Uttam Maharjan

Money laundering has been a global problem. This is the conversion of illicit money into legitimate one through various means. The major sources of ill-gotten money are bribery, corruption, trafficking, drug dealing, smuggling, tax evasion, and organised crimes. Money laundering usually takes place in real estate, bullion market, share market and banking sectors. In the past, the scope of money laundering was confined to organised crime only. Now it covers any transactions which generate an asset or a value as the result of an illegal act. Money laundering is ipso facto an illegal activity. So any money generated by it is also illegal. Besides the above, money laundering includes false accounting, extortion, illegal gambling, economic scandals and inside trading as well.

There are three steps that are employed to convert dirty money into laundered money: placement, layering and integration. Under placement, illicit money is brought into the financial system. Under layering, complex financial transactions involving many banks, intermediaries and even countries are carried out to hide the source of the illicit money. Under integration, laundered money is brought back to the financial system as legitimate one.

Shell companies
There are at least five techniques for effecting money laundering. Money launderers may use shell companies that exist only on paper but have no physical existence. Money launderers may exploit weak spots in financial institutions and the weak supervision of legal structures. They may smuggle physical cash. They may resort to trade-based money laundering to launder money through mis-invoicing. And they may mix clean and dirty money in business transactions to make the dirty money look like clean money.

The history of money laundering may be traced back to the 1930s, when laws against money laundering were enacted to fight organised crime. In the 1980s, countries around the world braced themselves to seize the ill-gotten money from drug criminals by applying money laundering rules. Money laundering became all the more pronounced after al Qaida attacked the US on September 11, 2001. This forced the US to enact the Patriot Act, followed by similar legislations around the world.

The Group of Seven nations used the Financial Action Task Force on Money Laundering to pressurise governments around the world to step up the surveillance and monitoring of financial transactions and share information between countries. Countries around the world, including Nepal, then stepped up the vigilance and monitoring of financial transactions as a counter-measure against money laundering.

After the formation of the Financial Action Task Force and the promulgation of the International Framework of Anti-Money Laundering Standards, AML guidelines gained prominence globally. Anti-money laundering is a legal mechanism that is aimed at requiring financial institutions and other entities concerned to prevent, detect and report AML activities. The AML task is a big burden for financial institutions. They have to assign certain staff for the task. They have to monitor financial transactions all the while. They have to look out for suspicious transactions and keep tabs on such transactions. Failure to follow the rules may entail punishment.

In Nepal, there is the Asset (Money) Laundering Prevention Act, 2008 and the Asset (Money) Laundering Prevention Rules, 2009. These legal provisions apply to any individual or corporate body engaged in any kind of money laundering. As per the Act and rules, action may be taken against the transfer of illegal money from Nepal to a foreign country or vice versa. Preventing cross-border money laundering is also one of the basic thrusts of the Act and rules. The Financial Information Unit was set up in April 2008 under Section 9 of the Asset (Money) Laundering Prevention Act, 2008 within Nepal Rastra Bank. Banks and financial institutions are required to report AML activities to the unit.

Until a couple of years ago, cooperatives were not required to report AML activities. There was suspicion that money launderers could have used cooperatives for their nefarious motives. Now cooperatives are also required to report AML activities. The Department of Cooperatives enforced the Directive on Money Laundering Prevention for Cooperatives in March 2017. The main motive of the directive is to detect and prevent suspicious transactions in cooperatives. With the enforcement of the directive, cooperatives are required to keep details about their members and they are prohibited from carrying out transactions through fake accounts. Violation of the directive carries a fine ranging from Rs. one million to Rs. 50 million depending on the offence.

Risk management
Cooperatives were considered a safe haven for money laundering activities until the government brought them within the ambit of the Asset (Money) Laundering Prevention Act. In fact, the government is under pressure to implement anti-money laundering in any financial institutions, be it banks or cooperatives. Consequently, cooperatives are required to adopt risk management strategies, monitor business activities of their members, detect suspicious activities remaining within the threshold and keep tabs on transactions involving over Rs. three million per year. Further, they are required to keep and update KYC details of their members.

Money laundering is a worldwide problem now. The network of money laundering has spread to every nook and cranny of the world. Cross-border money laundering has been a common phenomenon. That is why the world as a whole has been trying to curb money laundering. To attain success on this front, every country should play its part honestly and effectively in putting the kibosh on money laundering.

(Maharjan has been regularly writing on contemporary issues for this daily since 2000. uttam.maharjan1964@gmail.com)