By Lalitha Kunaratnam
KUALA LUMPUR, Malaysia--A year ago, the International Consortium of Investigative Journalists (ICIJ) and 150 media partners around the globe began rolling out the Pandora Papers, a world-rocking exposé that’s been called “a money bomb with political ripples”, and “a financial earthquake”.
The Pandora Papers’ revealed the financial secrets of ministers, oligarchs, mobsters and other powerful figures spawned action by governments and international groups, triggering investigations, legislation and rule changes in dozens of countries.
According to the recent report released by the Basel Institute on Governance, a Swiss corruption watchdog, Malaysia ranked 54th among 128 countries on the Basel AML Index 2022. With a slightly improved score of 5.33 from last year (10 is the worst possible mark), Malaysia remains a middle-ranking country for money-laundering risk.
The score reveals a broken and unjust system, where regulatory and enforcement agencies are barely uncovering the tip of the iceberg in the fight against financial crime. According to the Basel Institute, “When it comes to tackling dirty money, most countries are taking one step forward and four steps back – and remaining too many steps behind criminals seeking to launder illicit funds. Hence, dirty money continues to remain a threat to Malaysian society.
Where are the illegal proceeds coming from?
In most cases, the source of the illegal proceeds was generated from the embezzlement of public funds, crimes related to corruption and abuse of power, fraud in the financial sector, and drug trafficking.
What happens to this dirty money?
Illegal proceeds need to be laundered, i.e., to enter the financial system without the stigma of illegality. Whilst money laundering schemes vary in their complexity and methods, the three common stages are: placement, layering and integration.
“Placement” is the term given to the process of moving illegal proceeds into the legitimate economy and further away from its illegal source. “Layering” involves making the money as hard to detect as possible, by passing it through several hands. “Integration” is where the cash comes back into the legitimate economy.
Having successfully processed criminal profits through the first two phases, the launderer might choose to invest the funds into real estate, luxury assets, or business ventures.
The methods most commonly used to launder these illegal proceeds include: using front or shell companies or other non-resident legal persons and arrangements; trade-based money laundering through fictitious economic activity abroad; and misuse of electronic payments and virtual currencies.
Why isn’t money detected at the source?
While financial institutions have a significant role to play in detecting illicit activity, criminals have sought to diversify their operations. An emerging threat is the rise of cryptocurrency, which, in its largely unregulated state, is creating a breeding ground for criminals.
At the same time, corruption may facilitate money laundering: corrupt officials may influence the process by which proceeds are laundered, and enable launderers to escape all controls and sanctions.
As perceived in the case of the infamous Macau Scam suspect, Alvin Goh, and his partner Dato Addy Kana, both allegedly acted as agents or coordinators in providing facilities for the money-laundering syndicate. They were believed to be supported by a network of senior police officers, celebrities, and successful entrepreneurs, to launder the defrauded money.
What are the weaknesses that need to be addressed?
The Financial Crimes Enforcement Network (FinCEN) files and Pandora Papers highlighted several recurring, common elements that need to be addressed to mitigate this threat of money laundering which supports criminal activities. Among these are:
1. The use of shell companies formed in jurisdictions that do not require the identification of the beneficial owners of the companies or their assets. Examples of such schemes include the use of companies formed in the British Virgin Islands to open bank accounts in Cyprus.
2. Lax anti-money laundering and counter financing of terrorism (AML/CFT) compliance by financial institutions and money changers, as well as the inability of such institutions to detect transactions involving illegal proceeds.
3. The lack of cross-border cooperation by some countries in response to mutual legal assistance requests from countries where money laundering has taken place.
4. Corruption and the failure of bank regulators in some countries that open the door to the use of domestic financial institutions by foreign actors to launder the proceeds of foreign crime.
5. The facilitators involved in the property deals – law firms, real estate, accountants, and professional services firms – are not subject to the same regulatory scrutiny as financial institutions when it comes to AML/CFT compliance. They are effectively unregulated and don’t have processes in place to prevent financial criminals, such as the prominent figures named in the Pandora Papers, from exploiting the loopholes.
6. The inability of some governments to investigate and prosecute money launderers and to recover criminal proceeds using existing tools as the process requires strict and meticulous tracing and linking of assets to criminal activity.
Other factors to be considered
Research has shown that countries with a low level of control over corruption tend to have lower levels of compliance with the AML/CFT standards. Malaysia’s global rank in Transparency International’s annual Corruption Perceptions Index 2021 (CPI 2021) dropped five places, a stark contrast to the improvement seen after the 14th general election. The country ranked 62 out of 100 in the latest report – the lowest since the methodology was revised in 2012. With a CPI score of 48, Malaysia is now grouped among two-thirds of the countries globally which have scores that are below 50.
Russia’s invasion of Ukraine will have both negative and positive effects on the fight against money laundering. According to Basel AML Index project leader, Kateryna Boguslavska, “The conflict has revealed huge gaps in the global anti-money-laundering framework. This has resulted in a better understanding of the importance of cooperation between countries and a greater international political will than ever before to fight this type of crime.”
