FOLLOW THE MONEY (PAST THE RED TAPE) How money laundering rules disturb the (mostly) innocent

Europol sets out its aims in dealing with gangsters and money laundering quite clearly. “To effectively disrupt and deter criminals involved in serious and organised crime, law enforcement authorities need to follow the money trail as a regular part of their criminal investigations with the objective of seizing criminal profits.” The route towards such dubious money has never been, as Ophelia put it in Hamlet, “the primrose path of dalliance”; far from it. Clever accounts, clever lawyers and ruthlessly greedy crooks have made it a path of multiple twists and turns, punctuated with boobytraps, sometimes leading nowhere that the law can follow. In our commercial banks, it merely seems to lead behind the rope barriers that separate where the ordinary customers can go and where the somewhat more privileged customers – privileged by whatever means and for whatever purpose – can mingle with senior management and serious financial advisers. For the ordinary customers, though, the people with whom they mainly liaise are lowlier bank clerks with little or no experience of business or how it operates.

This greatly inconveniences the honest bank customer. It also somewhat excessively inconveniences the very mildly dishonest customer whose shadier operations and habits don’t exactly endanger the state or disrupt the economy; the sort of activity more often labelled ‘naughty’ than ‘malignant’. So why go to so much trouble? Well, the serious offenders are very serious indeed. According to Money Task Force, despite all the measures put in place to restrict money laundering, experts in the United States believe the total figure is at least $1-trillion (almost €0.888-trillion) and may be as high as $1.5-trillion (€1.331-trillion). In the United States’ case, that’s around 7.5% of GDP, a not insignificant sum. Think of it in terms of the $4-trillion the US Federal Reserve has promised to inject into the American economy through slashed interest rates, quantitative easing (effectively printing more money) and injections of liquidity.

Federal Reserve Bank Building in Boston ©Rhododendrites/Wikicommons

If only the bad guys would pay their share. By an odd coincidence, 7.5% is the proportion by which the International Monetary Fund expects the economies of the eurozone countries – the nineteen that share the euro as a currency – to contract this year. Back in February it was forecast to grow, albeit by a measly 1.2%. Lockdown and the coronavirus have changed all that. If the practice of money laundering could be stopped (it cannot, of course) and its proceeds redirected to the public good, it would make a massive difference. In Fyodor Dostoyevsky’s book, Crime and Punishment, the young criminal, Raskolnikov, justifies his murder of the old pawnbroker, Alyona Ivanonva, that way. “Hundreds, thousands perhaps, might be set on the right path; dozens of families saved from destitution, from ruin, from vice, from the Lock hospitals (hospitals to treat venereal disease) – and all with her money. Kill her, take her money and with the help of it devote oneself to the service of humanity and the good of all.” But no-one is suggesting the practice of money laundering could be ended by a slightly unhinged former law student with an axe.

The Covid-19 pandemic has had an impact on the multinational criminal gangs. Previously, they could launder some of their ill-gotten gains by converting it to cash and using mules to take it wherever it was needed. Social distancing has put a stop to that but there are plenty of other measures. Take cryptocurrencies, for instance, that weird transactional tool beloved of those who trade on the dark web and reliant on a blockchain very few understand. The amount being laundered through cryptocurrencies tripled between 2017 and 2018 and is said to have risen again, although the volumes remain relatively small. It’s a step up from the earliest examples on money laundering. It’s said to have started in the 13th century BC, when pirates, often in the pay of crooked rulers, stole from the main trade routes and sold on the pilfered goods disguised as legitimate trade. In the 1930s, Chicago mobster Al Capone took it further, routing his profits through a variety of legitimate businesses, including laundrettes, because they were a cash business and hard to keep tabs on. It’s been suggested that it could be why the practice is known as ‘money laundering’, although that’s probably untrue: it was simply a case of making dirty money look clean.

