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Part-3
An Overview of Money Laundering
3.1 A Brief History of Money Laundering

No one can be really sure when money laundering first began. However, it can be said that it has
been going on for several thousand years. In China, merchants some 2000 years before Christ
would hide their wealth from rulers who would simply take it off them and banish them. In
addition to hiding it, they would move it and invest it in businesses in remote provinces or even
outside China. In this way, the offshore industry was born, and so was tax evasion. And so were
the principles of money laundering - to hide, move and invest wealth to which someone else has
a claim.
Over a period of thousands of years, people have used money laundering techniques to move
money resulting from crime - but also often to hide and move it out of reach of. Many minorities
in countries down the ages and around the world have taken steps to preserve wealth from rulers,
both unelected and elected, who have targeted them simply because of their beliefs or color. It is
happening even today.
In the USA, prohibition and a restriction on gambling made large amounts of cash for those
prepared to break the embargoes the most important fact about that time was that it caused a
dramatic increase in financial crime. Sanctions busting was a financial crime because for every
offence committed, the criminal immediately received cash in his hand. Thus it created an
immediate problem over what to do with that money. Opening a cash business was the obvious
thing to do. Laundries were a suitable business, and so goes rumor - the term "money
laundering" was invented. This may or may not be true.

3.2 History of Money Laundering Laws


The United States of America was the first to enact laws against money laundering. The Money
Laundering Control Act of 1986 was first enacted by the congress and made it as a federal
crime. This law prohibits individuals from engaging in a financial transaction with proceeds that
were generated from certain specific crimes, known as specified unlawful activities (SUAs).
Additionally, the law requires that an individual specifically intend in making the transaction to
conceal the source, ownership or control of the funds. There is no minimum threshold of money,
nor is there the requirement that the transaction succeed in actually disguising the money.
Moreover, a financial transaction has been broadly defined, and need not involve a financial
institution, or even a business. Merely passing money from one person to another, so long as it is
done with the intent to disguise the source, ownership, location or control of the money, has been
deemed a financial transaction under the law.
Section 1957 prohibits spending in excess of $10,000 derived from an SUA, regardless of
whether the individual wishes to disguise it. This carries a lesser penalty than money laundering,
and unlike the money laundering statute, requires that the money pass through a financial
institution.
3.2.1 Financial Action Task Force (FATF)
During 1980s there was a growing threat of money laundering in the international banking
sector. So initiatives were taken to tackle the threat and so the Financial Action Task Force
organization was established. The G-7 Nations (USA, Canada, Britain, Germany, Japan, Italy &
France) implemented the Financial Action Task Force in 1989.
The FATF is responsible for developing an international standard for anti-money laundering and
combating financing of terrorism issues and works closely with other global organizations such
as the International Monetary Fund, World Bank, and United Nations. The FATF has also
regional bodies for effective coordination globally.
A brief of 40 recommendations given by FATF:
Criminalizing the laundering of the proceeds of serious crimes and enacting measures to
seize the proceeds of crime.

Requiring financial institutions to identify all clients, including any beneficial owners of
property, and to keep appropriate records.

Ensuring adequate systems for the control and supervision of financial institutions.

Establishing international treaties or agreements to pass national legislation that will


allow countries to provide prompt and effective international cooperation at all levels.

Requiring financial institutions to report suspicious transactions to the competent national


authorities and to implement a comprehensive range of internal control measures.

4.1 Definition of Money Laundering


Money Laundering is the process of transforming or converting cash, or other property that is
derived from illegal activity, so as to give it the appearance of having been obtained from a
legitimate source.
Section 2 (v) of Money Laundering Prevention Act (MLPA), 2012 of Bangladesh defines money
laundering as follows:

Money Laundering means

Knowingly moving, converting, or transferring proceeds of crime or property involved in an


offence for the following purposes:-

(1) Concealing or disguising the illicit nature, source, location, ownership or control of the
proceeds of crime; or

