Informal Finance

MLCA (the Money Laundering Control Act)

MLCA, the Money Laundering Control Act, is the world first law to criminalize money laundering, made in the United States in 1986. It made money laundering a federal crime. It is considered as the cornerstone of criminalization of money laundering.

AML/CFT Framework

Money Laundering Becomes Interchangeable with Terrorist Financing: New Single Category "AML/CFT" for Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) The AML/CFT standard is an amalgamation of measures that can be summarized as follows: (1) criminalization of money laundering and terrorist financing, (2) setting up freezing, seizing and confiscation systems, (3) imposing preventive regulatory requirements on a number of businesses and professions, (4) establishing an FIU, (5) creating an effective supervisory framework, (5) setting up channels for domestic cooperation, and (6) setting up channels for international cooperation. The system purports to achieve a multiplicity of objectives: (1) removing profit out of crime through confiscation, (2) detecting crime by following the money trail, (3) targeting third party or professional launderers who through their services allow criminals to retain the proceeds of their crime, (4) targeting the upper echelons of the criminal organization whose only connection to the crime is the money trail, and (5) protecting the integrity of the financial system against abuse by criminals.

P.E.P.

P.E.P. is "Politically Exposed Persons." PEP is an individual who is or has been entrusted with a prominent function. Many PEPs hold positions that can be abused for the purpose of laundering illicit funds or other predicate offenses such as corruption or bribery.

Predicate Crimes

Predicate crimes refer to crimes in which are implemented parts of bigger crime. In the context of money laundering, predicate crimes especially the crimes motivated criminals to do money laundering. It was initially limited to drug-dealing. However, the range of predicate crimes expanded over time to include some 200 crimes, among them corruption, financial fraud, illegal arms sales, illegal prostitution, embezzlement, insider trading, bribery, computer fraud, trafficking in endangered species, stolen or smuggled art and antiquities, and, most important after 2001, terrorism.

SARs

Suspicious Activity Report, SARs, is one of the tools provided under the Bank Secrecy Act (BSA) as a way of monitoring suspicious activities that would not ordinarily be flagged under other reports. It is designed as an anti-money laundering tool. Normally, the customer is not told that an SAR is being filed.

Tax Havens

Tax Havens are areas used by non-residents to hide revenues or escape high taxes in their country of residence. The problem of tax havens exists in loose law and light rule that could be arbitrary interpreted by authorities of those places. Due to this lack of transparency in the legal grey area, the areas attract the rich in developed countries. (Advanced: Size of the amounts hidden in tax havens amounted to $35 trillion. Panama and Paradise Papers reveal detailed methods and stakeholders of this scheme)

Tax Inversion

Tax Inversion is the process of the US companies' relocation overseas to reduce the tax burden on income. This arbitrage is based on the different tax rules and rate: the US has a "global" system of taxation, while most other countries have a "territorial" system.

The 3Fs

The 3Fs refers to "Finding, Freezing and Forfeiting", a basic principle of anti-money laundering. Finding means detecting the crime of money laundering. Freezing means prevent "dirty money" from entering the system and going to criminal's revenue. Forfeiting is a powerful tool used by law enforcement agencies against criminals and criminal organizations to deprive them of their ill-gotten gains through seizure of these assets

ROSCA

"Rotating Saving and Credit Associations" A group of individuals that fill the role of an informal financial institution through repeated contributions and withdrawals to and from a common fund. Rotating Credit and Savings Associations are most common in developing economies or among immigrant groups in the developed world. This is because accessing formal institutions is difficult due to their unavailability or because these institutions are unable to provide the appropriate service. The name derives itself from the types of transactions that occur in these associations; members pool their money into a common fund, generally structured around monthly contributions, and money is withdrawn from it as a lump sum by a single member at the beginning of each cycle. This occurs for as long as the group exists.

System D

"System D" is a slang word that was dragged out from the French-speaking African and the Caribbean. The French use the word "débrouillards" to describe particularly effective and motivated people who are doing business on their own, without registering or being regulated by the bureaucracy and, for the most part, without paying taxes. According to Neuwirth, the author of Stealth of Nations, System D means the ingenuity economy, the economy of improvisation and self-reliance, and "do it yourself ( or DIY)" economy. The author prefers to use the term System D instead of informal economy. This is because the term "informal economy" could associated such economic activities with negative, illegal, and criminal one. Instead using the term "System D" could remove such negative assumptions.

