Money-laundering has been defined as the use of money derived from illegal activity by concealing identity of the individual who obtained money and converted it into assets that appear to have come from a legitimate source.
A simple definition would be, washing of dirty money to make it appear legitimate. Detection of such a well-coordinated activity by the legal authorities has annoyed the monetary and regulatory authorities as well the law-enforcers who conduct under-cover operations to nab such elements.
Cash proceeds are usually found at the beginning of the laundering process, that is, at the placement stage, although some experts have observed launderings in which proceeds are converted back to cash at some later point in order to break the paper trail. To place the proceeds into the financial system, launderers use many of the methods, including depositing directly into bank accounts (usually through structured transactions and ATMs); purchase of certain types of assets: real property, vehicles, jewellry, furniture, appliances, and collectibles (antiques, coins, stamps, etc.); and the commingling of legal and illegal cash proceeds deposited into bank accounts as ostensibly legitimate cash proceeds.
Web-based services: During the past years, the number of financial institutions offering on-line banking facilities has continue to grow. Range of services available also appears to be growing— along with the acceptance and usage of electronic payment systems by the general public.
The three characteristics of the Internet that together tend to aggravate certain “conventional” money-laundering risks are: (1) the easy access; (2) depersonalisation of contact between the customer and the institution; (3) rapidity of transactions. Although these factors could be considered as contributing positively to the level of efficiency and the reduction of costs of financial services, they also make customer identification and routine monitoring of accounts and transactions by financial institutions more difficult.
Customer identification: A potential risk exists at any first stage of the contact between a new customer and a financial institution. The institution must deal with certain difficulties which are essentially the same regardless of the type of account. It must verify the identity of a natural person, who may, for example, present false or forget documentation. It must establish adequate identification of legal entities when determination cannot be made of the legal existence or nature of the business.
It must verify signature authority for any account that is opened when it is not clear whether the customer is acting on his own behalf. In the case of Internet banking, the difficulties for the financial institution are increased if the procedures for opening such an account are permitted to take place without face- -to-face contact or without a link to an already existing traditional account.
Know-your customer: Once the initial identification of the customer has been accomplished, it is usually assumed by the financial institution that it is the identified customer who continues to perform transactions on the account. This assumption is probably a valid one for traditional bank accounts. However, if an account is accessed through the Internet, there is no human intervention that might help to detect suspicious or unusual activity, such as instances in which individuals other than the account-holder carry out transactions. Information on access to the account from other geographic locations - another possible indicator of unusual activity - would also not necessarily be detectable. Furthermore, account managers may be responsible for too many accounts and therefore less able to monitor activities of individual account holders - even if ultimately equipped with monitoring software.
Jurisdictional issues: Financial regulatory agencies may not be able to ensure that financial services available through the Internet within their national jurisdictions (but from servers outside the jurisdiction) follow adequate anti-money laundering. From the investigative perspective, jurisdictional issues arise in determining where an on-line transaction has taken place in order to know where investigative authorities should go to seek documentary evidence linked to money laundering activity.
Fraud or laundering: One method of money-laundering would be to establish a company offering services payable through the Internet. The launderer then “uses” those services and charges for them using credit or debit cards tied to accounts under his control (located perhaps in an offshore area) which contain criminal proceeds. The launderer’s company then invoices the credit card company which, in turn, forwards the payment for the service rendered. The company may then justify these income payments for a service rendered.
The problem for the investigator in dealing with such schemes is being able to follow the links between the various parts of the scheme. The launderer can easily use fictitious identities in setting up his presence on the web. If he takes advantage of the easy access to Internet services in other geographical locations so as to ensure additional distance between him and his activities, he can be sure that the lack of uniformity in maintaining on-line communication records by service providers will also work to ensure his anonymity.
The fact that the various components of the scheme only see part of the picture means that it will be very difficult to determine if illegal activity is taking place without first obtaining a picture of the whole operation. In short, the criminal using the Internet takes advantage of certain inherent aspects of the system to ensure that the whole picture is not visible by the investigator. To understand this better, it is perhaps worthwhile to provide some explanation of how Internet communication is organised.
Communication trail: All information conveyed through the Internet passes through a series of computer servers. Each connection from a particular server should leave traces (i.e., a record of its IP number, date and time of connection, etc.) on those servers with which it communicates. This information is only available, however, if the receiving servers at each step have been set up to create “log files”. If the log files exist at each step and the user sending the information has a fixed IP address, it is relatively straightforward to trace back from the addressee to the originator. In instances where the user is operating using dial-up access, his or her identity can be discovered through the log files of the ISP. However, if the log files are not maintained at any step of the way, or dial-up user (or subscriber) information is considered to be protected information, then it may be more difficult to determine the ultimate link between an illegal activity and a specific individual.
Gambling: Given this scenario, it seems that Internet gambling might be an ideal web-based “service” to serve as a cover for money laundering scheme. Despite attempts to deal with the potential problems of Internet gambling by regulating it, requiring licenses in order to operate, or banning such services outright, a number of concerns remain in addition to the inability to track the links. For example, transactions are primarily performed through credit cards, and the offshore placement of many Internet gambling sites makes locating and prosecuting the relevant parties more difficult if not impossible. Furthermore, gambling transactions, the records of which might be needed as evidence, are conducted at the gambling site and are software-based; this may add to the difficulty of collecting and presenting such evidence.
Cashless forms: Some countries appear to have had some success at deterring the placement of cash proceeds directly into their financial systems, or, because of the size, the development, or the sophistication of their financial system, they have become more important simply as a transit point for laundered funds. Additionally, some types of criminal activity may actually be generating proceeds in a non-cash form from the beginning (for example, investment fraud). Both transit movements and proceeds generated in electronic form are difficult to detect given what some experts perceive as an overemphasis on cash operations. In some laundering operations, wire transfers are made in close connection to cash deposits. However, since wire transfers frequently take place at the layering stage, there is often little to distinguish a suspicious transaction from others.
Conclusion: There are some possible counter measures for checking and containing the use of internet as a money-laundering channel, which entails the following:
• require Internet service providers (ISPs) to maintain reliable subscriber registers with appropriate identification information.
• require ISPs to establish log files with traffic data relating Internet-protocol number to subscriber and to telephone number used in the connection.
• require that this information be maintained for a reasonable period (6 months to a year).
• ensure that this information may be made available internationally in a timely manner when
• conducting criminal investigations.