Cryptocurrency logos © Wikicommons

But it means we have to feel sorry for the person who is well-heeled and honest (and, indeed, the rest of us who are less well-heeled and in no position to be seriously dishonest). While international crime and racketeers are still managing to hide their profits from the law enforcement authorities and the taxman, people who just fancy a flutter at the casino or to rent one of the exotic and beautiful Russian ladies for an hour or a night find they have no access to sufficient funds. The ladies in question flood the exclusive resorts, pursuing the ancient trade referred to by the late fantasy writer Terry Pratchett as “negotiable affection”, but their would-be clients find it hard to withdraw enough cash from their banks to pay for their favours. Since it’s unlikely that the ladies personally gain much from such a transaction, one has to assume they’re employed by somebody exploiting the market – and them – and who is being forced subsequently to launder his profits, which must be considerable. After all, Al Capone ran a prostitution racket among his many other criminal activities. Perhaps that’s why he succumbed to neurosyphilis, becoming increasingly debilitated and mentally confused following his release from prison for tax evasion before his death from cardiac arrest in January 1947 at the age of 48. One is tempted to say “be sure your sins will find you out”, but there are plenty of modern-day crooks around the world, currently immune from the repercussions of their deeds. And still exploiting women, of course.

Al Capone Photo FBI


Measures to counter money laundering (AML) are also part of the measures to counter the funding of terrorism (CTF); the two are often linked. According to the paper ‘Red Flags and Black Markets’, by Barry Peterson and quoted in the Journal of Strategic Security, “Money laundering may take the form of embezzlement to hide proceeds of corruption, introducing funds from criminal enterprises into legitimate banking, or simply the transferring of funds to or from parties on known criminal or terror watch lists.” In other words, their methods are similar, if the goal of the criminals is pure self-enrichment, while the goal of the terrorist is to change the world in a way that suits his or her political or religious beliefs. In most case, the perpetrators are remarkably similar. Barry Peterson again: “Classic perpetrators of these illicit transfers are transnational criminal organizations (TCO), corrupt government officials, terrorist organizations, and individuals seeking to disguise the proceeds of illegal activities such as embezzlement. Wire fraud may be one of the most common methods by which these illicit transfers are conducted, but they are by no means the only one. Credit card fraud, paper instrument fraud (travellers checks, money orders), over- and under-paying for goods and services and trading in hard commodities are all effective ways of injecting illicit funds into the licit financial system.”

Wire transfers have become the favoured method for shifting illicit funds from one place to another. It’s really because technological advances have made it easier for banks, financial institutions and individuals to communicate. The easier it is to contact the international banking system, the easier it becomes for criminals to use these transfers for their own nefarious purposes. Given the vast numbers of such transactions and the huge volumes of money thus moved, finding one that looks suspicious is never easy. At a meeting of bankers from Spain and the rest of Europe at the Universidad de Nevarra en Madrid, organised by the Banco Bilbao Vizcaya Argentaria S.A., BBVA’s Global Head of Supervisors, Regulation and Compliance, Eduardo Arbizu, admitted that while anti-money laundering is easy to define as a task, it’s becoming harder to carry out.

Eduardo Arbizu, BBVA’s Global Head of Supervisors, Regulation and Compliance ©

“What we, the financial sector, are being asked to do,” he told delegates, “is to collaborate with society to prevent money from crime from entering the financial system. In other words, to detect money coming from illicit activities, prevent it from entering the system and alert law enforcement agencies so that they can take adequate action.” Everyone knows what must be done, but first they have to detect the criminal intent and identify money transfers that shouldn’t be happening from amongst the millions that should. Arbizu said that global banks face six major challenges in tackling money laundering: “Their international footprint, supervisory pressure, maximizing efficiency and effectiveness, leveraging technology, recognizing specialized talent and raising awareness among society about how important it is that everybody collaborates with financial institutions.” Laudable aims, but the crooks are quite sophisticated, too.

The authorities in Canada, for instance, admit it’s a problem. “All high-risk areas are covered by AML/CFT measures, except legal counsels, legal firms and Quebec notaries,” says a report. “This constitutes a significant loophole in Canada’s AML/CFT framework.” It’s not only Canada that has legal loopholes, although at least they know what’s wrong. “Financial intelligence and other relevant information are accessed by Canada’s financial intelligence unit, FINTRAC, to some extent and by law enforcement agencies (LEAs) to a greater extent but through a much lengthier process. They are used to some extent to investigate predicate crimes and TF activities, and, to a much more limited extent, to pursue ML. FINTRAC receives a wide range of information, which it uses adequately, but some factors, in particular the fact that it is not authorized to request additional information from any reporting entity (RE), limit the scope and depth of the analysis that it is authorized to conduct.” The result, it says, is disappointing: “Law enforcement results are not commensurate with the ML risk and asset recovery is low.”