(2) Assisting any person involved in the commission of the predicate offence to evade the
legal consequences of such offence;

ii. Smuggling money or property earned through legal or illegal means to a foreign country;

iii. Knowingly transferring or remitting the proceeds of crime to a foreign country or


remitting or bringing them into Bangladesh from a foreign country with the intention of
hiding or disguising its illegal source; or

iv. Concluding or attempting to conclude financial transactions in such a manner so as to


reporting requirement under this Act may be avoided;

v. Converting or moving or transferring property with the intention to instigate or assist for
committing a predicate offence;

vi. Acquiring, possessing or using any property, knowing that such property is the proceeds
of a predicate offence;

vii. Performing such activities so as to the illegal source of the proceeds of crime may be
concealed or disguised;

viii. Participating in, associating with, conspiring, attempting, abetting, instigating or


counseling to commit any offences mentioned above.

4.2 Why Money Laundering Is Done-


Money laundering is done basically for three reasons:

First, since money is the lifeblood of an organization, it covers operating expenses, replenishes
inventories, purchase the services of corrupt officials to escape detection. Moreover, the
criminals want to lead an extravagant lifestyle. To spend money in these ways, the criminals
must make the illegal money legitimate.

Second, the trail of illegal money can be used by the investigators to incriminate the criminals.
In order to evade this situation they hide the source of their wealth or alternatively disguise
ownership or control to ensure that illicit proceeds are not used to prosecute them.

Third, the proceeds gained by doing illegal business can be targeted of investigation and led to
seizure. In order to avoid the ill-gotten gains being investigated and seizure, criminals must hide
their existence and make the proceeds legitimate.

4.3 Stages of Money Laundering

There is no single method of laundering money. Methods can be:

The purchase and resale of a luxury item to passing money through a complex
international web of legitimate businesses and shell companies.

There are a number of crimes where the initial proceeds usually take the form of cash that
needs to enter the financial system by some means. Bribery, extortion, robbery and street
level purchases of drugs are almost always made with cash. The methods of achieving
this are limited only by the ingenuity of the launderer and these methods have become
increasingly sophisticated.

Despite the variety of methods employed, money laundering is not a single act but a process
Of accomplishing in three basic stages which are as follows:

4.3.1 Placemen Stage

This is the initial stage of money laundering where the proceeds from the illegal activities are
introduced in the financial sectors. The funds that are intended to enter the financial sectors
mainly done through the different bank accounts. This stage mainly involves:

To avoid suspicion, the deposited money is mixed with the clean money. Then they are
converted the cash into purchasing money market instruments, securities or fixed deposits
or readily recoverable debt.

The large deposited amount is broken up into many smaller amounts so that the tellers do
not raise any suspicion. This process is called Surfing.
4.3.2 Layering Stage

This is the stage of making it hard for the law-enforcing agencies to trace and uncover the
laundering activities. It is stage of separating the proceeds of criminal activity from their source
through the use of layers of financial transactions to disguise the origin of the funds, disrupt any
audit trail, and provide anonymity.
In this stage launderers want to move funds around, changing both the form of the funds and
their location in order to make it harder for law enforcement authorities to identify the dirty
money. This stage usually involves:

Using the fund for purchasing or selling investment instruments.

Transferring the fund through a series of accounts at various banks across the globe or
across jurisdiction.

Using cash deposits as collateral security in support of legitimate transactions.

Resale of purchased goods/assets and the proceeds moved elsewhere.

5.1 Effects of Money Laundering

Money Laundering has bad effects on the total economy of a country. It not only hampers the
economic stability but also distorts the way of life. The effects of money laundering are given
below:

5.1.1 Social Costs

There are significant social costs and risks associated with money laundering. Money laundering
is a process vital to making crime worthwhile. It allows drug traffickers, smugglers, and other
criminals to expand their operations. This drives up the cost of government due to the need for
increased law enforcement and health care expenditures to combat the serious consequences that
result.

Among its other negative socioeconomic effects, money laundering transfers economic power to
criminals. In extreme cases, it can virtually take-over the legitimate government. Overall, money
laundering presents the world community with a complex and dynamic challenge.

