NATURE AND CAUSES OF

GLOBAL MONEY LAUNDERING

Group Members:

Abeer Arif

Anum Naz Nimra Irshad

DEFINITION OF
MONEY LAUNDERING
 Money laundering

•The word
“laundry” literally
means “cleaning”
•Metaphorically,
money laundering
refers to “cleaning
on money”
Money laundering

“Any financial
transaction which
generates an asset
or a value as the
result of an illegal
act.”
Another definition:

 Money laundering is the practice of engaging in

financial transactions in order to conceal the
identity, source, and/or destination of money,
and is a main operation of the underground
economy.
According to Swiss Bank:
 Money laundering is a process whereby the
origin of funds generated by illegal means is
concealed (drug trafficking, gun smuggling,
corruption, etc.)
 
Money laundering includes:

 Drug Trafficking
 Extortion
 Corruption
 Fraud
GLOBAL MONEY
LAUNDERING
How much money is laundered
every year?
 Since money laundering is an illegal
activity therefore one can only estimate
the amount of money laundered every year.
 The International Monetary Fund, for
example, had stated in 1996 that the
aggregate size of money laundering in the
world could be somewhere between 2-5%
of the world’s gross domestic product
 This is $800 billion - $2 trillion in current
US dollars.
PROCESS OF MONEY
LAUNDERING
PROCESS OF MONEY LAUNDERING

Placement Layering Integration

 PLACEMENT
Placement refers to the physical
disposal of bulk cash proceeds
derived from illegal activity.
This is the first step of the money-
laundering process and the ultimate
aim of this phase is to remove the cash
from the location of acquisition so as
to avoid detection from the
authorities.
 PLACEMENT
This is achieved by investing
criminal money into the legal financial
system by opening up a bank account
in the name of unknown individuals or
organizations and depositing the
money in that account.
It may involve use of smurfing
techniques through which the
launderers make numerous deposits of
amounts of money that are small
enough to avoid raising suspicion.
 LAYERING
Layering is the movement of funds
from institution to hide their origin.
It consists of putting funds, which
have entered the financial system,
through series of financial operations
to mislead potential investigators and
to give the funds the appearance of
having legal origins.
Again, obscuring the source is the
key.
Launderers may purchase expensive
items such as jewelry, yachts, or cars
in order to change the money's form.
 LAYERING
This phase can involve transactions such as:
Sending wire transfers of funds from one account
toanother, sometimes to or from other institutions
orjurisdictions.
 Converting deposited cash into monetary
instruments (e.g. traveller’s checks).
Reselling high-value goods and prepaid
access/storedvalue products.
Investing in real estate and legitimate businesses.
Placing money in investments such as stocks, bonds
or lifeinsurance
Launders may purchase expensive items such as
yachts, cars, jewelry in order to change the money’s
form.
Using shell companies or other structures whose
primary intended business purpose is to obscure the
 INTEGRATION
Integration refers to the
reinsertion of the laundered proceeds
back into the economy in such a way
that they re-enter the financial system
as normal business funds.
The funds may be reintroduced in
the economy through, for instance, the
purchase of luxury items or through
investment in assets such as shares in
a company or real estate.
This stage entails using laundered proceeds in
seemingly normal transactions to create the
perception of legitimacy.
The launderer, for instance, might choose to invest
the funds in real estate, financial ventures or luxury
assets.
By the integration stage, it is exceedingly difficult to
distinguish between legal and illegal wealth.
This stage provides a launderer the opportunity to
increase his wealth with the proceeds of crime.
Integration is generally difficult to spot unless there
are great disparities between a person’s or company’s
legitimate employment, business or investment
ventures and a person’s wealth or a company’s
income or assets.
 
OBJECTIVES OF MONEY
LAUNDERING

 The main objectives of money launderers

are thus to place their funds in the
financial system without arousing
suspicion, to move them around, often
after a series of complex transactions
crossing multiple jurisdictions so that it
becomes difficult to identify their original
sources, and finally to move the funds back
into the financial and business systems so
that they appear legitimate.
 CRIMINALS OF MONEY
LAUNDERING

Drug Dealers:
Drug dealers usually deal
with large amounts
of cash, making it difficult for
authorities to make a paper trail.
Large amounts of cash raise
red flags.
 CRIMINALS OF MONEY
LAUNDERING

Mobsters/
Gang members:
Like drug dealers, these
individuals (in a group form)
perform many
cash transactions while
maintaining safe networks
overseas.
 CRIMINALS OF MONEY
LAUNDERING

Terrorists:
Terrorists are big in
money laundering.
Terrorist activities
must be financed;
otherwise explosives
and other weaponry
would not be an
obtainable asset.
CAUSES OF MONEY
LAUNDERING
 CAUSES OF MONEY LAUNDERING

 Absence of
legislation
 Evasion of tax
 Increase in profits
 To make black
money appear white
money
 Limited risks of
exposure
 RISKS ASSOCIATED WITH MONEY
LAUNDERING

 Reputational: cause a loss of confidence in the integrity of the

institution. A major threat to banks as confidence of depositors,
creditors and general market place to be maintained

 Operational: Weaknesses in implementation of banks’ programs,

ineffective control procedures and failure to practice due diligence.
failed internal processes, people and systems or from external events.

