Coming out in the wash: How Europe and the world are combating money laundering

Opinion by Jim Gibbons

If crime were a country it would be one of the twenty wealthiest in the world, just after Australia on the World Bank’s rich list and higher than Switzerland, the United Arab Emirates, or the Netherlands, to name but a few. According to United Nations estimates, criminal activities generate a global annual profit of more than two trillion US dollars. That’s two with twelve noughts after it and a dollar sign at the front, or in the preferred notation of scientists and mathematicians, 2 X 10¹². Just think: two million million dollars. Every year. It’s equivalent to around 3.6% of the world’s gross domestic product or to slightly more than the combined economies of Belgium, Sweden, Austria, Denmark and Singapore. Who said crime doesn’t pay?

The only difference between crime and less illegal activities is that the criminals cannot simply take their ill-gotten gains to the bank and enter them into their profit-and-loss account. They have to legitimise them first by disguising their origins. The practice is exceedingly hard to detect and to police and it’s a massive problem for Europe and the rest of the world, especially today when criminal profits are also being processed to fund terrorist groups.

“It is a matter of fact that terrorism is financed mostly through illegal means,” says Ivan Koedjikov, head of the Strasbourg-based Council of Europe’s Action Against Crime Department. He says the sums needed to fund terrorist groups are generally smaller than the vast amounts laundered for organized crime bosses, but even so the money must be rendered invisible to the authorities, “and that means money laundering, laundering of proceeds from crime, be it through drug trafficking, be it kidnapping for ransom or some other methods that are used by terrorists and laundering of money is not possible without corruption.”

Money laundering walks hand-in-hand with corruption. In the European Union, for instance, the European Commission cautiously estimates that corruption costs the EU economy around €120 billion a year. An independent German report put the figure rather higher: €323bn, more than enough to clear Greece’s entire national debt at a stroke. The modern world of instant electronic communications and the ability to transfer vast sums of money between financial institutions in a wide range of jurisdictions provides the perfect environment for villainy to thrive. Crime has become easier, the task of curbing it harder, especially with a tacit acceptance of low level criminality by many of those in authority.

The Global Corruption Barometer for 2013 found that more than one in four of the population in the one hundred and seven countries surveyed had been obliged to pay a bribe to access public services and institutions within the previous twelve months. And faith in governments’ willingness to tackle the problem has weakened since the financial crisis in 2008. Then, 31% believed the authorities’ anti-corruption measures to be effective. Five years later, than number had fallen to 22%.

It should come as no surprise, then, that according to accountants Ernst and Young in their ‘Navigating today’s complex business risks Europe, Middle East, India and Africa Fraud Survey 2013’, more than 40% of board members and those at senior management level admitted that sales or cost figures had been manipulated by their companies through such tricks as the early reporting of revenue to meet short-term financial targets and the under-reporting of costs to make budgets look more profitable. Fewer than half of them even knew their companies had policies on giving or receiving gifts or hospitality.

“One has to look at how the system functions and where there are opportunities for corruption and close down those opportunities, which is one of the ways to minimise corruption,” said Ivan Koedjikov. His department, working in concert with others at the Council of Europe, makes recommendations to governments and local authorities and helps train those likely to be tempted or adversely affected by corrupt practices. It seeks to keep the authorities on the look-out:

“Typical sectors with a high risk of corruption are procurement, education, health care and some others.” It may come as no surprise, then, that in the world’s most corrupt countries less than 50% of children complete primary school: the money for their education has been stolen.

"Interestingly, when political party funding came under the spotlight, several governments became less co-operative, reluctant to look too closely at the sometimes shadowy bodies, people and companies that provide campaign funds and contribute to party coffers. Even so, political contributions have been shown to buy influence and reshape legislation in the interests of the donor. Only in Belarus is it illegal to fund political parties and that’s because it’s effectively a one-party state whose leaders will accept no opposition."

Koedjikov’s department is not alone at the Council of Europe in tackling criminality, although he points out that they are not a police force: their job is to monitor, suggest legislative or administrative improvements and sometimes to shame governments into action by naming those countries seen to be lagging behind. The Council also has the Group of States Against Corruption, known by the acronym GRECO, which includes all of its forty-nine member states. GRECO sets standards, monitors compliance and helps with capacity building through technical assistance. Its executive secretary is Wolfgang Rau: “What we are doing is monitoring and the results of our monitoring are fed into a project, which allows the Council of Europe to provide targeted assistance in those sectors identified as particularly problematic.”

The Council of Europe was the first international body to take a stand against money laundering, adopting its first measure in 1980, following this with two Conventions, in 1990 and then a greatly enhanced one in 2005, the so-called Warsaw Convention, which introduced measures against the funding of terrorism. The actual process of money laundering is quite complicated. In the most common examples, the proceeds of criminal activity are broken up into smaller pieces so as to avoid the attention of the authorities, then put into banks or financial institutions in a process known as 'placement' or 'smurfing'. This often involves the willing or at least blind-eye-turning participation of lawyers or bank executives.

The various smaller sums are then put through a range of complex financial instruments – the paper trail of some derivatives like collateralized debt obligations or CDOs, for instance, can be very long indeed – making the original investor hard to trace or identify. This is known as “layering”. The resulting funds are then reintroduced to the real economy by, for instance, adding the money gradually to the profits of a cash-based business, such as a casino or some form of retail outfit, such as a scrap metal dealership or second hand car trader. Indeed, that final step can be used on its own in the case of relatively manageable amounts of money and a patient criminal. The gangsters of Prohibition-era America, like Al Capone, used real laundrettes, although that’s not where the term 'money laundering' originates.

The Council’s anti-money laundering body, set up in 1997 as the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism is now more normally known by the less onerous name of MONEYVAL. It comprises twenty-eight of the Council’s forty-nine member states, plus Israel, the Holy See and the United Kingdom’s three crown dependencies, Guernsey, Jersey and the Isle of Man. Its investigation into alleged illegal activities at the Holy See’s Institute for Religious Works – the so-called Vatican Bank – led to major reforms. It starts by looking at what sort of measures a country has in place to counter money laundering, as MONEYVAL’s Executive Secretary John Ringguth explained: “What we’re interested in is the follow-up and all countries are subjected to quite a sophisticated degree of follow-up, depending on the speed with which they are responding to the recommendations. And this is all backed up by a process which we euphemistically call ‘compliance-enhancing procedures’, which is, if you like, extra peer pressure, which ranges from high-level visits to the country to explain the need to implement standards, as far as to a public statement.”

A public statement means identifying a country where financial irregularities are going on and is clearly bad for business; no government wants to be named and shamed. At present, the only country whose financial dealings MONEYVAL is warning about is Bosnia-Herzegovina. “We’ve had to do this before in relation to other countries,” said Ringguth "and usually we find the response is fairly rapid. No bank or financial institution wants knowingly to be contaminated with dirty money.” MONEYVAL and the other Council of Europe bodies are not alone in the fight. They work together with, for instance, the United Nations Office on Drugs and Crime (UNODC), the World Bank, the IMF and the Financial Action Task Force, an inter-governmental body set up in 1989.

The fight against money laundering has been criticized as too costly. It’s been estimated that reporting requirements and compliance measures cost the United States and Europe together around five billion US dollars per year and some leading banks – although not individual members of staff – have faced costly fines for helping crooks launder the proceeds of activities like people trafficking, arms dealing, the drug trade and child prostitution. But without measures to stop them, such activities will still generate a profit for crooks and also buy guns, tanks and bombs for terrorists. As the world has found out very painfully of late, they have more than enough of those already.

© Jim Gibbons, January 2015

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