Diamante, Paula Bianca: Technology Challenge – e-Money Laundering


Introduction

The emergence of electronic money and global systems of electronic payments formed a parallel banking system. It has the entire network of semi-legal financial institutions. The unique opportunities of quickly shaped infrastructure drew attention of criminal groups at once. It allowed anyone to rapidly transfer monetary funds to any country, anonymously, through tangled routes. Hereto fore, electronic transfers interested criminals as the efficient tool to conceal sources of money intakes; to launder money and to conceal their incomes to evade taxes earned.

Here’s one of the criminal schemes of payment operations. There operations can be hardly tracked by law enforcement: upon receipt of merchandise, let’s say drugs, the buyer electronically transfers money to the credit card of the supplier. The last at one stroke transfers this money through the system of electronic payments to his bank account in the country with a strong bank secrecy laws. Then the supplier can simply transfer his money to the card account in parts and can easily use this money. [1]

This paper will give an understanding on how these products of technology work; such as the electronic cash, electronic banking and internet gambling and the role they play within the financial system. This will also give the developers and users of these products ideas on how to develop and maintain the security of their financial transactions against the technology-based frauds, schemes and devices, particularly against money laundering.

Anti-Money Laundering in the Philippine Settings

In order to implement its continued commitment and support of the global fight against money laundering, the BSP has issued a number of measures to bring the Philippines’ regulatory regime on money laundering closer to international standards. In September 2001, the Anti-Money Laundering Act (AMLA) of 2001 was passed. The legislation, among others, defines money laundering as a criminal offense, prescribes penalties for such crimes committed and forms the foundation of a central monitoring and implementing council called the Anti-Money Laundering Council (AMLC). The AMLC is composed of the Governor of the Bangko Sentral as Chairman and the Commisioner of the Insurance Commission and the Chairman of the Securities and Exchange Commission as members. It acts unanimously in the discharge of its functions.

To address concerns such as the high threshold level for covered transactions, the coverage of “covered institutions” and the existing Bank Secrecy Law, the amendments to the AMLA were signed into law on 7 March 2003. The amendments included the following: a) lowering the threshold for covered transactions from P4.0 million to P500,000; b) authorizing the BSP to inquire or examine any deposit or investment with any banking institution without court order in the course of a periodic or special examination; and c) removing the provision prohibiting the retroactivity of the law. With the approval of the law incorporating these amendments, the Financial Action Task Force sanctions on non-complying countries were not imposed on the Philippines. However, the Philippines at that time remained in the list of non-cooperative countries and territories (NCCTs). The country’s removal from the list will be determined by the FATF after close monitoring of the implementation issues.

The revised implementing rules and regulations (IRR) on the AMLA of 2001 as amended was approved by the Congressional Oversight Committee on 6 August 2003 and was implemented on 3 September 2003. In October 2003, the Philippines’ amendments to the AMLA were evaluated by the FATF and were found to be at par with international standards. On 11 February 2005, the Philippines, Cook Islands, and Indonesia were removed from the list of NCCTs during the meeting of the FATF. After the country’s delisting from the list of NCCT’s, the AMLC of the Philippines is now one of seven new members of the Egmont Group, the global network of FIUs against money laundering and terrorist financing, making the Philippines an equal partner in the global fight against money laundering and terrorist financing. Membership to the Egmont Group means affording AMLC free and unlimited access to a wealth of financial data contained in the databases of all the FIU-members of the group. All information exchanged by FIUs are subjected to strict controls and safeguards to ensure it is used only in an authorized manner, consistent with national provisions on privacy and data protection. [2]

What is Money Laundering?

Money laundering is a crime whereby the proceeds of an unlawful activity are transacted; thereby making them appear to have originated from legitimate sources. [3]

How is Money Laundered?

Money laundering has three stages- placement stage, layering stage and the integration stage.

In the initial or placement stage of money laundering, the launderer introduces his illegal profits into the financial system. This might be done by breaking up large amounts of cash into less conspicuous smaller sums that are then deposit directly into a bank account, or by purchasing a series of monetary instruments that are then collected and deposited into accounts at another location.

In the second stage of money laundering or the layering stage, the launderer engages in a series of conversions or movements of funds to distance from their source. The funds might be channeled through the purchase and sale of investment instruments, or the launderer might simply wire the funds through a series of accounts at various banks across the globe. In some instances, the launderer might disguise the transfers as payment of goods or services, thus giving them a legitimate appearance.

After having successfully processed the criminal profits through the first two stages of money laundering, the launderer then moves them to the third stage or the integration stage, in which the funds re-enter the legitimate economy. The launderer might choose to invest the funds into real estate, luxury assets or business ventures. [4]

Possible Forms of Electronic Money Laundering

The rise of mobile phones and internet in the Philippines is bringing many benefits to it, but the simultaneous rise of the modern technology is creating new opportunities for money laundering and the use of electronic systems online has increased the potential for identity fraud and security issues.