If we are to learn anything from the ongoing battle against money laundering, it is that governments, law enforcement agencies, businesses, and financial institutions must act fast and openly collaborate while sharing timely information to help intercept crime at the source, to prevent financial crime and crucially, also to protect public resources.
*Lalitha Kunaratnam is an independent investigative journalist, researcher and anti-corruption activist.*
According to the recent report released by the Basel Institute on Governance, a Swiss corruption watchdog, Malaysia ranked 54th among 128 countries on the Basel AML Index 2022. With a slightly improved score of 5.33 from last year (10 is the worst possible mark), Malaysia remains a middle-ranking country for money-laundering risk.
The score reveals a broken and unjust system, where regulatory and enforcement agencies are barely uncovering the tip of the iceberg in the fight against financial crime. According to the Basel Institute, “When it comes to tackling dirty money, most countries are taking one step forward and four steps back – and remaining too many steps behind criminals seeking to launder illicit funds. Hence, dirty money continues to remain a threat to Malaysian society.
Where are the illegal proceeds coming from?
In most cases, the source of the illegal proceeds was generated from the embezzlement of public funds, crimes related to corruption and abuse of power, fraud in the financial sector, and drug trafficking.
What happens to this dirty money?
Illegal proceeds need to be laundered, i.e., to enter the financial system without the stigma of illegality. Whilst money laundering schemes vary in their complexity and methods, the three common stages are: placement, layering and integration.
“Placement” is the term given to the process of moving illegal proceeds into the legitimate economy and further away from its illegal source. “Layering” involves making the money as hard to detect as possible, by passing it through several hands. “Integration” is where the cash comes back into the legitimate economy.
Having successfully processed criminal profits through the first two phases, the launderer might choose to invest the funds into real estate, luxury assets, or business ventures.
The methods most commonly used to launder these illegal proceeds include: using front or shell companies or other non-resident legal persons and arrangements; trade-based money laundering through fictitious economic activity abroad; and misuse of electronic payments and virtual currencies.
Why isn’t money detected at the source?
While financial institutions have a significant role to play in detecting illicit activity, criminals have sought to diversify their operations. An emerging threat is the rise of cryptocurrency, which, in its largely unregulated state, is creating a breeding ground for criminals.
At the same time, corruption may facilitate money laundering: corrupt officials may influence the process by which proceeds are laundered, and enable launderers to escape all controls and sanctions.
As perceived in the case of the infamous Macau Scam suspect, Alvin Goh, and his partner Dato Addy Kana, both allegedly acted as agents or coordinators in providing facilities for the money-laundering syndicate. They were believed to be supported by a network of senior police officers, celebrities, and successful entrepreneurs, to launder the defrauded money.
What are the weaknesses that need to be addressed?
The Financial Crimes Enforcement Network (FinCEN) files and Pandora Papers highlighted several recurring, common elements that need to be addressed to mitigate this threat of money laundering which supports criminal activities. Among these are:
1. The use of shell companies formed in jurisdictions that do not require the identification of the beneficial owners of the companies or their assets. Examples of such schemes include the use of companies formed in the British Virgin Islands to open bank accounts in Cyprus.
2. Lax anti-money laundering and counter financing of terrorism (AML/CFT) compliance by financial institutions and money changers, as well as the inability of such institutions to detect transactions involving illegal proceeds.
3. The lack of cross-border cooperation by some countries in response to mutual legal assistance requests from countries where money laundering has taken place.
4. Corruption and the failure of bank regulators in some countries that open the door to the use of domestic financial institutions by foreign actors to launder the proceeds of foreign crime.
5. The facilitators involved in the property deals – law firms, real estate, accountants, and professional services firms – are not subject to the same regulatory scrutiny as financial institutions when it comes to AML/CFT compliance. They are effectively unregulated and don’t have processes in place to prevent financial criminals, such as the prominent figures named in the Pandora Papers, from exploiting the loopholes.
6. The inability of some governments to investigate and prosecute money launderers and to recover criminal proceeds using existing tools as the process requires strict and meticulous tracing and linking of assets to criminal activity.
Other factors to be considered
Research has shown that countries with a low level of control over corruption tend to have lower levels of compliance with the AML/CFT standards. Malaysia’s global rank in Transparency International’s annual Corruption Perceptions Index 2021 (CPI 2021) dropped five places, a stark contrast to the improvement seen after the 14th general election. The country ranked 62 out of 100 in the latest report – the lowest since the methodology was revised in 2012. With a CPI score of 48, Malaysia is now grouped among two-thirds of the countries globally which have scores that are below 50.
Russia’s invasion of Ukraine will have both negative and positive effects on the fight against money laundering. According to Basel AML Index project leader, Kateryna Boguslavska, “The conflict has revealed huge gaps in the global anti-money-laundering framework. This has resulted in a better understanding of the importance of cooperation between countries and a greater international political will than ever before to fight this type of crime.”
If we are to learn anything from the ongoing battle against money laundering, it is that governments, law enforcement agencies, businesses, and financial institutions must act fast and openly collaborate while sharing timely information to help intercept crime at the source, to prevent financial crime and crucially, also to protect public resources.
*Lalitha Kunaratnam is an independent investigative journalist, researcher and anti-corruption activist.*
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