INVESTIGATIONS TRAINING MODULE : MONEY LAUNDERING

OBJECTIVES OF THE SESSION:

By the end of the session participants should know the following:

a. Definition of money laundering

b. Potential sources of illicitly acquired wealth
c. Factors leading to money laundering on society
d. Effects of money laundering on society
e. Stages in the money laundering process
f. Money laundering and its effects on taxation
g. Money laundering techniques
h. Combating money laundering

1. INTRODUCTION AND BACKGROUND:

The purpose of this session is to introduce course participants to the money

laundering problem which is an international issue affecting almost every
country. The problem arises from the fact that some forms of economic crime
generate substantial wealth. Tax auditors need to be familiar with this topic
because of the resultant tax implications arising from money laundering
activities.

2. WHAT IS MONEY LAUNDERING

a. The U.K. 1995 Guidance Notes on money laundering booklet

describes it as “the process by which criminals attempt to conceal the
true origin and ownership of the proceeds of their criminal activities”.
b. “The concealment of disguise of the true nature, source, location,
disposition movement, rights with respect to, or ownership of property
derived from an act or participation in an act which constitutes an
offence.

Or

“….. the conversion or transfer of property, knowing that such property

is derived from any serious … offence or offences, or from an act of
participation in such offence or offences, from purpose of concealing
or discussing the illicit origin of the property or assisting any person
who is involved in the commission of such an offence or offences to
evade the legal consequences of his actions”.

Source – taken to the cleaners: Money Laundering in Australia,

December 1991; National crime Authority.

c. Other definitions

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 (i) “Receiving, possessing, concealing disposing or importation of
money or the property that is the proceeds of crime”. Australian
Proceeds of Crime Act.
(ii) “Conversion of illicit cash to another assets”
(iii) “Creation of the perception of a legitimate source”
United Nations convention against illicit Traffic in Narcotic
Drugs and Psychotropic Substances:1988
(iv) “To switch black money or dirty money … (to) clean money”

Michael Sindoma

Other Definitions which may help in understanding the term:

(a) The Penguin Dictionary of Economics defines money as

“anything which is generally acceptable as a means of
settling debt”.
(b) The 1932, 11th edition of G. Bell and Son’s Websters New
International Dictionary describes the word launder as to
wash, as clothes; to was to smooth with a flat iron or mangle;
to wash and iron, as, to launder shirts”

Or

“a conduit or trough for water”

3. POTENTIAL SOURCES OF ILLICITLY EARNED WEALTH

(a) Drugs e.g. marijuana, mandrax etc

(b) Illegal ivory trade
(c) Kick backs
(d) Robberies (cash, gold, goods etc)
(e) Fraud
(f) Theft of cars, goods etc
(g) Transfer Pricing
(h) Misuse of office e.g. Sandura Commission cases
(i) Smuggling
(j) Tax Fraud

4. WHY LAUNDER MONEY

(a) Some illegal activities generate substantial wealth in the form

of money and property which is well beyond what legal
activities can generate.
(b) This poses problems for the dealers because:

(i) There is need to enjoy the wealth acquired without

attracting attention of law enforcement agents. This may
lead to investigations, arrests, prosecution and possible
fine or imprisonment.

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 (ii) The funds will need to be kept in a secure place for
security reasons.
(iii) Dealers need to account for proceeds to other
dealers/owners along the line and such funds will need to
be passed from one dealer to the next.
(iv) There is need to have readily accessible and sufficient
funds to pay for costs such as drug purchases, transport,
etc.
(v) Need to transfer funds from one country to the next as
activities may stretch over a number of countries and
continents.

(c) Given the above, there is need to

(i) Conceal the true origin and sources of proceeds to avoid detection,
investigation or prosecution.
(ii) Conceal ownership of such funds to avoid detection
(iii) Conceal sources or ownership to avoid detection by tax authorities who
may subject such earnings to tax.

d) Such wealth can therefore only be safely retained and used when its actual source
or its ownership has been legitimised.

5. EFFECTS OF MONEY LAUNDERING ON SOCIETY

(a) Activities giving rise to such wealth are of a criminal nature.

(b) Products of such activities e.g. drugs are harmful to the users.
(c) Wealth is concentrated in a few citizens of the country at the
expense of law abiding citizens.
(d) The process legitimises proceeds of criminal activities
thereby leaving such activities undetected
(e) Retention and enjoyment of proceeds from organised crime
allows further investment in such activities.
(f) Lack of detection encourages new entrants into such illegal
activities resulting in further degradation of the moral fibre of
society.
(g) The process invariably involves the use of legitimate
institutions like banks thereby introducing corrupt tendencies
which eventually affect the whole economy and political
systems of a country.
(h) Once detection has been avoided, the dealers joining the
ranks of the wealthy eventually vie for political power further
posing a risk to the country.
(i) Such schemes are usually designed not only to avoid
detection by the police but also by tax authorities. Tax
evasion results in loss of potential revenue to the fiscus.

6. THE PROCESS OF MONEY LAUNDERING

 Money laundering is a process rather than a specific act.

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  It is done through different methods
 In the case of drug trafficking and other serious

crimes the process initially takes the form of cash.

* Analysts of money laundering have categorized the process into three

main stages:

(a) Placement stage

(b) Layering stage
(c) Integration stage

(a) Placement stage

 Is the physical disposal of the cash proceeds derived from illegal

activity

 Disposal is usually into the financial sector of the economy

 The major objective is to covert the bulky proceeds into less

suspicious forms and also ensure security for the proceeds

(b) Layering Stage

Breaking the link between the illicit proceeds and their illegal source
by creating complex layers of financial transactions designed to
confuse the audit trail and provide anonymity.
In other words concealing the original ownership of such funds or
property.

