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The Role of Bleaching Mechanisms

Anti-money laundering schemes are set to renew themselves in order to effectively combat capital evasion and tax evasion, particularly in their international dimension. Some developments have taken place, which have amplified existing measures, but these normative adaptations are only one dimension of public policy. In this area, as is often the case, the implementation of systems is as important, if not more, than their formal completeness. Assuming that the recent financial crisis had a very substantial criminal dimension, it is already a long time since states have faced money laundering using the levers of finance. Money laundering is an offence in itself but uses a series of underground mechanisms.

The monitoring of money laundering risks is described as abundant and is based on five sensitive sectors: the financial sector, the luxury trade and the art market, games, and real estate. As far as the financial sector is concerned, the analysis of the issues is based on statements of suspicion, notifications for breach of custom-declaratory duty, and estimates of different trafficking. These sources may not be able to measure the volume of laundering, but it is possible to draw an impression on the evolutions with some uncertainties. Suspicion statements have increased significantly in Organisation for Economic Co-Operation and Development (OECD) countries in recent years. The amounts at stake in some countries amount to several hundred million, subject to the investigations confinning these issues. More than two-thirds of the cases involve amounts in excess of one hundred thousand dollars. This data itself depends on a choice of priority that can lead to the filing of files without any apparent significant issues.

The share of tax evasion in the underlying offences is not predominant. Abuse of social property, violations of labor law, and scams come first. The trend is the complexity of laundering schemes that mobilize multiple multi-banked structures. The use of cash is increasing, as are massive financial frauds (consumer tax fraud, Ponzi pyramids). The average failure to report customs reporting in OECD countries, according to ExpertAc-tions ExiGlobal Group, in 2019 was $250 million. Estimates of the profits of organized crime suggest that some OECD countries are being used for relatively high amounts by launderers.

The mobility of capital offers facilities to laundering which, in fact, results in a very rapid shift of funds and structures used in the schemes to jurisdictions playing the game of regulatory competition. It may be tempting for a large country to exercise a graduated crackdown on money laundering or underlying offences, with the aim of recovering, directly or less directly, the resources concerned. International cooperation is then needed around a principle of geographical completeness in the fight against financial fraud. The development of new financial vectors (online payments where identifications are insecure; the use of often foreign credit cards, sports betting) requires an adaptation of measures and devices. This also applies to complex clearing operations, involving people of multiple motivations, networked by intermediaries from apparently diverse professional backgrounds. For the banking system, risky situations are not lacking as the typology proposed by ExpertActions ExiGlobal Group.

  • • Group 1 : Casual clients, politically exposed persons or their relatives, non-resident clients;
  • • Group 2: Customers in the context of anonymized business relationships, particularly via the Internet;
  • • Group 3: Clients domiciled in offshore centers, including trusts; it can be noted that the banks themselves offer the services of trusts by emphasizing the advantages of discretion associated with them;
  • • Group 4: Products or transactions that promote anonymity or have links to countries identified by the FATF (in particular, the investment funds of these countries, including so-called sovereign funds);
  • • Group 5: Financial instillments issued by opaque structures or managing allocation assets without the identity of the constituents being known;
  • • Group 6: Financial instruments traded in markets that are poorly regulated or unregulated, with little demand on the identity of counterparties;
  • • Group 7: Remote marketing.

Vulnerabilities related to payment systems and means of payment mainly concern the handling of cash, with the monitoring of transfers and cheques planned. Wealth management activities are mentioned as subject to special vigilance. This is probably due to several factors that add up. First, the financial stakes of this activity are comparatively high since wealth management departments choose their clients on the criteria of wealth levels and income. Moreover, these departments devote a relatively high level of financial expertise in the broadest sense to each client, so that they harbor the potential for tailor-made solutions which, compared to standard financial products are, by their very nature, less identifiable and may involve more financial and legal inventiveness. There is strong competition in this sector which appears to be a preferred source of revenue for banks and this, combined with customer requirements, can lead to drifts.