5.1.2 Economic Effects of Money Laundering

As the threat of money laundering is increasing day by day, the countries especially the
developing countries are becoming more and more cautious about it. But the launderers are also
becoming more innovative to counter the anti-money laundering activities of the countries. As a
result the developing countries like Bangladesh are exposed to greater risk and become target of
the launderers. But due to weak regulatory authorities the launderers are able to penetrate not
only the economy but also the financial sectors.

5.1.2.1 Undermining the Legitimate Private Sector

One of the most serious microeconomic effects of money laundering is felt in the private sector.
Money launderers often use front companies, which co-mingle the proceeds of illicit activity
with legitimate funds, to hide the ill-gotten gains. These front companies have access to
substantial illicit funds, allowing them to subsidize front company products and services at levels
well below market rates. In some cases, front companies are able to offer products at prices
below what it costs the manufacturer to produce. Thus, front companies have a competitive
advantage over legitimate firms that draw capital funds from financial markets. This makes it
difficult for legitimate business to compete against front companies with subsidized funding.
Clearly, the management principles of these criminal enterprises are not consistent with
traditional free market principles of legitimate business, which results in further negative
macroeconomic effects.

5.1.2.2 Undermining the Integrity of Financial Markets

Financial institutions that rely on the proceeds of crime have additional challenges in adequately
managing their assets, liabilities, and operations. For example, large sums of laundered money
may arrive at a financial institution but then disappear suddenly, without notice, through wire
transfers in response to non-market factors, such as law enforcement operations. This can result
in liquidity problems.

5.1.2.3 Loss of Control of Economic Policy

In some emerging market countries, the illicit proceeds of money laundering can harm
government budgets by decreasing it, resulting in a loss of control of economic policy by
governments. In some cases, the accumulated asset of laundered proceeds can be used to trap
markets. Money laundering can also adversely affect currencies and interest rates as launderers
reinvest funds where their schemes are less likely to be detected, rather than where rates of return
are higher. And money laundering can increase the threat of monetary instability due to the
misallocation of resources from artificial distortions in asset and commodity prices. In short,
money laundering and financial crime may result in inexplicable changes in money demand and
increased volatility of capital flows, interest, and exchange rates. The unpredictable nature of
money laundering, coupled with the attendant loss of policy control, may make sound economic
policy difficult to achieve.

5.1.2.4 Economic Distortion and Instability

Money launderers are not interested in profit generation from their investments but rather in
protecting their proceeds. Thus they invest their funds in activities that are not necessarily
economically beneficial to the country where the funds are located. Furthermore, money
laundering and financial crime redirect funds from sound investments to low-quality investments
that hide their proceeds, as a result economic growth can suffer. When the industries no longer
suit the money launderers, they abandon them, causing a collapse of these sectors and damage to
economies seriously.

5.1.2.5 Loss of Revenue

Money laundering decreases government tax revenue and therefore indirectly harms honest
taxpayers. It also makes government tax collection more difficult. This loss of revenue generally
means higher tax rates.

5.1.2.6 Hampers the Privatization Efforts

Money laundering intimidates many countries efforts to reform their economies through
privatization. While privatization initiatives are often economically beneficial, they can also
serve as a vehicle to launder funds.

5.1.2.7 Reputation Risk

There will be greater reputation risk if a nation or an institution is convicted of associating with
money laundering activities. The negative reputation will bar the organization or the country
associated with such activities the opportunity to enter globally and gain sustainable growth. This
can result in diminished development and economic growth. Once a countrys reputation is
damaged, reviving is very difficult and requires significant government resources to address that
could be prevented with proper anti-money-laundering controls.

Part-6
Bangladesh and Money Laundering

5.1 Current Situation of Bangladesh Regarding Money Laundering


Bangladesh has retained its position as a country free of risk of money laundering and terror
financing, assuaging the nerves of the government that feared the country might be demoted.

The seal of approval for Bangladesh's efforts to battle money laundering and terror financing
came at the 19th annual general meeting of the Asia/Pacific Group on Money Laundering, the
regional watchdog, held on August 7 in the US.

