What is Money Laundering?
Money laundering is frequently depicted in television shows such as Good Girls and Breaking Bad as a crime committed by violent drug dealers, with silver cases filled with hundreds of dollars in bills. Money laundering, on the other hand, is frequently associated with white-collar crimes such as identity fraud and money laundering. Although the average Netflix viewer may be unaware of this, financial institutions are well aware of the situation and have a legal obligation to report suspicious financial services to authorities for further investigation.
Money laundering occurs when people try to pass off illegally obtained funds as legitimate. The money is usually laundered through a shell company, such as a laundromat, hotel, or beauty salon, which offers insurance to exchange the money for legitimate money. Money, on the other hand, can be transferred through a complicated network of offshore bank accounts located on the small business side, making it difficult to track. According to a PwC report, illegal financial activities such as money laundering account for approximately 3.2% of GDP in both the UK and the US. Money laundering in some cases involves using illegally obtained funds to purchase and exchange cryptocurrencies, making it more difficult to track and regulate.
The three stages of money laundering are placement, layering, and integration. The introduction of illicit funds into the financial system occurs during placement. In the layering stage, these funds are moved through a string of transactions to hide their source. Finally, during the integration phase, the illegal funds are assimilated into the legal economy to give them a clean appearance.
Legislation for Money Laundering
The primary legislation and regulatory provisions that define money laundering offenses are as follows:
The Bank Secrecy Act 1970 (31 U.S.C. 5311-5331):
Financial institutions are required by the Bank Secrecy Act to establish and maintain anti-money laundering (AML) programs. It requires these institutions to report and keep records to detect and prevent money laundering. They must also file Currency Transaction Reports (CTRs) and Suspicious Activity Reports (SARs) under the act.
The 1986 Money Laundering Control Act (18 U.S.C. 1956-1957):
These laws divide money laundering offenses into two categories: domestic money laundering and international money laundering.
In general, 18 U.S.C. 1956 covers a wide range of illegal acts, including tax evasion, concealing the true nature of the illegal activity, and engaging in or attempting to engage in financial transactions involving money obtained through criminal activity.
On the other hand, 18 U.S.C. 1957 makes it a crime to knowingly participate in or attempt to participate in a monetary transaction involving property worth more than $10,000 that was obtained through specified unlawful activity. In layman’s terms, this statute makes it illegal to conduct monetary transactions involving funds tainted by their association with illegal activities.
Bulk Cash Smuggling (31 U.S.C. 5332):
This provision prohibits the smuggling of large sums of cash across borders to avoid reporting requirements. It makes transporting more than $10,000 in currency or monetary instruments into or out of the United States without properly reporting it to customs officials illegal.
The Proceeds of Crime Act (POCA) 2002:
It allows for the recovery of assets obtained through criminal activity. Unlike in the past, the Act allows authorities to seize and hold assets on suspicion of crime even before a conviction is obtained. POCA’s primary goal is to close financial system loopholes, preventing criminals from profiting from their illegal gains and concealing assets before conviction. It strengthens legislation on money laundering and the treatment of criminal proceeds, providing authorities with clearer guidelines.
Anti-Money Laundering Act of 2018:
It broadened the scope of the UK’s sanction regimes beyond terrorism-related offenses. This Act empowered England and Wales to impose sanctions on their own, particularly in the context of post-Brexit arrangements. The Act, which is in line with UN anti-money laundering standards, focuses on investigating and preventing money laundering and terrorist financing. It aims to protect the global financial system’s integrity by addressing and mitigating potential threats.
The Sixth Anti-Money Laundering Directive, or 6AMLD, is a European Union directive aimed at strengthening the EU’s legal framework for preventing money laundering and terrorist financing. The directive imposes stricter measures for customer due diligence, beneficial ownership registers, and money laundering penalties. It also broadens the scope to include cryptocurrency exchanges, as well as new risks associated with new technologies and high-risk countries. The 6AMLD strengthens cooperation and information exchange among authorities in EU member states to combat financial crime more effectively.
The Penalties for Money Laundering
If these laws are broken, the money laundering penalty is severe, with criminal penalties for money laundering including imprisonment, fines, and asset forfeiture. Banks and financial institutions could face fines of nearly $5 billion in 2022 for various “anti-money laundering” violations, sanctions violations, and deficiencies in their “know your customer” systems, according to data from compliance firm Fenergo. The total amount of fines imposed since the global financial crisis is now around $55 billion.
The following are the penalties:
- Domestic money laundering offenses (section 1956(a)(1) of the United States Code) and international money laundering offenses (section 1956(a)(2) of the United States Code): Conviction can result in up to 20 years in prison and fines of up to $500,000, or twice the value of the illegal proceeds involved.
- ‘Sting’ violations (1956(a)(3)): Offenders face up to 20 years in prison and fines of up to $250,000 (or $500,000 for organizations).
- Section 1957 offenses: Up to ten years in prison and fines of up to $250,000 or twice the value of the criminally derived property involved. Entities may face fines of up to $500,000 or twice the amount of the illegal funds.
- Offenses under 31 U.S.C. 5332 (Bulk cash smuggling): Conviction can result in up to five years in prison and the forfeiture of any property related to the offense.
- The minimum sentence for money laundering offenses increases from one to four years in prison. Economic sanctions are also increased to 5 million euros (and their equivalents in other currencies). The sixth EU anti-money laundering directive also encourages authorities to impose exemplary sanctions.