Criminals are well aware that financial transactions leave traces just
like fingerprints and therefore try to create a maze of financial
transactions and asset ownership details to obliterate possible audit
trails and identity.

(c) Integration Stage

Once placement and layering has been achieved, what remains is that
creation of an apparently legitimate source for the income. This is
meant to avoid detection.

Integration schemes place the laundered proceeds back into the

economy so that they re-enter the financial system appearing as normal
business funds.

Elaborate planning is done and this involves giving he funds a non-

taxable image.

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The three stages are not always present in each method. They may not appear
in the order given and may overlap or occur simultaneously. The table that
follows provides some examples.

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MONEY LAUNDERING STAGES AND EXAMPLES

PLACEMENT STAGE LAYERING STAGE INTEGRATION STAGE

1. Cash paid into the Transfers abroad often using Fake loan repayments or forged
bank sometimes with companies invoices used as cover for
staff complicity laundering money

2. Cash deposited into Transfers of funds disguised Can be as above

the bank but mixed as proceeds of legitimate
with proceeds of businesses.
legitimate business

3. Cash exported Cash deposited into overseas Complex web of transfers making
banking system. Can be tracing of original sources of funds
done as anonymous deposits virtually impossible

4. Cash converted into Resale of goods/assets Income from property or legitimate

high value goods such business assets appears clean
as property or business
assets (jewellery etc)

5. Cash deposited into Transfers and regrouping of Donations from trusts or relatives
various accounts in the deposits who cannot be traced e.g. dead or
names of nominees to living abroad
spread volume of cash

Deposits maybe changed into Fake imports and exports

negotiable instruments e.g.
travelers cheques
- overvalued exports allow
funds from overseas to be
repatriated and
- overvalued imports allow
funds to be moved offshore

Layering transactions usually

carried out through countries
or institutions whose
operations are confused or
with high secrecy laws

|Receipts may be said to be from

activities like gambling

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7. IMPLICATIONS OF MONEY LAUNDERING ON TAXATION

(a) Money laundering usually involves an element of tax evasion. being a

high risk area, there is need for tax auditors to be on the lookout for its
occurrence and take appropriate action to ensure the fiscus is not
prejudiced.

(b) Money laundering involves substantial amounts. As such this is a

potential source of additional revenue especially for the audit section
as such proceeds are not likely to be declared.

(c) Section 8 of the Income Tax takes all receipts except to the extent to
which they are of a capital nature. There is therefore need for auditors
to thoroughly scrutinize capital receipts claims.

(d) Where funds have been mixed with genuine business funds,
accountants may incorporate compensating adjustments on expenses or
stocks to keep audit indicators like gross profit percent ages at
acceptable levels.
8. MONEY LAUNDERING TECHNIQUES (Examples)

(a) Loan Schemes

This involves the creation of fictitious loans and may involve tax
haven countries. Receipts are disguised and become capital in nature.
They are therefore also excluded from taxation.

(b) Underground Banking

Such banking originated in Asia and operates on trust. Major players

are called Hawala Bankers. These may maybe traders or travel agents
who operate in different countries and accept transactions to shift
money using their international connections. There is no paper trail.
(c) Banking

The money launderer can give cash to a number of people who then
deposit it into accounts under his control. Funds are later transferred
abroad or to other accounts. This practice is called smurfing.

Travellers cheques maybe exchanged for cash. The transaction is not

tied to any account and the cheques can be exported or rebanked in a
less suspicious form.

(d) Letters of Credit

An exporter may present a letter of credit and other required

documents e.g. commercial and customs invoices and a bill of lading
and get paid when in fact no goods were sold.

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 A letter of credit is a document issued by a bank at the request of an
importer/buyer in which the bank promises to pay an exporter/seller
who presents certain required documentation.

9. DEALING WITH MONEY LAUNDERING

A number of countries have instituted measures to combat money laundering.

These may include some of the following:-

(a) Reporting of suspicious Transactions

Money launderers often exploit the facilities of the world’s financial

institutions to enable them to benefit from the proceeds of their
activities. Legislation can be put in place requiring financial
institutions to report any suspicious transaction. Such measures can
increase the detection rate.

Such transactions to be reported can be cash transactions above a

certain level, requests to borrow against assets held by a third party and
frequent requests for travellers cheques and foreign currency drafts.

(b) Record Keeping Requirements

Financial institutions maybe required to keep records which allow

individual transactions to be reconstructed and traced by law
enforcement agencies. Such records must be kept for a stipulated
period which is six years in Zimbabwe.

(c) Customer Identification

Legislation may require financial institutions to verify customer

identify in certain circumstances e.g.

(i) when one applies to establish a financial facility such as a

bank account
(ii) where a cash transaction exceeds a stipulated limit e.g. for
travellers cheques
(iii) In any case where money laundering is suspected

(d) Immunity

The above requirements mean the financial institutions will be

breaching their duties of confidentiality to clients. Legislation must
therefore remove the possibility of suit for such a breach.

(e) Definition of criminal offence of money laundering

There is need to provide a clear definition of activities constituting a

money laundering offence. Corporations may need to be subject to
criminal liability rather than merely their employees as is the case now.

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 (f) Confiscation measures

Zimbabwe already has an act on confiscation of cash or property

arising from illegal activities. The act allows authorities to freeze,
seize and prevent any dealing in transfer or disposal of such property.

END OF MODULE