Money laundering, new technologies, FATF and Spanish penal reform

Author:Miguel Abel Souto
Position:University of Santiago de Compostela, Santiago de Compostela, Spain

Purpose – This paper attempts to examine new technologies, typologies, FATF recommendations and the last Spanish penal reform on money laundering. Design/methodology/approach – The paper describes the potential provided via internet and electronic transfers, prepaid cards and payment services with mobile phones for executing money laundering, and comments on the Spanish penal reform ... (see full summary)

New technologies and money laundering

Money laundering is a “crime of globalization” ( Levi, 2012, p. 107 ). Its importance nowadays is transcendental because of the economic crisis we are suffering. As criminal organizations, characterized by growing transnational nature, weaken the economy further ( Finklea, 2009, pp. 9-40 ) with their illegal activities and enter the financial system, public finances or customs because of their vulnerability ( Fisher, 2012, pp. 153-161 ).

Indeed, it was noted that “an offense that has benefited most from the internet is money laundering” ( Velasco San Martín, 2012, p. 75 ), “generalised and radicalized” ( Sandywell, 2010, p. 46 ) by the new electronic media, with a “spectacular” ( Pérez Estrada, 2010, p. 306 ) development thanks to the potential provided via internet and electronic transfers ( Fernández Teruelo, 2011, pp. 231 and 234 ) for executing this crime.

The increasing use of new payment methods, such as transactions and movements of funds, resulted in an increase in the detection of cases of money laundering committed using telematic media (Financial Action Task Force – FATF, 2010b, p. 7 ). These new technologies are appealing to money launderers mainly because of the anonymity ( Mata Barranco, 2010, p. 19 ; Miró Llinares, 2011, pp. 12-13 and 25-26 ) provided, high marketability and usefulness of funds and global access to ATM network ( FATF, 2010a, p. 7 ). To these factors one should add the problems of persecution ( Gless, 2012, pp. 3-22 ), which requires new investigation methods that can maintain the delicate balance between security and fundamental rights ( Pérez Estrada, 2010, pp. 307, 309 and 311-317 ).

In any case, to avoid misuse of legal insufficiencies in new technologies by organized crime ( Angelini and Gibson, 2007, pp. 65-73 ), internet cannot be an “area outside the law” ( Gless, 2012, p. 22 ), but must be regulated ( Gómez Tomillo, 2006, p. 189 ).

Undoubtedly, the new payment systems facilitate money launderers' criminal activity. These systems are better than cash for moving large sums of money, non-face to face business relationships favour the use of straw buyers and false identities, the absence of credit risk, as there is usually a prepaid, discourages service providers from obtaining a complete and accurate customer information, and the nature of the trade and the speed of transactions make it difficult to control property or freezing ( FATF, 2010a, p. 21 ).

However, the development of technologies, including the internet, has unquestionable advantages involved, “a real change in the administrative, educational, labour or social forms of relationship” ( Mata Barranco, 2010, p. 16 ) and even provides, through online resources, verification of identity or other duty of surveillance for the prevention of money laundering ( The Money Laundering, 2011, pp. 37-39 and 54 ). The new payment methods are the result of the need to both offer commercial alternatives to traditional financial services and to include everyone in the system irrespective of poor credit rating, age or residence in areas of low bank offer. These methods can also have a positive effect on the economy, given their efficiency in terms of speed of transactions, technological security, low costs compared to payment instruments based on paper, and accessibility, especially for prepaid cards and payment services with mobile phones, identified as a possible tool to integrate excluded individuals because of poverty ( FATF, 2010a, p. 12 ).

As an example, a total of four million people in the USA receive social security benefits without actually being bank accounts holders. To reduce their dependence on cheques, which force translates in them spending between $50 and $60 a month in check cashing, bill payment or sending money to their families, benefits were provided with prepaid cards with which could buy goods or get cash. Moreover, in 2009, the war displaced in Pakistan more than a million people, and their government distributed prepaid cards with a maximum value of 25,000 rupees, about $300, for the immediate assistance of 300,000 families. Similarly, in Afghanistan, the police salary is paid via mobile phones, so that policemen do not have to leave their job in order to collect their salary. This also reduces the possibility of corruption or bribery ( FATF, 2010a, pp. 12-13, 15 and 20 ).

