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Chapter I
Money Laundering and Terrorist
Financing: Definitions and Explanations
A. What Is Money Laundering?
B. What is Terrorist Financing?
C. The Link Between Money Laundering and
Terrorist Financing
D. The Magnitude of the Problem
E. The Processes
F. Where Do Money Laundering and Terrorist
Financing Occur?
G. Methods and Typologies
F
or most countries, money laundering and terrorist financing raise significant
issues with regard to prevention, detection and prosecution. Sophisticated
techniques used to launder money and finance terrorism add to the complexity
of these issues. Such sophisticated techniques may involve many different types
of financial institutions; many different financial transactions using multiple
financial institutions and other entities, such as financial advisers, shell corpora-
tions and service providers as intermediaries; transfers to, through, and from dif-
ferent countries; and the use of many different financial instruments and other
kinds of value-storing assets. Money laundering is, however, a fundamentally
simple concept. It is the process by which proceeds from a criminal activity are
disguised to conceal their illicit origins. Basically, money laundering involves the
proceeds
of criminally derived property rather than the property itself.
The financing of terrorism is also a fundamentally simple concept. It is
the financial support, in any form, of terrorism or of those who encourage,
plan, or engage in it. Less simple, however, is defining terrorism itself,
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Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism
because the term may have significant political, religious, and national impli-
cations from country to country.
Money laundering and terrorist financing often display similar transac-
tional features, mostly having to do with concealment. Money launderers
send illicit funds through legal channels so as to conceal their criminal ori-
gins, while those who finance terrorism transfer funds that may be legal or
illicit in origin in such a way as to conceal their source and ultimate use,
which is the support of terrorism. But the result is the same—reward.
When money is laundered, criminals are rewarded with disguised and
apparently legitimate proceeds. Similarly, those who finance terrorism are
rewarded by providing the financial support to carry out terrorist strata-
gems and attacks.
A. What Is Money Laundering?
Money laundering can be defined in a number of ways. Most countries subscribe
to the definition adopted by the
United Nations Convention Against Illicit Traffic
in Narcotic Drugs and Psychotropic Substances
(1988) (Vienna
Convention):
1
• The conversion or transfer of property, knowing that such property is
derived from any [drug trafficking] offense or offenses or from an act
of participation in such offense or offenses, for the purpose of conceal-
ing or disguising the illicit origin of the property or of assisting any
person who is involved in the commission of such an offense or offens-
es to evade the legal consequences of his actions;
• The concealment or disguise of the true nature, source, location, dispo-
sition, movement, rights with respect to, or ownership of property,
knowing that such property is derived from an offense or offenses or
from an act of participation in such an offense or offenses.
2
1. http://www.incb.org/e/conv/1988/.
2. The
Vienna Convention,
Article 3(b).
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Money Laundering and Terrorist Financing: Definitions and Explanations
The
Vienna Convention
adds that money laundering also involves:
• The acquisition, possession or use of property, knowing at the time of
receipt that such property was derived from an offense or offenses …
or from an act of participation in such offense or offenses.
3
By its terms, the
Vienna Convention
limits predicate offenses (which is
to say, the criminal activity whose illicit proceeds are laundered) to drug
trafficking offenses. As a consequence, crimes unrelated to drug trafficking,
such as tax evasion, fraud, kidnapping and theft, for example, are not
defined as money laundering offenses under the
Vienna Convention.
Over
the years, however, the international community has come to the view that
predicate offenses for money laundering should go beyond drug trafficking.
Thus, other international instruments have expanded the
Vienna
Convention’s
definition of predicate offenses to include other serious
crimes.
4
For example, the
United Nations Convention Against Transnational
Organized Crime
(2000) (Palermo
Convention)
requires all participant
countries to apply that convention’s money laundering offenses to “the
widest range of predicate offenses.”
5
The Financial Action Task Force on Money Laundering (FATF), which is
recognized as the international standard setter for anti-money laundering
(AML) efforts,
6
defines the term money laundering succinctly as “the process-
ing of…criminal proceeds to disguise their illegal origin” in order to “legit-
imize” the ill-gotten gains of crime.
7
However, in its 40 recommendations for
fighting money laundering (The
Forty Recommendations),
FATF specifically
incorporates the
Vienna Convention’s
technical and legal definition of money
laundering
8
and recommends expanding the predicate offenses of that defini-
tion to include all serious crimes.
9
3.
