Frequently Asked Questions
The origins of the term “money laundering”, which defines the process of converting illicit proceeds into seemingly legitimate assets, are often associated with the dealings of the notorious Chicago gangster Al Capone. Legend has it that proceeds from bootlegging – alcohol contraband in the USA during prohibition – were mixed with revenue from a chain of self-service laundries owned by Al Capone to make them look legitimate.
Subsequently, the term “money laundering” was used by news reporters during the Watergate scandal of 1973. The scandal erupted when the public learned of 200,000 dollars US in donations sent to Mexico to be later used to finance illegal dealings as part of President Nixon’s election campaign.
This expression first appeared in the USA within a legal and legislative context in 1982. Since then, it has been widely used on a global scale. Still, this term is believed to be rooted in the 1930s, when American gangsters would legalize cash proceeds from racketeering, prostitution, and sales of drugs and alcohol via a chain of laundries. Cash payments were allegedly made for clothes cleaning services.
As a criminal act, money laundering attracted attention in the 1980s, mainly within the context of drug trafficking. Many governments were forced to admit that criminal groups and their tremendous profits from the drug business could rapidly contaminate and corrupt government structures at all levels. To prevent this, a decision was made to develop an appropriate legislative framework. A brief definition of money laundering describes it as the process of concealing a dubious source of funds and converting them into legitimate funds.
The “official” definition of money laundering follows from the provisions of international and regional conventions that obligate states signatories of these conventions to recognize money laundering as a criminal offence:
- UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances of 1988 (Article 3)
- Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime of 1990 (Article 6)
- UN Convention against Transnational Organized Crime of 2000 (Article 6)
- UN Convention Against Corruption (Article 23)
- Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime and on the Financing of Terrorism of 2005 (Article 9)
The result of such crimes are proceeds, usually in cash, which have to be “laundered” in order to make them look legitimate. Laundered proceeds of crime provide financial resources for organized crime and corruption and frequently are the main source of funding for extremist groups. The criminal economic system thriving on this basis damages the economy, undermines the country’s financial stability, and lets organized crime establish control over the country’s economic system. Therefore, this phenomenon can be viewed as a threat to economic and even national security of the country.
Money laundering creates serious obstacles for market transformations in all segments of public activity, disrupting the normal course of the economy and all core economic institutions, undermining the ability of government agencies to control and manage the country’s financial system.
The heightened public danger of money laundering is due not only to its direct link to the operation of organized crime groups and terrorist activity, but also to the fact that it is markedly transnational in nature.
Money laundering has spread on a scale where it can be a source of financial and economic disturbances for any country, while the damage from terrorist financing comes in the form of both financial losses and irreparable losses of thousands of human lives.
In the modern conditions of transnational financial flows and growing threats of international organized crime and terrorism, efforts by individual countries prove insufficient. Today the efforts of the international community are becoming especially vital in ensuring public safety.
To enhance their national AML/CFT systems, countries join forces at the cross-country and regional levels to work out joint measures to combat financial crimes.
The AML/CFT system is the product of a number of initiatives by the UN, IMF, World Bank, European Union, Council of Europe, G7/G8, and other international organizations and bodies as well as individual countries. It has a number of specific traits that reflect the comprehensive nature of tasks faced by the international community in the process of forming this system. At its core is a comprehensive approach founded on simultaneous utilization of financial law and criminal law methods (mechanisms) whose combination largely predetermines the specific nature of the development process and complex structure of this system, which combines traditional organizational and legal mechanisms of fighting crime with new institutions and tools of financial and preventive nature.
The following goals were pursued in creating an international AML/CFT system:
- deterring the crimes mentioned;
- undermining the financial foundations of all transnational organized crime, including corruption and international terrorism;
- protecting financial institutions and the entire financial and economic system from the infiltration of criminal proceeds, and ensuring their stability and security.
The existing international AML/CFT system comprises:
- international and regional organizations, other agencies and bodies (including specialized ones) tasked with AML/CFT issues;
- international treaties and acts, including those establishing such international and regional organizations, other agencies and bodies;
- the combination of national organizational and legal AML/CFT systems.
Meanwhile, the international AML/CFT system itself is a component (subsystem) of the international crime-fighting system. Global efforts to combat money laundering and terrorist financing are spearheaded by the United Nations Organization, the International Monetary Fund, the World Bank, the Council of Europe, the Basel Committee on Banking Supervision, the Egmont group that unites financial intelligence units of the world, and other organizations.
A key role in creating and enhancing effective AML/CFT measures at the international level is played by the Financial Action Task Force (FATF).
FATF is tasked with forming international AML/CFT standards and spreading them throughout the rest of the world.
Current standards are codified in the FATF 40+9 Recommendations that are essential to effective enforcement of economic and financial security.