The Law Society (TLS), which represents more than 100,000 solicitors in the UK, sees a difficult rôle for solicitors in dealing with the issue. “Economic incentives are one motivator of criminal activity. Removing the economic profits of crime can assist in disrupting future criminal activity and increasing the opportunity costs of committing certain types of crimes. For these reasons, the prohibition on concealing and using the proceeds of crime has a clear social justification.”

FATF President Xiangmin Liu, Vice-President Marcus Pleyer and Executive Secretary David Lewis met with The Duke of Cambridge and Lord William Hague at Kensington Palace to discuss the United for Wildlife Financial Taskforce, spearheaded by The Duke of Cambridge and The Royal Foundation

However, there’s no doubt that the ways in which the anti-money laundering measures are applied have a downside for legitimate businesses, especially those that are too small to afford the sorts of legal and accountancy help enjoyed by the criminals, or even by their larger competitors. “These small firms are receiving the same methodologies and risk indicators as larger firms, both within the regulated sector as a whole and within their individual sectors,” says TLS. “They are being expected to assimilate that information into their business as effectively as those larger firms, which will inevitably have more resources. Many smaller firms are simply not involved in the types of transactions mentioned in the existing methodologies. As a result they find themselves having to: purchase the expertise to adapt existing information; assess the risks for their type of firm from private information held by consultants; and develop policies, procedures and tools to enable them to fully implement a risk-based approach.” Over-complicated laws with which it’s not easy to comply and all too easy to contravene, even unintentionally, are not helping. TLS believes the whole business needs a re-think. “More resources need to be employed by UK intelligence agencies, the EU and FATF (Financial Action Taskforce) in developing relevant, timely and sector specific methodologies and risk indicators, including more focussed assistance for smaller firms.” And, of course, it stops the wealthy and adventurous from easily getting their hands on enough cash-in-hand to pursue their particular interests.


The rules to counter money laundering differ around the world and there are a lot of different authorities trying to ensure compliance. The European Union, for instance, has the European Banking Authority (EBA), The United States has the Office of the Comptroller of the Currency (OCC), globally there’s the Financial Action Task Force (FATF).

FATF is an intergovernmental organization, set up to combat money laundering and the financing of terrorism. It boasts 36 member states and its jurisdiction spans the world, taking in every major financial centre. Its primary function is to set global standards for AML compliance and monitor their effective implementation. In fact, although the OCC is officially in charge of tackling money laundering and terrorist financing, the US relies on the Banking Secrecy Act and the Financial Crimes Enforcement Network (FinCET) to make it work.

Naturally, for all administrations, the rules have to be constantly updated to keep up with inventive crooks and their devious accountants. For instance, the EU’s 5th Anti-Money Laundering Directive (5AMLD), which was adopted in 2018, came into effect in January 2020. It was focused on cryptocurrency regulations and introduced a legal definition of cryptocurrency, reporting obligations, and rules for crypto wallets. 5AMLD also introduced new legal requirements for prepaid cards, transactions involving high-value goods, beneficial ownership, customers from high-risk third countries, and Politically Exposed Persons (PEP) lists. In case you’re wondering, a PEP is defined by the international accountancy group Accuity as “someone who, through their prominent position or influence, is more susceptible to being involved in bribery or corruption.” That probably means ‘best avoided’, although one hopes that being in a prominent position doesn’t mean someone is automatically dishonest. 5AMLD was followed, inevitably, by 6AMLD – the 6th Directive – which includes provisions for a harmonised definition of money laundering offences, an extension of the scope of money laundering and the criminal liability of persons associated with it, and tougher punishments for those convicted of money laundering. It is always a case of running to catch up.

