Vol. 5 Num 567 Fri. December 30, 2005  

Preventing money laundering
What should be the mechanism?

Money laundering means Illegal transactions made in order to project the proceeds of crime as legally obtained. Persons, who earn illegal money, try to hide their source of earning by conducting a number of transactions. Such transactions separate the source of earning from its proceeds. It becomes difficult for the law enforcing agencies to trace the source of earning.

The transactions normally take place in the following manners: (a) Dirty money being inserted into the financial system by putting that into bank account, purchasing property, making payment of loan etc; (2) Separating the money from its illegal source e.g. drug trafficking, smuggling etc. by conducting frequent transactions e.g. by transferring it to another bank account, selling property purchased with such money and putting it into bank account elsewhere etc; (3) Stop making transactions or transfers when the original source of earning is no more visible.

Money laundering can take place in different institutions. Banks, financial institutions, stock brokers, insurances, law firms, tax firms, accounting firms, audit services, real property transactions through property development companies, high value dealers etc. can be used as channels for converting black money into white.

It is an international problem. Many international treaties etc. were signed, guidelines issued and bodies formed by different international organisations, group of countries etc in order to prevent money laundering: For example Vienna Convention 1988 against Traffic of Narcotic Drug; Council of Europe Convention on Laundering 1990. Resolutions passed in ICPO-Interpol General Assembly; Guideline on Prevention of the Criminal Use of the Banking System for Purpose of Money Laundering 1988 by Basle Committee; Financial Action Task Force (FATF) created by G-7 countries on 1989 etc.

Under the present law of Bangladesh namely Money Laundering Prevention Act 2002 ("MLPA"), money laundering is defined as (i) acquiring or earning (directly/indirectly) property (both movable/immovable) through illegal way, or (ii) illegal transfer, change of nature, concealment (assisting concealment) of property, acquired or earned through legal or illegal way [Section 2 of MLPA]. The acquiring or earning includes legally retaining, transferring, remitting, concealing, investing property acquired illegally [Section 2:2 of the Guideline Notes on Prevention of Money Laundering published by Bangladesh Bank]. Money laundering is a non-bailable criminal offence. The penalty can be up-to seven years imprisonment and fine [Section 13 MLPA]. All courts of session are made money-laundering courts [Section 7 MLPA]. Such courts take cognisance of offences only on a written complaint made by Bangladesh Bank or a person authorised to do it. [Section 8 MLPA].

Bangladesh Bank is given the duties to conduct investigation or authorise someone to conduct investigation of any suspected money laundering, supervise/monitor Banks, Financial Institutions and others, seek reports from them, review reports, train the employees, lodge complaint and also take any other action necessary to prevent money laundering etc [Section 4 of MLPA]. The power of investigation vested in Bangladesh Bank is same as of a police officer [Section 5 of MLPA].

Banks, financial institutions and other agencies are given responsibility to: (1) Maintain true and complete information of identity of all customers, keep five years accounts of transaction of all the clients and supply the same to Bangladesh Bank from time to time and Inform Bangladesh Bank any unusual transaction and suspicious transaction which may be linked with money laundering. Bangladesh Bank has defined the suspicious transaction in AMLD Circular No. 02 of 2002. The definition of money laundering under section 2 (L) will be applicable for the definition of suspicious transaction. The character of such transaction will be: (1) Transactions disproportionate to earning, (2) Transferring money to someone usually unrelated or unknown, (3) Mismatch between the deposit and earning of the account holder, (4) Account holder's delay in submitting details, (5) Avoidance of direct contact, (6) Huge investment in security market disproportionate to earning. Failure to inform may result in monetary punishment or other punishments including cancellation of licence. [Section 19; also AMLD Circular No. 02 of 2002].

However, the present framework contains many flaws. First, the definition of money laundering is problematic. It includes earning/acquiring property through illegal way. This definition is so wide that offences like theft, robbery, decoity, cheating, forgery etc. well defined in the Penal Code, also qualify to be an act of money laundering. Further, it includes illegal transfer, change of nature, concealment of property, acquired or earned through legal or illegal way. This part was added to stop transfer of money by unauthorised channel namely "Hundi." The problem of the second part of the definition is that it imposes serious allegation of money laundering on innocent persons, in particular wage earners. They transfer their hard-earned legal money to their family living in Bangladesh by using some informal channels because the authorised channels are not found reliable. This 'wrong' may not be a crime at all as there is no intention to change black money into white.

Secondly, the power of investigation of suspected money laundering should not be imposed on Bangladesh Bank. As a central bank of the country, it is not supposed to have expertise in criminal investigation.

Thirdly, as stated above, money laundering does not take place only in banks, financial institutions. It takes place in many other institutions. Bangladesh Bank, as a regulator of banks and financial institutions can surely take care of the suspected transaction taking place in banks or financial institutions. However, it is not the proper forum for regulating other business establishments as well because the number of such establishments is huge. However, a wrongdoer may not use the banking channel at all to insert hit black money into the system. He will simply use other remote and less regulated channels e.g. property dealer. He can easily purchase property in cash. This transaction is unlikely to be reported to Bangladesh Bank.