From the organizational viewpoint, the national AML/CFT system comprises the following elements:
- The financial intelligence unit (FIU), which collects, processes, and analyses information on suspicious and unusual transactions. In some cases, the FIU can request additional information from the monitored organizations. When there are sufficient reasons to believe that a transaction was carried out with the purpose of money laundering, the FIU reports this information to the law enforcement.
- Monitored organizations (banks, insurance companies, other financial institutions, etc.), which send suspicious or unusual transaction reports to the national financial intelligence unit.
- Oversight bodies, which supervise the monitored organizations, among other things, for compliance with national AML/CFT laws and submit to the FIU (and receive from the FIU) information about any violations by monitored organizations.
- Law enforcement agencies, which receive reports of possible money laundering from the FIU, investigate the reports, and refer criminal cases to court. In some countries, the FIU operates as part of the law enforcement, in which case the law enforcement agencies are not singled out as a separate element.
- The judicial system, which hands down rulings in criminal cases.
- Foreign FIUs, which request and receive from FIUs of other nations the information needed for financial investigations, and carry out joint investigations.
Financial intelligence units collect and analyze data from banks and other financial intermediaries. This information is used to identify suspicious transactions and operations that may be associated with money laundering or terrorist financing. Such transactions are subject to financial investigations that may lead to the initiation of criminal proceedings.
Covering the majority of regions, FATF-style regional bodies represent a core element in the implementation of mechanisms of the international AML/CFT policy.
One of them is the Eurasian Group on combating money laundering and financing of terrorism or EAG.
EAG is the largest of such groups in terms of coverage and population of its member states.
EAG pursues its activities as part of four working groups:
- Working group on mutual evaluations and legal issues
- Working group on typologies
- Working group on technical assistance
- Ad hoc working group on the development of operational guidelines
- The Moscow-based EAG Secretariat handles administrative and technical support of the Group’s operation.
The supreme governing body of the Eurasian Group on combating money laundering and financing of terrorism is the EAG Plenary, which approves the key decisions and initiatives and shapes the policy of continued development of EAG.
The Plenary is held twice a year.
The jubilee 10th Plenary is being held in the summer of 2009 to assess the Group’s performance over the past period.
EAG was originally created in the Eurasian space in order to unite countries outside then existing FATF-style regional bodies. Interaction mechanisms within the Group have enabled these states to become involved more actively in the efforts of the global financial community. Simultaneously, efforts were launched to create conditions for the establishment and development of effective anti-money laundering systems in these countries.
The establishment of EAG was meant to play a major role in reducing the treat of terrorism and ensuring transparency, reliability, and safety of financial systems of the region’s countries, mainly taking into account the specifics of the Eurasian space as regards its involvement in the zone of Islamic bank financing and risks of laundering of the proceeds from Afghan drug trafficking.
The Group’s efforts are directly aimed at ensuring public safety in the region by creating conditions for combating serious economic crimes, including the ones perpetrated at the cross-border level. Meanwhile, the introduction of effective AML/CFT systems in EAG member states increases the region’s potential for economic growth and sustainable development. This is accomplished thanks to such positive factors as a reduced crime rate (including crimes of corruption), the economy leaving the shadows, favorable conditions for legitimate private business, and improved manageability of the economy in general and the financial sector in particular. This results in higher investor appeal of economies in the Eurasian region thanks to a stronger financial system and improved image of the countries in the eyes of the international community.
To raise the effectiveness of the fight against economic crimes and implement a system of preventive measures, EAG researches typologies and trends of money laundering and terrorist financing, which are typical of the Eurasian region, as well as studies best international practices in this area.
Based on its typology research findings, the Group holds consultations with private sector representatives to work out recommendations of the most effective ways for the region’s financial institutions to comply with international standards. The priority line of EAG efforts is implementing technical and advisory assistance programs for the region’s countries, which involve sponsorship from other member states and donors. A leading role in this matter is played by Russia, which currently provides the bulk of funding for EAG and its Secretariat.
In the 5 years since its creation, EAG has achieved notable progress in the functioning of anti-money laundering systems within the Eurasian space.
Thanks to joint efforts and assistance from member states and donor organizations, most EAG member states have formed the legal framework for national AML/CFT systems and created financial intelligence units.
The financial intelligence unit of the Kyrgyz Republic was set up and supplied with modern software in 2006 with the direct support of EAG and specifically Russia.
The country is currently working actively to improve its AML/CFT legislation.
A financial intelligence unit was created in Kazakhstan in April 2008. And MAL/CFt legislation was adopted in 2009.
Belarus is actively involved in all EAG efforts. In 2008, its anti-money laundering system underwent a mutual evaluation for compliance with FATF standards, showing good ratings across the majority of indicators.
The AML/CFt regime was restored and is being actively developed in Uzbekistan.
October 20, 2009 the President of the
EAG also plays a notable role in strengthening the anti-drug trafficking potential in Central Asia, including through its participation in the “Channel” anti-drug operation and efforts to create “financial security” belts around Afghanistan.
