Since September 11, 2001, the U.S. government has significantly increased efforts to combat illegal financial operations and money laundering. With the passage of the U.S.A. Patriot Act and new legal requirements financial institutions must follow, money laundering is fiercely being fought. This effort is not only attempting to curtail criminal activity, but is working to disarm and deter terrorist organizations.

But what does this mean for businesses and the world economy? What kind of businesses are most at risk? And how can companies protect themselves against money laundering? To answer these questions it is first necessary to understand the size and scope of money laundering and how this illegal activity occurs.

Money Laundering Is Complex

In short, money laundering occurs when individuals or organizations seek to disguise or place illegally obtained funds in the stream of legitimate commerce and finance. Most commonly associated with illegal arms sales, smuggling, and the activities of organized crime, such as prostitution and drug trafficking, money laundering also often lies at the heart of embezzlement, computer fraud schemes and insider trading.

For example, when criminal activities produce large profits, those involved must look for ways to control the funds generated without drawing attention to themselves. This is usually achieved by disguising the sources, changing the form of the funds (i.e. from cash to money orders or traveler’s checks) or by moving the funds to a location where they will draw the least attention.

Traditionally, money launderers have targeted banks, since banks accept cash and facilitate domestic and international funds transfers. However, the U.S. securities market may be a growing target of criminals looking to hide and move illicit funds.

The Scope and Size

Anyway one looks at it, money laundering is a significant problem—in terms of size and scope. According to the Organisation for Economic Co-operation and Development (OECD), money laundering could equal two to five percent of the world’s gross domestic product, and based on 1996 statistics, money laundering ranges from $590 billion to $1.5 trillion. The smaller number is roughly equivalent to the value of the total output of an economy the size of Spain!

How Is Money Laundered?

After the funds are generated, the first stage of money laundering takes place when the launderer places his illegal proceeds into the financial system. This is usually accomplished by breaking up large amounts of cash into smaller sums and then depositing those less conspicuous amounts into bank accounts. Or, the cash is used to purchase a number of smaller monetary instruments that are then, in turn, deposited into bank accounts.

The second stage of money laundering is to convert or move the funds after they have been deposited into the financial system. For instance, the launderer may choose to convert the funds to investment instruments or wire them through a series of bank accounts across the globe. Another way to move the illegal funds is to disguise them as legitimate payments for goods or services.

After the second phase is complete, the final stage occurs. Referred to as integration, this involves re-entering the funds into the legitimate economy. At this point, many criminals choose to invest the funds into real estate or business ventures.

Effect of Money Laundering on Businesses and Society

Financial institutions are leading the way in the fight against money laundering. These institutions recognize the potential macroeconomic consequences and damage that could occur in their industry. They also understand the effect money laundering can have on publicly and privately held companies, regulatory authorities, capital flows, exchange rates, and international trade, as well as on national economies and workforces.

Money laundering also has steep social and political costs. If organized crime is allowed to infiltrate financial institutions, gain control of large sectors of the economy via investment, or even bribe public officials and governments, a country’s entire society, ethics and social framework could be at risk.

Protecting Your Business

A company’s first and most important step is to establish sound anti-money laundering policies and procedures across the board. For starters, this means placing an emphasis on “knowing your customer.”

Imperative to the success of an anti-money laundering effort is the full support of senior management and all employees. In fact, compliance to anti-money laundering policies and procedures should be part of a company’s code of ethics or basic employment standards/expectations. In addition, non-compliance with anti-money laundering strategies could be sufficient cause for employee dismissal.

A very clear anti-money laundering training program and a commitment to on-going training are two additional necessities. All employees who have customer contact (directly or indirectly) or who have occasion to see or handle customer transactions and activity, should be required to take the training, including all new hires. Furthermore, a policy should be in place that states what form of annual training will be given and who will take it.

Very importantly, the company needs to be concerned about protecting against fraud, money laundering and reputation risk, as well ensuring compliance with laws and regulations.

Ignorance Is No Excuse

Any company, knowingly or unknowingly, that facilitates the exchange of ill-gotten goods for legitimate assets may be vulnerable to money laundering charges. And, any company that provides a way to move dirty money from one source to another, or to many other end points is highly susceptible to money laundering charges. Consequently, almost any company, financial institution or organization can be a potential candidate for fraud.

Another concern is doing business with companies who either operate out of countries known for their high risk of money laundering or who are from countries known as “tax haven” countries.

Yet, not all companies operating in high risk lines of business or countries considered high risk need to be shunned. If they have the appropriate controls in place to ?“know their customers” and detect, deter and report unusual or suspicious transactions, they should be considered normal risk companies.

Legitimate companies also must be aware that if they become investment recipients of laundered money, knowingly or unknowingly, their assets may be confiscated by the authorities. In addition, the public relations damage can be disastrous. And, since a corporation’s reputation and integrity can be among its strongest assets, protecting them is imperative.

Impact of the Internet

Over the years, sophisticated criminal organizations have leveraged the accessibility, speed and relative anonymity of the internet and web-based financial programs to better perform and hide their money laundering activities. In fact, instead of having to run the risk of physically transporting currency gained from illegal operations out of a country, criminals often now are concealing the currency by transforming it into a digital format. This way, dirty money is unable to be distinguished from legal currency.

On a positive note, the internet also is being used by banks, law enforcement and other interested parties as an investigative tool for research of people, companies, transactions and countries.

A Joint International Effort

Today’s global fight against money laundering includes a combined effort involving the U.S. government and several international institutions. Without a doubt, money laundering is an international problem that affects virtually every country. And to protect your company, you must be especially vigilant.

This article appeared in Impact Analysis, November-December 2004.
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John Manzella
About The Author John Manzella [Full Bio]
John Manzella is a world-recognized author and speaker on global business, competitive strategies and the latest economic trends. He also is CEO of World Trade Center BN, chair of the Upstate New York District Export Council, and founder of The Manzella Report and Manzella Trade Communications Inc. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.




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