- The Criminal Code Act of 1995 specifies the severity of penalties for money laundering offenses based on the amount of money or property involved. Intentional conduct can result in 25 years in prison, a fine of 1500 penalty units, or both for high-value offenses (over $1 million). Reckless behavior is punishable by 12 years in prison, a fine of 720 penalty units, or both, whereas negligent behavior is punishable by 5 years in prison, a fine of 300 penalty units, or both. Intentional conduct can result in 12 months in prison, a fine of 60 penalty units, or both for low-value offenses (under $1000). Reckless behavior is punishable by 6 months in prison, a fine of 30 penalty units, or both, and negligent behavior is punishable by a fine of 10 penalty units.
- Individuals convicted of money laundering in the UAE may face imprisonment ranging from one to ten years, as well as fines ranging from AED 100,000 to AED 5 million. The penalty for companies found guilty of money laundering ranges from AED 500,000 to AED 50 million.
While these punishments are severe, it is important to remember that they are not always carried out with the maximum sentence. The average sentence for money launderers in the United States in fiscal year 2020 was 64 months, with 87.7% of those found guilty sentenced to prison.
Money Laundering Penalty in the UK
Money laundering is a serious criminal offense in the United Kingdom, and those found guilty face harsh penalties. The Proceeds of Crime Act of 2002 (POCA) and the Money Laundering Regulations of 2017 outline the penalties for money laundering. The exact penalty will be determined by the nature and seriousness of the offense.
In the United Kingdom, money laundering sentences are decided by either the Crown Court or the Magistrates’ Court.
Money laundering carries a maximum sentence of one year in prison and an unlimited fine in Magistrates’ Court. The fine amount is determined by the specific band for which the defendant is found guilty. Fines under bands B and F, for example, could be up to 700% of the guilty party’s weekly income.
For higher-value cases, sentencing is usually carried out in front of a jury at the Crown Court. The maximum sentence for money laundering in the Crown Court can be up to 14 years in prison, depending on the level of culpability. In addition to the prison sentence, a fine may also be imposed.
For instance, HMRC has named hundreds of businesses that have been fined a total of £3.2 million for violating anti-money laundering rules between July and December 2022. These companies failed to comply with Money Laundering Regulations, which are intended to prevent criminal exploitation of illicit cash.
Judges have discretion when sentencing individuals for money laundering, taking into account various factors such as
- Whether the perpetrator was aware that the laundered funds came from criminal activities involving controlled substances, violence, weapons, national security, or sexual exploitation of a minor. For example, if an attorney can persuade a prosecutor that their client does not know of the money’s connection to drug trafficking, even if they knew the funds came from an illegal source, severe enhancements may be avoided, benefiting the client.
- The knowledge of the specific source of the funds is an important consideration in money laundering sentencing.
- Furthermore, sentences may be increased if the offender played a leadership or supervisory role in the offense, obstructed justice, or engaged in monetary instrument laundering. In contrast, if the individual played a minor role in the offense, the sentence may be reduced. For example, whether the individual pleaded guilty through a plea bargain or was found guilty at trial can have an impact on the outcome. Additional factors, such as the extent of the individual’s direct involvement in the illegal activities and the reasons for their involvement, will be considered if the individual pleaded guilty.
- Individuals may be charged solely with money laundering in some cases, without being charged with any illegal activities. This could imply that the government’s evidence that the person was involved in previous illegal activity is lacking, which could help the defense. Such considerations are critical when constructing a defense against a money laundering charge.
Recent Cases of Money Laundering Penalty
- The Dubai Financial Services Authority, the Dubai International Financial Centre’s regulator, allegedly fined Swiss private bank Mirabaud (Middle East) $3.02 million. The fine was imposed because the bank’s anti-money laundering systems and controls were inadequate between June 2018 and October 2021.
- The State Bank of Pakistan (SBP) allegedly imposed a monetary penalty of Rs. 350.799 million on six banks for violating regulatory instructions during the quarter ended June 30, 2023. The central bank’s banking supervision department imposed penalties for a variety of violations, including customer identification, asset quality, foreign exchange, general banking operations, and noncompliance with anti-money laundering and terrorism financing regulations.
- The Federal Reserve has allegedly fined Deutsche Bank $186 million for “unsafe and unsound practices” in sanctions compliance and money-laundering controls.
- Crown Resorts and Australia’s financial crime regulator agreed on to a A$450 million penalty for the casino operator’s failure to effectively prevent money laundering and criminal activity within its casinos.
To effectively combat money laundering, financial institutions, and regulated entities must follow stringent AML requirements. Implementing comprehensive AML programs with specific policies for customer due diligence, transaction screening, and sanctions, as well as media and politically exposed person checks, is part of this.
- They must keep transaction records for at least five years
- Appoint a chief compliance officer, and provide employees with adequate AML training. Furthermore, reporting currency transactions exceeding $10,000 to FinCEN, as well as suspicious transactions, is required.
- Failure to comply with these requirements may result in significant fines ranging from $10,000 per day for failing to report foreign financial agency transactions to $100,000 per day for failing to perform customer due diligence.
- Individuals involved in financial firms could face up to 20 years in prison for each violation.
We can collectively combat this illegal practice and protect the global economy from the harmful consequences of money laundering by continuously enhancing AML efforts and enforcing stringent penalties.