Money laundering as a general concept may be relatively easily defined as rendering the proceeds of crime unrecognisable as such.

The simplest definition of money laundering is that of the sub-committee on Narcotics and Terrorism of the US Senate Foreign Relations Committee (SFRC):

"Money laundering is the conversion of profits from illegal activities into financial assets which appear to have legitimate origins."

The SFRC identifies three stages: first placement, the physical disposal of the cash: second, layering, the process of transferring the funds through various accounts to disguise its origins; and third, integration, the movement of laundered funds into legitimate organization.

Money laundering is now an extremely lucrative criminal enterprise in its own right. An emerging criminal class —professional money launderers who aid and abet other criminals through financial activities, these individuals hardly fit the stereotype of an underworld criminal. They are Accountants. Attorneys, Money Brokers and they need not become involved with the underlying criminal activity except to conceal and transfer the proceeds that result from it. They are drawn to their illicit activity for the same reason that drug trafficking attracts new criminals to replace those who are convicted and imprisoned - greed. Money laundering, for them, is an easy route to almost limitless wealth. The new offences of money laundering created by European Member States in compliance with the European Directive on money laundering include within their definition money obtained through drug trafficking and through the proceeds of other criminal conduct, including money associated with terrorist activities.

Money laundering is nothing more than a egregious use of the world's banking system, and is a truly international phenomenon. Much of that impetus has been supplied by the technical advances made in the computer and communications industry. As technology hat. advanced, so new methods of laundering "funny

money' have become possible. The strategy of criminal organisations is to manipulate their illicit proceeds through the legitimate financial sector, in such a manner as to make those proceeds appear to have come from a legitimate source. Thus money laundering is a vital component of all financially motivated crime. Obfuscating any evidentiary paper or money trail is a precondition to successful money laundering, such activity will invariably involve trans-border operations, often including many border crossings in the course of a laundering transaction.

The phenomenon of money laundering has arisen because of the combination of two factors. First, the advent of offshore havens: these were originally regarded simply as offering a means of tax avoidance: today it is often said, they operate as 'black boxes', shielding the criminal from the glare of investigation. Specifically, such offshore jurisdictions usually offer ease of nominee company formation, banking confidentiality and a minimum amount of banking regulation. Secondly, the electronic transfer of funds; the advent of new technology and the 'information highway' via satellite and fibre-optic communications mean that cash paid into a bank account opened in the name of a shell company in a jurisdiction which asks few questions as to the money's origins can be sent round the world as a 'stream of electrons'. Such money can then be passed on, again, electronically through a series of accounts held in different names in different countries, in an attempt to destroy the audit trail; or can be drawn on by the use of a credit card in a cash dispenser in another country, which the credit card bill settles, again with no questions asked by the bank in an offshore jurisdiction. The money so obtained may be used to buy goods such as jewellery or cars, or 'dissipated' on general living expenses or on gambling.

It is estimated that atleast 60 percent of the world's money is now 'held' offshore. For example, the Cayman Islands is regarded as one of the largest banking centres in the world, with over 500 banks. The British Virgin Islands have over 1,20,000 trust companies registered there, many with nominee shareholders or directors.

There are a number of well-known fiscal havens, often called 'tax havens' as one of their original functions was to enable individuals and corporations to evade tax liabilities in their home countries. All that is needed if for a business to be incorporated in the haven, often needing no more than a nominal amount of capital and equally nominal registration fees and annual corporation fees, perhaps as little as $100, plus a room with a telephone, fax and computer terminal. It can be incorporated as a holding company free to conduct business all over the world.

One essential feature is banking secrecy; some of the havens enshrine this in their laws, having a statutory ban on disclosing the names of account holders or information about their accounts — for it is this feature which brings the haven its business.

The havens are in most cases small independent republics or offshore islands which have traditionally enjoyed a degree of autonomy.

