Posts Tagged 'financial transaction authorities'

Unexplained Wealth Orders

Money laundering conventionally focuses on finding the proceeds of crime. It has two deterrent effects: the proceeds are confiscated so that ‘crime doesn’t pay’; and discovering the proceeds can be used to track back to find the crime, and the criminals that produced it.

Since crimes prefer not to leave traces, the proceeds of crime used to be primarily in cash — think drug dealers. As a result, criminals tended to accumulate large amounts of cash. To get any advantage from it, they had three options: spend it in a black economy, insert it into the financial system, or ship it to another country so that its origin was obscured.

Money laundering detection used to concentrate on these mechanisms. Many countries have made an effort to stamp out the cash economy for large scale purchases (jewels, cars, houses, art) by requiring cash transactions of size to be reported, and by removing large denomination currency from circulation (so that moving cash requires larger, more obtrusive volume). Most countries also require large cash deposits to banks to be reported. Preventing transport of cash across borders is more difficult — many countries have exit and entry controls on cash carried by travellers, but do much less well interdicting containers full of cash.

One reason why much of current money laundering detection is ineffective is that there are now wholesale businesses who provide money laundering as a service: give them your illicit money, and they’ll give you back some fraction of that money in a way that makes it seem legitimate. These businesses break the link between the money and the crime, making it almost impossible to prosecute since there’s no way to draw a line from the crime.

Unexplained wealth orders target the back end of the process instead. They require people who have and spend money in quantity to explain how they came by the money, even if the money is in the financial system and apparently plausible. This is extremely effective, because it means that criminals cannot easily spend their ill-gotten gains without risking their confiscation.

Of course, this is not a new idea. Police have always kept a look out for people who seemed to have more money than they should when they wanted to figure out who had committed a bank robbery or something similar.

The new factor in unexplained wealth orders is that the burden of proof shifts to the person spending the money to show that they came by it legitimately, rather than being on law enforcement to show that the money is proceeds of crime (which no longer works, because of the middemen mentioned above). This creates a new problem for criminals.

Of course, the development and use of unexplained wealth orders raises questions of civil liberties, especially when the burden of proof shifts from one side to the other.  However, unexplained wealth has always attracted the attention of taxation authorities and so these orders aren’t perhap as new as they seem. Remember, Al Capone was charged with tax evasion, not racketeering.

Unexplained wealth orders seem like an effective new tool in the arsenal of monay laundering detection. They deserve to be considered carefully.