Money Laundering in relation to criminal organizations

The phenomenon of money laundering  in the modern sense was born during the period of Prohibition in America when with the proceeds of alcohol smuggling, laundries were opened as a cover business. Over the years, the methods and tools for laundering money have multiplied, however the aim remains the same: to enter capital from illegal activities into the legal economy, concealing their criminal origin. As will be seen, through the complex methods of money laundering coordinated by contiguous professionals, criminal organizations make possible the free circulation of “dirty” money veiled by a semblance of legitimacy, subverting the mechanisms that underlie free competition.

 

According to estimates by the United Nations Office for Drug Control and Crime Prevention (UNODC), between $ 800 billion and $ 2 trillion are laundered each year, about 2-5% of global GDP. In particular in Italy where the underground economy  is worth approximately 12% of GDP, it is not surprising that, according to the statistics of the Bank of Italy, recycling activities can amount to 140 billion per year, or 10% of the Italian GDP against a European average of 5%.

Of this amount, the State manages to confiscate only 2%, also due to the scarce judicial cooperation of some countries that benefit from these huge financial flows.

 

It can therefore be observed that a not insignificant part of the Italian GDP is composed of unregistered and therefore untaxed activities, often of illicit origin, which need to be “justified” in order to freely dispose of the proceeds. As pointed out by the Public Prosecutor of Catanzaro Nicola Gratteri, for the ‘Ndrangheta (but the discussion can also be extended to other criminal associations) “the problem (…) is not to increase revenues, but to recycle them, clean them up in order to justify the income “.

It is clear that the real problem for criminal organizations is legitimizing their illicit proceeds, usually held in the form of cash. The possession of cash, in fact, also limits its use for certain operations.

 

The art. 35 of the legislative decree 21 November 2007, n. 231 obliges a wide range of subjects, including banking and financial intermediaries, professionals, gaming service providers, centralized management companies for financial instruments and management of regulated markets of financial instruments, to report to the UIF, ie the Italian financial intelligence unit, suspicious transactions, transactions for which “they know, suspect or have reasonable grounds for suspecting that money laundering or terrorist financing operations are in progress or have been carried out or attempted or that however, the funds, regardless of their size, come from criminal activity “. Furthermore, criminal organizations can derive enormous economic benefits from their constant flow of capital, albeit of illicit origin, entrusted to shrewd professionals.

 

In this regard, Giovanni Falcone already forty years ago stated that:

The real Achilles’ heel of mafia organizations is the traces left behind by the large movements of money connected with the most lucrative criminal activities. The development of these traces, through a patrimonial investigation that follows the flow of money coming from illicit trafficking, is therefore the main road, the aspect to be decidedly privileged in investigations concerning the mafia (…).

Consequently, the “river” of illicit proceeds that are placed on the market alters the legal economy : enterprises financed or managed indirectly by criminal organizations are able to find resources more easily than their competitors, also because the profit is mitigated by the more stringent purpose of covering illicit funds, in the ways described below.

 

The system that is established is therefore doubly detrimental: firstly because of the crimes committed to procure illicit capital, usually drug trafficking, usury or extortion and secondly because of the alterations in the mechanisms of free competition that are produced as a result of introduction of illicit proceeds into the legal market, which generate crises in competing companies and consequently unemployment, ultimately leading to a monopoly situation of the companies controlled by criminal associations.

In this regard it is interesting to note, as the sociologist Nando dalla Chiesa points out, how criminal organizations in money laundering operations also have new jobs, “creating social consensus around the criminal association”.

 

To combat this phenomenon, in 1989 during the G7 in Paris, the FATF (Financial Action Group) was set up, an intergovernmental body with the aim of “devising and promoting strategies to combat money laundering of illicit origin”. The FATF has developed a typical scheme of money laundering , now commonly accepted by doctrine, which consists of three steps:

1)  Placement . Cash of illicit origin is transformed into writing money, through bank deposits or transfers to credit institutions or financial intermediaries. A technique often used is smurfing, i.e. the deposit by multiple collaborators of a fractional sum of the entire amount to be laundered, below the threshold that triggers checks on the origin of the money.

2)  Layering . This is the most complex phase as it involves eliminating all accounting traces, “cutting the umbilical cord that binds the money, goods or other benefits acquired, to the crimes committed and which generated them” (Vigna). As will be seen below, stratification would not be possible without the help of compliant banks based in tax havens.