As a specific form of computer-related economic crime, e-money laundering rests at the intersection of several different branches of law: commercial, banking, electronic-commerce law, electronic-evidence rules, intellectual property and criminal law. Hence, the specific legal effects of this modern technology will be has yet to be determined.

Electronic Cash or Electronic Money

As defined in Section 2 of BSP Circular No. 649 dated 9 March 2009, e-money shall mean monetary value as represented by a claim on its issuer, that is (a) electronically stored in an instrument or device; (b) issued against receipt of funds of an amount not lesser in value than the monetary value issued; (c) accepted as a means of payment by persons or entities other than the issuer; (d) withdrawable in cash or equivalent; and (e) issued in accordance with the BSP Circular No. 649, series of 2009. [5]

They operate via stored electronic units of value. Paid for in advance by conventional money and representing equivalent units in real currency, these funds can be transferred between vendors and individuals using compatible electronic systems, in some cases without resort to banks or other financial intermediaries.

E-cash (or e-money) comes in two basic forms: smart card e-cash and computer e-cash. E-cash is most often downloaded from its respective system through special terminals (for example, specially equipped ATM machines, computers, or cell-phones) onto smart cards. Such cards are called stored-value smart cards. E-cash can also be downloaded to personal computer hard disks via a modem. The “money” remains stored until the user spends it. In the case of smart cards, the “money” is spent by transacting it with another individual, in vending machines, turnstiles, toll-collecting devices, or retailers’ terminals. In the case of computer e-cash, the “money” is spent over the Internet. Each e-cash transaction reduces the amount of stored “money” (value). [6]

Electronic Banking

Electronic banking is an umbrella term for the process by which a customer may perform banking transactions electronically without visiting a brick-and-mortar institution. Internet banking, sometimes called online banking, is an outgrowth of PC banking.

Internet banking uses the Internet as the delivery channel by which to conduct banking activity, for example, transferring funds, paying bills, viewing checking and savings account balances, paying mortgages, and purchasing financial instruments and certificates of deposit. An Internet banking customer accesses his or her accounts from a browser—software that runs Internet banking programs resident on the bank’s World Wide Web server, not on the user’s PC.

Net Banker defines a “true Internet bank” as one that provides account balances and some transactional capabilities to retail customers over the World Wide Web. Internet banks are also known as virtual, cyber, net, interactive, or web banks.

The growth of electronic banking has introduced various challenges for financial regulatory officials. Government authorities must continually evaluate commercial developments in order to formulate strategies and programs that minimize the risk for financial fraud and money laundering, without inhibiting the continued growth of the industry. Today’s electronic bank may consist of no more than a computer server and a telecommunications connection and, depending on its location, may be subject to a wide range of regulatory treatment—from very robust and effective programs, to very lax or nonexistent.

In addition, an electronic bank whose practices come under suspicion by regulatory and law enforcement authorities may be difficult to investigate because of the remote and global projection capabilities of the Internet and other telecommunications technologies. The victims of a bank fraud and/or the perpetrators of a money-laundering scheme may be half-a world removed from the physical location of an electronic bank’s computer servers. Online payment technologies may also pose other unique problems vis-à-vis concealed transaction identities and insufficient or non-existent audit trails.

Banking supervisory activities and anti money laundering activities are closely linked in many nations. However, as previously noted, authorities around the globe have widely ranging standards for regulatory oversight and supervision, a factor that may greatly influence their ability to effectively deter money laundering and other financial crimes. [7]

Internet or Online Gambling

Internet gambling is an essentially borderless activity that poses regulatory and enforcement challenges .Representatives of law enforcement agencies, regulatory bodies, and gaming industries expressed mixed views regarding the vulnerability of Internet gambling to money laundering. Law enforcement officials said they believed that Internet gambling could potentially be a powerful vehicle for laundering criminal proceeds at the relatively obscure “layering” stage of money laundering. They cited several characteristics of Internet gambling that they believed made it vulnerable to money laundering, including the volume, speed, and international reach of internet transactions and the offshore locations of Internet gambling sites.

In their view, these characteristics promoted a high level of anonymity and gave rise to complex jurisdictional issues. Likewise, credit card and gaming industry officials did not believe Internet gambling posed any particular risks in terms of money laundering. Gaming industry officials did not believe that Internet gambling was any more or less susceptible to money laundering than other types of electronic commerce and pointed out that, in their view, the financial industry, which is responsible for the payments system, is better suited to monitoring for suspicious activity in the area than the gaming industry itself.

