How money laundering works


Does crime pay? For those of us who claim to be morally correct the answer would be a resounding no. For others who have mastered the skill to draw dispassionate conclusions, the answer may be different. “Obviously crime pays, or there would be no crime” is an exciting proposition that stimulates the analytical faculties of both its supporters and critics.

Study Al Capone of yesteryear or Madoff or Fastow and Skilling of today and you would repel or be thrilled, depending upon your natural inclinations, to know that they made hefty gains from their criminal activities and lived lavishly from the proceeds of their crimes. Their stories, for them, did not have the desired ending but their journey through life, for many, was and still remains something to be desired if not followed. We must however remember that as life unfolded these notorious white collar criminals were stripped of all wealth, status and standing. They spent or are destined to spend substantial part of their lives behind the bars. And all the illegal wealth they had amassed was and is of no help or use to them.

Crime in its scale and degree of influence on a society has changed over time but the perennial philosophy behind it remains unchanged. Crime is always perpetrated and often prevented by humans. And humans as specie have not changed. We have survived hundreds of millennia with the same blend of emotions, desires, motivations and beliefs. This blend essentially controls and dictates all our actions. The motive behind a crime today may not be substantially different from the motive behind a crime hundreds of years back. Lust, greed, hate, anger, retribution, frustration, power or money or a twisted combination of all were and still largely remain the basic motives behind a crime. The methods have improved but motives of a crime remain almost the same.

It is only natural that gain made from a crime must be protected and preserved. This is the silent pledge taken by all criminals. By hiding the proceeds of crime it was generally believed that the criminal and the crime would also remain hidden. In ancient times, proceeds of crime were stashed away in caves or buried under the earth only to resurface at an opportune time or when some need arose. However, with the introduction of the financial systems, capital/money markets and artificial persons such as corporations, everything changed. Criminals rose to the occasion and used the legal channels to shield illegal gains. Hence the phenomenon of “money laundering” in its notorious glory came to haunt the law enforcers.

In common parlance, money laundering, as the name suggests, means cleaning dirty money. Dirty money means proceeds of a crime. This cleaning process includes the available legal means to hide criminal acts and the criminals behind them. Through this process the proceeds of crime are passed through different stages so as to wash away the stains of crime and to establish that these proceeds were gained through legitimate means.

The offence of money laundering originates from a predicate offence. According to Article 2 (h) of UN Convention against Corruption the term “predicate offence” means any offence as a result of which proceeds have been generated. In Pakistan, a predicate offence is defined as an offence specified in the Schedule of the Anti-Money Laundering Act, 2010. Under the said Schedule specific offences under The Pakistan Penal Code, 1860, The Arms Act, 1878, The Foreigners Act, 1946, The Copyright Ordinance, 1962, The Pakistan Arms Ordinance, 1965, The Securities and Exchange Ordinance, 1969, The Emigration Ordinance, 1979, The Control of Narcotics Substances Act, 1997, The Anti Terrorism Act, 1997, National Accountability Ordinance, 1999 and The Registered Designs Ordinance, 2000 are considered predicate offences.

There are three stages of a successful money laundering operation namely:

Placement: Putting the funds into the financial system through “structuring” or “smurfing” – deposits of currency in amounts under the reporting threshold. “Structuring” occurs to avoid anti-money laundering reporting, to avoid suspicion of commercial activity and to help launder proceeds of crime. “Smurfing” is the term given to the process whereby criminals use a number of individuals (smurfs) to deposit the proceeds of crime. By using a number of different parties to make cash deposits a financial service provider is less likely to question the transaction as an unusual one than if one person had made a single large scale cash deposit.

Layering: Moving the money around in financial institutions and from one nation to another to suggest a legitimate source and making it difficult for authorities to link the funds to the ultimate beneficiary.

Integration: Integration of the money into the legitimate financial system.

Money launderers intentionally target areas that lack desired regulatory or legal controls. Real estate, capital markets, money markets, commodity exchanges, financial institutions, foreign exchange, jewelry and antiquities are some of the key areas that may be exploited to launder money. The primary reason, in most jurisdictions, is the absence of strict controls and poor application of laws. Astonishingly financial sector and capital markets around the world were at first opposed to strict anti-money laundering regimes fearing a drop in profits and client base. The situation is no different in Pakistan.

Dirty money or ill-gotten gains in Pakistan inter alia originate from corruption, drug trafficking, illegal cash couriers (Hawala), financial/corporate crimes including tax evasion, kidnapping for ransom, terrorist activities, smuggling of goods and people, gun running and intellectual property crimes. Predominantly cash based society, Pakistan provides ample space for the money launderers to either route their illegal proceeds through cash couriers in Pakistan or invest in Pakistan with virtually no questions asked. With porous borders and inherent corruption coupled with abject poverty Pakistan is considered a haven for money launderers.

The writer is a lawyer based in Islamabad.