Tontines

A saving and life insurance scheme A system for raising capital in which individuals pay into a common pool of money and then receive a dividend based on their share and the performance of investments made with the pooled money. The principal invested in the tontine is never paid back to the investor; rather the investor receives dividends until his or her death. If a "shareholder" dies, his or her shares are divided up among the surviving investors. It is relatively widespread in 17th and 18th Century in US and Europe. Because the risk of fraud, it is banned in US and EU.

Bank Secrecy Act

Bank Secrecy Act (BSA) is a U.S. law requiring financial institutions in the United States to assist U.S. government agencies to detect and prevent money laundering. It required banks to preserve a financial paper trail and inform the government of their customers' suspicious transactions. It was remarkable because, before this legislation, banks are operated on "no question asked" rule, which prioritize the secrecy of depositor, and it was uneasy to follow the money. BSA seemed ineffective at first, but was increasingly invoked as time went on to justify keeping tabs on customers.

CCCA

Comprehensive Crime and Control Act (CCCA) is a comprehensive package of crime measures passed by the U.S. Congress and signed into law by President Ronald Reagan in 1984. In the context of informal and underground finance, this law is remarkable because it changed the restrictive tendency of government to use of forfeiture, triggered by the consideration for the Fifth Amendment. CCCA made it possible to seize assets through a civil proceeding. It presented two major advantages: i) protections given to defendants under criminal law did not apply; and ii) the evidence threshold ("preponderance of the evidence") was lower than that needed in criminal cases ("proof beyond a reasonable doubt"). Moreover, this law allowed for out-of-court "administrative seizures" of assets valued less than $100,000. As it was both easy and lucrative, law enforcement agencies became "addicted" to drug-related seizures, resulting in significant abuses. This raised a severe political fight, eventually leading to the enactment of the Civil Asset Forfeiture Reform Act in 2000, the law requiring federal prosecutors to show a substantial connection between the property and the crime

Deviant globalization

Deviant globalization can be described as "the unpleasant underside of transnational integration." It is not necessarily illegal but often inconsistent with conventional norms of developed societies, entailing the economic exploitation of the difference in morality between different cultures. Deviant globalization includes a variety of illicit activities. For instance, illicit commodity flows such as drug trafficking are a typical example of those activities. In addition, humans can be a target of illicit flows such as human trafficking, sexual exploitation, and organ trade. Deviant globalization also has security implications: WMD proliferation, arms sales to non-state actors, and terror financing are serious threats the international community is faced with now.

FATCA

FACTA is abbreviation of "Foreign Account Tax Compliance Act." It is the US tax system based on global income. This act requires foreign financial Institutions to report the foreign assets held by the US account holders to the IRS (Internal Revenue Service).

FATF

FATF refers to the Financial Action Task Force created under OECD in 1990. It is considered as an example of international cooperation to "follow the money" and defeat organized crime. Its "naming and shaming" approach forced countries to introduce legislations criminalizing money laundering. This gave way to the creation of Regional FATFs to ensure compliance on a regional basis.

FinCEN

FinCEN (the Financial Crimes Enforcement Network) is a law enforcement agency established to help track money laundering and other financial crimes. Created in 1990, it was designed as the financial intelligence gathering arm of the US Treasury, and was given computerized access to data from a variety of government agencies. Under Bank Secrecy Act, FinCEN requires financial institutions to preserve the paper trail behind transactions and file currency transaction and suspicious activities reports.

Hawalas Network

Hawala is a method of transferring money without any actual movement. One definition from Interpol is that Hawala is "money transfer without money movement." Hawala is an alternative remittance channel that exists outside of traditional banking systems. Transactions between Hawala brokers are done without promissory notes because the system is heavily based on trust. Why Hawalas are most common? • In countries lacking formal banking infrastructure • Where formal remittances are costly or inefficient • Where there is a significant number of migrant workers Since hawala transfers are not routed through banks and, hence, not regulated by governmental and financial bodies, many countries have been led to re-examine their regulatory policies in regard to hawala. Some countries have made hawala illegal due to the absence of bureaucracy in the system.