3)  Integration . At this point, the money of illicit origin has been covered with anonymity and “washed”, so it will be possible to reinvest it in the legal economy through seemingly legitimate operations, such as the purchase of real estate or luxury goods.

Alternative methods include the issuing of false invoices and the loan-back , which consists of a loan to oneself from associated companies based in tax havens.

 

All these steps often involve costs (bank commissions, taxes, etc.) which, however, represent a sort of “price” that criminal organizations are willing to pay in order to freely dispose of their capital of illicit origin. It must be emphasized that all these operations require a deep knowledge of financial mechanisms and are therefore carried out on the mandate of criminal organizations by true contiguous professionals, who can be considered the real protagonists of the money laundering phenomenon.

 

There are many recycling techniques, probably still partly unknown and constantly updated, usually also combined with each other to make the paper trail even more complex . The purpose of these operations is in fact to create an inextricable labyrinth that prevents investigations on the reconstruction of financial flows even before the placement.

A widely used technique is that of front names, usually trusted entrepreneurs to whom a cash intensive business is registered , that is an activity with considerable cash flows, such as bars, hotels, betting agencies etc. The extensive use of cash makes it possible to “inflate” the balance sheet of the commercial activity in order to enter the illicit source capital into the legal circuit.

Furthermore, cases where criminal organizations set up structures to launder money through community or state funds are not at all rare.

Companies based in off-shore countries play a fundamental role in money laundering , which share common characteristics such as a substantially zero level of taxation ( tax haven ), banking secrecy, poor judicial cooperation, lack of currency assessments , the possibility of setting up joint stock companies anonymously and finally the island geography.

Off-shore countries usually lack alternative economic resources so they base their economy on the inflow of foreign capital, guaranteeing particularly favorable conditions for customers.

The blacklist of “fiscally non-cooperative countries” is drawn up and updated by Ecofin, that is the European Council of Economy and Finance Ministers, and mostly includes countries located in the Caribbean region, although some financial centers located in the Old Continent also represent a place of choice for money laundering operations.

 

In Italy too billions of euros are recycled every year. The sectors most affected are public procurement, waste disposal, the world of betting, tourism, the food supply chain and lastly, as highlighted by the Bank of Italy, the production of wind and electricity from renewable sources, earth moving , quarry management and gold buying.

 

It remains to underline that in recent years there has been an evolution in recycling techniques, thanks to the advent of the internet. The new cryptocurrencies , such as Bitcoin, represent a new attractive frontier for criminal organizations, due to their a-physicality and the anonymity they guarantee.

 

From the legal point of view, the Italian system contemplates the crime of money laundering in art. 648-bis of the Criminal Code. The systematic classification within crimes against property is explained by the will of the legislator to include this crime following the crime of receiving stolen goods, with which it shares various aspects.

However, it can be considered as a multiple offensive crime, since in addition to assets, other legal assets are also protected such as the administration of justice and public economic-financial order; from the reading of the article it is also understood that there is no need for pecuniary damage as the conduct of those who hinder “the identification of their criminal origin” is sanctioned, ie those who try to hide the paper trail, effectively preventing the assessment of the offense and related culprits.

 

The crime of money laundering can also be considered a common crime, which can be committed by anyone, provided that, according to the exclusion clause at the beginning of the law, they have not taken part in the predicate crime. The forms of conduct set out in article 648 bis of the Criminal Code are “replacement”, “transfer” and “other operations” involving money, goods or other benefits.

The “substitution” represents the most basic form of laundering: as we have seen, the “dirty” money is replaced with clean money with the recycling techniques seen above.

 

The second form of conduct consists in the “transfer” of money, goods or other benefits deriving from an intentional crime. This hypothesis includes the movements of money through electronic payment systems such as SWIFT and CHIPS networks or the use of shops dedicated to money transfer , which allows the immediate transfer of sums of money.

Alongside the typical conduct of substitution and transfer, article 648-bis also contemplates further unnamed conduct that fall within the “other operations” concretely capable of hindering the administration of justice with regard to the identification of the criminal origin of money and goods , since this need not be definitively prevented.

 

As far as anti-money laundering legislation is concerned , since the end of the 1970s there has been a copious production, in particular on the impulse of international organizations and the European Community, which with the instrument of the directive has attempted to harmonize the various national legislations.