The laundering of the funds can take many forms, but will usually involve a series of transactions transferring funds from one point to the next. These transfers may have the following features:

They will happen quickly;

They may use more than one jurisdiction;

In particular, the jurisdictions used may include those which are 'opaque' (not easily accessible) to outside investigators —jurisdictions which are considered tax havens usually fall into this category;

The funds may change their nature — for instance, rather than a simple transfer from one bank account to another, the identity of the funds may be disguised by multiple transfers — layering and integrating';

The named owners of bank accounts in a chain of transactions will often themselves be foreign (to the jurisdiction of the bank account) companies or trusts, which renders these account holders opaque to the investigator.

Western Europe is both a producer and an exporter and importer of organised crime. As exporters, the Sicilian Mafia have spread their tentacles throughout both Western and Eastern Europe while maintaining their traditional connections in the United States and elsewhere in the American continents. Conversely, organised crime is imported from the East, primarily from the Russian. Turkish and Chinese Mafias, and from Africa, such as the Nigerian groups. Central and eastern European countries are potentially major exporters of organised ciime m the Russian mould and provide fields of investment for money laundering by-West European criminals. Evidence that mone}'laundering itself has come of age as a business in its own right is provided by the emergence of two phenomena-

(1)    The increasing involvement in money laundering schemes of financial services, by professionals, such as private lawyers, bankers and accountants;

(2)    The establishment of money laundering is a business service available to more than one criminal organisation as client and on offer to a wide range of criminals.

One of the easiest ways to transfer money internationally is for a multinational corporation to have a number of subsidiary accounts in different countries. Money can then be paid into the corporate account in one country and drawn out from the corporate account in another. If it become necessary to adjust the balance by transfer, this could be concealed in the regular transfers of money or credit to and from subsidiaries. If necessary, false invoices can be arranged, to pay for, say, 'goods provided' to a subsidiary or for raw-materials 'bought' from a third country. without any material actually moving at all. The art lies in concealing these transactions amongst a chaff of other transactions in the corporation's ordinary course of business.

Fictitious operations or inflated invoicing are common methods of concealing the criminal origins of money.

There is a metaphorical classification for describing the different levels of money laundering services, such as 'hand wash', family washing machine' and 'condominium washing machine', which 'reflect the professionalism of money laundering activities'. There are fully or quasi-legitimate alternative systems of informal banking employed extensively by traffickers, such as the Asian hawala or hundi and the 'Casa de cambio' prevalent in Latin America.

A key element in concerted national and international anti-drugs strategy is to deny to criminals the huge profits derived from the drugs trade in the form of laundered money.


There is, according to some estimates, a trillion dollars of dirty money stashed away in the world's offshore tax havens. Apart from Switzerland and Liechtenstein, the chief destinations for whitewashed cash are all British 'controlled'. Off the coast of Britain, the main destinations for those seeking anything from easy tax regimes to "confidentiality" or in other words "no questions asked" are the Channel Islands-Jersey, Guernsey and Sark, and the Isle of man (whose residents, like their famous tail-less cat, are known as Manx); further out, there is Gibraltar, the Cayman islands and the British Virgin islands.

The Channel islands and the Isle of Man came under British rule in the llth and 12th centuries and have continued as "dependent territories" of the British crown. The main islands have their own parliaments and laws, and unless specially legislated for, they are not are not bound by British acts of Parliament. Britain's tax and business laws obviously do not apply.

The Channel Islands despite being only a few miles off the north coast of France, the islands are, in fact, British. The Channel Islands are one of the most popular tax havens in the world, a place where the rich and famous can invest, deposit or launder money with little chance of anybody finding out.

The islands consist of two historic Bailliwicks or districts, Jersey (45 square miles, population 86,000) and Guernsey (24.5 square miles, population 64,000), which also includes the islands of Herm, Jethou, Alderney and Sark. Constitutionally, they are not part of the United Kingdom; they are known as Crown Dependencies, which means that they are self-governing and fiscally independent.

