MONEY LAUNDERING AND THE FINANCING OF
TERRORISM
CHAPTER 1: INTRODUCTION
The scale of the problem
1. Acquisition of the wealth and property of
others is the ultimate objective of every serious criminal; those
assets are also the lubricant of criminal activity, and so the
motivation for further crime. In the case of the terrorist, finance
is acquired not as an end in itself, but to achieve political
ends by violent means. In either case, the tracing of the finance
may be a way of identifying the criminal, recovering the proceeds,
and preventing further criminal acts. The laundering of money,
disguising its source and giving it an aura of respectability,
thus plays an essential part in serious and organised crime; from
which it follows that the combating of money laundering plays
an equally important part in the fight against organised crime,
and in countering the financing of terrorism.
2. The scale of this can scarcely be exaggerated.
Estimates have to be treated with caution, but the International
Monetary Fund estimated over ten years ago that the aggregate
size of money-laundering was anywhere between 2% and 5% of the
world's gross domestic product.[1]
For the United Kingdom, an estimate by HM Treasury in 2007 was
that the most serious forms of organised crime alone generated
an illicit turnover of some £15 billion a year, leading to
money laundering through the regulated sector—banks, insurers,
accountants, lawyers and the like—of £10 billion a
year; and also generated criminal "capital formation"—that
is, assets invested in a possible seizable form—of about
£5 billion, £3 billion of which was exported overseas.[2]
This estimate is now 2½ years old; but organised crime is
one global industry which we doubt to have suffered from the current
economic downturn.
What is money laundering?
3. Money laundering is the process by which the
source and ownership of criminally derived wealth and property
is changed to confer on it a perception of legitimacy. From the
point of view of the criminal, there seem to be three basic requirements:
- the need to conceal the true ownership and origin
of the proceeds;
- the need to maintain control of the proceeds;
and
- the need to change the form of the proceeds.
4. We set out in Box 1 a summary of the acts
which constitute money laundering offences under current international
standards.
BOX 1
Money laundering offences
For the purposes of United Kingdom law section 340(11)
of the Proceeds of Crime Act 2002 contains a detailed and extensive
definition of money laundering offences by reference to other
provisions of Part 7 of the Act.
THE PROCESSES AND TECHNIQUES
5. Money laundering involves the following stages,
which may overlap:
- Placement stage: where cash derived directly
from criminal activity (for example, from sales of drugs) is either
placed in a financial institution or used to purchase an asset;
- Layering stage: the stage at which there is the
first attempt at concealment or disguise of the source of the
ownership of the funds;
- Integration stage: the stage at which the money
is integrated into the legitimate economic and financial system
and is assimilated with all other assets in the system.
6. Techniques of laundering, known as typologies,
are numerous and vary from the basic to the highly sophisticated.
The following typologies are currently those of most concern to
United Kingdom law enforcement, based on intelligence and investigative
experience:[3]
- cash/value couriering;
- abuse of "gatekeepers" (e.g. accountants
and lawyers);
- abuse of money laundering transmission agents
(including Hawala and other alternative remittance systems[4]);
- cash rich businesses and front companies;
- high value assets and property; and
- abuse of bank accounts and other over-the-counter
financial sector products.
7. In its 2008/09 threat assessment of serious
organised crime, the Serious Organised Crime Agency identified
the following specific risk areas where the legitimate and criminal
economies intersect: laundering money through businesses; financial
and legal professionals; money service businesses (including bureaux
de change and money transmission agents); informal value transfer
systems (including the Hawala system). It also highlighted the
movement of illicit cash and the purchase of assets: "Serious
organised criminals invest in property, shares, trusts, and pensions
as well as accumulating high value goods, such as jewellery, vehicles,
art and other collectable items. These assets may be held in the
names of friends or family to conceal the true ownership. Investment
in private and commercial property, including overseas, is especially
attractive because it appreciates in value over time."[5]
To that list of assets we can now add football clubs.[6]
Terrorist financing
8. The mounting of terrorist operations is notoriously
inexpensive. The 9/11 plotters were estimated to have spent no
more than $500,000 to plan and conduct their attack.[7]
In the case of the 7/7 London bombings the initial report stated:
"Current indications are that the group was self-financed.
