternative remittance systems (1) (also called underground or parallel banking, informal money or value transfer systems) are almost always associated with different ethnic groups from Africa, China or Asia. Many of these systems, particularly in India/Pakistan and China, were developed in parallel with 'western' banking in the west. Different systems are associated with different ethnic groups.

    These systems commonly involve the transfer of value between countries, but outside the legitimate banking system. The "broker", who may be a financial institution such as a remittance company, or may be an ordinary shop selling goods, has an arrangement with a correspondent business in another country. The two businesses have customers that want funds in the other country, and after taking their commission, the two brokers will match the amounts wanted by their respective customers. The details (which are usually minimal) of the customers who will receive the funds are faxed between the brokers (or may simply be the subject of a telephone call), and the customers obtain their funds from the broker at the end of the transaction.

    The businesses will then balance their books, generally by transferring an amount between them over a given time period, for example, once a month (although this could be over a much longer period). Settlement of the net amount owing by one business to the other may not, however, always take place between the two businesses direct; amounts owing between them may be settled by one of the businesses settling an amount owing by the other businesses to a third party, or by the amount being placed or deposited elsewhere for the benefit of the second business.

    Often there is no, or little, physical movement of currency across border and a lack of formality with regard to verification and record-keeping. Normally, money transfer takes place by coded information being passed through chitties, couriers, letters or faxes, followed by telephone confirmation. Almost any document which carries an identifiable number can be used for this purpose. Because there is no recognisable audit trail, the launderer's chance of remaining undetected, or avoiding confiscation, is significantly increased.

    There is evidence that terrorists use traditional methods of money transmission such as Hawala to move funds between jurisdictions. Such transactions often involve transfers from the UK through a third country, further obscuring the ultimate destination of the funds.

     

    3. Investment banking and the securities sector

    All types of securities, commodities, futures and options can be used to launder criminal proceeds - usually in the layering or integration stages. An investment might be made by way of a stockbroker, a portfolio management service from an investment bank, or direct with a securities house. The wholesale market is attractive due to the ease and speed with which products can be purchased, sold, converted between currencies and transferred from one jurisdiction to another. A further attraction is the availability of bearer products and the relatively large sizes of transaction that are permitted (or expected, and so cause less interest to be taken in them). When washing large sums through a relationship, the high net worth individual or corporate launderer may not draw as much attention as they would in a more conventional banking operation.

     

  • Cash based transactions
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    The use of cash within the securities sector is relatively unusual, and many market operators restrict or prohibit the acceptance of cash. Consequently, the use of the securities sector for laundering purposes is primarily part of the layering and integration stages. However, from time to time cash can be introduced through the sector, particularly if brokers were to break their own rules and accept cash, perhaps if attracted by increased commissions. Another way within some countries is to allow cash to be used in margin trading. In an effort to turn a quick profit, settlement within the margin trading market is often left until the last minute, when cash is a popular means of settlement.

     

    4. Insurance and personal investment products

    Life policies and other personal investment products, and general insurance can be attractive to the launderer. Life policies and personal investment products can often be purchased with cash, especially through smaller intermediaries. A useful ploy for the launderer is to purchase the investment with cash, followed by early cancellation or surrender of the policy.

    In many jurisdictions, life insurance polices are viewed as another form of investment, and it is this investment aspect that increases the vulnerabilities of the products. Because the insurance sector within many jurisdictions tends to view itself as lower risk for money laundering, the insurance broker may often prove to be one of the weaker links in an anti-money laundering strategy.

    General insurance policies can also be an attractive laundering technique: putting an expensive asset on cover, paying a large premium by bank transfer, followed by early cancellation of cover requesting the refund remittance to be made to another bank in another country.

     

    5. Emerging technologies

    The number of financial institutions providing banking services on the internet is growing considerably, with an increasing range of services becoming available (including savings and deposit accounts, full cheque accounts, electronic fund transfers). Banking services are now being joined by internet-based stockbroking.

    Delivery of financial services over the internet is, in essence, an extension of banking and stockbroking services delivered by telephone. The challenge to the service provider, and the attraction to the launderer, is the absence of face-to-face contact. The opportunities for identity theft are greater, and so the level of identification evidence that firms seek should generally be greater than in an equivalent face-to-face situation.

