AML in Perspective: Money Laundering Outside the Financial Sector
Trawling through the various articles that focus on non-financial businesses and compliance I felt these comments by Sergio Ferragut was very interesting. Sergio Ferragut is a senior consultant on public policy and business transformation and lectures on drug policy, money laundering and business transformation. He was in charge of key projects on transformation and anti-money laundering at the Mexican Attorney General Office (PGR) and the Mexican Treasury Department (SHCP) after a long career in senior management positions within the private sector in retailing, information technology and banking.
In 2013 FATF issued a new mechanism to strengthen money laundering and terrorist financing compliance. A new round of compliance evaluations begins this year in which this new mechanism will be applied. The emphasis continues to be on member countries and their financial institutions strengthening their AML policies and procedures under the new guidelines. All that is expected of them is to comply. Financial institutions are not in charge of policing illicit activities, their role is to comply with government regulations; therefore, they are not called to identify or prosecute money laundering activities performed by some of their customers before engaging the services of the financial institution. However, some of the money received from these customers may have its origin in some illicit activity, and have been laundered before entering the financial institution. When a bank receives a deposit from such customers it cannot differentiate which money has a legitimate origin and which one does not. This is a matter for the police and prosecuting authorities to handle, not the bank.
It is very likely that the reason why less than 1% of the global illicit proceeds are intercepted is that most of it is not laundered in the first instance through financial institutions. Criminals are known to use other conduits to launder the proceeds of crime, such as using businesses that accept cash as tender (retailing, hospitality and the like) or use cash in their day-to-day activities (the construction industry for instance). These enterprises certainly use the service of financial institutions; however, when they interact with the financial institution the money transacted is mixed with money derived from their otherwise legitimate operations and undistinguishable. The illicit money entering the financial institution has the look and feel of legitimate money.
This mechanism is presented in the Chatham House paper Organized Crime, Illicit Drugs and Money Laundering: The United States and Mexico. By recording fictitious sales in their books these money laundering companies receive the illicit proceeds and process them together with their otherwise legitimate revenues, with all due taxes being paid along the way. The laundering company enhances its financial statements and the contributor of the dirty money gets a percentage of the contribution in ostensibly legitimate financial assets through other legitimate entities under its control. A 50% payback doesn’t seem like an unreasonable arrangement in light of the solid and near untraceable nature of the assets received. Contrary to what many authorities believe, professional money launderers are not tax evaders; tax evasion attracts the eyes of the tax collector and this is no good for the money laundering business.
As presented in the Chatham House paper, huge amounts of money have been laundered in Mexico over the past three decades. The United Nations Office on Drugs & Crime (UNODC) estimates that 70% of the illicit proceeds of organized crime get laundered, the rest is used to cover operating expenses. Hence, Mexico may have laundered at least 200 billion US dollars during the past 30 years; this amount only takes into account the proceeds of Mexican drug traffickers’ business in the United States. Is this a neat financial mechanism for Mexico’s economic development or a highly dangerous operation transferring economic and political power into the hands of unscrupulous drug traffickers and their stealth “legitimate” business associates? This all happens in plain sight, under the nose of the authorities but beyond their reach. Safeguarding the financial system against money laundering is a must, but it is not enough. The authorities must look outside the box if their objective is to protect society from the ills derived from operations by organised crime.