The Dirty Money in Legitimate Financial Systems

4th March 2010 By: ISS, Institute for Security Studies

In most countries, criminals have to find ways in which to legitimize their profit. This is often done through the laundering of money. Since 2000 Africa has experienced the growth of ways of infiltrating illegitimate profits into the legitimate economy. Money laundering, which is not a new phenomenon, is often linked to organized crime. The usual steps, even though they are not necessarily in this order, include placement, layering and integrationof the funds to be laundered - all of which are intended to distance them from their origin. Organized crime affects individuals and institutions, impacting on the fabric of society and occasionally, on some of the basic elements of our democratic order.

The attack on the World Trade Centre in the United States on 11 September 2001 provided justification to draw a strong link between money laundering and terrorist financing. Terrorists are said to receive some funding from money obtained illegally. Among the crimes that produce proceeds that need to go through the process of laundering are drug trafficking/smuggling, armed robbery, motor vehicle theft, tax evasion, illicit acquisition of precious resources like timber, diamonds and fish, and cyber fraud. A recent trend is the use of proceeds of piracy, or ransom, to sponsor more piracy. The ‘sponsoring' funds conceivably pass through the legitimate financial system, at least at some point, but their source has to be disguised. The clandestine nature of money laundering makes it difficult to track, or to obtain accurate statistics on scale and frequency. Cash transactions add to the difficulties of documenting transactions that could be used in investigating money laundering.

It is often argued that the only way to unmask the disguise is through the work of task forces that focus exclusively on combating money laundering. The Eastern and Southern African Anti Money Laundering Group (ESAAMLG), which was set up as a platform for the exchange of ideas and information, appears to be among the proponents of this approach. Its membership includes Botswana, Kenya, Lesotho, Malawi, Mauritius, Mozambique, Namibia, the Seychelles, South Africa, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe.

Even though most ESAAMLG member states have adopted anti-money laundering (AML) measures, very few have managed to add on legislation to anticipate the financing of terrorism through money laundering. Part of the reason is the sheer complexity of finding and drawing connections between criminal money and terrorist violence, before such violence has been committed.

Drug trafficking, a major criminal activity in countries such as Malawi, Namibia and South Africa, attracts and involves multiple entrepreneurs, who include subsistence farmers, transporters, wholesalers, retailers, vendors and exporters. Drug traffickers need to hide and convert the cash in order to avoid detection of their complicity in drug trafficking. Dagga is the main drug trafficked in Malawi, especially from the northern parts of the country. Large quantities are exported to Zimbabwe, Namibia and South Africa. The drug market in South Africa involves more than 100 syndicates, and is the largest in the region. It appears that most of them launder their assets locally, in acquisition of motor vehicles, legitimate businesses and front companies, and residential properties. In June 2002, the Asset Forfeiture Unit of the National Prosecuting Authority reported that of the 150 cases in which assets had been seized, 31% involved drug trafficking. Cash transactions facilitate the acquisition of assets with a low risk of detection. It is not clear how much of the proceeds of drug trafficking, if any, would be available to support terrorist acts.

It is not unusual for drug merchants to use a family member's bank account to distance the money from themselves. The money is usually deposited in small amounts into a family member's bank account and later withdrawn. In some instances the family member or third party will purchase something (usually property) under their name in order to de-link the money from the perpetrator and make the origins of the cash legitimate. In Zambia, there have been reports that drug traffickers use the particulars of third parties without their consent, or fictitious identity documents to open and operate bank accounts. In order to clean their money, criminals typically invest their money in real estate. In Kenya, property located in low-value neighbourhoods in cities like Nairobi has been used for this purpose. Criminals avoid purchasing any property in up-market areas for fear of attracting suspicion.

A notorious trend in several Southern African states is that of ‘ghosting', which may involve the use of documentation that is either false or belongs to deceased individuals, in claiming entitlement to services. The largest known cases involve fraudulent claims lodged with the Ministry of Defence in Namibia where false identification papers of non-existent soldiers were used after the civil war in the Democratic Republic of Congo to claim pensions. Over the years salary payments to ‘ghost' soldiers have continued to be made in Uganda. In South Africa there has been an enduring battle against fraudulent claims for the refund of value added tax for fictitious exports. Typical schemes involve companies that may be engaged in legitimate export of goods or services. The companies could use a real or shell company in a foreign jurisdiction to create the false impression that goods have been exported and payment received. The involvement of banks and other financial institutions makes no difference to the processing of claims, partly because the banks get involved at too late a stage to play a preventative role.

A recent trend in money laundering seems to be through the use of cash couriers. The widespread use of cash facilitates this form of money laundering. A cash courier is an individual who physically transports, mails, ships or causes currency or monetary instruments to be physically transported, or shipped. Cash smuggling is one of the major methods used by terrorist financiers, money launderers and organized criminals to move money derived through illegal means to support their activities. Dirty money transmitted by couriers is laundered through transfers at retail, entertainment, gambling, exchange control and other outlets. At some point it will be introduced into the financial system through banks - but at a time when its origins are most unlikely to be determinable. Many countries are still battling to comprehensively regulate all the possible entry points that worsen the vulnerability of financial institutions to infiltration by dirty money.

Written by: Thobani Matheza: Researcher, Organised Crime and Money Laundering Programme, ISS Cape Town