    Emerging technologies also provide an opportunity for more credit and financial institutions to offer electronic money. This may be by way of a card-based electronic purse. Whilst the size/value of such purses is restricted by regulatory requirement, the opportunity to purchase such electronic money for cash and then to use it to purchase assets, albeit modest, or obtain a refund by cheque, does provide an opportunity for structured placement.

     

    6. Companies, trading and other business activities

    Companies, partnerships and sole trader businesses can be used as a cover for money laundering. Cash-based businesses can provide a cover for depositing additional, illegally earned cash into a bank account, and the payment of suppliers, both domestically and internationally, provides a good excuse for transfers of amounts of all sizes. Criminals might also pay an inflated price for shares in order to obtain control of a company and then use the company to inject the criminal proceeds along with the legitimate earnings, or use legitimately earned company profits to fund further criminal activity.

    It is not uncommon for criminals to operate cash-intensive business in order to "justify" large cash deposits (which may be reported). In order to reduce the volume of data and cost to financial institutions of filing the reports, customer businesses which are known to involve cash deposits will be flagged, or profiled, to indicate the expected, or usual, level of cash deposits. For example, a large fast food restaurant can easily do $10,000 a day. Assuming the business is legitimate, nothing is gained by reporting its cash transactions (in this case, deposits). A criminal could open an apparently legitimate business that does more than $10,000 a day and get this profile flagged by the financial services firm; then any "extra cash" (from illicit activities) is then also "exempt" from reporting. Note that it would not always be necessary for the criminal to open and operate a new business; it would be possible to work out an arrangement with a business already known to have a profile with a bank.

     

  • International trade/trade finance
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    International trade in goods and services can be used either as a cover for money laundering or as the laundering mechanism itself. Any commodity can be used as payment, so long as all parties to the transaction agree; instead of one party saying 'you owe me CU100,000', he might say 'you owe me 2000 DVD players, to be delivered to my depot at X'. Import/export activities and transactions are commonly undertaken; a trader may pay a large sum of money (from the proceeds of illegal activity) for goods which are worthless and are subsequently thrown away or sold on cheaply (often as part of an invoice manipulation scheme to move money). Alternatively, illegal proceeds can be used to buy high value assets such as luxury cars, aeroplanes or boats, which are then exported to third countries. Trade/invoice manipulation is one way in which hawaladers, and others engaged in alternative remittance systems, to settle the balance between them It is often easier for them to engage in trade deals, as opposed to money transfers.

    The launderer's priority is to make the transactions look normal. To achieve this, the launderer will utilise all the normal trade finance services offered by the banks to legitimate import/export businesses.

     

  • Shell companies
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    It is important to distinguish between 'shell' companies and 'off-the-shelf' companies. An off-the-shelf company is one that was set up by someone (lawyer, incorporation agent) some time ago. It "sits on the shelf" until someone wants to buy it. So, hypothetically, someone could buy a company that had been set up in late 1999 in 2004. It would not necessarily be apparent that the person had only taken ownership of it in 2004; it would look as though he had been trading since 1999.

    A shell company is just that - a shell and no real business is conducted. There are, for example, shell banks corporate entities that look like banks, but are not really banks. The purpose is to deceive others into thinking the company is a bank. A shell bank (or other company) can be a convenient vehicle to launder money. It conceals the identity of the beneficial owner of the funds, and the company records are often more difficult for law enforcement to access because they are offshore, held by professionals who claim secrecy, or the professionals who run the company may act on remote and anonymous instructions. Such companies would be used at the placement stage, to receive deposits of cash which are then often sent to another country, or at the integration stage, for example to purchase real estate.

    Dealings with shell banks are explicitly prohibited by the US PATRIOT Act. A similar prohibition will also form part of a Third EU Money Laundering Directive.

     

    7. The gold and diamond markets

    There are significant differences between the gold and silver markets. Gold is worth so much more per unit of weight, and there is a constant market for it. The purity of gold is easy to determine, and assay marks are well understood and available to see. Diamonds, on the other hand, are more complex; individual diamonds can be worth very much more than an equivalent weight of gold, but individually, diamonds are unique - there has to be the 'right' buyer for a particular diamond. In addition, a diamond worth, say, $100,000, cannot simply be cut in half, to make two worth $50,000 each. The valuation of diamonds is a much more complex process than gold; it involves specialist training, without any guarantee that a sale can be arranged.