According to Europol, “economic and financial crime currently offers a relatively low risk of discovery and prosecution with potentially very high profits.” If you’re a criminal, what’s not to like? Even today, with more sophisticated detection methods, Europol admits that “the EU still shows mediocre results when it comes to the recovery of criminal assets.” That’s putting it mildly: more than 98% of criminal assets remain unrecovered. Even so, Europol can boast some considerable successes. In April 2018, fifty-eight suspects were arrested in Belgium, Germany, Portugal and Spain in connection with a criminal organisation that specialised in VAT fraud and money laundering services. More than a hundred premises were searched in various EU countries and law enforcement officers seized fifty-two luxury cars, a lot of documents, €400,000 in cash, IT material and one weapon. The gang involved had a network of more than a hundred companies, most of them shell companies registered in the names of frontmen and scattered across Belgium, Bulgaria, Cyprus, Germany, Hungary, Italy, Portugal, Romania, Spain and the United States. The group owned a production centre to create false invoices and perform VAT fraud on electronic goods and the import of luxury vehicles at below invoice price. Over three years, Europol reports, the gang had issued false invoices to a value of more than €250-million. Investigations revealed that the money was ‘layered’ among the large network of shell companies before being funnelled to Bulgarian or Hungarian bank accounts. Layering is the stage where the illicit money is blended with legitimate money or placed in constant motion. Layering often involves generating so many different transactions that the laundered cash disappears into them. In one example, the group moved more than €140-million through two shell companies in two years. They then used different methods to integrate the profits, such as investing in real estate and genuine businesses, or the purchase and sale of luxury vehicles. The final destinations of the proceeds of crime were Italy, Spain and the United States.

Even so, the authorities are aware that their efforts to halt the laundering of money by criminal groups can get in the way of legitimate businesses and even affect their ability to operate profitably. That’s why the European Banking Authority (EBA) has issued a call for input to understand the scale of ‘de-risking’ at EU level, what drives it and its impact on customers. This call, which forms part of the EBA’s work to lead, coordinate and monitor the EU financial sector’s AML/CFT efforts, aims primarily to understand why financial institutions choose to de-risk instead of managing the risks associated with certain sectors or customers. This call for input is of interest to stakeholders across the financial sector and its users, as the EBA wants to hear from all groups affected by de-risking. In other words, sooner than police the flow of money through their systems, many banks are choosing to eschew risks altogether, which is bad news for enterprising businesses. The EBA sees this development as a threat it needs to address, possibly by changing its official advice. “To manage customers’ profiles associated with higher money laundering and terrorist financing (ML/TF) risks,” it says on its website, “financial institutions may decide not to service a particular customer or category of customers. This is what is meant by ‘de-risking‘, and it impacts both financial institutions and their users. De-risking affects particular sectors and customers across the EU, such as banks engaged in correspondent banking relationships, payment institutions and NGOs. Given the variety of institutions and customers affected by de-risking and the different degree at which Member States are exposed to this phenomenon, the EBA is reaching out to stakeholders across the financial sector and its users to hear from their experiences.”


The United Nations Office on Drugs and Crime (UNODC) is not hopeful that it can be stopped any time soon, not now the genie of illicit money flows is out of the bottle (if it was ever in the bottle, that is).

One might be tempted to think that if so, little dirty money is intercepted and recovered, is it worth all the pain that honest operators have to go through? Well, yes. Criminals, especially drug traffickers, may have laundered around $1.6 trillion (€1.43-trillion), or 2.7 per cent of global GDP, in 2009, according to a new report by UNODC. This figure is consistent with the 2 to 5 per cent range previously established by the International Monetary Fund to estimate the scale of money-laundering. Less than 1 per cent of global illicit financial flows is currently being seized and frozen, according to the report ‘Estimating illicit financial flows resulting from drug trafficking and other transnational organised crime’. It makes for worrying reading. “Tracking the flows of illicit funds generated by drug trafficking and organized crime and analysing how they are laundered through the world’s financial systems remain daunting tasks,” acknowledged Yury Fedotov, Executive Director of UNODC. In his introductory comments he says: “Prior to this report, perhaps the most widely quoted figure for the extent of money-laundering was the IMF’s ‘consensus range’ of between 2-5 per cent of global GDP, made public in 1998. A study-of-studies, or meta- analysis, conducted for this report, suggests that all criminal proceeds are likely to have amounted to some 3.6 per cent of GDP (2.3 – 5.5 per cent) or around US$2.1-trillion (€1.87-trillion) in 2009.” The figure has probably risen since then, although the proportion has probably remained much the same.

