Money laundering, usually confined to the pages of crime novels and gangster movies, has become front page news after an investigation by the Bundesnachrichtendienst (BND), Germany's foreign intelligence agency, revealed that Cypriot banks were sitting on around £17 billion in laundered Russian money. The amount is all the more astonishing given that the entire GDP of Cyprus only amounts to around £15 billion.
What's money laundering?
Money laundering is described by the International Monetary Fund (IMF) as the process of concealing the source of assets generated by criminal activity by obscuring the link between the funds and the criminal activity.
According to the BND's report, Russian oil companies have been using Cypriot banks to store "black money" earned from the fraudulent sale of energy assets. Funds were deposited in local accounts before being transferred back to Russia. At the peak of the operation in 2010, money flows from Russia to Cyprus totalled £102.6 billion while £119.5 billion was transferred from Cyprus to Russia, equivalent to nearly eight times the size of the entire economy of the Mediterranean nation.
The number of incidents of money laundering globally has been rising over the past few years. The US in particular has seen a series of scandals. Simon Johnson, formerly chief economist at the IMF, described the country's banking sector as a haven for money laundering following several revelations involving leading financial institutions in recent months.
In December 2012, the US government ordered bank Standard Chartered to pay out £218 million in fines after having been found guilty of laundering more than £160 billion over the course of 60,000 transactions in the 2000s. Also implicated in the scandal was professional services firm Deloitte, which was accused by US regulators of omitting critical information in the report it submitted to them. Shortly after this news broke, the UK's largest bank HSBC was fined a record £1.2 billion by the US government for its involvement in money laundering activities.
The UK perspective
In the UK, there is heavy regulation in place to combat money laundering. "Every bank and financial institution must conduct thorough due diligence on their clients," says an employee at a London-based financial regulator. "This means identifying exactly who they are, where they're from, where their accounts are, and what they're dealing with, who they invest with, what they intend to do with their money in the new firm. The point of these measures is to prevent money from dubious sources being 'layered' into the financial markets. It also seeks to prevent legally sourced money from being used or invested in order to be used in illegal ways."
This regulation is not just a matter for senior figures or compliance officers. "Money laundering is everyone's problem," our source said. "It doesn't matter where you rank in a firm - if you deal with money or client assets, then you can't plead ignorance if you're privy to any information which may imply that money is being laundered."
To help them comply with money laundering regulation, professional services firms offer anti-money laundering services to their clients, including ensuring they're not breaching anti-money laundering regulations in any of the jurisdictions they operate in, and conducting due diligence on parties they do business with.
This strict money laundering regulation in the UK has ensured that money laundering scandals have largely been avoided here so far. But the global nature of the financial services industry means that it's unlikely that these shores can escape them for long.
With both Cyprus and the US having strong ties with the UK, it's possible that there's already been some UK involvement in the high-profile overseas money laundering sagas of the past few months. A new chapter in the UK's financial horror story may be about to start.