Since the end of World War II, the islanders have capitalised on then-independence, developing a range of legitimate, offshore services based on lax taxation. In the modern world of international finance, there is a need for havens where large sums of money can be invested without the often heavy burden of domestic taxes.

There is also demand for anonymity-places where money can be hidden and is hard to trace. The Channel Islands satisfy both these needs. A staggering $90,443,000,000 is currently deposited in banks in Jersey.

Guernsey, is one of the best run offshore tax havens in the world. Anonymity is guaranteed, except in cases where international law is known to have been broken and the island has a convincing veneer of respectability.

Guernsey is concerned not to be tainted in any way by the proceeds of drug trafficking and other crimes and there are the obvious exceptions to confidentiality that any respectable jurisdiction has in order to combat money laundering, says the Guernsey Financial Services Commission. "These exceptions are carefully defined and controlled to protect clients against 'fishing expeditions', legitimate business can be confident that it has the protection of complete confidentiality."

There are many offshore tax havens in the world — Isle of Man, British Virgin Islands, Cayman Islands, Norfolk Island (a tiny place off the Australian coast) — but few are as well placed as the Channel Islands. Close to Europe (they are not part of the European Community, but enjoy a "special relationship" under Protocol 3 to the Treaty of Accession), they fall conveniently between the time zones of the East and America. They also boast a colourful eccentric history.

Prior to the Norman Conquest, the islands were part of the territory of the Duchy of Normandy, but when continental Normandy was liberated from English rule in 1204 the islands continued to owe allegiance to the King of England. Since then, successive English monarchs have ruled the islands through their claim to the Duke of Normandy, and they have observed existing local laws, customs and liberties. (Islanders still toast the Queen as "Our Duke".) Royal Charters were issued to guarantee the independence of the islands' judicial system from the English courts. They were also issued to grant important privileges, including the right to tariff free trade with England, and freedom from English taxes.

Unlike mainland Britain, the islands have a low rate of income tax (20 per cent, compared to a maximum of 40 per cent in the UK) and there are no capital gains, inheritance, capital transfer, value-added or withholding taxes. However, what attracts international investors is that non-residents are not liable to pay local income tax in respect of bank interest earned on the islands. Companies owned by non-residents can apply for "exempt" status enabling them to pay a flat rate of income tax of 500 pounds a year. The islands also have a very stable political system, with no violent swings of policy.

One of the most common schemes for anyone wishing to invest "offshore" is known as the "roll-up fund". Similar to "onshore" unit trusts, they differ in one key respect: they don't pay out any income. Instead, dividends are reinvested gross. This sort of investment grows faster than those which require investors to pay tax on investment returns. The rates of interest are also better than on the mainland, although charges can also be higher.

Another ruse popular with companies wishing to avoid tax is to pay Channel Island residents to be nominee shareholders and directors. The chief culprit appears to be the island of Sark, where the practice has been dubbed the "Sark Lark". There are only 560 residents on the tiny feudal island, which barely

measures two square miles, but it is said to have 23,000 registered companies-more than 40 a head. One resident is alleged to have 2,300 directorships.

The islands, however, are not just known for their financial services. They are very popular holiday destinations-the hours of sunshine are longer here than anywhere in the UK-and there is a famous tradition of farming, fishing and market gardening. Jersey and Guernsey cows are internationally famous (they produce a rich, creamy milk), and there is also a large flower export business, as well as a thriving knitwear industry. ("Jersey" and "Guernsey" are the names given to a distinctive type of knitted woollen sweater, particularly popular with seamen.)

Such is the appeal of the islands and their lifestyle that many wealthy individuals decide to set up home, taken advantage of the climate and most importantly, the legitimate tax benefits.

