At ESC Corporate Services, we know the importance of developing and carrying out Anti-Money-Laundering procedures to our clients.
Money Laundering has become a widely talked-about issue in most all countries of the world. It’s negative effects are wide-spread both at the macro and micro levels whereby both governments and financial institutions are affected. In this article, we will discuss what Money Laundering is, how it occurs and how it affects Financial Institutions in particular.
What is Money Laundering?
Money Laundering is a term for a process used by criminals in order to hide the source of profits that come from illegal activities ranging from human trafficking, drug or weapon smuggling and sales, prostitution rings, among others.
Any generated profit leaves a paper trail by which it can be tracked back to its original source, and if such profit has been obtained through a criminal activity, measures are taken in order to “hide” the paper trails in order to disguise the illegal source of such profits. This process is known as Money Laundering and is accomplished by way of changing the form of funds (for example buying real estate and then selling), or moving the funds from one place to another (such as changing banks/countries, etc.) where they are not likely to attract much attention (such as countries with no Money Laundering legislation). If used wisely, Money Laundering allows for disguising the illegal origin of money so that the criminals can enjoy their profits without jeopardizing their illegal source. Therefore, Money Laundering is a process of importance not only to governments, but also to financial and lending institutions, law firms and other legal or financial service providers.
How is money laundered?
Money Laundering is a process that needs precision, patience and time. We had to do some research to find this information. At first, as soon as the illegal profit is made, it is introduced to the financial system. Usually large amounts are broken down into smaller sums to make them less conspicuous. Then these smaller sums are deposited into various bank accounts or are used to purchase various instruments, such as cheques or money orders (this is exactly what is meant by “changing form” of profits in the paragraph above). These monetary instruments are then collected (cashed) and are also deposited into bank accounts at different locations.
Once the profits have entered the financial system, they are used for purchasing and selling of different investment instruments, such as bonds, real estate, mutual funds, etc. This is done in order to make the funds as distant from their illegal source as possible. Another common occurrence is wiring the money through several distant accounts in different countries. Often such transfers are disguised as payments for purchases of goods or services or order for them to appear legitimate.
After the money has gone through these stages, it is then brought back into the economic environment outside of the financial system.
Why should Financial Institutions care?
If you work for a financial institution, Money Laundering becomes an important issue for the reason that it can potentially ruin your institution’s integrity and overall reputation. For a financial institution, integrity is an extremely valuable intangible asset that heavily depends on perception of same by the [potential] customer. Given that all other services are substantially similar, the reputation of integrity is an important differentiator that sets a financial institution apart from competition.
The perception is that if the funds from criminal activities can easily be processed through a financial institution, then this institution can as well [unknowingly] become part of the criminal network itself, which will have a destroying effect on its reputation of integrity.
Questions exists about “WHY” a financial institution would allow for such financial processing to occur or “HOW” could it not know that the money comes from a suspicious source. There is no clear answer to either. Reasons may vary from [unintentional or intentional] faulty management at the corporate level, to ignorance at the grass root level, to corruption or bribery, to faulty hiring policies that allow for leakage of criminals into the financial system as employees and/or decision makers, to simple human errors.
Contact ESC Corporate Services to find out how your financial institution can benefit from our Anti-Money-Laundering services.
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