Combatting the Dark Side of Business

The extent and sophistication of modern-day organised crime has led criminal entrepreneurs to devise highly innovative and complex methods to launder their profits. Money laundering is the process of disguising the existence, illegal source or illegal application of the proceeds of crime with a view to transforming criminal income into ostensibly legitimate money or other assets. Simply put, it is the ‘legitimising’ of illegitimately generated capital.

Money laundering is the process of disguising the existence, illegal source or illegal application of the proceeds of crime with a view to transforming criminal income into ostensibly legitimate money or other assets

Accordingly, anti-money laundering law and regulation seeks, primarily, to facilitate the detection and reporting of any attempt to use legitimate business as a conduit for ‘cleaning’ dirty money, with a view to cutting off the blood supply to organised crime by rendering its proceeds unusable. The legislative logic is simple; depriving criminals of the proceeds of crime will make crime less attractive to commit whilst at the same time deterring other would-be criminals and will, of course, also starve criminals of the financial means to commit other crimes.

The laundering process typically comprises a series of multiple transactions used to disguise the source of financial assets, which may be broadly classified into three distinct stages:

1. Placement – the process of placing, through deposits, wire transfers or other means, unlawful proceeds into financial institutions;
2. Layering – the process of separating the proceeds of criminal activity from their origin through the use of layers of complex financial transactions; and
3. Integration – the process of using an apparently legitimate transaction to disguise the illicit proceeds. Money launderers do not necessarily seek the best rate of return but the easiest way to clean their dirty money.

The international community’s growing concern about money laundering and potential terrorist financing is not misplaced. The sheer economic power generated by illicit activities provides criminal organisations with a degree of leverage on all economies, large or small. Indeed, globalisation and the communications revolution have made crime increasingly international in scope (particularly drug trafficking, money laundering and terrorism), the corresponding financial aspects of crime have become more complex and money launderers are increasingly well-organised, both financially and technologically.

Failure to comprehensively and effectively deter money laundering could have devastating social and security-related consequences for any country, but could be particularly damaging to a small nation, eroding its financial integrity and crippling its financial services industry.

Malta has implemented all EU Directives regulating the prevention of money laundering and is a signatory to the main international multilateral treaties which represent the manifestation of the global push to tackle the affliction of money laundering

Cognisant of the fact that, as an international financial centre of repute, Malta could be targeted by money launderers, the legislator together with the competent authorities has implemented several comprehensive safeguards designed to weed out attempts to use Malta’s financial system as a conduit to launder the proceeds of criminal activity, with a view to preserving the jurisdiction’s financial and operational integrity.

As a member of the European Union, Malta has implemented all EU Directives regulating the prevention of money laundering and is a signatory to the main international multilateral treaties which represent the manifestation of the global push to tackle the affliction of money laundering in the world’s financial markets.

Malta does not appear on any international blacklist of countries which are likely to be used for money laundering activities. It participates in several global initiatives aimed at combatting money laundering and has implemented a robust prevention of money laundering legislative regime, comprising the Prevention of Money Laundering Act (the “Act”), the Prevention of Money Laundering and Funding of Terrorism Regulations (the “Regulations”) and Sub-Title IV A of the Criminal Code.

Besides criminalising the offence of money laundering, the Act effectively establishes the foundations for the legal framework by introducing basic legal definitions, laying down the procedures for the investigation and prosecution of money laundering offences as well as the measures for the confiscation of property upon conviction, the freezing of assets and measures for the issuance of investigation and/ or attachment orders where appropriate. The Act also establishes the Financial Intelligence Analysis Unit (FIAU), the specially designated government agency tasked with the collection, collation, processing, analysis and dissemination of information with a view to combatting money laundering and the funding of terrorism. The FIAU is also responsible for monitoring compliance by subject persons with the relevant legislative provisions.

The Regulations are designed to amplify the substantive provisions relating to the offences, setting out the various obligations incumbent upon subject persons as well as the systems and procedures that subject persons are required to implement in their day to day operations.

Moreover, the Maltese regulatory regime is bolstered by the Implementing Procedures issued by the FIAU in terms of the Regulations which serve as comprehensive guidance to subject persons with the primary purpose of facilitating effective and harmonised implementation of the salient legal provisions contained in the afore-mentioned legislative instruments.

The Regulations apply in their entirety to all persons (natural or legal) deemed to be ‘subject persons’, which term includes, inter alia, banks, insurance companies, stock-brokers, investment services providers, corporate service providers, trustees and other fiduciaries, auditors, accountants, tax advisors, notaries, lawyers, real estate agents, casino licensees, and generally any person trading in goods whenever payment is made in cash amounting to or exceeding €15,000 (whether the transaction is executed in one single operation or several linked operations).

The obligations incumbent upon subject persons in terms of the Regulations are focussed primarily on rigorous due diligence and ‘know your client’ (KYC) procedures coupled with strict reporting obligations which are clearly geared towards the prevention of the subject person’s use for money laundering purposes as well as ensuring the timely reporting of any suspicious transactions to the competent authorities. Summarily, subject persons are obliged to implement and maintain robust, appropriate systems, policies and procedures to facilitate effective:

• Identification of the applicant for business and verification of such identity on the basis of documents, data or information obtained from a reliable and independent source;
• Identification and verification of beneficial ownership;
• Information on the purpose and intended nature of the business relationship, such that the subject person is able to establish the business and risk profile of the customer;
• Scrutiny of source of funds;
• Record keeping;
• Ongoing monitoring of the business relationship;
• Internal and external reporting of suspicious transactions;
• Staff AML training program which must be sufficiently rigorous to adequately train all appropriate employees to identify and react to ‘red flags’.

few will argue that these costs are not far out-weighted by the overriding public interest to preserve the jurisdiction’s financial integrity and safeguard Malta’s role as an international financial services centre of repute

Subject persons are also obliged to appoint a designated money laundering reporting officer (MLRO) to whom internal suspicions of money laundering are reported and who generally acts as the subject person’s point of contact with the FIAU. The MLRO is responsible for determining whether the facts reported to him do raise a suspicion of money laundering or funding of terrorism and, if so, is duty bound to lodge a suspicious transaction report with the FIAU.

As all subject persons will be aware, AML compliance comes at a cost. However, few will argue that these costs are not far out-weighted by the overriding public interest to preserve the jurisdiction’s financial integrity and safeguard Malta’s role as an international financial services centre of repute, benefitting the industry as a whole.

From an international regulatory perspective, the goal should continue to be uniform enforcement and seamless cooperation across national jurisdictions. This should be coupled with ongoing cooperation and consultation between the public and private sectors with a view to containing costs, maintaining a level playing field and, ultimately, promoting an accepted global public good from which the benefit to each participant far exceeds the cost.

This Article was first published on Money Magazine, 2015.