Criminalization of Money Laundering and the Financing of Terrorism

A presentation to the Workshop

“Developing An Effective AML/CFT RegimeDeveloping An Effective AML/CFT Regime”” Damascus

January14-15,2005

Joy Smallwood International Monetary Fund

Criminalization of Money Laundering Material elements (R. 1)

• Assessors need to establish that :• The physical and material elements of the ML

offense are in line with the UN Vienna (Art. 3) and Palermo (Art.6) Conventions (c.1.1) i.e. that they cover :

conversion or transfer ; concealment or disguise ;

Criminalization of Money Laundering Material elements (R. 1)

aacquisition, possession or use of property with knowledge at the time of receipt; [subject to fundamental concepts of legal system]

participation in, association or conspiracy to commit ML [subject to fundamental concepts of legal system]

Criminalization of Money Laundering Material elements (R. 1)

• The ML offense extends to any type of property that represents proceeds of crime, not simply cash

• Proving the illicit origin of the proceeds does not require conviction of a predicate offense. Discuss what level of proof regarding the illicit origin of proceeds is needed and how specific it must be to a particular predicate offence

Criminalization of Money LaunderingPredicate offenses

• Mandatory scope of ML -- assessors examine whether:

• The jurisdiction’s ML offense covers all “serious offenses” and the range of serious offenses is defined as widely as possible.

Criminalization of Money LaunderingPredicate offenses

• In all cases, predicate offenses for ML cover at a minimum a range of offenses in each of the 20 “designated categories of offenses” as defined in the Glossary to the FATF 40, including the financing of terrorism.

Criminalization of Money LaunderingPredicate offenses

• Predicate offenses for ML extend to conduct that occurred in another country, which constitutes an offense in that country and which would have constituted a predicate offense had it occurred domestically. Look at legal basis for this and ask for case law.

• Note that market manipulation, insider dealing and environmental crimes may not be listed in the criminal or penal code. Ask for other legislation to look for these offences.

Criminalization of Money Laundering Predicate offenses

Jurisdictions can use various methods to achieve this minimum coverage:• Threshold approach

Category-based: all offenses defined as “serious” [or as “indictable” offenses, “crimes”, etc.] in domestic law ;

Numerical : all offenses punishable by 1 year of imprisonment or more (if maximum); or by 6 months of imprisonment (if minimum); or a combination of these

Criminalization of Money Laundering Predicate offenses

List approach all offenses specifically referred to in the ML

provision (note that threshold 1 year/6 months minimum does not apply here)

Criminalization of Money Laundering Predicate offenses

• All crimes approach no list, no threshold (again : note that threshold

1 year/6 months minimum does not apply here, but Glossary offenses must be covered) ;

• Combination Threshold plus list (e.g. all “serious offenses” or all

offenses above the threshold, plus certain designated offenses that are not “serious” or below the threshold) ;

Criminalization of Money Laundering Predicate offenses

Issues to examine : Whatever method is used, predicate offences

must:• cover all designated categories of offences in the

FATF 40 Glossary• be criminalized in the jurisdiction's laws• have a range of offenses in each category, where

appropriate

Criminalization of Money Laundering Predicate offenses

Note that if the description (or definition or name) of the offence is different but conduct or concept is there, it is OK.

Criminalization of Money Laundering:Self Laundering and Ancillary Offences R 1

Assessors should examine that:• Self-laundering is criminalized, unless contrary is

required by fundamental principles of law• Unless contrary to the fundamental principles of

domestic law, ancillary offences include: Conspiracy to commit Attempt Aiding and abetting Facilitating, and Counseling the commission of

Criminalization of Money Laundering:Self Laundering and Ancillary Offences R 1

• Ultimately, the assessors must determine that all parties Ultimately, the assessors must determine that all parties involved in laundering money may be prosecuted for committing involved in laundering money may be prosecuted for committing a criminal offencea criminal offence

Criminalization of Money Laundering- R. 2

The standard is knowingly but knowledge should be able to be inferred from objective factual circumstances. This principle needs to be set forth at least in case law (civil law countries = free evaluation of evidence).

Sanctions for natural and legal persons: effective, proportionate, dissuasive (for all types).

Assessors should look annual statistics to confirm that sanctions have been issued and that they are appropriate.

