Money laundering involves obtaining the earnings from crime activity and disguising their illegal sources in order to use the funds to carry out legal or illegal activities. Simply put, money laundering is the process of turning dirty money into the clean money.
When a criminal activity is profitable, the individuals or group involved must find a way to use these funds without drawing attention to the underlying activity or its participants.
Criminals achieve this goal by hiding the source of funds, changing their shape, or moving money to a location where it is less likely to be found. Criminal activities that lead to money laundering (that is, predicate offenses) can include the illegal sale of weapons, drug trafficking, smuggling and other activities related to organized crime, theft of funds, insider trading, bribery and different fraud schemes.
The Financial Action Task Force on Money Laundering (FATF), founded in 1989, is an intergovernmental body that sets standards and supports international cooperation in the fight against money laundering. The group members are the G7 countries. One of the first achievements of the FATF was to refute the claim that money laundering concerns only cash transactions. Through several typology exercises, FATF experts have demonstrated that money laundering can be carried out through any channel, financial institution or commercial company.
The UN Convention against Transnational Organized Crime from the year of 2000, also known as the Palermo Convention, provides the following definitions of money laundering:
- the conversion or transfer of property, if such property is known to constitute proceeds of crime, in order to conceal or disguise the criminal source of that property, or to assist any person involved in the predicate offense so that he or she can evade responsibility for their actions;
- hiding or concealment of the true nature, source, location, method of disposal, movement, rights to property or its belonging, if it is known that such property is the proceeds of crime;
- the acquisition, possession or use of property, if at the time of receipt it is known that such property constitutes proceeds of crime.
Knowledge is an important precondition in defining of money laundering. All of the above paragraphs contain the phrase: “if it is known that such property is the proceeds of crime”. In this case, the general concept of "knowledge" is interpreted rather broadly. According to the FATF 40 Recommendations on Anti-Money Laundering and the Financing of Terrorism and the 4th EU Directive on the Protection of the Financial System Against Money Laundering and the Financing of Terrorism (2015), “the intent and the knowledge necessary to prove the crime of money laundering include the concept , according to which the conclusion about such a mental state can be deduced from objective facts ”.
A number of jurisdictions also use the legitimate principle of intentional ignorance in money laundering cases to prove the knowledge. In the courts, the intentional ignorance is defined as “deliberate evasion of knowledge of the facts” or “purposeful indifference”. It has been established that intentional ignorance is the equivalent of real knowledge of an illegal financial source or the client's intentions to carry out a money laundering operation.
Following the tragic events of September 11, 2001, in October 2001, the FATF expanded its mandate by including terrorism financing. Both terrorists and money launderers can use the same means to move their funds to avoid detection, such as structuring payments to evade reporting, using clandestine banking systems and different money transfer systems such as "Hawala", "Handy" or "Fei Jian".
However, while funds intended for laundering are usually obtained through criminal activities, such as drug trafficking and fraud, terrorism can be financed from completely legitimate sources. Concealment of funds used to support terrorism is mainly aimed at disguising the purpose of these funds, rather than their source.
Terrorist funds can be spent on operating expenses, including food, transportation, and housing rent, as well as terrorist acts. Terrorists, like criminal structures, want to keep transactions in secret in terms of their purpose and goals. In February 2012, the FATF issued a new list of 40 recommendations, including an additional clause on how to prevent, suppress and moderate the spread of weapon of mass destruction.