The main channel islands, Jersey and Guernsey are at pains to present a "clean image". Jersey, known as the most "exclusive" offshore destination, (it claims residence rights to five known drug barons) is touchy about bad publicity, Jersey businessmen bend over backwards to establish that they do not quite fit Hemingway's "sunny place for shady people" description. They have, they said, tightened regulations extending money laundering restrictions to all crimes, not just drug offence. They claim that they now compare themselves with London and New York, rather than other offshore centres.

Indeed, the offshore centres are no longer the refuge of the seriously shady and the super rich, British high street banks offer their customers products from their offshore operations which skim the ambiguous space between tax evasion and tax avoidance. Interest paid gross, on an offshore deposit, is the simplest one. Offshore "trusts" are another. The onus on declaring the income is on the individual. But, such deposits are still chicken feed compared with what makes up the over $120 billion in bank deposits in Jersey alone. While Jersey may claim to have cleaned up their act since their "Dodge-city days" in the 1960s, there seem to be enough loopholes for dubious dosh to enter the banking system.

This makes questions about who continues to seek offshore centres for their money and why they do so even more interesting.

Wliat do offshore tax havens offer? Different offshore centres have different rules for residence, investments, registering companies or depositing money. But, there is a uniformity of principle i.e., the bottomline is the same; low or no income-tax, inheritance or capital gains tax, "confidentiality" or absence of disclosure, and minimal regulation of companies, with regard to nature of business or disclosure of accounts.

Companies, for instance, would in most of these locations, only be required to register the names of nominee directors without having to reveal the names of the "beneficial owners" — that is, the true owners of the companies. Investigation into businesses operating out of the island of Sark and Isle of Man found, 23,000 registered companies and several local residents who held over 2000 directorships. They found several companies based in one man's greenhouse, while many supposed residents of Sark turned out to be telephones with redirect facilities to wherever in the world the person actually happened to live.

The business on the islands range from arms dealers, purveyors of pornography, to providers of fake degrees.

While Switzerland, where a third of non-resident money is held, has in recent years tried to develop a more co-operative attitude with investigations into money laundering, the island governments are notorious for refusing to co-operate with foreign investigations into companies and bank accounts held there. The British governement has announced a review of the channel island's financial industry.

Usury is another activity used to cover money laundering. Companies and individuals often try to avert the treat of bankruptcy by taking out loans with little or no collateral, paying interest of around 40 per cent. Deals of this kind are kept as quiet as possible in order not to prejudice confidence in the liquidity of the borrower, so they can relatively easily simulate to provide explanations, if demanded, for the transfer of money. In 1991, there were believed to be about 800,000 usurers operating in Italy alone.

Asian traders have for centuries used the hawala system. Hawala is a Hindi word meaning the transfer of funds via a third party or fiduciary. Its origins predate conventional banking by many hundreds of years and it provides for a level of anonymity which makes supervision and control impossible. A similar system is carried on in the Far East through the 'Chit' or the 'Chop Shop' banking facilities, both systems being conducted on similar lines. Hawala operates where-ever there is an ethnic Indian community.

In 1985, a typical laundering operation was uncovered in New York and became known as the 'Pizza Connection'. Cosa Nostra, who at that time controlled a large part of the heroin traffic and sales in USA, arranged for a number of pizza houses and fast food bars to be bought by New York Italians on whom they could rely to co-operate through to a mixture of incentives and fear of retribution. Dollars from street sales of heroin were delivered to launderers to be banked with the legitimate flow of cash taken across the pizza counters in a trade where bills and receipts are neither asked for nor given. As an extra precaution, they probably made suitable entries in their books to record false purchases of supplies to be reasonably consistent with payments of profits to the launderers.

Another commonly used device is 'cycling' through vending machines or mail order transactions. The goods are bought and sold either in the names of different members of the gang, or by use of aliases so that a person can buy and sell to and from himself, each time at a profit. As a front, a stock of suitable items is available, with enough turnover to conceal the rest, and these items (on paper in the case of mail orders) go around and round, generating a credible profit on paper, which is in fact cash from street sales of drugs.