4.
5.
6.
7.
8.
Id.,
Article 3(c)(i).
See discussion at Chapter V, A., 1., Predicate Offenses.
The
Palermo Convention,
Article 2 (2), http://www.undcp.org/adhoc/palermo/convmain.html.
See Chapter III, B., FATF.
FATF,
What is money laundering?, Basic Facts About Money Laundering,
www.oecd.org/fatf.
The Forty Recommendations,
Rec. 1, http://www1.oecd.org/fatf/40Recs_en.htm.
The Forty
Recommendations
are reprinted in Annex IV of this Reference Guide.
9.
Id.,
at Rec. 4.
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Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism
B. What Is Terrorist Financing?
The United Nations (UN) has made numerous efforts, largely in the form of
international treaties, to fight terrorism and the mechanisms used to finance
it. Even before the September 11th attack on the United States, the UN had
in place the International Convention for the Suppression of the Financing of
Terrorism (1999), which provides:
1. Any person commits an offense within the meaning of this Convention
if that person by any means, directly or indirectly, unlawfully and will-
ingly, provides or collects funds with the intention that they should be
used or in the knowledge that they are to be used, in full or in part, in
order to carry out:
(a) An act which constitutes an offence within the scope of and as
defined in one of the treaties listed in the annex; or
(b) Any other act intended to cause death or serious bodily injury to
a civilian, or to any other person not taking any active part in the
hostilities in a situation of armed conflict, when the purpose of
such act, by its nature or context, is to intimidate a population, or
to compel a government or an international organization to do or
to abstain from doing an act.
2. ...
3. For an act to constitute an offense set forth in paragraph 1, it shall not
be necessary that the funds were actually used to carry out an offense
referred to in paragraph 1, subparagraph (a) or (b).
10
The difficult issue for some countries is defining terrorism. Not all countries
that have adopted the convention agree on what actions constitute terrorism.
The meaning of terrorism is not universally accepted due to significant political,
religious and national implications that differ from country to country.
FATF, which is also recognized as the international standard setter for
efforts to combat the financing of terrorism (CFT),
11
does not specifically
10. International Convention for the Suppression of the Financing of Terrorism (1999), Article 2,
http://www.un.org/law/cod/finterr.htm. The conventions referred to in the annex in sub-para-
graph 1(a) are listed in Annex III of this Reference Guide.
11. See Chapter III, FATF
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Money Laundering and Terrorist Financing: Definitions and Explanations
define the term financing of terrorism in its eight
Special Recommen-
dations on Terrorist Financing
(Special
Recommendations)
12
developed fol-
lowing the events of September 11, 2001. Nonetheless, FATF urges coun-
tries to ratify and implement the 1999 United Nations International
Convention for Suppression of the Financing of Terrorism.
13
Thus, the
above definition is the one most countries have adopted for purposes of
defining terrorist financing.
C. The Link Between Money Laundering and Terrorist Financing
The techniques used to launder money are essentially the same as those used
to conceal the sources of, and uses for, terrorist financing. Funds used to sup-
port terrorism may originate from legitimate sources, criminal activities, or
both. Nonetheless, disguising the source of terrorist financing, regardless of
whether the source is of legitimate or illicit origin, is important. If the source
can be concealed, it remains available for future terrorist financing activities.
Similarly, it is important for terrorists to conceal the use of the funds so that
the financing activity goes undetected.
For these reasons, FATF has recommended that each country criminalize
the financing of terrorism, terrorist acts and terrorist organizations,
14
and
designate such offenses as money laundering predicate offenses.
15
Finally,
FATF has stated that the eight
Special Recommendations
combined with
The
Forty Recommendations
on money laundering
16
constitute the basic frame-
work for preventing, detecting and suppressing both money laundering and
terrorist financing.
Efforts to combat the financing of terrorism also require countries to con-
sider expanding the scope of their AML framework to include non-profit
organizations, particularly charities, to make sure such organizations are not
used, directly or indirectly, to finance or support terrorism.
17
CFT efforts also
12. http://www1.oecd.org/fatf/SRecsTF_en.htm. The
Special Recommendations
are reprinted in
Annex V of this Reference Guide.
13.
Id.,
at Spec. Rec. I.
14.
Id.,
at Spec. Rec. II.
15.
Id.
16.
Id.,
at introductory paragraph.
17.
Special Recommendations,
Spec. Rec. VIII.
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