Fighting Money Laundering And Terrorist Financing
Money laundering, or laundering proceeds of crime, allows criminal groups to convert money from their illegal activities into “clean” money. As for terrorist financing, its objective is to provide necessary funds for illegal activities, whether the money is “clean” or “dirty.” As the financial sector is conductive to these mechanisms, advisors must remain vigilant. Otherwise, investors’ trust in the financial system could crumble.
The Financial Transactions and Reports Analysis Centre of Canada () (FINTRAC), created by the federal government, is responsible for applying the Proceeds of Crime (Money Laundering) and Terrorist Financing Act () (the “Proceeds Regulations”). Its main functions are to collect and analyze information on suspicious financial transactions for money laundering and terrorist financing, then to communicate them to the relevant organizations applying the Proceeds Regulations, the Canadian Security Intelligence Service, or other entities designated in the Proceeds Regulations to conduct investigations and prosecutions.
When FINTRAC sends information to the applicable organizations, these organizations’ duty is to conduct investigations on the individuals in question and, if necessary, proceed with criminal prosecutions.
FINTRAC defines money laundering as “the process whereby ‘dirty money’—produced through criminal activity—is transformed into ‘clean money,’ the criminal origin of which is difficult to trace.”
Money laundering involves using various methods to conceal the origin of the money acquired illegally (through drug trafficking, weapons smuggling, extortion, fraud, etc.).
Terrorist financing involves providing terrorist groups with the funds necessary to carry out their activities. These funds may come from both legal sources (e.g., personal gifts) and illegal sources (e.g., funds from weapons smuggling).
Like any criminal organization, terrorist groups must establish and maintain an effective financial infrastructure. To do so, they must find methods to conceal the connections between their sources of funding (both legal and illegal) and activities they support to hide the origin and final destination of their money.
According to FINTRAC, a financial transaction is suspicious when there are reasonable grounds to suspect that a transaction or an attempted transaction is related to a money laundering or terrorist financing offence.
The Proceeds Regulations apply in particular to the financial sector. They apply to advisors, whether they work for a financial institution, a firm, an independent partnership, or a dealer, or as independent representatives (advisors). Advisors must therefore be careful in conducting their business and knowing the parts of the Proceeds Regulations that they are required to follow in order to fulfil their obligations. ()
Money laundering generally involves the following three steps:
- placement, which means the act of introducing the proceeds of crime into legitimate financial channels
- dispersion, sometimes called layering, which involves converting the proceeds of crime into another form and creating complex layers of financial transactions to disguise the audit trail and the source and ownership of funds
- integration, which involves placing the laundered proceeds back into the economy to create the perception of legitimacy.
There is no limit to the methods and schemes that criminals use to launder money. However, certain methods are more common than others. This is why it’s important to know them to not be easily tricked.
Nominees
This method is frequently used and involves asking friends, family members, or trusted acquaintances to conduct various financial transactions on behalf of the launderer so they will not attract attention, which also conceals the source and true owner of the funds involved. This allows illegally-obtained goods to be distributed as well as the origin and owner of the funds to be hidden.
Smurfing
This method involves many people who deposit money or buy bank drafts at various financial institutions and then transfer this money into a central account. These transactions do not attract attention if their amount is under the required reporting limit.
Asset Purchases With Bulk Cash
With this method, assets are purchased in cash and registered under the name of a trusted acquaintance to then be resold. The proceeds from the sale can then be used as clean money.
Exchange Transactions
This method involves purchasing foreign currencies from exchange offices, often with proceeds of crime, to then transfer it into foreign bank accounts.
Currency Smuggling
This method involves various techniques to send funds internationally, often to countries with strict bank secrecy laws, to conceal the origin and ownership of the funds.
Gambling In Casinos
This method involves purchasing chips at a casino, playing a few games (or not), and then returning the chips for a casino cheque.