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Friday, 15 March, 2002, 10:18 GMT
An A-Z of money laundering
Dollar bills
Crooks and terrorists both need to move money around

Laundering ill-gotten gains is of necessity a murky business, and even the professionals - on both sides of the fence, legally speaking - take years to get to grips with it.

The explosion of interest in how terrorist groups fund their activities has added new concepts and ideas to the mix, muddying the water further.

But don't make the mistake of thinking that the two are identical. Laundering money and financing terrorism may share some techniques - but they are still very different activities.

On the one hand, money laundering is all about hiding the proceeds of criminal - or at least illegitimate - activity.

This could be anything: the biggest amounts, probably hundreds of billions of dollars each year, stem from the global narcotics trade, but bank robbers, embezzlers, fraudsters, tax dodgers - not to mention corrupt public servants and politicians - all need some way of making their money look legal when its origin is otherwise.

Cleaner than clean

Generally speaking, it's a three-stage process.

First comes placement, getting the money into the global financial system and away from where it was made in the first place.

A stack of newly-printed currency
Money launderers hide billions each year

Then comes layering: pushing the money through multiple transactions, using a number of countries and a handful of shell companies - also known as "brass plate" companies, bought off the shelf and with nominee directors standing in front of whoever really benefits.

Finally comes the integration: getting the money back to a place and form in which you, the original crook, can spend it.

Offshore finance is useful here. Any number of Caribbean and Pacific islands have very stringent privacy laws, sometimes preventing not only foreign investigators but even local ones from knowing who really controls a company or a bank account.

And often they lack any real regulation to speak of.

Nauru in the Pacific, for instance, has only a few thousand inhabitants - but 400 registered banks. It is widely believed to act as a conduit for Russian mafia money.

Everyone's at it...

It's not just the small islands - many of whom have few other ways besides financial services of earning foreign currency.

London, New York, Tokyo, Paris, Frankfurt and of course Switzerland have their own thriving offshore businesses. And many crooks prefer dealing with the big places, where the sheer volume of money changing hands covers their tracks.

The island territories often like to point out that the $1.6bn found to have been looted from Nigeria by the family of the late dictator Sani Abacha was found, not in the Caribbean or the Pacific, but in reputable banks in the UK and Switzerland.

And as for Raul Salinas, brother to the ex-president of Mexico, his looted cash ended up in the world's then largest banking group, Citibank.

Raising suspicion

Tracking all this as an investigator is a tough business. With millions of wire transactions a day, and with enough stages to the process, law enforcement agencies rely on banks, insurers, bureaux de change and other financial institutions to tip them off through suspicious transaction reports (STRs).

Bazaar in Peshawar, Pakistan
Any bazaar in Pakistan is likely to house hawala brokers

In most developed countries, all transactions above a certain margin - usually around $10,000, although some set it much, much higher - have to be reported to the authorities.

That has led to smurfing - the practice of pushing through multiple money transfers at levels just below the threshold.

So bankers and others are now charged with reporting anything that just LOOKS suspicious. How to define that is a question no-one quite has an answer to yet.

The institutions also now have to "know their customers" - the days of anonymous accounts are, in theory, numbered.

Cleaning up

Many of the small players are now cleaning up their act, partly because of pressure from industrialised countries and an organisation called the Financial Action Task Force.

The FATF is a small group in Paris tasked by Western governments to come up with strategies for tackling money laundering.

It recommends best practice, backs research into typologies - the techniques the crooks use - and audits the performance of its 30-odd members.

And now it has a new task: helping its members track terrorist financing.

No smoke, no fire

The problem here is that while money laundering has to start with a crime, much of the money thought to be used by terrorists comes from legitimate sources - although drugs, kidnapping, bank robberies, extortion and other crimes are sources of funding as well.

So there may not always be a whiff of smoke to alert the investigators.

That makes the task more difficult for law enforcement and financial institutions, which are worried that they could run into a legal minefield if they are asked to extend their definitions of "suspicious behaviour" too far.

In addition, the sums required for terrorism are often relatively small when compared to the multi-billion-dollar global laundering industry. $50,000 are relatively easy to hide in a legitimate business's accounts.

Dubai gold market
Hawala brokers are common in Dubai's gold markets

And there are widespread suspicions that charities are abused to act as conduits for terrorist funding.

Many of the groups on the US and UK watch-lists published after the 11 September attacks are Islamic charities - and many of them are protesting loudly that not only are they unjustly accused, but that the accusation is stopping them from serving the needy they are set up to help.

Off the books

In any case, not all smuggled money - whether laundered or for terrorist consumption - has to pass through the mainstream western banking system.

Organised crime in the Middle East, South Asia and the Chinese diaspora has long relied on informal money transfer networks.

Called hawala in India, hundi in Pakistan and Afghanistan and chop in China, the systems share two characteristics.

Neither involve records that can be traced; instead, tokens - now no more than often passwords in an email - are sent from one country to another, telling a trusted confederate to deliver a given amount of local currency to its destination.

And in all such systems, the original sum delivered to the hawala broker never actually leaves the country of origin. The whole system relies on trust between brokers, rather than paper records or third party guarantees, with any shortfalls between what goes out and what comes in settled periodically.

The systems are hundreds of years old, and are used entirely legitimately by, say, people working abroad and sending money home to relatives who may not have a bank account.

But they are also a godsend to crooks and terrorists - and a huge headache for those who try to catch them.

Tracking down how terrorist organisations fund their operations suddenly took on new importance after 11 September 2001


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