Money laundering is the process whereby proceeds of crime are transformed into ostensibly legitimate money or other assets. The term ‘money laundering’ has become conflated with forms of financial crime and is sometimes used to include misuse of the financial system (involving digital currencies, credit cards and traditional currencies) including terrorist financing, tax evasion and evading international sanctions.
Money Laundering is commonly defined as happening in 3 steps:
- Placement – Introduction of cash into the financial system by some means;
- Layering – To undertake complex financial transactions to camouflage the illegal source;
- Integration – The acquisition of wealth generated from the transactions of the illicit funds.
Terrorist Financing is the processing of funds to sponsor or facilitate terrorist activity. A terrorist group builds and maintains an infrastructure to facilitate the development of sources of funding for their own requirements and launder the funds used in terrorist activity. They derive income from a variety of sources, often combining both lawful and unlawful funding which can be grouped into two types:
- Financial Support – In the form of donations, community solicitation and other fund-raising initiatives. Financial support may come from States, from large organisations or from individuals.
- Revenue Generating Activities – Income from criminal activities such as kidnapping, extortion, smuggling or fraud. Income may also be derived from legitimate economic activities such as diamond trading or real estate investment.
Terrorist groups want to disguise illegal funds while also preserving the continuity of or maximising revenue from legitimate sources. The need to camouflage the sources of funds means terrorist financing has certain similarities with traditional money laundering i.e. to place, layer and integrate the funds in the international financial system.
One significant difference between traditional money laundering and terrorist financing is that:
- The investigation of financial transactions in traditional money laundering is done in order to link the funds to a criminal act that has already taken place and to strip the criminal and any accomplices from the economic benefits of engaging in criminal behaviour.
- In terrorist financing the investigation is done to prevent individuals gaining access to funds that could finance future criminal activity.