Money Laundering – the scourge of an economy

Money Laundering is one of the most trenchant challenges that any progressive economy perennially faces. This is because, the challenge that it poses is two-fold: On one hand, Money Laundering is extremely difficult to fully arrest and mitigate, while on the other, failure to do so degrades trust in an economy’s financial institutions.

This is why countries, economies, and financial institutions around the world are constantly scrambling to come up with newer and newer ways to try and stop it from happening.

So, what is Money Laundering?

Every day and in each economy, massive amounts of money get generated through a host of legal and illegal activities. The illegal ways include drug trafficking, criminal activities, terrorist funding, etc. and it is this money that governments designate as “Dirty” and the illicit ways in which criminal elements try and make it “Clean” is referred to as ‘Money laundering’.

Even though Money Laundering is a serious Financial Crime, it is often very difficult to intercept as it is employed by White-Collar and Street Criminals alike.

In recent years, the global expansion of Online Banking and Cryptocurrencies have made money laundering even tougher to intercept and very often Financial Institutions have to create and establish International Partnerships to arrest this issue.

A close study of how Money Laundering Processes work reveals that for criminals to “clean” their “dirty” money, they need to establish a way of depositing their ill-gotten wealth into established Financial Institutions – but in a way that makes the ‘source’ of the wealth seem legitimate. This process often involves 3 stages:

1. Placement: This stage involves a criminal element(s) clandestinely injecting ‘dirty money’ into a legitimate Financial Institution.
2. Layering: This stage involves the criminal or in some cases an insider at the institution, using a series of transactions, jugglery, and booking tricks to conceal the true source of the money
3. Integration: The last stage is where the criminal element(s) withdraws the now “legitimized” money through the Financial Institution and into the real economy – thus completing the process of laundering.

What Is Anti-Money Laundering (AML)?

AML is a broad term that applies to rules, legislation, and practices, whose primary purpose is to prevent the laundering of improperly acquired funds as lawful earnings. This is mainly done by forcing banks and other monetary institutions that directly deal with credit or consumer deposits to conform to a series of guidelines designed to prevent money laundering.

In the UAE, AML regulations generally apply to activities in 4 categories:

1. Real Estate Brokers
2. Dealers of precious metals and gemstones
3. Auditors
4. Corporate Service Providers.

For companies operating in the aforementioned categories, compliance with AML-CFT (Anti-Money Laundering and Combating Financing of Terrorism) laws is critical and failure to meet the required standards can result into fines ranging up to AED 1 million.

Why do so few companies/business groups know about this though?

1. Insufficient Awareness: Most firms are simply unaware of the AML-CFT rules and norms and do very little as a result when it comes to compliance and treats it as an encumbrance.
2. Inability to Measure performance in relation to AML compliance: A large proportion of businesses have very little idea of how to actually track or measure their performance in accordance with AML rules.
3. Misplaced Objectives: Most firms approach the issue of AML compliance with the sole objective of preventing fines. This results in them targeting bare minimum targets set by AML rules – resulting in non-fulfillment of the real goal of AML compliance.

This is unfortunate, as the AML-CFT requirements have been meticulously calculated and mapped by authorities as competent and reliable as the UAE Central Bank and the Ministry of Economy, specifically to help businesses root out the evil of money laundering. Anti-Money Laundering in Dubai is taken extremely seriously.

What are the key Red Flag Indicators for AML-CTF for any business?

1. During any financial transaction, it is incumbent for any responsible business to look for any potential ‘Red Flags’ that might indicate the potential of Money Laundering. The most important detail for any business in this regard is information about its consumer. This information is critical as it helps determine the origin or source of the money that the consumer might be using during the business transaction.

   Having a competent Money Laundering Reporting Officer create a SAR (Suspicious Activity Report) if needed and present it to FinCEN (Financial Crimes Enforcement Network) is vital. Financial Institutions such as banks often use a series of “Red Flag Metrics” to track the origin and destination of funds. If any points in the ‘journey’ of the said funds create ambiguity or raise Red Flags, regulators are authorized to assume Money Laundering or Terrorist Funding.

   Thus, it is extremely vital for any business to operate in complete transparency and compliance with AML-CFT norms, as it is only through a joint effort that the evil of Money Laundering can be successfully rooted out.