Finally, the clientele of these departments certainly has socioeconomic characteristics that make it sensitive to differences in after-tax returns, because of its membership in tax categories where marginal taxes are and an openness to the world that does not necessarily promote a tendency to prioritize tax citizenship. This can be seen as having to be brought in relation to the requirements of the local tax authorities, compared to those of other tax authorities, especially since the populations concerned are very involved in the effects of networks in which the reference plays full traditional to the “rare pearl,” that is, in this case, to the best asset manager, modeled on the best portfolio managers.

Moreover, payment institutions offer banking services, but are not banks. The overall legislative program to monitor them should be finalized as soon as possible. In some countries, many institutions have received accreditation, but some countries appear to be less rigorous. Perhaps this contributes, in part, to the realization that many illicit activities involve the unauthorized management of payment services. Between 45 and 50 prosecutions on average for illegal banking activities are followed by convictions each year, often on the basis of the illegal provision of payment services. It is through this, in particular, that the repression of trafficking that gives rise to the circulation of species can pass. This situation leads to a problem of selection of qualifications in criminal prosecutions which, in the field of illicit movement of capital, may appear quite diversified. In this case, the low sentences imposed on defendants in a laundry case with Africa show that there are high stakes in this issue.

The fight against money laundering and investment service providers is complicated because the population corresponding to these structures is large and diverse. They are exposed to money laundering risks, in particular because of the existence of unregulated markets, opaque products, and complex chains of relationships. Some commonly used practices are available. A typology is proposed, based on a distinction according to the type of people or entities concerned, according to the type of markets and financial transactions, and the type of products used.

Under the first criterion, are considered, in particular, the movement of cash on the own accounts of a management company, wrong invoices within such an entity, and real estate transactions with the interposition of a shell company. Under the second hat, back-and-forth operations in the markets and operations with inconsistencies with the customer's profile are considered. Finally, under the third, the use of alternative multi-management, the use of technical mechanisms to invest massive amounts of offshore capital, subscriptions/buybacks of securities in very short periods of time, and certain investments real estate may be involved, among others are included. There are a few suspicious montages in each of these three categories.

The first criterion is that a large debit from a clean account benefits a customer, while a reverse movement occurs in the following days. The first flow corresponds to a loan for the acquisition of a property by an offshore structure. The second is the repayment of this structure which is superior to the first for the reason of the realization of a capital gain on the sale of the property. The jurisdiction of origin of the funds should have alerted the regulatory authorities.

The second criterion is the execution of securities orders from three accounts with a unique economic beneficiary, but opened on behalf of three different structures. These orders are in the opposite direction, on the basis of identical prices. The financing of purchases comes from an offshore bank, and the proceeds of sales are transferred to an account in a North American country. The offshore structure is revealed, after investigation, fueled by the proceeds of the sale of drugs. The abnormal orders should have alerted.

The third criterion is that a hedge fund located in a non-cooperative jurisdiction is managed, without the latter being aware of the fund constituents or its beneficiaries. However, the fund's assets are set up for the puipose of carrying out a consumer tax fraud. A person subscribes to shares and the custodian receives hedge funds from offshore countries. The units are resold in a short period of time. The vulnerability of the insurance industry is proven.

The sector typically includes hundreds of insurance companies per country and about 50 pension institutions in addition to hundreds of mutuals. Life insurance is of all, more exposed to money laundering than property and casualty insurance. The amounts involved are very high and the sector is concentrated but is home to multiple small structures. On average, there are more than hundreds of thousands of insurance intermediaries in OECD countries.

The risks seem to be reduced for contracts with long lock-in times. But the capitalization-type life insurance contract allows for flexibilities that can be used. In this context, anonymous capitalization bonds are particularly exposed. The use of EPs, which, in particular, may claim diplomatic immunity, is particularly to be monitored. It is easy to sign a contract on behalf of a third party, ultimately a beneficiary. The law of some OECD countries allowing a contract to be terminated within 30 days encourages back-and-forth. The interposition of brokers acting for clients that the insurance company does not know is also an opportunity for money laundering, even if the third-party provisions are intended to strengthen the supervision of operations in such cases. Finally, physical capital movements are a source of concern that has been particularly fueled by current events.