And yet, banks continue to flout the rules in the name of profit, putting the desires of their shareholders above any concern for the countries in which they operate, the legitimate businesses that use their services or the people in the streets whose jobs may be put at risk by their crooked customers’ criminal activities.

Commerzbank Tower, Innenstadt (Frankfurt am Main) © Wikipedia

Britain’s Financial Conduct Authority, for instance, has recently fined Germany’s Commerzbank nearly £38-million (€42-million) over failures in anti-money laundering checks at its London offices over a period of five years. The FCA said it would have been more than £54-million (€60-million) were it not for the fact that senior figures in the bank have agreed to cooperate and install new systems to try and ensure that customers are not transferring through the bank money earned from criminal activities. As the FCA’s Final Notice states: “Commerzbank London agreed to resolve this matter and qualified for a 30% (stage 1) discount under the Authority’s executive settlement procedures. Were it not for this discount, the Authority would have imposed a financial penalty of £54,007,800 (€60-million) on Commerzbank London.” Helpful bosses, then? Well, yes and no. The FCA said they had still put profits above paying attention to dubious activities, having failed to react to previous FCA warnings: “Commerzbank London was aware of these weaknesses and failed to take reasonable and effective steps to fix them despite the FCA raising specific concerns about them in 2012, 2015 and 2017,” said a statement. “These weaknesses also persisted during a period when the FCA was publishing guidance on steps firms could take to reduce financial crime risk as well as taking enforcement action against a number of firms in relation to AML controls. Despite these clear warnings, the failures continued.” FCA Executive Director of Enforcement and Market Oversight, Mark Steward, said: “Commerzbank London’s failings over several years created a significant risk that financial and other crime might be undetected. Firms should recognise that AML controls are vitally important to the integrity of the UK financial system.” It seems likely that the FCA will be watching closely in case of any future breaches, such as a failure to conduct “timely periodic due diligence on its clients,” it says, “which resulted in a significant number of existing clients not being subject to timely know-your-client checks. By 1 March 2017, 1,772 clients were overdue updated due diligence checks. A material number of these clients were able to continue to transact with the bank’s London branch due to the implementation of an exceptions process, which was not adequately controlled or overseen and which became ‘out of control’ by the end of 2016.” The FCA said Commerzbank also failed to address long-standing weaknesses in its automated tool for monitoring money laundering risk on transactions for clients.

Europol’s headquarters, The Hague, The Netherlands

For example, in 2015 Commerzbank London identified that 40 high-risk countries were missing from, and 1,110 high-risk clients had not been added to, the transaction monitoring tool. It also failed to have adequate policies and procedures in place when undertaking customer due diligence on clients. The watchdog said that in 2016 a client identified as being ‘high risk’ was allowed to make sixteen transactions, even though his required background check was five years overdue. It’s claimed these deals made the bank a profit of over £270,000 (€300,000) in fees, but Commerzbank London has also voluntarily implemented a wide-ranging business restriction, which included temporarily stopping taking on new high-risk customers and suspending all new trade finance business activities.

Meanwhile, organised criminal gangs (OCGs) continue to invest their profits in both the legal and illegal economy. Their skills at accomplishing this vary enormously and specialised gangs have cropped up to do the laundering on behalf of those less adroit at such things. According to Europol, money launderers often set up and use shell companies that lack assets and perform few or no activities. Often, they are registered in offshore jurisdictions. “In exchange for a commission of between 5% and 8%, these syndicates offer complex laundering techniques and carry out the laundering operations on behalf of other OCGs.” Europol says that professional enablers such as solicitors, accountants and company formation agents then provide the skills and knowledge of financial procedures required. It’s a specialised area of crime and a relatively small number of criminal groups provide such a service, but Europol reckons them to be especially dangerous. “The criminal groups that possess the expertise or have access to skilled online money launderers are potentially of a bigger threat than those using traditional money laundering tools such as cash.”