It is not clear, why other regulators e.g. Dhaka Stock Exchange are not given similar responsibilities like Bangladesh Bank with regards to the businesses they regulate. Such regulators normally receive returns e.g. annual reports from the business they regulate. It is desirable that every business establishment should submit their return relating to money laundering to the regulators concerned, as normally they are very concerned about their regulators. Such regulators will be in better position to understand the nature of the business establishments they regulate. They can identify the suspicious transactions more easily than the others can. This will surely work well as wide range of transactions would get covered.

Fourthly, money laundering is a financial crime. Therefore, in order to conduct investigation and taking responsibility of filing complaint properly, some training is required. The police force, in the absence of any training, cannot skilfully conduct such investigation although they are capable of conducting other criminal investigation. Further, who so ever conducts the investigation must work closely with the regulators and also with the institutions and business establishments vulnerable to money laundering crime.

Money laundering is a very delicate matter for many vulnerable business establishments. The persons, they may suspect for money laundering, are basically their clients. Such institutions normally try to develop personal relationship with their clients; handle powerful and influential clients and often become advocate for them. Therefore, in order to handle the matters properly there is a need for an investigation and research unit specially created for handling such crime.

Such Unit can take the responsibility of handling all the investigation matters and also of filing complaint as reported to them by the regulators etc. Such Unit can also conduct training for the relevant personnel, frame guidelines, make recommendations, conduct research and give consultation service to the relevant business establishments.

As stated above, it is not desirable that institutions, which are already regulated by some other regulators, shall directly report to such Unit. There are some businesses, which have no regulator at all. e.g. high value dealers like jewelers, car dealers etc. They accept huge amount of cash against their sale. Such huge amount may have been obtained illegally. Such Unit can take care of such institutions by maintaining an official register and asking them to report any suspicious high value cash transaction. On the other hand, all regulators can direct such Unit to investigate any transaction they suspect as unusual and file complaint if necessary.

In order to maintain transparency and accountability a committee can be created composed of the governor of Bangladesh Bank, the head of Anti-corruption department, representative from relevant ministries, concerned business associations and heads of all other regulators. Such committee shall be responsible for the business of the Unit to whom the Unit shall report its progress.

Similar system is already in place in the UK. They Money Laundering Regulation 2003 regulates money-laundering crimes in relevant business. The term "relevant business" means all financial service of accepting deposits, dealing in investment, issuing electronic money etc., insurance, raising money, work of state agency, casinos, insolvency practices, tax advice, accountancy services, audit services, legal services relating to financial and real property transaction, services relating to company or trust formation etc., dealing with goods of any description involving a cash payment of Euro 15,000 or more [Section 2 (2) of the Regulation 2003]

The persons doing "relevant business" are required to follow identification procedure, record-keeping procedure, internal reporting procedure and communication and also raise awareness and conduct training among its employees regarding money laundering. [Section 3]

Failure to do so may lead to prosecution, which may be tried summarily or on indictment. In deciding whether a person has committed an offence, the court considers whether he followed the relevant guideline issued by his supervisory authority. The Supervisory Authority means Bank of England, Financial Services Authority created under Financial Service and Markets Act 2000, Counsel of Lloyd's, office of Fair Trading, Pension Regulatory Authority, Professional Bodies, Gaming Board, Secretary of State, Treasury. It is a defence for that person to show that he took all reasonable steps and exercised all due diligence to avoid committing the offence.

Further, high value dealers [means persons dealing in goods of any description by way of business whenever a transaction involves accepting a total cash payment of Euro 15,000 or more] and money service operators are required to register their name with the commissioners of customs and excise. The commissioner has the power to inspect, impose penalties, order justice of the peace for entry, have access to recorded information and institute proceedings. Supervisory authorities have the duty to disclose any suspected money laundering to a constable, commissioned by the commissioner.

Money laundering seriously harms the overall economy of a country. Dr JD Agarwal and Professor Aman Agarwal, of India state that US$ 500 billion to US$ 1 trillion are laundered through banks world-wide each year. There are some factors, which nurture this crime. e.g culture of secrecy prevails in banking system by using code, numbered account etc; secrecy jurisdiction where there is no anti-money laundering; competition among banks giving opportunity to clients to open multiple account, international transfer of money etc. The BCCI scandal is regarded as the world's worst banking scandal inflicting huge financial losses on thousands of people worldwide. BCCI financed terrorist activities, drug trafficking, deals, defrauded depositor etc. BCCI was the means of covert and corrupt activities of CIA.

Money laundering exposes banks, financial institutions etc to legal risk, reputation risk, operational risk and fund risk.

Therefore, a clearly balance law is required.

Forrukh Rahman, Barrister at Law, is an associate of A Hossain and Associates currently working in the Legal Counsel, Central Bank Strengthening Project, Bangladesh Bank.