The l. 191 of 18 May 1978. introduced the aforementioned art. 648-bis of the Criminal Code, initially entitled “Replacement of money or valuables deriving from aggravated robbery, aggravated extortion and kidnapping for the purpose of extortion”, which outlined a special form of receiving stolen goods.

The considerable spread of the phenomenon of money laundering in the following years led the legislator, on the basis of the Vienna Convention on the prevention of drug trafficking, to modify the aforementioned rule.

 

With the l. 19 March 1990, n. 55 the heading took the current term of “money laundering” and crimes concerning the production and trafficking of narcotic or psychotropic substances were included within the category of predicate offenses. Furthermore, the law punished the conduct of those who “outside the cases of participation in the crime”, replaced “money, goods or other benefits deriving from the crimes” indicated with other money, other goods or other benefits “or hindered” the identification of their origin “. It is clear that the new rule introduced, in addition to the typical replacement conduct, also had the purpose of sanctioning the conduct of those who attempted to prevent the identification of the criminal origin of the money or asset.

The current wording of art. 648- bis of the Criminal Code is attributable to art. 4 of the l. 9 August 1993, n. 328, which ratifies the 1990 Strasbourg Convention on money laundering. Among the main innovations of the law, it can be noted that all forms of criminal offense capable of producing economic gains currently fall into the category of predicate offenses. These innovations have certainly facilitated the application of the crime of money laundering, which in the past was limited by the crimes indicated by the law.

 

Despite the abundant national legislation, it is clear from the estimates on the financial flows of money laundering that money laundering is still a well-established scourge. The phenomenon of money laundering is, in fact, of a transnational nature as often is also the crime upstream, so it is clear that it can only be tackled with a shared effort by the entire international community: not surprisingly, the first legislative interventions they aim to stem the profits from international drug trafficking ( drug money laundering ).

As the magistrate and jurist Luigi Domenico Cerqua points out, “the transnational dimension of money laundering corresponds to the need, felt by the international community, to prepare common strategies for the repression of the phenomenon”. The international regulatory authority, the FATF, however, does not yet have sanctioning tools, but only moral suasion (for example through the preparation of a blacklist of “non-cooperative countries”).

In this regard, it would be desirable, in the years to come, to eliminate regulatory asymmetries, to homologate the codes and finally to develop common investigative strategies for the repression of money laundering. In this sense, Italy is at the forefront, since, unlike many countries, including European ones, it has expressly prohibited both with primary (law 231/2007) and secondary (Bank of Italy and UIF regulations) ) relations with banks and entities that are not subject to adequate standards in anti-money laundering legislation.

 

Finally, it would also be appropriate to adequately prosecute those who enrich criminal organizations, the so-called ” white collar “, ie those professionals who make up the “gray zone”.

As the Professor of Criminal Law of the Federico II University of Naples Giuseppe Amarelli points out in The political-mafia contiguity , the aforementioned contiguous professionals are sanctioned, when possible, through the figure of the external competition . However, the burden of proof of the consultant’s criminal liability by way of external competition is particularly onerous and moreover “the sanctioning scope is largely limited by the fact that the professionals of the operations are at most condemned by way of possible participation in the case severe, such as tax fraud and false accounting ».

 

In light of this, the author suggests that “rather than concentrating on mafia associations, in relation to which today’s anti-mafia legislation already provides a very severe and articulated repressive response, the attention of the legislator should focus on the so-called” gray area“Of the contiguity of the mafia” for which the figure of the external competition does not appear at all adequate. Indeed, it is precisely these professionals who make the growth of criminal organizations possible, even if they are not mentioned in any report on the most wanted criminals. A reasonable proposal would be to introduce new hypotheses of ad hoc offenses that sanction with the right severity “the facilitating conduct of professionals to which the associations inevitably turn to implement their economic and financial operations” in derogation “to today’s rules on money laundering referred to in art. 648 bis of the Criminal Code which excludes from the list of possible active subjects of the crime those who have participated in the predicate offense “.

 

In conclusion, as many have pointed out, including the former director of the UNDC, recycling is the “lifeblood of the markets”: money from drug trafficking is useful for ” adventure capitalism “, that is, for unscrupulous operators who see in these flows capital constants the possibility of financing oneself in an apparently more facilitated manner. However, it should be emphasized once again that the wealth that recycling generates is a wealth that “drugs” the market, which subverts the rules of free competition causing enormous damage to honest operators and plundering public resources.

 

And in this sense, only shared action at the international level can really contribute to exacerbating this modern scourge.

 

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