Terrorists always one step ahead of regulators - Director, FIU
Money laundering refers to the conversion of proceeds derived from any unlawful activity (tainted cash or property) into legitimate assets by bringing them into the mainstream. While a precise quantification of the funds laundered is difficult, IMF estimates a figure exceeding US$ 1.35 trillion (3% of the world’s GDP).
Typically, the process of laundering money takes place in three distinct phases: Firstly, placement - when the ill-gotten gains are deposited with financial institutions. Then, layering through multiple transactions is how the origin of the deposit is disguised. Finally, integration is the utilisation of disguised funds to purchase clean, legitimate assets.
Describing the phenomenon, H. A. Karunaratna, Director – Financial Intelligence Unit (FIU) of CBSL, spoke of the vital role played by central banks in maintaining financial system stability. Addressing a seminar on ‘Anti – Money Laundering and Combating the Financing of Terrorism’ last week, he pointed out that the banking system is vulnerable because of its ability to transfer funds rapidly.
Indicating how acts of terrorism do not require massive sums of money, Karunaratna recalled how Al-Qaeda caused massive destruction to the US economy in 2001. “Their cost was limited to flying lessons and a box of cutters with six blades”, he said.
In Sri Lanka, there are three pieces of legislation that seek to prevent money laundering and the financing of terrorism: The Convention on the Suppression of Terrorist Financing Act, 2005 (CSTFA), The Prevention of Money Laundering Act, 2006 (PMLA) and The Financial Transactions Reporting Act, 2006 (FTRA). These were enacted in response to a worldwide clamour for a clampdown. But “terrorists are always one step ahead of regulators,” contends Karunaratna.
Joan de Zilva, Consultant – FIU of CBSL, said that the definition of ‘unlawful activities’ that constitute an offence under the PMLA encompasses the entire gamut of crime. She said that Section 31 of FTRA places an obligation on the financial system to file suspicious transaction reports and to exercise customer due diligence. This overrides all restrictions on disclosure imposed by any other law.
On methods adopted for money laundering, de Zilva described alternate remittance systems like ‘hawala’ as “a potent source of terrorist financing”. International trade transactions, cash smuggling and trade in precious metals and gemstones are also adopted. Referring to occasional misuse of charities, de Zilva said, “Some NGOs put on a humanitarian face and come to countries where natural disasters have struck. Sri Lanka received Rs 40 billion in the aftermath of the tsunami, 80% of which was brought in by NGOs - and banks swept aside due diligence.”
Buwaneka Aluwihare, Deputy Solicitor General, described money laundering and terrorist financing as ‘victimless crimes’ where no one rushes to the law enforcement agencies to file complaints.
To safeguard the banking system, banks need to know their customers, said R. M. P. Ratnayaka from the Sri Lanka Banks Association. In that context, “Customers’ refers not only to account-holders but also to those who transact casually,” he clarified.