     

  • The gold market
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    In some societies, gold carries an important cultural or religious significance that increases the demand for the metal in certain regions of the world. For example, South Asia produces virtually no gold itself, but consumes more of it than any other region. The advantages that gold provides are also attractive to the money launderer, in particular its high intrinsic value, convertibility, and potential anonymity in transfers. Most laundering schemes involving gold are linked to drugs trafficking, corruption, organised criminal activities and illegal trade in merchandise and goods. The gold itself may be the proceeds of crime that needs to be laundered if, for example, it has been stolen or smuggled by creating a system of false invoicing.

    Another more complex technique uses gold or precious metal purchases and sales as a cover for the laundering operation.

     

  • The diamond market
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    The illegal trade in diamonds is important in certain areas of the world, and some terrorist groups are believed to be using diamonds from these regions to finance their activities. The ease with which diamonds can be hidden and transported, and the very high value per gram for some stones, makes diamonds attractive for the exploitation and profit of criminals. As with gold, the simplest typology involving diamonds consists of direct purchase of the diamonds with criminal proceeds. Other common typologies using diamond trading activity include retail foreign exchange transactions, purchasing of gaming chips at casinos, forged or fraudulent invoicing, and the co-mingling of legitimate and illicit proceeds in the accounts of diamond trading companies.

     

    8. Lawyers, accountants and other intermediaries

    Lawyers, accountants and estate agents can become involved in money laundering through their role in setting up corporate and trust structures, when acting as directors or trustees, and when acting on behalf of those buying and selling property. In addition, their client accounts can provide a money launderer with a conveniently hidden route into a bank account. Since 1 March 2004, these parties have been subject to the Money Laundering Regulations in their own right. Although they now have a duty to identify their client, financial services firms dealing with such intermediaries must form a view, as with any other intermediary, as to whether account may be taken of their customer due diligence procedures. No business, however respectable or closely regulated, is immune from being drawn into laundering the proceeds of crime or establishing vehicles or into arrangements to facilitate this.

    In some jurisdictions, legislation may forbid a bank being provided with information relating to the identity of the clients behind a client account, and the source of funds. Lawyers, accountants and other financial advisers can also be a used for laundering money through the sale of personal investment products.

     

    9. Correspondent banking

    By their nature, correspondent banking relationships create a situation in which a credit institution carries out financial transactions on behalf of customers of another institution. This indirect relationship means that the UK based correspondent bank provides services for individuals or entities for which it has neither verified identity, nor obtained first-hand knowledge, of the respondent's customers. In correspondent banking, therefore, the correspondent institution must rely on the respondent bank performing all the necessary due diligence and monitoring of its own customers account activity. Some additional risks incurred by the correspondent bank include:

     

  • A foreign respondent bank may apply less stringent anti-money laundering standards, due to weaker laws and regulation, inadequate regulatory supervision, or failures in applying standards or internal controls. While the correspondent bank may be able to determine the legislation within which the respondent bank operates, it is much more difficult for it to know the degree and effectiveness of the supervisory regime to which the respondent is subject.
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  • There may be sub-respondents, through which a respondent bank may itself be offering correspondent banking facilities to other credit institutions. This means that in certain cases the correspondent bank is even further removed from knowing the identity or business activity of these sub-respondents, or even the types of financial services provided.
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  • Increased difficulties of monitoring individual transactions involved in large volume correspondent accounts, since the bank is usually not in contact with the originator or the beneficiary of such transactions.
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    10. PEPs/Corruption

    The Financial Action Task Force defines PEPs as "natural persons who are or have been entrusted with prominent public functions in a foreign country, for example Heads of State or of government, senior politicians, senior government, judicial or military officials, senior executives of state-owned corporations, important political party officials. Business relationships with family members or close associates of PEPs involve reputational risks similar to those with PEPs themselves. The definition is not intended to cover middle-ranking or more junior individuals in the foregoing categories."