The aims of measures authorising the confiscation of laundered money are:

(a)    Deterrent —making drug trafficking less profitable;

(b)    Preventive — stopping the reinvestment of the proceeds in further criminal activities, drug trafficking or otherwise:

(c)    Investigative — enabling investigators follow the money trail, thereby making it easier to identify and dismantle organisation.

In the scheme of money-laundering the Swiss banking system has a dubious role to play. Banking in the classic Swiss sense means total secrecy and confidentiality backed by strict bank secrecy laws. The use of numbered accounts in Swiss banks represent the key safeguard where privacy is concerned. Client identity is made known only to two executives of the bank, and two executives only, from the time the account is opened until it is closed. Everybody else within the bank — from tellers to secretaries to auditors — that account and all transactions made through it are identified only by a number. Since 1934 onwards criminal penalties were attached to Swiss bank secrecy laws, which ensures that no breach of confident a like occurs. The Swiss have immensely benefited from this type of banking system secrecy. Various drug cartels, smugglers, tax-evaders, third world dictators, politicians, corrupt bureaucrats, arms dealers and commission agents have all found a safe haven to stash away their loot. Enormous funds, gold and silver bullion, precious stones are entombed in Swiss vaults, many may go unclaimed and ultimately be forfeited.

Consider the following examples of the loot hoarded in Swiss banks;

1.   During World War II several Nazi Generals had transported looted gold and precious treasures to secret Swiss Bank accounts. Heinrich Himmler the head of the SS was reportedly maintaining a Swiss bank account.

2.   The German magazine Weltwoche of 15th March 1990 reported that Hitler had deposits of over 1 million Swiss Francs in three different accounts, in Switzerland, using false names. The bank involved was a Easier Handelsbank which specialized in German business. As a result it failed shortly after the war and was liquidated under Swiss government supervision. All records which could be potentially damaging to Swiss national interest, were destroyed.

3.   In the second half of the 1980: alone, it became known that five of the worst of the post World War II dictators had, collectively, deposited billions in Swiss banks; President Ferdinand Marcos of the Philippines, Duvalier of Haiti, Noriega of Panama, the Ceausescus of Romania and Honecker of East Germany.

4.   The movement of looted gold from Germany into Switzerland is one of the best

kept secrets of World War II both during and after. The Swiss government had put under seal all references to these matters.

5.   It was at the Geneva branch of the Credit Suisse that the principals involved in the Iran/Cantra affair kept their accounts.

6.   Illegal commissions received in the Bofors gun deal between Sweden and India was reportedly deposited in Swiss banks.

7.   The Auditor General of Pakistan had sent a list of 353 drug traffickers to the Swiss Attorney General requesting for investigating their Swiss Bank accounts. The list comprised of people like former President Ghulamlshaq Khan, Asif Zardari husband of former Prime Minister Benazir Bhutto, General Trimzi Corps Commander Multan; former chief of Air staff Abbas Khattah; Major   General Nasir Ullah Babbar, several Brigadiers and Colonels"


An off-shore fund is nothing more than a currency transfer center. The demand for off-shore banking licenses has become so great than an industry has developed for their purchase and sale. These regularly appear, in publications throughout the world, advertisements for sale of off-shore banking licenses in exotic tropical jurisdictions. Such licenses enable the holder not only to proclaim that he or she is the owner of a 'bank', but to transact business worldwide (except in the domicile of the 'bank') as if the entity were a true and legitimate financial institution. These off-shore banks are for the most part mere shells, often with names closely adapted from those of legitimate banks. They are devoid of employees, have no capital base, and are subject to virtually no regulatory control. A new fund effectively can be registered in the Cayman Islands, the Bahamas or the British Virgin Islands in three days. Fiscal havens of this kind abound in the islands off the coasts of North and South America, especially in the Caribbean and the Antilles, where money laundering can be run in parallel with the role of the islands as transit and distribution points for cocaine. There are also many fiscal havens in Europe, some within the EU. Andorra, the Channel Islands, Liechtenstein. Luxembourg and Monaco, all offer incentives to outside investors.