5.1.1 Position of Bangladesh in Basel Anti-Money Laundering Index


Based in Switzerland, the Basel Institute of Governance has published the AML index since
2012, measuring the risks of money laundering and terrorist financing of countries based on
publicly available sources.

Bangladesh holds a better position among South Asian countries regarding risk of money
laundering and terrorist financing. Bangladesh has also improved its ranking two steps
globally.
Among six South Asian countries, Bangladesh has been placed 5th after India, according
to the Basel Anti-Money Laundering (AML) Index 2016 developed by the Basel Institute
on Governance.

In the fifth edition of the AML index 2016 that covered 149 countries, Bangladesh has
ranked 54th with its score at 6.40 followed by India with 5.69 (78th position).

In the Basel AML Index 2015, Bangladesh ranked 52nd with its score at 6.43 among 152
countries. Besides, Finland is the lowest-risk country, followed by Lithuania and Estonia.

Meanwhile, outflow of dirty money from Bangladesh marked a phenomenal rise in recent
years despite various steps to help curb such acts by the government and the country's
central bank.
Between 2004 and 2013, illicit funds amounting to $55.87 billion fled out from the
country to different destinations, mostly tax havens, according to the latest available
reports of the Global Financial Integrity (GFI).

Funds held directly by Bangladeshi individuals and entities with banks in Switzerland
stood at around US$ 545 in 2014.

[The Financial Express]

5.2 Anti-Money Laundering Laws in Bangladesh


The National Parliament of Bangladesh passed the Act on Money Laundering titled Money
Laundering Prevention Act 2002 on 7th April, 2002. Before that there was no such act in
Bangladesh to check money laundering issues.
Then the Money Laundering Prevention Act 2002 repealed and the Money Laundering
Prevention Act 2009 enacted on 25th February 2009.
In 2012 the Money Laundering Prevention Act 2009 repealed and the Money Laundering
Prevention Act 2012 enacted on 20th February, 2012. The President gave his consent and the law
came into effect on March 03, 2012.
By the enactment of this law Bangladesh Bank was given all powers and responsibility to control
and prevent Money Laundering through all scheduled banks in the country. The first step taken
by the government in preventing Money Laundering was by passing the law in 2002. Before this
law there was no legal procedure or policies in determining Money Laundering activities in
Bangladesh.
The summary of Money Laundering Act 2012 is given below:
5.2.1 Brief Definition of Money Laundering According to Money Laundering Act 2012
The Money Laundering Act, 2012 in Bangladesh clearly defines such acts that can be deemed as
offence is set out in Section-2 (THA) as follows:

Property acquired directly or indirectly through illegal means.


Illegal transfer, conversion, concealment of property acquired directly or indirectly by
legal or illegal means and aiding and abetting such activity.

5.2.2 Punishment for Money Laundering

The Money Laundering Act, 2012 deemed money laundering as an offence and cited several
punishments. They are as follows:

(i) For the purposes of this Act, money laundering shall be deemed to be an offence.

(ii) Any person who commits or abets or conspires to commit the offence of money
laundering, shall be punished with imprisonment for a term of at least 4(four) years
but not exceeding 12(twelve) years and, in addition to that, a fine equivalent to the
twice of the value of the property involved in the offence or taka 10(ten) lacks,
whichever is greater.

(iii) In addition to any fine or punishment, the court may pass an order to forfeit the
property of the convicted person in favor of the State which directly or indirectly
involved in or related with money laundering or any predicate offence.

(iv) Any entity which commits an offence under this section shall be punished with a fine
of not less than twice of the value of the property or taka 20(twenty) lacks, whichever
is greater and in addition to this the registration of the said entity shall be liable to be
cancelled.

(v) It shall not be a prerequisite to charge or punish for money laundering to be convicted
or sentenced for any predicate offence.

(vi) Punishment for Violation of an Order for Freezing or Attachment

Any person who violates a freezing or attachment order issued under this Act
Shall be punished with imprisonment for a term not exceeding (three) years
Or with a fine equivalent to the value of the property subject to freeze or attachment,
Or with both.