In law enforcement’s view, legitimate Internet gambling sites provide an opportunity to transfer high volumes of money in and out of a number of accounts within a single “institution.” An individual could potentially deposit illicit funds into a legitimate Internet gambling account under a false name and wager a small amount in order to make the account appear genuine to the site operator. After a few losses, the individual could withdraw the rest of the illicit funds from the account. The transaction’s “paper trail” would register a lawful Internet gambling transaction, mingling legitimate money with illicit.

In addition, law enforcement officials believe a money launderer would not necessarily have to place a wager in order to “clean” illicit funds. A legitimate on-line gaming account could be used as a potential storehouse for illicit funds until they could be transferred to an offshore account. Law enforcement officials said they also believed that money launderers could develop Internet gambling sites for the sole purpose of laundering money. An operator of a complicit site could theoretically program casino gaming software to react to a specific password or sign-on command, automatically taking a percentage of the deposit and cloaking it as a gaming loss. In essence, however, such a deduction would be the operator’s service fee for laundering the illicit funds. Such a site would also need legitimate gamblers in order to mask the true nature of the operation [8]

Conclusion

In an electronic world in which the banking system operates through linked computers 24 hours a day, there must be increased global emphasis upon thorough vetting of personal, company and financial institution accounts at the bank of origin. There is no substitute for a thorough know-your-customer policy, especially as applied to those placing currency into the system and converting it to an account susceptible to immediate transfer outside the jurisdiction.
Considerable attention also must be focused by anti-money laundering authorities on establishing international standards, obtaining agreements to exchange information, establishing linkages for cooperative investigations, and overcoming political resistance in various key jurisdictions to ensure such cooperation.

Governments need laws and regulations that: establish corporate criminal liability for bank and non-bank financial institutions for money laundering violations; apply to all financial transactions, not just to cash transactions at the teller’s window; apply anti-money laundering measures to serious crimes, not just drug trafficking; criminalize investments in legitimate industry if the investment proceeds were derived from illegal acts; and enable the sharing of financial and corporate ownership information with law enforcement agencies and judicial authorities.

Governments also need strategies that focus on changes in both the operations of financial systems and the methods criminals develop to exploit them–strategies that look at specific governments and specific financial systems. [9]

There is a thin line between doing what you need to do to catch criminals, and imposing on honest citizens’ rights.  Many times it seems as though law enforcement people will do whatever they need to do to catch the crook.  One such way has turned out to be following the crook’s money.

There are already tons of acts and regulations prohibiting anything to do with money laundering, but it is possible that with the onset of anonymous money transfers that many of those acts will be impossible to enforce.  Then if the authorities are going to continue to outwit the criminals, they must make new acts to take control again.

Credits shall be given to the law enforcement people.  They have to play by the rules.  The criminals can do whatever they need to do to win and only are concerned for the rules in-as-much as they don’t get caught breaking them. 

The future of money laundering is not entirely certain..  Criminals are not going to stop doing bad stuff for money, criminals are not going to stop finding creative ways to hide this money from authorities, and authorities are not going to stop trying to track down the criminals. <sup[10]

Therefore, any financial services provider offering services over the internet should implement procedures to verify the identity of its clients. Care should be taken to ensure that the same supporting documentation is obtained from internet customers as for other customers particularly where face to face verification is not practical. In view of the additional risks of conducting business over the internet, financial institutions should monitor activity in customer accounts opened on the internet on a regular basis. [11]


Endnotes

[1] http://www.crime-research.org/Money laundering and cybercrime,/May 2003/ Source: Computer Crime Research Center.

[2] http://www.bsp.gov.ph/about/advocacies_anti.asp/Anti-Money Laundering.

[3] Section 4, Republic Act No. 9160, as amended by Republic Act No. 9194, otherwise known as “The Anti-Money Laundering Act of 2001”.

[4] From the Lecture on Anti-Money Laundering and Countering Terrorist Financing by Ms. Rowena C. Destura, Manager, Anti-Money Laundering Council Secretariat.

[5] Section 2 of BSP Circular No. 649 dated 9 March 2009.

[6] A Survey of Electronic Cash, Electronic Banking and Internet Gambling, by the Financial Crimes Enforcement Network (FinCEN), US Department of Treasury, 2000, Electronic Cash, page 15.

[7] A Survey of Electronic Cash, Electronic Banking and Internet Gambling, by the Financial Crimes Enforcement Network (FinCEN), US Department of Treasury, 2000, Electronic Banking, page 25.

[8] Internet Gambling, An Overview of the Issues, Report to the Congressional requesters, US General Accounting Office, December 2002.

[9] http://www.state.gov/p/inl/rls/nrcrpt/1999/928.htm/Money Laundering and Financial Crimes, US Department of State

[10] http://www.cs.utah.edu/~kmay/look/digital/Laundry.htm/Laundering Digital Money

[11] http://www.argonlimited.com/storage/Money_Laundering_Prevention_Guidance_Notes.


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Author licensed this article under Creative Commons Attribution 3.0 Philippine license

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