Money laundering (ML) has become a matter of great concern around the world having profound negative impacts on both economy and society. Different types of perils such as reputational risk, operational risk, legal risk and concentration risk may be emerged due to ML. The well-known American Mafia, Alphonse Gabriel Capone (1899-1947) who is considered as the father of money laundering used his laundering firms known as Laundromats to wash his dirty money into legitimate one. Later on, gangster & Mob’s Accountant, Maier Suchowljansky (1902-1983) better known as ‘Meyer Lansky’ the Russain-born immigrant of America who considered as father of credit backed money laundering grasped the importance of creating businesses not only for money laundering but also to provide ‘fronts’ for his illegal activities. Casinos (Casinos are not permitted in Bangladesh) are notorious business ‘fronts’ for illegal activities. Meyer Lansky understood the usefulness of foreign countries that provide heavens for criminal activities. Later in life, Meyer Lansky would hold untold millions in Swiss bank accounts and in banks and corporations in Hong Kong, Israel, and throughout South America. Meyer Lansky established offshore accounts with foreign banks, and then borrowed from them; receiving what looked like legitimate loans.
Money laundering means knowingly moving, converting, or transferring property involved in an offence for the purposes of concealing or disguising the illicit nature, source, location, ownership or control of the proceeds of crime. The experts defined credit backed money laundering as the process of disguising the proceeds of crime and moving value through the credit transactions or credit facilities in an attempt to legitimise their illicit origins. This method of money laundering involves ‘cleaning’ of money obtained from predicate offences to become visible to have been derived from legal activities. Under credit-backed money laundering, criminals borrow their own illicit money. It is usually executed through the creation of credit agreement between the criminal and a third party.
The common techniques which are used in CBML process are offshore corporations, front companies, shell companies, phantom mortgage, fund diversification, over valuation of primary securities, over valuation of collateral securities, using fictitious assets as security, accommodation bill, using beneficial owner, willful defaulter etc.
Key Challenges to Prevent CBML in Bangladesh:
Bangladesh faces numerous challenges to prevent CBML due to involvement of multiple parties in the credit processing. Skilled manpower is required to deal with credit related activities like borrower selection, assessment of the borrower’s business; scrutiny of various documents related to primary and collateral securities, analysis of financial statements, legal formalities etc. In Bangladesh there is limited credit specialists who are able to understand and handle the credit dealings very well. Willful defaulters are another challenge. As per Centre for Policy Dialogue (CPD) statement willful defaulters contribute huge amount in Non-performing loans (NPLs). The amount of NPLs (Sub-Standard, Doubtful and Bad & Loss are under the umbrella of NPLs) is increasing in Bangladesh very quickly. According to the Bangladesh Bank data, total NPLs at the end of June, 2022 surged to Tk 1,25,258 crore, which was 8.96 percent of the total outstanding loans of the banks amounting Tk 13,98,592crore.There is a close relationship between willful loan defaulters and money laundering. Unhealthy competition influences bankers to constantly hunt for aggressive businesses and profit target. Working under pressure of such target combined with the fear of losing customers and presence of other competitors’ banks officials sometimes ignore credit related due diligence which makes some banks victims to CBML. Absence of co-ordination among related parties like banks, NBFIs, Bangladesh Bank, Bangladesh Financial Intelligence Unit, Anti-Corruption Commission, National Board of Revenue, Customs, Registrar of Joint Stock Companies & Firms, Credit Rating Agencies and Judicial bodies is one of the major challenges in combating CBML. Lack of effective Management Information System (MIS) and a central database for credit defaulters increases the risk of CBML. Lack of adequate customer due diligence/enhanced due diligence (CDD/EDD) measures on the underlying credit facilities; collusion between credit approval authorities and the credit customers; weak compliance culture of Banks/NBFIs; weak corporate governance; hindrance of implementation of quick legal action against defaulters are also challenges for preventing credit backed money laundering.