(vii) Punishment for Divulging Information

No person shall, with an ill motive, divulge any information relating to the
Investigation or any other related information to any person, organization or
News media.

5.3 Bangladesh Bank Regarding Money Laundering


Bangladesh Bank is the sole organization to conduct operations against money laundering. The
Bangladesh Money Laundering Prevention Act 2012 has given the Bangladesh Bank the
supreme power to direct all the scheduled banks in Bangladesh to follow the rules and
regulations of the law.

5.3.1 The Powers and Responsibilities of Bangladesh Bank


The Bangladesh Money Laundering Act provides Bangladesh Bank board responsibility for
prevention of Money Laundering and wide-range of powers to take adequate and proper
measures to restrain Money Laundering, simplify its detection, monitor its incidence, make and
enforce rules and to act as the prosecuting agency for breaches of the Act. In summary, the
responsibilities and powers of Bangladesh Bank are:

To examine all the Money Laundering offenses.

To supervise and monitor the activities of banks, financial institutions, non-financial


institutions and other institutions engaged in financial activities.

To summon reports relating to Money Laundering form banks, financial institutions, non-
financial institutions and other institutions engaged in financial activities, analyze such
reports and take appropriate actions.

To provide training to employees of banks, financial institutions and other institutions


engaged in financial activities on prevention of Money Laundering.
To authorize any person to enter into any premises for conducting investigations into
Money Laundering offenses.

Persons authorized by Bangladesh Bank to investigate offenses can exercise the same
powers as the Officer in Charge of Police Station can exercise under the Code of
Criminal Procedure.

To do all other acts in attaining the objectives of the Act.

The Courts will not accept any offense under the Act for trial unless a complaint is lodged
by Bangladesh Bank or any person authorized by Bangladesh Bank in this behalf.

5.3.2 Initiatives Taken by Bangladesh Bank to Check Money Laundering

After the initiation of Money Laundering Act in Bangladesh by Bangladesh Government,


Bangladesh Bank formed two task forces to monitor money laundering. They are:

Central Task Force; and

Regional Task Force

Central Task Force

In every month, this task force conduct a meeting to discuss issues that are very important; make
decision about issues that are critical and also make guidelines to check money laundering.

Regional Task Force

The Central Body involves:


members of Ministry of Finance;
Home Law, Foreign Affairs, Commerce, and NBR (Income Tax);
Bureau of Anti-corruption, Special Branch of Police, Customs; and
Securities and Exchange Commission, 15 Bank representatives.

The Regional Task Force Body involves five members. Their tasks are to investigate the Money
Laundering cases reported to Bangladesh Bank and other Anti-Money Laundering issues.

5.3.3 Bangladesh Banks Anti-Money-Laundering Department

To take severe actions against money laundering activities in Bangladesh, Bangladesh Bank
established an Anti-Money-Laundering department in Bangladesh Banks Headquarter. It is
called Bangladesh Financial Intelligence Unit (BFIU).
Bangladesh Financial Intelligence Unit (BFIU)

BFIU was established in June 2002, in Bangladesh Bank named as 'Anti Money Laundering
Department'. To enforce and ensure the operational independence of FIU, Anti Money
Laundering Department has been transformed as the Bangladesh Financial Intelligence Unit
(BFIU) in 25 January, 2012 under the provision of Money Laundering Prevention Act, 2012 and
has been bestowed with operational independence. The main objective of the BFIU is to establish
an effective system for prevention of money laundering, combating financing of terrorism.

Functions & Responsibilities of BFIU

Bangladesh Financial Intelligence Unit (BFIU) is the central agency of Bangladesh responsible
for:

Receiving Suspicious Transaction/Activity Reports (STRs/SARs) from the reporting


organizations and Cash Transaction Reports (CTRs) from banks, complaints from
different sources, analyze the same and disseminate ML/TF related cases to respective
investigating authority for further action.