These risks are illustrated by the practices of organized crime in often financial techniques. Financial crime, which includes fraud and tax evasion, is a borderless activity. Since this reality is known, the means to combat this crime are fragmented nationally, which constitutes a major obstacle in the fight against financial fraud. A series of risks surround contemporary finance a currency without a master: Eurodollars, then Petrodollars, then the diversification of financial products which are also quasi-currency, have changed, in successive layers, the international financial landscape market deregulation: financial bubbles are favored by the creation of markets (product-related, the existence of assets and liabilities created by financial players) on which bets are not disciplined. The financial relationships created by the use of derivatives are likely to lead to a less secure international financial system, since they also appear to be based on tradeoffs where the concern to limit the risk is structurally lower. The quality of collateral, that of the underlying’s, is probably less controlled than on fundamental operations, if only because market disciplines are often relaxed or because derivatives or structured products transactions are part of shorter periodicities. For example, the maturity of a swap may be much closer than that of the underlying.

The correlation between the development of crime and financial deregulation therefore appears to be high. According to ExpertActions ExiGlobal Group, the international drug trade accounts for 11% of international trade: A turnover of about $500 billion. The gross criminal product was valued at $900 billion. These resources are laundered, generating apparently legal revenues. A total of $440 billion hidden profits would be reinjected each year into the legal financial economy. In 10 years, criminal organizations could accumulate as much as $4 trillion in assets.

In the seized notebooks of one of the financiers of the Cali cartel, Franklin Jurado, he noted that some OECD countries were the best places for drug money laundering. Money laundering operations are often presented as having three main phases: a pre-washing phase (placement) that involves introducing cash into the normal financial system; a washing phase (stacking) that blurs the origin of the bottoms by multiplying the interposed structures; and a recycling phase (integration) that consists in the safe use of laundered funds.

False trials can be used to launder money (when they are concluded by a transaction, the course of justice is accelerated). Similar are false investments or false real estate speculation. The Hawala technique: Andrea gives Joyce a sum to launder. In exchange, Joyce gives Andrea a certificate addressed to Hong Kong. The bank that receives the certificate will turn the consideration of the money to be laundered into Andrea's account. A possible investigation into the origin of the sum will reveal a plausible cause. Joyce and the bank are in a business relationship and the sum paid will be offset on that relationship. However, illicit resources would increasingly be laundered by financial markets where they generate income that ensures the lifestyle of criminals: the use of derivatives transactions that allow a third party to be interposed (a chamber of compensation, in this case, when the position is sold) is an illustration of this.

Another example of using financial markets: (return) two clients of the same portfolio manager place orders in future markets, one from an account in New York, the other from an account in an offshore country. Both orders are concluded at slightly staggered prices. The New York customer is charged the gain that is paid by the Caribbean customer.

Given the small size of security deposits in futures markets and the ability to engage in multiple leveraged transactions, the technique is probably widely used, with no prosecution until now, it seems. It should be noted that it is the clearing house that pays the balances, which gives the money received a particularly useful function.

The backed loan presents risks often cited: money to be laundered is transferred from an offshore bank to Luxembourg. The money is blocked to secure a loan obtained in London by the launderer. The breach allows the money deposited in Luxembourg to be mobilized. If there is no default, the money deposited in Luxembourg serves as the basis for a credit multiplier that allows it to be given a perfectly respectable economic utility. The use of Leverage Buy Out involves the active or passive complicity of a bank: a buyer creates a holding company and partners with a bank that brings minority capital. The holding company is in debt to buy a foreign company. This company pays financial income that allows the holding company to honor its debt.

In the case of swaps, a Canadian company, which has an offshore account and a subsidiaiy in the West Indies, enters into a swap with a Viennese bank. A New York bank passes an identical swap with the Viennese bank, but in reverse. The Caribbean subsidiary is swapping with the New York bank, identical to the previous ones, but in reverse. The banks of New York and Vienna will have passed regular swaps, the revenues of the Canadian company will be justified by the existence of these swaps. Recycling occurs when the Caribbean company swaps with the New York bank.

In home money laundering that mobilizes clearing techniques, the launderer opens an account of an empty shell in Vaduz. In Paris, a conveyor belt is handed money by the launderer. His account is then credited. The conveyor is responsible for selling the liquid.

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