Criminalization of Money Laundering: Corporate Criminalization of Money Laundering: Corporate Liability R 2Liability R 2

Assessors should establish that:Assessors should establish that:• criminal liability for money laundering extends to legal criminal liability for money laundering extends to legal

personspersons

• legal persons are subject to civil or administrative legal persons are subject to civil or administrative liability for money laundering and to criminal liability, liability for money laundering and to criminal liability, where it is not contrary to fundamental principles of where it is not contrary to fundamental principles of domestic lawdomestic law

Criminalization of Money Laundering: Corporate Criminalization of Money Laundering: Corporate Liability R 2Liability R 2

• legal and natural persons may be held concurrently legal and natural persons may be held concurrently liable for the same act of money laundering (c.2.4)liable for the same act of money laundering (c.2.4)

• parallel criminal, civil and administrative proceedings parallel criminal, civil and administrative proceedings may be initiated against a legal person for the same may be initiated against a legal person for the same money laundering act or acts (c. 2.5)money laundering act or acts (c. 2.5)

Criminalization of Money Laundering – Implementation and effectiveness

Assessors should examine:

• Has the assessed jurisdiction kept statistics annual for prosecution and conviction of money laundering? (R 32)

• The adequacy of criminal sanctions. Relative to other crimes in the jurisdiction, what is the penalty for money laundering? Look at a range of offences for comparison. Relative to other countries in the region, what is the penalty for money laundering?

Criminalization of Money Laundering – Implementation and effectiveness

• If no convictions, clarify whether there are any prosecutions underway and take into account the date of criminalization of ML

• If no prosecutions, but ML offense is recent, clarify whether there are any investigations.

Criminalization of Money Laundering - Implementation and effectiveness

•Where money laundering is criminalized but no prosecutions/investigations are underway, look at possible problems of implementation (e.g. lack of resources) – compare with ML situation in the country or region. Look also at the predicate offence statistics.

•If prosecutions are undertaken but fail for lack of evidence, check on evidentiary standards (statutory or case law)

•If judicial interpretation exists look at whether it is overly restrictive, look at numbers of investigations, prosecutions and convictions.

•Look at who is being targeted by the investigations and

prosecutions (self-laundering or third-party laundering).

Criminalization of FT : Material and mental elements of the FT offense (SR II)

Assessors need to establish whether: • The FT offense in the assessed jurisdiction is in accordance

with the definition of FT as set forth in:

• the Financing of Terrorism Convention (1999), Section 2; and• FATF SR II on Terrorist Financing (and IN)

Criminalization of FT

• The FT offense should be criminalized on the basis of the FT Convention and SR II and should cover the following minimum elements:

The Conduct: Provision or collection of funds by any means, directly or indirectly, to be used in full or in part:

*To carry our “terrorist acts” *By a terrorist organization *By an individual terrorist

Funds: assets of every kind, however acquired (IN SR II).

• It should be irrelevant whether the funds: (i) were actually used to carry out or attempt terrorist acts; or (ii) be linked to a specific act (s).

Criminalization of FT

• Mental state: willfully and with intent that funds be used or in the knowledge that they are to be used for financing

• The FT offense must be a predicate offense for ML

Criminalization of Financing of Terrorism: Definitions

Assessors need to examine FT-related definitions in the assessed jurisdiction’s laws. Reference definitions are provided by FATF SR II and FT Convention :

• Financing of Terrorist organization : refer to IN to SR II • Financing of Terrorist acts : refer to FT Convention (Art 2) and IN to SR II • Financing of a Terrorist individual : refer to IN to SR II • Funds: refer to definition in FT Convention and IN to SR II (identical) • Provision [of funds]: no definition• Collection [of funds]: no definition

Criminalization of Financing of Terrorism: Summary

Assessors need to examine:

• Definitions of terrorist, terrorist act and terrorist organization and confirm that all three are part of the offence.

• Does the FT offense cover both proceeds and legitimate funds?

• Does the FT offense cover “provision of funds” and “collection of funds” as distinct material acts as required ?

• Is the FT offense an autonomous offense or only an ancillary offence (e.g. related to “terrorism”)? Note that criminalising FT solely on the basis of aiding and abetting, attempt, or conspiracy does not comply with SR II (see IN to SR II and footnote 40 of Methodology).

Criminalization of Financing of TerrorismSummary

Does FT offence extend to the situation where:

• the funds, legitimate or proceeds, have not been used?• the terrorist act that is “financed” has not been carried out or

attempted? • the funds are not linked to specific terrorist acts?

Criminalization of Financing of TerrorismCriminalization of Financing of Terrorism Implementation and Effectiveness Implementation and Effectiveness

Assessors also need to examine whether : The assessed jurisdiction has obtained any convictions for FT, relative to

the threat of terrorism or financing of terrorism. If no convictions, clarify whether there are any prosecutions underway and

take into account the date of criminalization of FT If no prosecutions but FT offense is recent, clarify whether there are any

investigations. If prosecutions are undertaken but fail for lack of evidence, clarify whether

there are any judicial decisions on evidentiary standards. If judicial interpretation exists but is overly restrictive, look to issues of

effectiveness.