Tax havens are sovereign "off-shore'' countries with an advanced degree of willingness to permit foreign, non-resident, high-rate tax payers to deposit funds secretly, to hide behind anonymous corporate fronts, or to form highly complex trust arrangements. They exist for the simple reason that, enormous sums of money will continue to flow into their jurisdiction, and remain safe from the prying eyes of the fiscal authorities of the country of origin. Such facilities, while being legal within the haven state itself, place high-net-worth individuals who have recourse to their services in very considerable difficulties in their home jurisdiction if the revenue authorities discover that they are making use of evasion vehicles. For this reason, an obsessive level of secrecy and the guarantee of complete discretion in the handling of the client's affairs, are the hallmarks of the most successful tax havens. Such "off-shore" secrecy facilities have been one of the main influences on the proliferation of channels for the movement of criminally generated money, whether it be in the form of the proceeds of drugs, crime or for terrorist purposes. When money is passed electronically in and out of two or three of these in succession, to end up in a respectable bank or property in Europe or the USA, its original source is virtually impossible to trace.

Highly effective underground banking systems such as the Hawala in India, and the Fei Chi'en in Chinese communities are virtually impenetrable by outsiders, and are the mechanisms by which incredible sums of money, both illicit and licit, flow. Indian Hawala operations spread from the Phillippines and Hong Kong in the East, to Singapore and Sri Lanka, Oman and Dubai in the Middle East, and the UK, Europe and the US. These underground banking systems are also employed by those who must legitimise or conceal the proceeds of their illegal activities.


Times change, communication changes — paying tax is a constant. In the 1880s, the debate was about who is liable to account for tax on international telegraph messages. Today the debate is about who is liable to account for tax on commercial transactions taking place over the Internet. The difference now is the blistering speed of change: television took 38 years to reach 50 million people, while the Internet has taken only four years to reach the same number.

But, as we move from an industrial economy to an information economy, can the taxman keep up? Tax laws have been largely written to deal with tangible goods, with few international transactions. Now we have a growing global economy in which the cosmonauts on Mir can (and indeed did) buy Christmas presents for their families through Virtual Emporium, a US-owned Internet shipping mall, for delivery to Russia.

International tax : At present, tax and the Internet are an awkward combination. Domestic tax is not significantly affected, but international tax depends on knowing who is doing what and, most importantly where. The Internet provides an environment in which that information can be easy to establish. Software can be used to conclude simple business transactions in another country, so that the vendor has no physical presence in that country. There may be no correlation between the Internet address of a party to a transaction and their physical location.

While the current scale of trade on the Internet is not yet that significant, projections for its potential growth are causing many countries to be concerned about the possible reduction of their tax income. Not only is it difficult to work out which country has authority to tax a transaction, the problems can start with simply trying to identify whether a transaction has occurred at all. There may be no documentation, or where documentation exists, it may be encrypted.

The Internet opens up international trade to small traders who lack the resources to handle complicated international tax compliance. This increases the potential for lost tax through accidental non-compliance. The Internet also allows business to cut out middlemen, such as wholesalers and agents, who not only generate tax but also collect it (particularly value added tax).

Tax authorities are becoming more aware of the issues, partly due to reports from countries such as the US and Australia. The US seems anxious to avoid conflicts amongst its 30,000 taxing jurisdictions, whilst Australia, is equally anxious to ensure that the US does not single-handedly set the agenda for taxation of Internet trade. High level discussions have taken place in groups such as the OECD, as countries try to avoid the problems that could arise from unilateral taxation, such as conflicting and retaliatory taxes. So far no new taxes seem likely and a framework has been published which sets out the principles on which Governments will work to apply existing international tax principles to electronic trade.


15 Jun 2022


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