In 1996, the FATF was specifically concerned in the recommendation number 13 with new technologies and the danger they pose for potential money laundering by allowing the realization of huge transactions instantly from remote locations, while keeping the anonymity of the transgressor and without the involvement of traditional financial institutions. The absence of financial intermediation makes it difficult to identify customers and to keep a record of relevant information. In addition, traditional investigation techniques become ineffective or obsolete to new technologies: the problem of physical volume of money posed for launderers – to the point of leaving the paper money because of slow movement – is minimized with “electronic money”, its rapid mobility, especially on the internet, difficult to trace the funds transferred and the unusual volume of data to analyze make it almost impossible to detect any suspicious activity.

Please note that 30 years ago there was no internet. However, a decade and a half later the closure of the “European Union Bank” ( Schudelaro, 2006, pp. 47-72 ) was agreed in Antigua, the bank that became famous for being the first bank to operate through the internet and for advertising explicitly on the web that this was the right bank for tax evaders and money launderers ( Blum et al. (1999, pp. 52-57) with reproduction of the advertisements that the “European Union Bank” made available in internet; Martin, 1997, pp. 38-39 ). Today nearly three-quarters of households in the European Union have internet access, over a third of the population makes banking online ( Gaceta Informativa, Lex Nova, 2012, p. 1 ; Comisión Europea, 2012, p. 1 ) and in the world have reached 2,267,000,000 internet users ( Fundación Orange, 2012, p. 9 ).

Precisely for this reason the FATF developed, in October 2010, a report regarding the use of new payment methods for money laundering ( Baldwin, 2004, pp. 125-158 ) which focused on prepaid cards, payment services on the internet ( Philippsohn, 2001, pp. 485-490 ; Ping, 2004, pp. 48-55 ; Yan et al., 2011, pp. 93-101 ), steady growth, and its misuse for the implementation of the so-called “cyber laundering” ( Filipkowski, 2008, pp. 15-27 ) – a phenomenon also linked to terrorist financing ( Hummel, 2008, pp. 117-130 ; Souza, 2012 ) – as well as on payments with mobile phones. Notably, with regard to his latter issue, it is estimated that 1,400,000,000 people will use payments via mobile phones for their financial transactions in 2015 ( FATF, 2010a, p. 18 ).

Finally, the FATF has provided revised recommendations on 16 February 2012, of which recommendation number 15 indicates that countries and financial institutions should identify and assess the risks for money laundering relating to new technologies, while recommendation number 16 discusses about electronic transfers and identifying both their originators as beneficiaries ( FATF, 2010a, p. 17 ).

To conclude, future development of measures for the prevention of money laundering should take into account all potential threats against the administration of justice and legal trade economic and financial ( Abel Souto, 2005b, pp. 21-89 ) that arise from the use of new technologies. It is hoped that the creation of the European Cybercrime Centre, linked to Europol, that will start its operations in January 2013 ( Gaceta Informativa, Lex Nova, 2012, p. 1 ; Comisión Europea, 2012, p. 1 ), will effectively address these new challenges.

Typologies and FATF recommendations

It has now become a classic statement that the methods and techniques used for money laundering “are in constant evolution” ( FATF, 2011a, p. 16 ). There have also been arguments in favour of a “balloon effect”, a term that has been coined to describe the fact that whenever authorities hinder some laundering mechanisms, criminals respond in other forms. That is, when the national and international prevention and prosecution systems strangle certain methods of money laundering the “globe” becomes smaller in that crowded place, but expands to other parts ( Zagaris, 2010, p. 68 ). No doubt, “ease of adaptation to new situations and speed the development of new methods” ( Blanco Cordero, 2012, p. 61 ) is a fundamental characteristic of money laundering.

However, money launderers have not completely abandoned traditional typologies, classic and personal ( Núñez Paz, 2011, p. 217 ). What seems to be the case is that these traditional typologies are now being combined with more sophisticated methods used to overcome the legal obstacles posed for the prevention of money laundering ( Blanco Cordero, 2012, p. 61 ).

In recent years, the FATF has paid special attention to the trusts and company service providers ( FATF, 2010c, pp. 1-101 ). Their important role as mediators between financial institutions and their customers, knowingly or not, has frequently been used in money laundering activities. Trusts and company service providers can also play an important role in detecting, preventing and prosecuting ( FATF, 2011a, p. 17 ) all persons and entities involved in the creation, administration and management of funds, as also suggested by letter e of the 22nd revised recommendation of FATF in 2012 ( FATF, 2012a, p. 20 ). The creation of the trust has made it possible for money launderers to hide their identity by setting up a fund, so that it is shown that the trust company...

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