Money Laundering Matters I

This article is Part I of a series. Read Part II here.

Former Minister of Petroleum, Diezani Alison Madueke, has recently become the face of corruption and money laundering in Nigeria. Since her arrest in London by the UK National Crime Agency, many have jubilated, celebrating what they consider the beginning of a long journey to justice. Accompanying this is the risk of adopting a narrow view of money laundering, where only politicians and ministers are targeted for their roles in re-channelling Nigerian funds.

In Nigeria, a more robust money laundering conversation has been sidetracked by the intense and persistent focus on politicians as the primary agents involved. There is little doubt that money laundering has been a feature of political office, but this ignores a much bigger picture. The techniques employed in laundering funds are extensive, and while it is possible to do so without the commercial sector – banks, law firms and consultancies, these institutions must now be identified as playing a key role in facilitating money laundering.

Money laundering is the process by which the proceeds of illegitimate activities such as crime, and the true ownership of those proceeds, are changed so that it appears to come from a legitimate source. The dirty money is simply ‘laundered’ to look ‘clean’.

At its simplest, the very skilled make it impossible to find the original source. Money laundering is arguably more about the process (using the commercial sector to disguise funds) than it is about the person (criminal or corrupt politician). Therefore, any concerted effort should focus more on strengthening regulatory checks and tracking commercial transactions, than on media criticism of individual culprits. This is essential because both civil and criminal courts will require tangible proof in order to pursue their cases.

Money laundering works in various ways, with different strategies employed by white collar criminals and government officials. Yet certain steps are always present. Traditionally, it includes placement, layering and integration.

Placement

Placement is the stage at which the illicit funds are first introduced into the financial system, and usually provides the best opportunity for detection. In practice, placement may involve dividing the funds into smaller, non-suspicious amounts, low enough to avoid the alarms at any bank or other financial institution. If the money is successfully deposited in the institution, then it can be later extracted in a legitimate form.

It is at this point regulation should focus on deposit holding companies. Typically, launderers place money in client accounts as if in the course of normal business, or to achieve a transactional aim such as the purchase of property. But once the money is deposited, they would usually abandon the transaction and simply extract the money back from its holding account. The result is that the accounts of reputable institutions act as intermediaries to push illegal money into legal accounts. Sometimes, the process ends here, with the money mixed with other legitimate funds in the account.

Layering

Then comes layering, the most visible of the three stages, and the traditional focus of the money laundering conversation. Layering depends on how much money is being transferred, and the type of financial structure used to disguise it. In some cases, funds may be transferred between different jurisdictions using untraceable shell companies and special purpose vehicles. In most local Nigerian cases, property is the name of the game. Launderers typically invest in houses, flats or other sizeable assets, before selling them off to unwitting buyers, who help legalise the funds through this legitimate transaction. This allows raw cash to be substituted into assets, and then converted back into cash via bank transfers. The process may be multiplied many times over, to the extent that it becomes unclear whether the funds used to purchase the assets were legal or not.

Integration

Finally, the most complicated transactions isolate the process of integration. This is where funds are reintroduced into the economy in a legitimate form such as investment in local businesses, liquidation of property, or in some cases, simple withdrawals from deposit holding companies. Following these steps, looted funds or any other form of profits can be injected and ejected from the system, without raising too much alarm. The process underlined here is not always sequential – steps sometimes occur simultaneously, but the characteristics are easily identifiable.

So what next for Nigeria?

As has been tried and tested around the world, regulation is capable of solving this problem. In addition, a more precise understanding of this process will lead to the creation of policies and government initiatives informed by the role of the financial sector. Here, anecdotes have misled. Laundered money does not necessarily leave Nigeria in Ghana-must-go bags. Most times, it is facilitated by close relationships with organisations that have the infrastructure to use cashless transactions to disguise it. Global financial centres are important focuses of any money laundering campaign, but our focus must begin with Nigerian institutions and creating a criminally aware workforce.

For example, the famous reference to Nigerian ‘offshore accounts’, while single handedly focusing on politicians, also reveals a poor appreciation of money laundering techniques. Naturally, countries which have bank secrecy laws permit anonymous banking, hence complex schemes channeling millions to places like the Bahamas, Bahrain or Panama. But, money laundering is primarily an economic and financial crime which requires a financial system to operate and money is laundered in Nigeria through currency exchange houses, stock brokerage houses, automobile dealerships, and trading companies.

Once this problem has been questioned, understood and challenged, law enforcement can begin to work with the institutions to prevent it. The money launderers are far ahead of the system, and will remain so if the nation does not at some point, stop to observe the methodical laundry cycle.

This article is Part I of a series. Read Part II here. 

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