 Legal: The possibility that lawsuits, adverse judgments or contracts

that turn out to be unenforceable can disrupt or adversely affect the
operations or condition of a bank. Bank can suffer fines, crimes,
criminal liabilities special penalties imposed by supervisors .
 RISKS ASSOCIATED WITH MONEY
LAUNDERING

 Reputational: cause a loss of confidence in the integrity of the institution. A major

threat to banks as confidence of depositors, creditors and general market place to be
maintained

 Operational: Weaknesses in implementation of banks’ programs, ineffective control

procedures and failure to practice due diligence. failed internal processes, people and
systems or from external events.

 Legal: The possibility that lawsuits, adverse judgments or contracts that turn out to be
unenforceable can disrupt or adversely affect the operations or condition of a bank. Bank
can suffer fines, crimes, criminal liabilities special penalties imposed by supervisors.

 Concentration: Mostly applies on the assets side of the balance sheet, Information
systems to identify credit concentrations; setting prudential limits to restrict banks’
exposures to single borrowers or groups of related borrowers
EFFECTS OF MONEY
LAUNDERING
ON ECONOMY
Economic Distortion and Instability:

 Money launders "invest"

their funds in activities
that are not
necessarily economically
beneficial to the country.
They redirect funds from
sound investments to low-
quality investments that
hide their proceeds,
economic growth
can suffer.
Money laundering facilitates corruption
and crime:

 Money laundering
reduces criminals' cost of
crime, thereby increasing
the level of crime. Lax
anti-money-laundering
policies encourage the
criminal activities and
corruption.
Loss of Control of Economic Policy:

 Some phases of money laundering

transactions are "underground" or in
the informal sector of the economy,
such transactions do not appear in
official monetary and financial
statistics, thus giving misleading
information to policymakers and leads
to misallocation of resources.
Money Laundering distorts capital and trade flows

 Laundering of outbound illicit funds

constitutes the facilitation of illicit capital
flight, which drains resources from
developing economies, and extensive
money laundering of all forms can deter
legitimate inward foreign direct
investment (FDI). The obvious effect of
illicit capital flight is to worsen the
scarcity of capital in developing
countries.
EFFECTS OF MONEY
LAUNDERING ON SOCIETY:
Increase In Criminal Activities:

 Money Laundering allows drug traffickers,

smugglers, and other criminals to expand
their operations. This drives up the cost of
government due to the need for increased
law enforcement and health care
expenditures (for example, for treatment
of drug addicts) to combat the serious
consequences that result.
Money Laundering In Pakistan
Sharif Brothers-Money
Laundering Case:
Mian Nawaz Sharif and
Mian Shahbaz Sharif
were alleged of money
laundering and used
the Hudaibiya Paper
Mills as cover for
money laundering
during the late 1990s.
The Hudaibiya Paper
Mills case is still
pending in the National
Accountability Bureau.
President Zardari-Money Laundering
Case:

President Zardari
is
alleged of
misappropriated as
much
as $1.5 billion.
President Zardari - Money
Laundering Case:
 NAB opened a fresh case against him:
the so-called BMW car reference (a
BMW was imported in 1993 allegedly
for Zardari and allegedly while evading
customs duties). Fast forward to March
2008 and Zardari was cleared of all
charges in the BMW case, without
recourse to the NRO.
President Zardari - Money
Laundering Case:
 In 2003, Ms Bhutto and Mr. Zardari
were convicted of simple money
laundering by a Geneva investigating
judge who handed down a six-month
suspended sentence.
 The case was pending in the Swiss court
when then President Pervez Musharraf
promulgated the National Reconciliation
Ordinance and the government dropped
the case in April 2008.
Recommendations
Some of these recommendations include:
 Identify and do background checks on depositors.

 Report all suspicious activity. (For example, if a

background check revealed that depositor A works

in a steel factory, and he typically deposits $2,000
every two weeks, a series of 10 $9,000 deposits over
the course of two weeks should raise a red flag.)
 Build an internal taskforce to identify laundering

clues.
 Financial institutions should not keep anonymous

accounts or accounts in obviously fictitious

 Recommendations
 Customer due Diligence :
 Before a business relationship can be established, due diligence must
always be carried out on customers.

 Due diligence involves knowing the customer, obtaining information

on the intended transactions and verifying the above information
through identification and certificates.

 Information gathered in relation to due diligence is updated as

appropriate; for instance, the customer must present valid
identification again if previously presented identification expires
while the business relationship is on-going.
 Recommendations
 Financial institutions should, in relation to
politically exposed persons, in addition to
performing normal due diligence measures:
 Have appropriate risk management systems to
determine whether the customer is a politically
exposed person.
 Obtain senior management approval for establishing
business relationships with such customers.
 Take reasonable measures to establish the source of
wealth and source of funds.
 Conduct enhanced ongoing monitoring of the business
relationship.
Recommendations
 Financial institutions should maintain, for at
least five years, all necessary records on
transactions, both domestic or international, to
enable them to comply swiftly with information
 Financial institutions should pay special
attention to all complex, unusual large
transactions, and all unusual patterns of
transactions, which have no apparent economic
or visible lawful purpose
 If a financial institution suspects or has
reasonable grounds to suspect that funds are the
proceeds of a criminal activity, or are related to
terrorist financing, it should be required,