SR IX : Cross border movement of cash or bearer SR IX : Cross border movement of cash or bearer instrumentsinstruments

For cross border movements of currency or bearer instruments valued at For cross border movements of currency or bearer instruments valued at USD/EUR 15,000 or more, the term “physical cross border transportation” USD/EUR 15,000 or more, the term “physical cross border transportation” refers to and in-bound or out-bound physical movement of currency or refers to and in-bound or out-bound physical movement of currency or bearer instruments from one country to another country including the bearer instruments from one country to another country including the following modes of transportation:following modes of transportation:

• Physical transportation by a natural person, or in a person’s Physical transportation by a natural person, or in a person’s accompanying luggage or vehicleaccompanying luggage or vehicle

• Shipment through containerized cargoShipment through containerized cargo

• Use of the mail systems (IN, SR IX, Para 5)Use of the mail systems (IN, SR IX, Para 5)

SR IX: Declaration or disclosureSR IX: Declaration or disclosure

Countries are required to put in place either a declaration or disclosure system to Countries are required to put in place either a declaration or disclosure system to deter cross-border movements of currency and monetary instruments related to deter cross-border movements of currency and monetary instruments related to ML/FT.(c.IX.1) ML/FT.(c.IX.1)

In a declaration system it is required that persons making cross-border transportation In a declaration system it is required that persons making cross-border transportation of currency or bearer negotiable instruments exceeding the threshold to make a of currency or bearer negotiable instruments exceeding the threshold to make a truthful declaration to a designated competent authorities ( usually a written truthful declaration to a designated competent authorities ( usually a written declaration on a form). declaration on a form).

A disclosure system requires that countries have a system in place whereby if a A disclosure system requires that countries have a system in place whereby if a person is asked to make a disclosure while making a cross-border transportation of person is asked to make a disclosure while making a cross-border transportation of currency or bearer negotiable instruments exceeding the threshold, that such a currency or bearer negotiable instruments exceeding the threshold, that such a person be required to make a truthful disclosure to a designated competent authority person be required to make a truthful disclosure to a designated competent authority upon request. upon request.

SR IX: False declarations/disclosuresSR IX: False declarations/disclosures

Upon discovery of a false declaration or disclosure of currency or bearer Upon discovery of a false declaration or disclosure of currency or bearer negotiable instruments, failure to disclose, or suspicion of ML/FT, negotiable instruments, failure to disclose, or suspicion of ML/FT, designated competent authorities should have the ability todesignated competent authorities should have the ability to: :

• request and obtain further information from the carrier with regard to request and obtain further information from the carrier with regard to the origin of the currency (Criterion IX.2)the origin of the currency (Criterion IX.2)

• be able to stop or restrain currency or bearer negotiable instruments in be able to stop or restrain currency or bearer negotiable instruments in order to ascertain whether evidence of ML/FT may be found (Criteria order to ascertain whether evidence of ML/FT may be found (Criteria IX.3)IX.3)

• sanction persons who make a false declaration or disclosure and sanction persons who make a false declaration or disclosure and confiscate the cash or bearer negotiable instruments (Criteria IX.8 - confiscate the cash or bearer negotiable instruments (Criteria IX.8 - IX.10) IX.10)

SR IX: RecordsSR IX: Records

Information on the amount of currency or bearer negotiable instruments Information on the amount of currency or bearer negotiable instruments declared/disclosed or otherwise detected, and the identification data of the declared/disclosed or otherwise detected, and the identification data of the bearer(s) should be retained for use by the appropriate authorities when:bearer(s) should be retained for use by the appropriate authorities when:

* a declaration which exceeds the prescribed threshold * a declaration which exceeds the prescribed threshold is is made; ormade; or

* where there is a false declaration/disclosure; or* where there is a false declaration/disclosure; or* where there is a suspicion of money laundering or * where there is a suspicion of money laundering or terrorist terrorist

financing (c. IX.4)financing (c. IX.4)

Information obtained under the declaration/disclosure system should be Information obtained under the declaration/disclosure system should be available to the FIU either where the FIU is notified of suspicious available to the FIU either where the FIU is notified of suspicious transactions or where the FIU has direct access to the transactions or where the FIU has direct access to the declaration/disclosure information declaration/disclosure information (c. IX.5)(c. IX.5)