    Examples of senior government officials involved in corruption and other types of proceeds generating crime are no longer rare occurrences. In the past few years, several high visibility corruption cases involving corrupt politicians and others laundering significant criminal proceeds through various FATF jurisdictions have been detected and investigated.

     

    11. Private Banking

    A criminal, or a PEP, may often seek out private banking services, as these offer an opportunity for them, their family members, and close associates to carry out sophisticated and/or complex financial transactions that will further protect their criminal assets. Since a private bank is often involved in assisting the client to invest or protect his assets, one that fails to apply appropriate due diligence could find itself, unwittingly, assisting in setting up nominees and shell company arrangements, thus ensuring that the beneficial ownership of the assets remains hidden.

     

    Terrorist Financing

    1. Apparently legitimate sources of terrorist financing

    Because many terrorist movements have an ideological rationale, individual terrorists or terrorist groups may sometimes be able to rely on legitimately generated sources of income. As mentioned above, this is a key difference between terrorist groups and traditional criminal organisations. Some fundraising methods specifically used by terrorist groups include:

     

  • Collection of membership dues and / or subscriptions;
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  • Sale of publications, cassettes and other items;
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  • Speaking tours, cultural and social events;
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  • Door-to-door solicitation within the community;
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  • Appeals to wealthy members of the community; and
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  • Donations of a portion of their personal earnings.
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    It is common practice within many religious communities to encourage the donation of a percentage of one's income to charity. There should be no automatic assumption that such donations bear any relation to terrorist financing. However, donations, often made on an irregular basis, continue to be a lucrative source of funds from private individuals, certain states/jurisdictions, and from the sale of publications. Sometimes, large donations made by wealthy individuals in certain countries to charitable organisations that have connections with terrorist organisations, are less associated with terrorism than with extortion, such as Mafia-style protection payments, where a 'donation' ensures that the donor's business interests remain allowed to operate.

     

    2. Non-legitimate sources of terrorist financing

    Criminality provides a much more consistent revenue stream to terrorist organisations. They will often choose activities that carry low risks and generate large returns. Major sources of income are:

     

  • Kidnap and extortion;
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  • Smuggling;
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  • Fraud, including cheque and credit card fraud;
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  • Misuse of non profit organisations and charities fraud; and
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  • Drug trafficking.
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  • Kidnapping and extortion
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    Raising funds in this way continues to be one of the most prolific and highly profitable. Monies are usually raised from within the community of which the terrorists are an integral part. Eventually, extortion can become a built in cost of running a business within the community and the payment of ransom demands to free family members can become an every-day occurrence.

     

  • Smuggling
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    The profits made from smuggling can be channelled via couriers to another jurisdiction. Cash can enter the banking system through front companies or short-term shell companies that disappear after a few months. Specialised bureaux de change may also be created, whose sole purpose is to facilitate the laundering of proceeds of smuggling.

    Another method of integrating the proceeds into the banking system is where monies are given by the smuggler to legitimate businesses, not associated with the smuggling operation. These monies are then paid into the banking system as part of a company's normal turnover. Provided individuals are not greedy, detection is extremely difficult. Monies are then sent via different financial institutions and jurisdictions, including FATF blacklisted countries. The transfer of monies through different jurisdictions causes one of the principal problems of tracing the asset trail. Different legislative laws and procedures can prevent quick and effective investigation.

     

  • Misuse of Non Profit Organisations (NPOs) and Charities
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    NPOs can be established in a wide variety of legal forms and are subject to varying degrees of control and monitoring by the jurisdictions in which they are located. Given their diversity, FATF has adopted a definition of NPOs which is based on their function rather than on their legal form (2).

    The misuse of NPOs by terrorist groups can take many forms. One possibility is the establishment of an NPO with a stated charitable purpose, but which actually exists only to channel funds to a terrorist organisation. Another possibility is that an NPO with a humanitarian or charitable purpose is infiltrated by the terrorists and their supporters, often without the knowledge of the donors, or the members of staff, or management. Still another possibility is for the organisation to serve as the intermediary or cover for the movement of funds, usually on an international basis. In some cases, the NPO support function could extend to the movement and logistical support of the terrorists themselves.

