By Juan E. Román, DBA, CPA, CGMA
Program Director, Accounting and Finance at American Public University
Money laundering is considered a phenomenon of social and economic character, given that its origin stems from various illegal actions that cause economic disorder and social decay. Money laundering is also a phenomenon of international dimensions; with the high degree of interdependence among countries and the technological development of telecommunications, capital flows easily through the global financial system.
Money laundering generally involves a series of multiple transactions to hide the source of financial gain, so that criminals can use those funds without repercussions. These transactions generally occur in three stages:
- Placing illegal profits in financial institutions through deposits, transfers to bank drafts, or other means.
- Stratification of profits of criminal activity by layers of complex financial transactions.
- Using an apparently legitimate transaction to disguise illicit proceeds. With this process, the offender tries to transform the monetary proceeds from their illegal activities to an apparently legal source.
Money laundering first arose in the 1920’s as a result of illegal gains from the sale, production, and distribution of alcohol. Meyer Lansky, the treasurer of the Torrio-Capone Administrator Group, suggested the first money-laundering scheme as the perfect way to conceal profits from illicit activities by presenting them as part of the income of their textiles factories. This would allow members of the Torrio-Capone administrator group to freely use their funds within society.
Money laundering can undermine the integrity of the financial institutions in any nation. Due to the current intense integration of capital markets, money laundering adversely affects currencies and interest rates, as money launderers reinvest funds where their schemes are not likely to be detected rather than places where the rates of return are higher. Money launderers also reduce tax revenues by creating underground economies and compete unfairly with legitimate businesses by damaging financial systems and disrupting economic development. Finally, when laundered money flows into the global financial system it can undermine national economies and currencies.
The negative impact of money laundering on the global financial system has caused market participants to recognize and implement strict measures to deal with these illegal activities. However, the modern financial system fosters an environment in which money laundering has become increasingly elusive.
Well-funded and technologically skilled criminals are able to manipulate modern accounting and financial tools to subvert the financial systems, which are the cornerstone of legitimate international trade. The manipulation of fund proceeds along with tax evasion committed by some offshore financial centers, the proliferation of online banking transactions online, and the widespread use of banks and clandestine money managers highlight the importance of using new technologies and aggressive strategies to combat money laundering schemes.
The financial sector receives and channels much of the flow of capital in the economy while the accounting sector records and reports that capital. Combining the tools of these two sectors allows for money illegally obtained to be intertwined with funds obtained from legal economic activity. Therefore, these sectors are particularly vulnerable to being used without the participants’ consent or knowledge to money laundering.
The accounting and financial sectors have therefore taken special measures to prevent money laundering. These measures exceed the simple duty to cooperate with law enforcement authorities.
The primary measure has been the development of Financial Intelligence Units (FIUs), national organizations that are committed to fighting worldwide illicit financial activity. FIUs often gather information on suspicious or unusual financial activity, analyze data, and provide information to authorities and other FIUs under multilateral cooperation agreements.
The creation and maintenance of FIUs are part of the recommendations of the Financial Action Task Force (FATF), and evaluated as part of the revisions made to the International Monetary Fund and the World Bank on developing internal controls for money laundering and terrorism financing to high threat countries. In this sense, the detection and prevention of money laundering has recently acquired a special global significance.
This effort involves not only states and governments; but also the accounting profession, finance professionals, and auditors. The privileged position of accountants, auditors, and finance professionals within companies and public bodies not only allows them to implement prevention mechanisms and controls but also to detect and take concrete actions against money laundering.
About the Author
Dr. Román has eight years of experience in the private sector working in the finance industry, six years of experience as an accounting and finance professor in various universities across the United States, and five years of public service as a National Clandestine Service Officer for the Central Intelligence Agency. Dr. Román has a Doctorate in Business Administration (DBA) with a specialization in accounting from the Pontifical Catholic University of Puerto Rico, and a master’s in finance and bachelor’s in economics and finance from the University of Puerto Rico. Dr. Román is also a Certified Public Accountant (CPA), a Chartered Global Management Accountant (CGMA), and has a post-doctoral degree in finance from Walden University. Dr. Román lives in Florida but is originally from Puerto Rico.