On 27 January 2019, 17 of the 19 national central banks in the euro area stopped issuing €500 banknotes

So what is the favourite denomination of banknote for money launderers? Why, the €500 banknote, of course. With those, a very large amount of money can be carried in a very small space. And, as the European Central Bank says on its website, although these high denomination notes are no longer produced, they are still legal tender. “On 27 January 2019, 17 of the 19 national central banks in the euro area stopped issuing €500 banknotes. In order to ensure a smooth transition and for logistical reasons, the Deutsche Bundesbank and the Oesterreichische Nationalbank stopped issuing the notes on 27 April 2019.

Existing €500 banknotes continue to be legal tender, so you can still use them as a means of payment and store of value (i.e. spend and save them). Similarly, banks, bureaux de change and other commercial parties can keep recirculating the existing €500 notes. Like all denominations of euro banknotes, the €500 note will always retain its value and can be exchanged at a national central bank of the euro area at any time.” That must be very reassuring for the money launderers. I’ve seen hotels in France and elsewhere refuse to accept them and they have always been controversial, in the light of their convenience for crooks, but they were popular in Germany.

We can’t leave the subject of money laundering without looking at cryptocurrencies, such as Bitcoin and Etherium, which make up most of that market. Drug traffickers use bitcoin automated teller machines (ATMs) to convert criminal profits into virtual currency. This was the case for a specialised money laundering scheme in Spain, which used cryptocurrency ATMs and a process known as ‘smurfing’, in which the sum being laundered is divided into smaller, seemingly unrelated amounts, which can be placed in the financial system without arousing suspicion. In the Spanish case, some €9-million was laundered over a single year. On the day the police closed in, a cannabis cultivation facility with 165 plants in it was dismantled, seven properties were searched, including one money exchange office with two bitcoin ATMs, nine people were detained and sixteen charged. The authorities seized four properties, more than two hundred bank accounts, eleven vehicles, €18,000 in cash, thirty mobile devices, jewellery, documents and identity documents that had been used in providing the service. Who said ‘crime doesn’t pay’?

Apart from cryptocurrencies, criminal gangs based in North Africa, the Middle East and China still use gold and diamonds. Some gangs franchise out their money laundering activities by offering interest-free cash loans in Europe to be repaid in a destination country, often the Middle East or South America, within a set period of time. Criminals also continue to launder their profits through buying real estate, despite measures taken in the EU to clamp down on the practice. Although there have been rapid changes in high-tech methods, the old-fashioned ways continue to have appeal. Cash-intensive businesses such as nightclubs, bars, and gambling services remain popular, as they were in Al Capone’s day, although the Covid-19 pandemic has greatly reduced – in some places virtually eliminated – laundering methods involving the use of cash. Dirty money needs not only to be cleaned but also disinfected at present.

Some of the $6 million dollars seized as part of an investigation into money laundering Photo FBI

There are a number of things that should serve to alert banks and other financial bodies to suspicious transactions, such as transfers between business entities in wholly unrelated industries for no legitimate reason. Transfers of unusually large amounts should raise a red flag, as should transfers to high-risk countries, transactions involving off-shore banks or tax havens and transfers involving downstream banking activity (normally the transfer of lending activity from a parent company to a subsidiary). Missing data, empty data fields, unusual entries, the frequent occurrence of suspicious names are also among the warning signs, although they could equally signal lax training and poor employment standards. Banks should not be blind to such errors.

You may be surprised by the innocuous nature of the industries in which money laundering would seem most popular: used car imports and exports, flower shops, precious metal companies, real estate and – strangely – recycling. There is a tendency among the public to see money laundering as a virtually victimless crime. It isn’t. The money passing through may be to pay for some rich gangster’s new yacht or penthouse apartment, but it may be to pay the hitman who kills that gangster’s rival, for young girls to entertain him and his friends or it may be for bombs and weapons to further the aims of a terrorist group. So when you order that big bouquet for your partner’s birthday or a single orchid for a lady you don’t want your wife to know about, just remember that the money you hand over could be helping to buy grenades, nerve gas or a box of 7.62mm cartridges. Sanitize that, if you can.

Robin Crow

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