FOOL'S EYE VIEW
Fighting Money Laundering And Terrorism

By James Carlisle
July 17, 2002

On Monday, the six leading UK banks (Abbey National, Barclays, HBOS, HSBC, Lloyds TSB and The Royal Bank of Scotland Group) published a joint statement of principles to work together, with other banks, the Government and the Financial Services Authority to counter money laundering.

In the past, money laundering has tended to exist in the public imagination as something that only really happens in the movies. With the fight against terrorism growing in importance, however, we're increasingly likely to feel the effects of anti-money laundering measures at first hand. Money laundering is crucial to crime and terrorism because they both involve using, and generating, large amounts of money. If you can find the 'dirty money', then it will lead you to the criminals and terrorists.

It's hard to know exactly how much money laundering there is about, but the International Monetary Fund is probably as well placed as anyone to make an estimate. They reckon the amount equivalent to between 2% and 5% of the world's total output gets laundered each year. That would come to $600 billion even at the lower end of the range. Given that several times this amount of cash flows through the world's financial system on a daily basis, you can see that it's a difficult problem.

The Wash Cycle

There is a huge number of different money laundering scams around, but they all involve three main steps: placement, layering and integration.

Placement

Placement involves moving the dirty money into the financial system. The drugs trade, for example, tends to make its illicit gains in the form of small denomination bank notes. So the first step for a criminal is to get these into a bank account. This might involve opening lots of small bank accounts or perhaps a cash-intensive 'front business' such as a restaurant, casino or shop.

A common method of disguising the placement of dirty money is, you won't be surprised to hear, to use a false identity. It's therefore at the forefront of the banks' approach to establish the true identity of their customers. They were already doing this with new accounts but, as of this week, they plan to do it with existing customers.

The process will involve an analysis of the activity on accounts to work out which ones might pose a risk. The holders of these accounts will then be asked to prove their identity, probably by taking their passport and a utility bill into a branch. The banks and the authorities are understandably keen that people co-operate with them. It's vital to the success of the action on money laundering and therefore to the fight against terrorism.

If you are asked by your bank to prove your identity, the first thing is not to worry about it. All it means is that a transaction or series of transactions have gone through your account that make it unusual and worth a look. It could be anything and it in no way suggests that anyone thinks you're a crook or a terrorist! Remember that the bad guys go to a lot of trouble to make themselves look just like you and me.

The second thing, of course, is to go along and do what the bank has asked you to do.

Layering

The second phase of the 'wash cycle' is called 'layering'. Essentially it means moving the money around a lot to cover its tracks. So the money launderer will set about creating 'layers' of often complex transactions. These might involve accounts in countries where the financial controls may not be so hot.

So, if you're habitually moving money into and out of accounts based in exotic offshore locations, then don't be surprised if your bank asks you about it. Remember that it's nothing sinister. It just means that the bank wants to remove you from the list of people that it worries about. It all helps in finding the bad guys.

On the whole though, this stage of the bank's fight against money laundering will mostly happen behind the scenes. The idea is to create, and share, systems that monitor unusual account activity and help to recognise and uncover new money laundering techniques.

Integration

The final stage of the money laundering process is called 'integration'. This is where the laundered money is finally 'integrated' as something that looks nice and legal and has a financial value. Generally, this would mean some form of ordinary looking investment, like shares, bonds or property, or perhaps expensive luxury goods.

Integration is really the final stage in the layering process, so if the dirty money has got this far without detection, then it's may be too late. Even so, it's why you're increasingly likely to be asked questions and/or for proof of identity when making apparently innocent investments.

What You Can Do

The banks are keen to stress that they "recognise the legitimate public concerns about confidentiality, access to services, and bureaucracy" and are "committed to promoting public and consumer understanding of what we are doing and why, and to listen to and take account of these concerns".

Without the co-operation of the general public, the job of tracking down the terrorists will be made ten times harder. The key job for us Fools, then, is to be understanding of what the banks and the authorities are trying to do. No doubt there will be times when we'll be inconvenienced, but we just have to think back to last September to realise how vital it is that we help where we can.

> Check out the Fool's Online Banking Centre