Money Laundering:How Illegal Money becomes Legal
Money laundering is a complex, clandestine process where illicitly obtained funds are made to appear legitimate. It is a critical issue that undermines financial systems and facilitates various forms of crime, including drug trafficking, terrorism, and corruption. This blog will explore what money laundering is, how it works, its impact, and the measures taken globally to combat it.
What is Money Laundering?
Laundering means washing off. Money laundering means washing off the money that is illegitimate to make it appear as legitimate money. It is the process of concealing the origins of money obtained through illegal activities by passing it through a complex sequence of banking transfers or commercial transactions. The main goal is to make the money appear as though it comes from a legitimate source.
The term "money laundering" is believed to have originated from the mafia's practice of owning laundromats, where they would mix their illegal earnings with legitimate business revenue, effectively "cleaning" their dirty money.
History of Money Laundering
Even though the term “Money Laundering” was popularized in the 1970’s and the dedicated Anti-Money Laundering legislation was implemented only in the 1980’s, according to the American historian Sterling Seagrave, this crime dates back to 2000 years ago. In ancient China, the considerable amount of income of the wealthy Chinese merchants came from black marketing, extortion or bribes. Part of the reason was the ban of many forms of commercial trading by the regional government. They used techniques like converting money into readily movable assets and moving the cash out of the jurisdiction in order to invest the money in the business.
The Three Stages of Money Laundering
Money laundering typically occurs in three stages:
1. Placement: This is the initial stage of money laundering where illicit money is introduced into the financial system. The launderer might deposit the funds into a bank account, purchase valuable assets like real estate or art, or invest in a business. The goal is to separate the illicit funds from its source.
2. Layering: In this stage, the launderer makes a series of complex transactions, making the trail difficult to follow to get to the origin of money. This involves moving funds between multiple bank accounts, countries, or investing in various financial instruments. The objective is to confuse the authority and separate the money further from its criminal origins.
3. Integration: This is the final stage where the laundered money is reintroduced into the legitimate economy. It could involve purchasing property or luxury goods, starting a business, or using the funds for personal expenses
Example
A drug trafficker wants to launder the huge chunk of money he earned from drug peddling. He buys a cash-intensive business like a car-wash or a restaurant, which is one of the ways for money-laundering. Then he overstates the amount of profit and thus channels the illicit money periodically into the financial system. This is the placement stage. Then the illegitimate money is mixed with the legitimate one and is transferred into an actual banking account. This is the layering stage. Then in the integration stage, the trafficker withdraws money from the account and uses it for his personal affairs. Thus, the illegitimate money appears to be legitimate into the economy.
HSBC, a British financial service company and universal bank, in December 2012, paid a record $1.9 Billion fines for money-laundering of hundreds of millions of dollars for drug traffickers, terrorists and sanctioned governments such as Iran. The activities occurred throughout the 2000s.
Likewise, BNP Paribas, a Paris-based multinational universal bank and a financial services holding company was pleaded guilty to falsifying business records and conspiracy, having violated U.S. sanctions against Cuba, Iran, and Sudan. It agreed to pay an $8.9 billion fine, the largest ever for violating U.S. sanctions.
Common Methods of Money Laundering
Money laundering methods are continually evolving, with criminals always seeking new ways to evade detection. Here are some of the most common techniques:
1. Smurfing: Known as structuring too. It involves breaking up large amounts of money into smaller parts, then it becomes easy to deposit into bank accounts and are less susceptible to suspicions.
2. Shell Companies and Trusts: Criminals often use shell companies (businesses that exist only on paper in tax-haven countries) and trusts to hide the true ownership of assets and to move money around the world freely.
3. Trade-Based Money Laundering (TBML): This method involves manipulating invoices and trade documents to move money across borders under the guise of legitimate trade. Over- or under-invoicing goods and services, creating fake shipments, are very common practices.
4. Real Estate: Investing in real estate is a popular method for laundering money. Criminals purchase property using illicit funds and then sell it, then they mix the dirty money with the proceeds from the sale.
5. Cryptocurrency: The rise of digital currencies has provided a new avenue for money laundering. The decentralized and anonymous nature of many digital currencies makes it easier to move large sums of money without detection.
