Combating Money Laundering and Terrorism Financing
Discover what is money laundering and terrorism financing and how the Central Bank of Armenia acts to prevent it.
What is money laundering and why should we combat it?
Money laundering refers to the process of transforming the proceeds derived from criminal activity into funds with an apparently legal source.
It typically follows the following three stages to finally release laundered funds into the legal financial system:
Stage one: placement – The physical disposal of cash or other assets derived from criminal activity. During this phase, the money launderer introduces the illicit proceeds into the financial system. Often, this is accomplished by placing the funds into circulation through formal financial institutions, casinos, and other legitimate businesses, both domestic and international.
Stage two: layering – The separation of illicit proceeds from their source by layers of financial transactions intended to conceal the origin of the proceeds. The second stage involves converting the proceeds of the crime into another form and creating complex layers of financial transactions to obscure the source and ownership of funds.
Stage three: integration – Supplying apparent legitimacy to illicit wealth through the reentry of the funds into the economy in what appears to be normal business or personal transactions.
In reality, money laundering cases may not have all three stages, some stages could be combined, or several stages could repeat several times.
Money laundering facilitates a broad range of serious underlying criminal offenses and ultimately threatens the integrity of the financial system. Money laundering has devastating social consequences – it provides the fuel for drug dealers, terrorists, arms dealers, and other criminals to operate and expand their criminal enterprises. This process is of critical importance, as it enables the criminals to enjoy these profits without jeopardizing their source.
There are numerous potential macroeconomic consequences of unchecked money laundering including increased exposure to organized crime and corruption, undermining the legitimate private sector, weakening financial organizations, reputational risk for the country and businesses, and more. Thus, it is crucial to combat money laundering by continuously monitoring all forms for countermeasures to be timely and effective.
What is terrorism financing and why should we combat it?
Terrorism financing is the act of providing funds to terrorists or terrorist organizations in order for them to carry out terrorist acts or to benefit any terrorist or terrorist organization. Terrorist financing uses funds for an illegal purpose, but the money is not necessarily derived from illicit proceeds, it can also come from legal sources like salaries, profits from legal businesses, through non-profit organizations.
From a technical perspective, the methods used by terrorists and other criminals are similar. Although it would seem logical that funding from legitimate sources does not need to be laundered, terrorist groups do need to disguise the link between them and their legitimate funding sources, in part to ensure the continued and uncompromised future use of sources.
In doing so, the terrorists use methods similar to those of criminal organizations, such as cash smuggling; structuring; purchase of monetary instruments; wire transfers; and use of debit, credit, and prepaid cards.
Similar to money laundering, terrorism financing often involves three steps:
Step one: raising funds – collecting funds for terrorism purposes.
Step two: moving funds – providing funds to terrorists and terrorist organizations.
Step three: using funds – directing funds for terrorism purposes.
The potential consequences of terrorism financing may be similar to the ones of money laundering. However, the severe outcome of terrorism financing is terrorism which can cause ripple effects through the economy that have negative impacts. The most obvious is the direct economic destruction of property and lives. Terrorism indirectly affects the economy by creating market uncertainty, loss of tourism, and increased insurance claims.
Why is it important to combat it and what are the risks?
The high-level objective is to protect financial systems and the broader economy from the threats of money laundering and the financing of terrorism, thereby strengthening financial sector integrity and contributing to safety and security.
To achieve this objective, the following intermediate outcomes should be pursued:
- Policy, coordination, and cooperation mitigate money laundering and
financing of terrorism risks;
- Proceeds of crime and funds in support of terrorism are prevented from
entering the financial and other sectors or are detected and reported by these
sectors; and
- Money laundering threats are detected and disrupted, and criminals are
sanctioned and deprived of illicit proceeds. Terrorist financing threats
are detected and disrupted, terrorists are deprived of resources, and those
who finance terrorism are sanctioned, thereby contributing to the prevention
of terrorist acts.
How do we combat money laundering and terrorism financing?
To effectively combat money laundering and terrorism financing, financial intelligence units (FIU) are formed. FIUs are mandatory national agencies that handle financial intelligence. Armenian national FIU is the Financial Monitoring Center (FMC), which was established in 2005 as a separate unit in the structure of the Central Bank of Armenia.
The FMC is an administrative-type financial intelligence unit, with a mission to combat money laundering and terrorism financing acting as an intermediary between reporting entities and law enforcement authorities.
The main function of the FMC is to collect, analyze, and exchange information for anti-money laundering and counter-terrorism financing purposes. In addition, the FMC represents the Republic of Armenia in several international organizations and structures, while actively participating in relevant international initiatives.
The directions and targets of the national efforts in this direction are defined under the National Strategy for Combating Money Laundering and Terrorism Financing.
The powers and duties of the FMC are defined under the Republic of Armenia Law on Combating Money Laundering and Terrorism Financing. In contrast, the organizational structure and functions of the Armenian FIU are defined under its statute.