Vulnerabilities of Credit Products and Services in Banks/ NBFIs
Primarily funded credit facilities escalate the CBML. ‘Front company’ can enjoy lease/Ijara/term loan finance from a Bank/NBFI and repay the loan from illegal sources. Money launderers can use these financial instruments for placement and layering of their ill-gotten money. Any person can take personal loan/car loan/ home loan/loan for real estate/ HPSM from Bank/FI and repay the loan by illegally earned money and immediately by selling that home/car/real estate he/she can show the proceeds as legitimate. Financial Action Task Force (Global standard setting body for combating ML, TF & PF), published a report in 2007 titled ‘Money Laundering & Terrorist Financing Through The Real Estate Sector.’ The report showed that investment in the real-estate offers advantages both for law-abiding citizens and for those who would misuse the sector for criminal purposes. The real-estate sector may be used for obscuring the true source of the funds and the identity of the (ultimate) beneficial owner of the real asset. The Organization for Economic Co-operation and Development (OECD) examined tax fraud and money laundering involving the real estate sector, along with identity theft and identity fraud. Small, medium and women entrepreneurs can enjoy credit facilities and repay that with illegally earned money. The women entrepreneurs may be used by their family members to legalize their illicit money. Banks/NBFIs sell various deposit products and these schemes may be used as lucrative vehicle to place criminal proceeds in the financial system. Not only that the customer can enjoy loan facilities against the deposits schemes but also repay the loan by pre-matured encashment of these schemes. Credit cards (local and international) are considered most vulnerable product and can be used to launder money or to be used as a medium of terrorist financing. A credit cardholder could make an overpayment and then ask for a refund via a cheque or pay order. The credit card would be a great way for layering of transactions.
Potential Red Flags: Credit Backed Money Laundering
Red flag means a potential signal that helps to financial entities to be careful about the clients’ behavior and their nature of transactions whether the clients are involved in any form of money laundering. There are many red flags related to CBML but the following are the most common. Unwilling to submit required documents for credit facilities; using front and shell companies; loan repayments by third parties; loan proceeds used to purchase property in the name of a third party; formation of a new company in the name of employees; creation of forced loan without valid reason; customer requests to disburse loan by issuing cheques in favor of another bank/FIs/third parties; large cash transaction inconsistent with customer’s business/profession; huge credit balance in the loan account; transfer of funds between irrelevant businesses; multiple online deposit/withdrawal from irrelevant locations; making loan decisions and then cancelling immediately and asking for refund of documents; adjustment of long terms loan like home loan within short time; customer suddenly pays off a large classified loan with no plausible explanation of source of funds; offering third party’s property as collateral security; counterfeited documents submitted for credit facilities; frequently attempt to enjoy Excess Over Limit (EOL) facility; diversification of credit (fund) facility; willful defaulter; making pressure to enhance credit limit which is not viable according to the volume of business; willing to pay highest profit/ interest rate without any bargaining; purchase DD/PO or EFT/RTGS by using credit facilities to different parties who have no business relationship with the client; over valuation of primary security; over valuation of collateral security; frequently enjoying Secured Over Draft (SOD) facility against new high valued term deposits; proposal for credit facility for investment in luxurious products and antiques items; application for credit facility to investment in movable commodities like gold, diamond and gems; credit cardholder uses card for purchasing luxurious products frequently; excess amount deposited in credit card than outstanding amount and then claim the additional amount via cheque or Pay Order; loan secured by deposits or other readily marketable assets, such as securities.
Tactics to Prevent CBML:
Applying Risk Based Approach (RBA) for credit customers, checking and verifying customers’ background, nature of business, net worth, beneficial owner, analyzing of the purpose of the loan, conducting borrower due diligence (BDD),monitoring credit transaction profile (CTP), introducing three lines of defense, ensuring good corporate governance, strengthening institutional & regulatory frameworks, avoiding of undue influence at the approval stage of credit, arrangement of proper training and awareness among the bankers and the related parties may help to prevent CBML.
Md. Mashiur Rahman is an Assistant Vice President of Anti-Money Laundering Division of the Shahjalal Islami Bank Limited