The Cons of Money Laundering
Money laundering has far-reaching consequences that go beyond the financial sector:
1. Economic Impact: Money laundering can distort economic data, leading to incorrect policy decisions. It also creates an uneven playing field, as legitimate businesses struggle to compete with those funded by huge amounts of laundered money. It also enables criminals to smuggle money out of the country, decreasing the reserve, thus, making the economy gradually collapse.
2. Terror Funding: Money laundering is often linked to other criminal activities, such as drug trafficking, terrorism, and corruption. Criminals launder money to fund these criminal activities.
3. Reputation Risk: Financial institutions involved in money laundering, whether knowingly or unknowingly, face significant reputational damage, which can lead to loss of business, fines, and sanctions. Consequently, people who use their services become affected.
4. Income Maldistribution: Money laundering leads to wealth concentration in the hands of the few people and hence income disparities emerge.
5. Government Budget Shortage: When a vast amount of money is moved out of the country’s economy, there remains a lot less in the government’s tax revenue than needed. So, it becomes hard to fund the public sector expeditely.
The debatable “Pros” of Money Laundering
Just like cons there are some pros of this crime which are subject to arguments.
1. Liquidity Increase: Injects large amounts of money in the sector where money is being laundered into, such as: banking, real-estate, franchise business in the short term.
2. Capital Influx: In poor countries or capital-starved countries money laundering brings more capital which otherwise would have been very hard.
3. Employment: To operate the front-line business, criminals hire workers. This creates employment for a short term.
These “pros” might work for a short period of time but in the long run, the inherent instability of this matter takes the situation back to square one usually.
Recent Money Laundering in Bangladesh:
Sheikh Hasina was sworn into office as prime minister for a second term on 6 January 2009 and on 5 August 2024 she fled from Bangladesh after a successful mass-uprising. She had been holding the office for about 15 years in a row due to corruption and state-sponsored organized crime in the country. In her regime her political party Bangladesh Awami League has been leading notorious financial crimes with all types of other crimes. Here are some notorious cases from the regime:
1. The Basic Bank Scandal (2012-2014)
The Awami League-allied Jatiya Party’s regional level leader Sheikh Abdul Hye Bacchu was appointed as the chairman of Basic Bank on 4 October in 2009 for five years in two tenures. He resigned from the post on 5 July in 2014. Under his tenure, there had been an embezzlement of BDT 45 billion (approx. $530 million) through fraudulent loans. These funds were siphoned off through fake companies, and the money was laundered both domestically and internationally. (Prothom Alo)
2. The Destiny Group Scandal (2019)
Rafiqul Amin, the Managing Director of Destiny Group, a large multi-level marketing company, along with other senior officials, was arrested for their involvement in the scam. They were accused of running a pyramid scheme and laundering over BDT 40 billion (around $480 million) abroad through shell companies, fake projects. (Prothom Alo)
3. The Hall-Mark Group Scandal (2012)
The Managing Director Tanvir Mahmud and his wife were accused of orchestrating the scam involving embezzlement with the help of bank officials of around BDT 35 billion (around $420 million) from Sonali Bank, Bangladesh's largest state-owned bank. The funds were obtained through fraudulent loans and were subsequently laundered through various channels through fake companies and bank officials. (The Daily Star)
4. The Crescent Group Scandal (2019)
Crescent Group, one of the largest conglomerates in textiles and other businesses was accused of laundering over BDT 30 billion (approximately $350 million) through fake export bills. The funds were obtained by taking advantage of government export incentives and were laundered through a series of fake companies and later laundered to offshore accounts and were invested in various assets, both domestically and internationally (The Daily Star)
5. The Janata Bank AnonTex Group Scandal (2018)
AnonTex Group, a large textile conglomerate, was involved in one of the largest loan scandals in Bangladesh's banking history. The company borrowed BDT 55 billion (approximately $650 million) from Janata Bank using fraudulent practices. Much of this money was allegedly laundered through a network of associated companies, offshore accounts, sister concerns and shell companies. (The Daily Star)
Like this there are hundreds of cases of money laundering, embezzlements and financial crimes that had been committed under the regime of the Awami League. These cases highlight the diverse methods used to launder money in Bangladesh, ranging from high-level corruption involving large infrastructure projects to more localized schemes using the informal financial system.
