Money Laundering – Don’t Ignore The Real Threat!

Money laundering activity is not restricted to the criminals who are trying to clean up their proceeds of crime so that they can spend it or invest in further criminal activities. Every business and every individual is also just as likely to take receipt of proceeds of crime, albeit unknowingly.

Being ignorant to unwitting participation in laundering money obtained from the likes of drug dealing and people trafficking may well afford some defence if you are unlucky enough to be caught up in a regulatory investigation and subsequent prosecution, but you may need to suffer the stress and inconvenience of having to prove this in court! Depending on the quality of the records you have kept, the ability of your lawyers and sometimes, it seems, even the direction of the wind on the day you give evidence, there is always a chance you may be convicted.

Where money laundering is concerned, you must be able to prove to a civil standard that any money you received came from a legitimate source, rather than relying on the premise of innocent until proven guilty!

For example, a business in the UK might sell goods to a new customer in India. The business asks for its payment in advance, as it prepares to ship the order. The money arrives as a deposit in the businesses bank account and all is well. However, it is common practice for Indian businesses and individuals alike to bypass the mainstream (which is government controlled with disadvantageous exchange rates) banking system and use local money transfer businesses, such as Western Union or Hawala dealers.

Hawala Banking, which predates conventional Western banking systems, works by transferring indebtedness rather than cash itself. Thus customers in India wishing to send money to the UK will give money to their local Hawaladar, whose counterpart in the UK will also collect money from customers wishing to send money back to India. This means that both Hawaladars in their respective countries have funds with which to satisfy their counterpart’s transactions.

The problem lies in the fact that such systems are often hijacked by money laundering gangs. In some cases, the UK Hawaladar will receive instructions from his Indian counterpart to pay a number of recipients in the UK, but the money for this will arrive as cash by courier. The cash has in fact been collected from criminal sources in the UK. The UK Hawladar then distributes the cash to individuals and businesses expecting cash from abroad. The customers are happy as they receive the cash that they are expecting ostensibly coming from legitimate sources in India, but is actually dirty street cash being either deposited into their bank accounts or sometimes even handed to them. The Indian Hawaladar pays out the funds he has collected from the legitimate customers wishing to send money abroad to the crooks in India and the books are balanced.

Thus dirty street cash has been distributed in the UK to innocent customers, and its value as been transferred out of the country as clean funds to the criminals abroad.

The large sums of money collected in the UK are used to settle numerous smaller Hawala receipts expected from abroad. Making smaller deposits of cash into innocent recipients’ bank accounts is possible when the amounts are too small to trigger a bank’s anti money laundering suspicions. In this way, a distributor may visit many different bank branches in a day, depositing a few £100 or several £1,000 each time until he has dispersed perhaps £50,000.

This is known as “cuckoo smurfing” by the authorities, who are well aware of this very popular system of money laundering. Many organized criminal gangs employ this method, or a variation of it, operating for many years before being identified and closed down. Many may escape detection.

The problem is two-fold:

  • There is no onus on an individual to identify the source of funds being received. A business theoretically should know the source of any revenue it receives, but as they are typically non-regulated for the purpose of the anti-money laundering framework they pay little heed to this requirement. Therefore, criminals can usually deposit their funds in these innocent parties’ accounts without creating a fuss.
  • There is huge ignorance and even bigger apathy within the general public and even within general business activities concerning the problem of money laundering. Therefore, a person will agree to make a little money on the side by depositing money, cuckoo smurfing, for a friend – thinking what harm can there be acting as a distributor for a Hawaladar?

Lawyers and accountants, estate agencies and dealers in high value goods (like car distributors) are regulated businesses and must comply with ant-money laundering regulations. This means that no large sums of money can be received without carrying out checks on the source of the funds, and any suspicions of criminal activity must be reported to the authorities. The penalties for failing in these obligations are harsh. Banks and Hawaladars fall within this regulated sector. However, unregulated businesses do not.

As a regulated business, I take some comfort in the fact that fees that I receive from clients come via the UK mainstream banking framework, not as bags of cash! Even so, I ensure that the person sending me the money is my client, whom I have already checked thoroughly before taking on their custom.

If a Hawaladar in the UK knows that his counterpart Hawladar in India is sending £50,000, and it turns up as a bag of cash, is it safe for him to assume that because it has come from someone he knows who is meant to be a recognised and regulated Money Service Business, the money is legitimate? In the UK, Hawala Banking is a regulated legitimate business and its operators the Hawaladars are closely supervised by HMRC and the FCA. Unfortunately, Hawaladars in other countries may not be as highly regulated, and a UK practitioner assuming that transactions connected to an Indian Hawaladar are legitimate would be failing to observe the UK regulations. In fact in India, Hawala Banking is illegal, and therefore receiving cash by courier is highly suspicious and most likely to be connected to crime.

There are many highly legitimate Hawaladars in the UK, who will trade indebtedness with their counterparts all around the world, from Pakistan to Hong Kong and from Somalia to Afghanistan. Although Hawala Banking grew up through the ages based on Eastern traditional values of trust, a UK practitioner must uphold the highly regulated standards expected of a financial institution in the West. Those individuals or businesses interacting with this method of money transmission would be advised to do the same.

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About Mark Jenner

Mark Jenner is an experienced forensic accountant specialising in fraud and white collar criminal matters. He provides independent financial investigation and expert accounting witness services to police forces, fraud regulators and criminal defence lawyers, also providing assistance and solutions to organisations embroiled in financial disputes.

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