"Know you customer" Rule (KYC)

KYC laws were introduced in 2001 as part of the Patriot Act, which was passed after 9/11 to provide a variety of means to deter terrorist behavior. The section of the Act that pertained specifically to financial transactions added requirements and enforcement policies to the Bank Secrecy Act of 1970 that had thus far regulated banks and other institutions. These changes had been in the works for years before 9/11, but the terrorist attacks finally provided the political momentum needed to enact them. Thus, Title III of the Patriot Act requires that financial institutions deliver on two requirements to comply with the stricter KYC: the Customer Identification Program (CIP) and Customer Due Diligence (CDD). CIP is the more straightforward of the two components, and likely more familiar. To comply with CIP, a bank asks the customer for identifying information CDD, is more nuanced. In conducting due diligence, banks aim to predict the types of transactions a customer will make in order to then be able to detect anomalous (or suspicious) behavior; assign the customer a risk rating that will determine how much and how often the account is monitored; and identify customers whose risk is too great to do business with.

Money Laundering

Money laundering is defined as a financial transaction scheme that aims to conceal the identity, source, and destination of illicitly-obtained money. It consists of three stages: 1) placement, 2) layering, and 3) integration. Placement means the transaction which the launderers introduce their illegal profit into the financial system. This stage is the easiest to be caught. Second stage, layering, consists of a series of conversions and movements designed to mask the source, ownership and location of money. Globalization, deregulation and technological innovation have opened boundless possibilities to those who seek to obscure the money trail and confuse investigators. Final stage, integration, happens when the funds re-enter the legitimate economy. For investigators, it is difficult to catch the criminals at this stage because luxury assets or legitimate business ventures, and the origin of the funds can be deemed legitimate once the money has found its way to a place and form in which can safely be spent or invested in real estate.

OFAC

Office of Foreign Assets Control (OFAC) is one of the Treasury Agencies involved for administering and enforcing BSA. The Office of Foreign Assets Control (OFAC) of the US Department of the Treasury administers and enforces economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy or economy of the United States.

RICO statutes

Racketeer Influenced and Corrupt Organizations (RICO) Act is a United States federal law that provides for extended criminal penalties and a civil cause of action for acts performed as part of an ongoing criminal organization. This intentionally vague and sweeping law was designed to be used against organized crime, containing several powerful weapons. One example is that it allowed the federal government to seize the assets of any organization deemed to be a criminal conspiracy. Its financial provisions allowed for the freezing of assets even before conviction. RICO made it easy to prove a conspiracy: all it required was evidencing a pattern of racketeering activity, which constituted a total of two violations over a 10-year-period. These provisions seemed so complicated that even Antonin Scalia, a former Associate Justice of the US Supreme Court, admitted that he could not comprehend the meaning of RICO statutes.

Remittance

Remittance is a transfer of money from Point A to Point B, domestically or internationally, which can be done through banks, through specialized companies (such as Western Union or MoneyGram), or through informal networks (such as hawalas) Remittances can be formal (documented or going through regulated institutions) or informal (off-the-books), also known as "informal value transfer systems" (IVTS) defined as any network or mechanism that can be used to transfer funds or value without leaving a paper trail or going through regulated financial institutions. Reasons for informal remittance: - Cheaper, faster or more efficient - Getting around capital controls or regulations, avoiding taxes - Anonymity - Crime or terrorism

TBML（Trade-Based Money Laundering）

Trade-Based Money Laundering, TBML, is an attempt to hide money through international trade transactions, primarily misinvoicing, not through financial institutions. The attempt involves a number of schemes in order to complicate the documentation of legitimate trade transactions, such as over and under invoicing, over and under-shipments, false description of goods and services sold, and multiple invoicing of goods and services sold. It is very hard to detect it for investigators.

USA PATRIOT

（Uniting and Strengthening America by Proving Appropriate Tools Required to Intercept and Obstruct Terrorism) USA PATRIOT Act is an antiterrorism law enacted by the U.S. Congress in October 2001, at the request of then-President George W. Bush in response to the terrorist attacks that took place on Sept. 11, 2001. Under this law, the "Know Your Customer" rule was introduced and the range of "following the money" was expanded to terrorism.