    Within the UK, charities have an enhanced position when compared to other corporate or financial vehicles. Advantages include the ability to carry out street collections, as well as tax advantages. All charities should, however, be registered, and are regulated by the Charities Commission; the Commission has power to ensure that the charities stay within the legal remit for which they were formed. Reporting suggests, however, that not all charitable or good-will institutions are regulated to this extent. In particular, charities do not always publish full accounts of the projects which their fund raising has helped to finance.

     

  • Drug trafficking
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    Drugs can be a highly profitable source of funds and are used by some groups to finance other activities. Many terrorist groups are not directly involved in the importation or distribution of drugs, but in order for the suppliers to be allowed to operate within a certain area or community, a terrorist group can require some from of levy to be paid.

    Combating the supply of controlled narcotic substances is a high priority for virtually all law enforcement agencies throughout the world, and large resources are dedicated to investigation. Extortion is therefore far less risky than being responsible for organising the supply and distribution of the drugs.

    There are perhaps two distinct models for the involvement of terrorists in drugs. In the first, there is an antagonistic relationship between traffickers and terrorists; terrorists kidnap traffickers' relatives for ransom, terrorists extort 'protection money' from traffickers, terrorist provide 'protection' for traffickers. In the second model, terrorists engage directly in the productions and trafficking of narcotics to raise money.

     

    3. Laundering through the financial system

    Whilst terrorist groups may support themselves with funding from legitimate and non-legitimate sources, there appears to be little difference in the methods used by terrorist groups or criminal organisations to hide or obscure the links between the source of the funds and their eventual destinations or purposes.

    Bank accounts have been used in the following manner to launder terrorist funds.

     

  • Legitimate accounts
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    Individuals may run a number of accounts with several banks. It is not unusual for the accounts with one bank to be used for domestic purposes, while accounts based at another are for 'business purposes'. Into the former, a salary or benefits may be paid, while the latter account will be used for money transfers and cheque payments.

     

  • Dormant accounts
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    On occasions, dormant accounts have been used by terrorists to create a purported customer relationship, upon which additional frauds may be perpetrated. Facilities can be accessed, including bank loans, the repayment instalments of which will invariably not be met.

    Dormant accounts have also been used to receive monies from support members abroad. In one example, a terrorist used a number of banks, holding an account in each of them. Two of the accounts contained a minimal sum, believed to be for two purposes: first, to keep the account open, and secondly, to ensure that undue attention was not drawn to it. At a strategic time, a transfer was received into the account, to enable the purchase of terrorist material. The sum was eroded by the daily removal of the maximum cash amount from automatic teller machines. This continued until the entire transfer sum had been removed, which took almost two months.

     

  • Telegraphic transfers
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    These can be effected through banks or wire transfer companies. The experience of law enforcement suggests that banks or wire transfer companies based in retail outlets containing video cameras are used to a much lesser extent than those where the wire transfer service is franchised to a small, more localised unit. However, the extent to which these facilities are used is also determined by the ease of both sending and receiving the money. In cases where companies do not request documentation, and require only the use of a pre-agreed question and answer prior to release of the transferred sum, these facilities are particularly attractive to money launderers.

     

  • Money service businesses and alternative remittance systems
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    Given that many sources of terrorist funding (for example, extortion and drug trafficking) generate a high volume of cash, terrorists often channel funds through bureaux de change, money changers and other dealers in foreign currency to finance their operations abroad. Money may pass through several jurisdictions before reaching its final destination.

     

  • Poorly regulated jurisdictions
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    Terrorists may choose to locate bank accounts in jurisdictions with a low level of effective regulation. Transfers out of, or in to, such jurisdictions are difficult to follow through, thus creating a 'dead end' for financial investigators.

    Notes:
    (1) The systems are referred to by different names, depending upon the community being served: Hawala (originally from an Arabic word meaning transfer; this word has taken on the meaning of trust and reference in Urdu), Hundi (a Hindi word meaning trust; the word comes from the Sanskrit root meaning to collect the hundi box in a Hindi temple is for offerings; in Indian law, a hundi is a bill of exchange), Chiti banking (referring to the way in which the system operates), Chop Shop banking (China) and Poey Kuan (Thailand).
    (2) Any legal entity that engages in the raising or disbursing of funds for charitable, religious, cultural, educational, social, fraternal or humanitarian purposes, or for the purposes of carrying out some other types of good works.

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