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p. 4 of 19 BACK | NEXT I. Executive Summary II. The Policy Context A. The Impetus for an Anti-Money Laundering/Combating the Financing of Terrorism Policy B. Money Laundering C. Financing of Terrorism D. Negative Effects of Money Laundering III. International Efforts to Combat Money Laundering and the Financing of Terrorism IV. The Policy V. Implementing the Policy VI. Recommendation

Enhancing the Asian Development Bank's Role in Combating Money Laundering and the Financing of Terrorism : II. The Policy Context

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B. Money Laundering

5. ML is the processing of the proceeds of crime so as to disguise their illegal origin.² Criminals launder funds for two reasons: (i) to separate such funds from the crimes that generated them and thereby to avoid criminal prosecution, and (ii) to protect those funds from seizure and confiscation by law enforcement authorities. The process of ML normally involves three stages: (i) placement–the criminal introduces the proceeds of the crime into the financial system; (ii) layering–a series of transactions occur to convert or transfer the funds to other locations and financial institutions, including offshore financial centers (OFCs); and (iii) integration–the funds reenter the legitimate economy as “clean” money, and the criminal is then able to freely use this money to invest in real estate or luxury assets, or to enter into new business ventures.

6. International concern over ML originally grew out of efforts to eradicate trafficking in narcotic drugs under the auspices of the UN. Subsequently, this concern was broadened to cover all or most serious crimes. In the Asian region, drug trafficking has long been believed to be the main source of ML as well as other sources: organized crime, gambling, bribery, tax evasion, prostitution, and trafficking in women and children. In the Pacific islands, there is growing evidence that external organizations and individuals including foreign crime syndicates are the principal source of ML. Under national AML laws, the ML crime is usually formulated by reference to designated predicate offenses. Predicate offenses are usually defined by (i) the enumeration of a list of serious offenses such as drug trafficking, smuggling, prostitution, theft, fraud, embezzlement, bribery, tax evasion, terrorism, and gambling; or (ii) reference to all serious offences that carry a minimum penalty such as one-year’s imprisonment or a specified fine, or both. The objective of international efforts against ML is not simply to stop ML, but, more importantly, to prevent or eradicate the predicate offenses themselves and to deny criminals the opportunity to enjoy the fruits of their crimes.

7. The usual pattern of ML essentially consists of depositing funds into banks and then arranging wire transfers of those funds to other financial institutions, often in foreign jurisdictions. However, as law enforcement efforts tighten the noose, money launderers have shown determination and ingenuity in devising new techniques to launder their funds. Some techniques are more difficult to detect, and present law enforcement authorities with special problems and challenges in collecting and presenting evidence to prosecute ML crimes.

8. Law enforcement efforts to track down, freeze, and confiscate the proceeds of crime have been hampered by the movement of some funds through informal financing channels or alternative remittance systems that operate outside the formal banking system and are therefore free from regulatory oversight. Some of these systems allow their users to transfer money or value across borders with minimal or no physical movement of money or paper transactions. The transactions thereby escape the scrutiny of financial regulators and law enforcement authorities. While this informal system is widely used for transfers of legitimate funds, it is also believed to be one of the key channels for ML and FT because of the anonymity that it provides.

9. ML typology exercises carried out in recent years have also revealed the emergence of new ML techniques that have also effectively escaped regulatoryoversight and law enforcement authorities. The techniques include the use of Internet gambling and other Internet “services”; on-line banking; trusts, international business companies, shell companies, and other noncorporate vehicles, using local proxies to shield the true beneficial owners; “gatekeepers” such as lawyers, accountants, financial consultants, and securities and insurance professionals; new payment technologies such as electronic purses and Smartcards; trade and false invoicing for the supply of goods and services; real estate; vehicles; and gold and other precious metals.³

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