Maintaining a database of all STRs/SARs and CTRs and related information.

Issuing necessary directives, circulars, circular letters and Guidance Notes from time to
time for reporting organizations to combat money laundering and terrorist financing
activities.

Enforcing compliance of the respective Acts and rules/regulations/directives issued by


this unit through on-site and off-site supervision of the reporting organizations.

Monitoring the implementation of United Nations Security Council Resolutions


(UNSCR) including UNSCR 1267 and its successors, UNSCR 1373 and UN Security
Council Resolutions related to proliferation of weapons of mass destruction and its
financing.

Imparting training for the officials of the reporting organizations, investigating


authorities, prosecutors, regulatory agencies and other related organizations or
institutions.

Cooperating and work together with various international organizations including FATF,
APG, World Bank, Egmont group, United Nation Office on Drug and Crime (UNODC)
etc. regarding AML/CFT issues.

Performing the secretarial job for National Coordination Committee (NCC) on


AML/CFT, Working Committee (WC) and take necessary steps to implement the
decisions taken in the NCC, WC.

Working as the secretariat of Inter Agency task Force for Stolen Asset Recovery (StAR).
Performing activities related with the Central Task Force on preventing ML and illegal
Hundi activities and monitoring the implementation of the decisions of the meeting.

Arranging regular meeting with Anti-Corruption Commission (ACC), police and other
law enforcement authorities and monitor the implementation of the decisions.

Creating public awareness.

Carrying out other related functions to prevent money laundering and combat financing
of terrorism and proliferation of weapons of mass destruction.

7.1 Roles of Banking Sector and Financial Institutions for Combating Money Laundering

Bangladesh Bank provides all the necessary directions to the financial institutions for combating
Money laundering. So all the financial institutions must follow the rules and regulations given by
Bangladesh Bank. According to Bangladesh Bank circular for anti-money laundering activities,
all institute must have:

7.1.1 Senior Managements Commitment

To resist the criminals from using the facilities of money laundering, the most significant
component is the commitment of senior management which includes the chief executive
officer and the board of directors.

The senior management of the institution must send the signal to the officers and their
sub-ordinates that they not only care about the profit, marketing and customer service but
also they care about the reputation of the institute. To be successful about the anti-money-
laundering initiatives, they must communicate clearly with their employees on an annual
basis giving a statement from the chief executive officer that clearly put emphasize on its
strong stance against money laundering. Such a statement should show the strong
commitment of the institution and its senior management to comply with all laws and
regulations designed to combat money laundering.

The statement of compliance policy of the institute must include:

A statement that all employees are required to comply with applicable laws and
regulations and corporate ethical standards.

A statement that all activities carried on by the financial institution must comply
with applicable governing laws and regulations.

A statement complying with rules and regulations is the responsibility of each


individual in the financial institution in the normal course of their assignments. It
is the responsibility of the individual to become familiar with the rules and
regulations that relate to his or her assignment. Ignorance of the rules and
regulations is no excuse for noncompliance.

The statement should direct staff to a compliance officer or other knowledgeable


individuals when there is a question regarding compliance matters.

A statement that employees will be held accountable for carrying out their
compliance responsibilities.

7.1.2 Written Anti-Money Laundering Compliance Policy

The Board of Directors of each bank and other financial institution must develop and
maintain an anti-money-laundering compliance policy that ensures and monitors
compliance with the Act. Such a compliance policy must be written, approved by the
board of directors, and noted as such in the board meeting minutes.

The written anti-money-laundering compliance policy should establish clear


responsibilities and accountabilities within their organizations to ensure that policies,
procedures, and controls are introduced and maintained.

Procedures should address its Know Your Customer (KYC) policy and identification
procedures before opening new accounts, monitoring existing accounts for unusual or
suspicious activities.

The anti- money laundering policies should be reviewed regularly and updated as
necessary at least annually.

7.1.3 Know Your Customer (KYC)

The KYC program or known as Know Your Customer is a major requirement for complying
with regulations regarding Money Laundering which simply involves the process to know their
clients.