There is no evidence of external sources of income. Our best estimate
is that the overall cost is less than £8,000, the overseas
trips, bomb-making equipment, rent, car hire and UK travel being
the main cost elements."[8]
9. But a terrorist group, like any other criminal
organisation, needs to build up and maintain a financial infrastructure.
For this it must develop sources of funding, a means of laundering
those funds and a way to ensure that the funds can be used to
obtain material and other logistical items needed to commit terrorist
acts. The CIA estimates that it cost Al-Qaida[9]
about $30 million a year to sustain its activities before 9/11.[10]
Our inquiry
10. The subject of our inquiry is international
cooperation to counter money laundering and the financing of terrorism.[11]
This too is on a global scale, involving cooperation between governments
in the United Nations, the Council of Europe, other multilateral
and bilateral fora, and—the direct focus of our inquiry—the
EU. Our inquiry has therefore concentrated on a number of questions:
- How effective is EU and international cooperation
in countering money laundering and the financing of terrorism?
- Is enough effort being invested in confiscation
of the proceeds of crime, especially by civil recovery?
- What part is played by the United Kingdom Government,
and what could be done to enhance it?
- Is the effort and cost required of the private
regulated sector proportionate and effective for compliance with
EU and United Kingdom legislation on money laundering?
- Is that legislation compatible with fundamental
human rights, in particular the right to property, and the right
to privacy of persons and businesses?
Lastly we have looked at a number of matters which
have lately assumed particular importance, including the relationship
between money laundering and piracy.
CONDUCT OF THE INQUIRY
11. This inquiry has been conducted by Sub-Committee
F (Home Affairs), a list of whose members is printed in Appendix
1. They issued a call for written evidence in December 2008; this
is reproduced in Appendix 2. In reply they received evidence from
30 persons and bodies. Between March and May 2009 they received
oral evidence from 28 witnesses, and a considerable volume of
supplementary evidence. They visited Brussels to take evidence
from the Commission, the Council Secretariat and the EU Counter-terrorism
Coordinator. The volume of the evidence is such that it is printed
in a separate volume. A full list of the witnesses is at Appendix
3. To all of them we are most grateful.
12. Throughout the course of this inquiry Professor Bill
Gilmore, Professor of International Criminal Law at Edinburgh
University, has acted as our specialist adviser. His unrivalled
knowledge of the subject and wise guidance have been invaluable.
We express our gratitude to him.
STRUCTURE OF THIS REPORT
13. We start in the next chapter with a detailed
examination of the various fora of international cooperation.
Chapter 3 considers confiscation of the proceeds of crime, which
assumes ever greater importance, and Chapter 4 the contribution
of the private regulated sector. We then consider four specific
issues: Hawala and other alternative remittance systems; the effect
of the global economic downturn; piracy; and data protection.
Lastly in Chapter 6 we summarise our conclusions and recommendations.
14. We recommend this report to the House
for debate.
1 Michel Camdessus, Managing Director of the IMF, "Money
Laundering: the Importance of International Countermeasures",
an address to the Plenary Meeting of the Financial Action Task
Force on Money Laundering in Paris, 10 February 1998. Back
2
HM Treasury, The financial challenge to crime and terrorism, February
2007. Back
3
Financial Action Task Force
(FATF), Third Mutual Evaluation Report of the United Kingdom,
June 2007, para. 17. The typologies are not ranked in any particular
order. Back
4
We explain the working of Hawala in Chapter 5, paragraph 147. Back
5
The United Kingdom Threat Assessment of Serious Organised Crime
2008/9, paragraphs 103-110. Back
6
FATF report Money laundering through the Football Sector, July
2009. Back
7
Final report of the National Commission on Terrorist Attacks upon
the United States, chapter 5.4. Back
8
Report of the Official Account of the Bombings in London on 7th
July 2005, HC 1087, 11 May 2006, paragraph 63. Back
9
This is the spelling commonly used in documents relating to money
laundering; see further paragraph 50, footnote. Back
10
Final report of the National Commission on Terrorist Attacks upon
the United States, chapter 5.4. Back
11
The common abbreviation for anti-money laundering is AML, and
for countering the financing of terrorism is CFT. Back
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