What is Money laundering?
Money laundering is a criminal act whereby money that has been obtained through criminal activities, i.e. “dirty” money, is “white washed” by using the financial system in order to conceal its origins. Essentially, then, money laundering means making illegal money look like legitimate money by wiping any traces that could link it to its criminal origins.
Money laundering presupposes that an original offence has been committed. Money laundering relates to any economic benefit that is gained via this predicate offence. Consequently, money laundering is a criminal act.
Usually, the act of money laundering consists of three basic steps: placement, layering and integration.
The fight against Money laundering in Luxembourg
In developing an international financial centre, Luxembourg became aware at a very early stage of the need to prevent the use of financial circuits for unlawful purposes. While initially designed to fight money laundering linked to drug trafficking, Luxembourg legislation today criminalises all offences recommended by the Financial Action Task Force (FATF).
Moreover, measures aiming to prevent money laundering not only apply to banks, but to all professionals in the financial sector, including insurance companies, notaries, estate agents, auditors, casinos, lawyers, tax and financial advisers, and persons selling high-value goods.
Ever since the recommendations made in 1987 by the Basel Committee on Rules and Practices for the Verification of Banking Transactions, Luxembourg has been on the forefront of legislation in this field.
Luxembourg anti-Money laundering legislation
Luxembourg legislation foresees very strict access conditions for those wishing to exercise a financial sector activity. Moreover, professional secrecy in Luxembourg does not protect those that commit criminal offences, since this secrecy is non-invocable in penal matters. Financial sector cooperation with legal and administrative authorities exists on various levels and includes the obligation to report any fact that is perceived as an indication of money laundering.
The cooperation with authorities, specifically in the fight against the financing of terrorism, intensified further after the 9/11 attacks. Thus, the law of 12 August 2003 on the repression of terrorism and its financing introduced the financing of terrorism into the penal code and extended the definition of Money laundering by including terrorism and the financing of terrorism in the list of primary offences.
The law of 12 November 2004 on the fight against money laundering and against the financing of terrorism, as amended by the laws of 17 July 2008 and 27 October 2010, transposed into national law the Third EU Money Laundering Directive. With the introduction of this directive, the list of primary offences is now composed of two sections: on the one hand, a list of offences that are explicitly named, and, on the other, a non-exclusive list that is determined according to a penalty threshold and containing all offences punishable by a custodial sentence of a minimum of six months. In Luxembourg, the latter offences, for instance, include insider dealing, counterfeiting, fraud, abuse of company assets, etc.
Professional obligations in Luxembourg
- obligation to apply customer due diligence measures: this includes the identification of the customer and of the beneficial owner, obtaining information on the business relationship, and constant monitoring of the business relationship (transactions, source of funds, updating data)
- obligation to scrutinize certain transactions with particular attention
- obligation to maintain a continuous follow-up of clients relative to the risk they present
- obligation to keep certain documents
- obligation to have an adequate internal organisation in place
- obligation to cooperate with authorities and obligation to notify
- obligation to incorporate a customer’s name or account number into transfers
The 3 basic steps of money laundering
The money launderer places dirty money into the legitimate financial system, usually by making cash deposits at a bank. This stage is particularly risky, since large cash deposits tend to attract suspicion. Criminals use different tactics such as smurfing (splitting the money into smaller amounts) or mixing legal and illegal assets.
Here the launderer changes the form of the money that was initially placed with the aim to wipe any possible traces. This can be achieved, for example, by making numerous transfers between different bank accounts with different account-holders, by repeatedly changing currencies, buying and re-selling various securities, or by buying high-value goods like houses, cars or precious metals.
At the final stage, the launder reintroduces the money, now seemingly legitimate, into the financial and economic system. Detecting dirty money at this stage is much more difficult: transactions now appear to come from a legal source.
The Financial Action Task Force
The Financial Action Task Force (FATF) is an inter-governmental body whose purpose is the development and promotion of policies, both at national and international levels, to combat money laundering and terrorist financing. The Task Force is therefore a “policy-making body” which works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas.
Since its creation the FATF has spearheaded the effort to adopt and implement measures designed to counter the use of the financial system by criminals. It established a series of Recommendations in 1990, revised in 1996 and in 2003 to ensure that they remain up to date and relevant to the evolving threat of money laundering, that set out the basic framework for anti-money laundering efforts and are intended to be of universal application.
The FATF monitors members’ progress in implementing necessary measures, reviews money laundering and terrorist financing techniques and counter-measures, and promotes the adoption and implementation of appropriate measures globally. In performing these activities, the FATF collaborates with other international bodies involved in combating money laundering and the financing of terrorism.