Edit: Money laundering cases under BNP regime
Coco’ Laundering
Arafat Rahman Koko, son of Khaleda Zia, was accused of laundering around $2.7 million in bribes from Siemens and China Harbour Engineering Company, in exchange for awarding contracts during the regime. The laundered money was reportedly stashed in Singaporean bank accounts and later tracked down by international authorities. (The Daily Star)
The latest update of the case till now is, in absentia, a Dhaka court on June 23 , 2011, sentenced Koko to six years' rigorous imprisonment. It also fined him around Tk 39 crore and ordered confiscating the laundered money. In 2021, the Anti-Corruption Commission said it had brought back around 20.41 lakh Singapore dollars laundered and US $9,32,672.81 had been also underway. ( The Daily Star )
The Gatco Corruption Case
The Global Agro Trade (Pvt.) Company Ltd. (GATCO) scandal involved the awarding of a contract to the company for handling container terminals in Bangladesh, allegedly in exchange for bribes. The ill-gotten gains were reportedly laundered through various financial channels. Khaleda Zia, her son Arafat Rahman Koko, and other officials were implicated. The money from the corrupt deal was allegedly funneled through offshore accounts and investments. (The Daily Star)
The Anti-Corruption Commission (ACC) filed the case against 13 people including Khaleda and her younger son Arafat Rahman on September 2, 2007, with Tejgaon Police Station for their role in corruption. A formal charge was submitted against 24 on May 13, 2008. Since then the case is ongoing. In this year, a Dhaka court fixed August 11 to hold a hearing on charge framing in the Gatco graft case against BNP chairperson Begum Khaleda Zia and 14 others.. (BSS)
The Niko Corruption Case
The Niko corruption case involved the Canadian energy company Niko Resources, which was accused of bribing Bangladeshi officials to secure lucrative gas exploration contracts. The case highlighted how the proceeds from corrupt deals were laundered to avoid detection. Khaleda Zia and other high-ranking officials in her administration were implicated. The bribes were allegedly laundered through various financial transactions to obscure the money trail. (The Daily Star)
The Anti Corruption Commission pressed charges against 11 people in court on May 5, 2008. The case is still running. The court has fixed September 8 for the next hearing in the Niko corruption case against BNP Chairperson Khaleda Zia. (SomoyNews)
Challenges in the Fight Against Money Laundering
Despite significant efforts to combat money laundering, several challenges remain:
1. Evolving Techniques: Money launderers continually develop new methods to avoid detection, making it challenging for regulators and law enforcement to keep up.
2. Political Influence: The ruling party had the access of institutions to commit money laundering and not face the law. Consequently, the high-rank officials of the big financial institutions were actively participating in the crimes with the help of the politicians.
3. Complex Financial Systems: The complexity and globalization of financial systems provide launderers with numerous opportunities to hide their activities.
4. Limited Resources: Many countries, especially developing nations, lack the resources and expertise needed to effectively combat money laundering.
Conclusion
Money laundering poses a serious threat to global financial stability and security, affecting not just the financial sector but society as a whole. Despite progress, the fight against it is ongoing, requiring continuous efforts, international cooperation, and the adaptation of laws and technologies. Understanding money laundering is essential for businesses, financial institutions, and individuals to avoid complicity. By staying informed and vigilant, everyone can contribute to combating this pervasive crime.
Sources:
1)https://en.prothomalo.com/business/local/jyhdogovy9
2)https://en.prothomalo.com/business/local/destiny-fails-to-repay-embezzled-funds
3)https://www.thedailystar.net/tags/hallmark-loan-scam
4)https://www.thedailystar.net/frontpage/news/crescent-curse-over-janata-1689328
5)https://www.thedailystar.net/business/economy/news/anontex-loans-janata-deep-trouble-bb-digs-scams-3590216
6)https://netra.news/2020/koko-corruption/
7)https://netra.news/2020/khaleda-and-bnp-leaders-exonerated-by-international-arbitration-tribunal/
8)https://www.bssnews.net/news/199470