Money Laundering & the Offshore Finance Industry

By Jonathan Katan, LL.B (Hons), McLeans International Attorneys

There is no doubt that when many people hear the words offshore finance, they think money laundering, even if they are not entirely sure what it is. This has been called the “Grisham effect” with shows such as “Law and Order” promoting the idea that offshore financial centers, such as the Turks & Caicos Islands, are full of people in dark suits with large suitcases full of cash ready to be put into secret numbered bank accounts.

Is that really a true picture of what the offshore financial industry is all about? There is no doubt that a great deal of money is laundered — perhaps as much as $500 billion every year. It is also true that offshore financial centers have been and are being used by money launderers. However, the process of money laundering rarely starts offshore. Two of the biggest money laundering centers in the world are New York and London.

What is money laundering? Why does it matter, and how does it affect you?

If you are interested in taking advantage of any of the financial products or services available in the Turks & Caicos Islands, or even thinking of purchasing a condominium, you are likely to feel the effect of some of the rules and regulations that have been put in place to prevent money laundering. However, as long as you are not a money launderer, there is nothing to worry about.

What is money laundering?
Money laundering is the means by which the proceeds of criminal conduct are moved back into the legitimate financial system. The process gets its name from the analogy of washing dirty money so it looks clean. The purpose is to disguise illegally acquired money derived from criminal conduct and obscure its true source so as to make it appear legal.

And, money laundering is a crime. If you have some funds that are the proceeds of a crime and do something with them in the hope that they will look like they are not from a crime, or knowingly help someone else do the same, you are guilty of laundering money.

How is it done?
This is not a guide on how to launder money, but an indication of the stages that a money launderer needs to go through in order to clean money.

The first step is Placement. This is where the proceeds of a crime are placed in the financial system. This usually takes place onshore and usually involves getting the money into a bank account. This is the riskiest stage of the process for criminals and where they are most exposed to being caught, as any cash deposit may arouse suspicion and any deposit over $10,000 will trigger a report to the authorities.

Common methods include depositing small amounts of money in many different bank accounts, intermingling illegal money with the cash takings of a legal business, or even gambling in casinos.

The second step is Layering. Once the money is in the financial system it needs to be moved around in order to muddy the trail in an attempt to confuse any investigation into the legitimacy of the money. It is at this stage that launderers may attempt to use offshore financial centers in an attempt to put the funds beyond the reach of the authorities in their home country. This is usually done by electronic wire transfers, but monetary instruments such as travelers checks or bank letters of credit may also be used.

The final step is Integration. In order to be of use to the launderer/criminal, the money needs to come back into their direct control and to appear to be legitimate. This can be achieved by phony loans being made from one company to another, phony business transactions and even fake gifts or inheritances from imaginary long-lost relatives.

Why does it matter?
Crime, particularly organized crime and terrorism, requires money. For a long time, law enforcement authorities have known fighting organized crime head- on is hard. Those usually caught are low down in the operation and easily replaced. Further, they usually remain silent, protecting those who mastermind the organization.

Law enforcement agencies realized that as well as trying to stop the crime directly they could undermine the organization by attacking the proceeds of crime. The United States became the first country to make money laundering a crime and the Turks & Caicos Islands introduced their own legislation as far back as 1998. If action against money laundering is effective, criminal organizations cannot function and terrorist groups cease to have the funds to carry out their activities. That is why it matters.

What is being done to prevent it?
Countries such as the U.S., Canada, the U.K. and the Turks & Caicos Islands have introduced domestic law to make money laundering or assisting someone who is money laundering a crime.

International initiatives have been set up by the leading industrial nations with a view to combating money laundering on a global basis. One of these, the Financial Action Task Force (FATF), prepared a report with the very catchy title of “The review to identify non-cooperative countries and territories; increasing worldwide effectiveness of anti-money laundering measures.” The report listed 15 offshore jurisdictions which the FATF considered were not doing enough to attempt to prevent money laundering. Although some very well-known offshore jurisdictions were on this list, the Turks & Caicos Islands were not.

Finally, laws and regulations have been introduced which mean that professionals in the financial services industry — including bankers, accountants and attorneys — must make sure their clients are not laundering money, and if they think they are, report them to the appropriate authorities.

How may this affect you?
If you intend to undertake any financial transaction in the Turks & Caicos Islands and you engage the services of a professional, you are likely to be asked for some personal information. This will include proof of your identity and address. You may also be asked for a reference from your bank or other professional and proof as to where the money came from for the transaction. The reason for this is so that the professional can ensure that they are not assisting in the laundering of money. To do this, they must satisfy their “due diligence” and “know your client” obligations prior to a transaction taking place. You may feel this is intrusive, but if there is one thing that a money laundering criminal does not like, it is checks on and confirmation of his identity, his address and where the money he is dealing with has come from. Do not be surprised if some or all of this information is requested, even if you are simply interested in buying some property. If you are asked, please do not think for one moment that you are in any way suspected of any wrongdoing.

You may be concerned about your right to privacy, but you can rest assured that your rights are well respected and that any information you give will be held in confidence in the same way as any other information you give to a professional. If you do not want to give that information, or if you have something to hide, you may want to think twice about coming here to do business.

Money laundering and the offshore financial industry
The Turks & Caicos Islands have never been listed as un-cooperative in the fight against money laundering and have done much to try to prevent money laundering.

Financial service providers in the Turks & Caicos Islands can offer legitimate ways in which tax may be avoided or deferred; structures that can help protect your assets and plans for dealing with your property on your death. There are also great investment opportunities within the Turks & Caicos Islands, both in real estate and financial products offered by the financial institutions here. The Turks & Caicos Islands’ financial industry is ready and willing to do business, but our business is not laundering.

Jonathan Katan LL.B (Hons) is an attorney at McLeans International Attorneys working in the areas of property, commercial and trust law. He is a member of TCI Financial Industry Association.