DAVMUN 2011
ECOSOC
AGENDA: MONEY LAUNDERING AND TAX EVASION
DESCRIPTION OF THE COMMITTEE
The United Nations Economic and Social Council is one of the six principal organs of the UN,
established under the United Nations Charter in 1945. It coordinates the economic, social, and
related work of the 14 UN specialized agencies, functional commissions and five regional
commissions. In addition, it receives reports from 11 UN funds and programmes. It consists of 54
members which are elected by the General Assembly.
ECOSOC is the central forum for discussing international economic and social issues. It also
formulates policy recommendations addressed to Member States and the United Nations system. Its
main objectives are:
1.
Promote higher standards of living, full employment, and economic and social progress;
2.
Identify solutions to international economic, social and health problems;
3.
Facilitate international cultural and educational cooperation; and
4.
Encourage universal respect for human rights and fundamental freedoms.
The ECOSOC can make or initiate studies and reports on these issues. It also has the power to assist
the preparations and organization of major international conferences in the economic, social and
related fields. Further, the ECOSOC can facilitate a coordinated follow-up to these conferences. The
Council's purview extends to over 70 per cent of the human and financial resources of the entire UN
system.
BACKGROUND ON MONEY LAUNDERING
I.
MONEY LAUNDERING:
A. What is Money Laundering (ML)?
According to financial action task force (FATF):
Money laundering is the practice of disguising the origins of illegally-obtained
money. Ultimately, it is the process by which the proceeds of crime are made to
appear legitimate. The money involved can be generated by any number of
criminal acts, including drug dealing, corruption, accounting fraud and other
types of fraud, and tax evasion
B. Various aspects of money laundering:
 Tax evasion – An illegal practice where a person, organization or
corporation intentionally avoids paying his/her/its true tax liability.
Those caught evading taxes are generally subject to criminal charges and
substantial penalties.

Drug Trafficking – Drug traffickers seek to transform the monetary proceeds from
their criminal activity into revenue with an apparently legal source. This is known
as money laundering.
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Terrorist financing – It is the collection or the provision of funds for
terrorist purposes. In the case of ML, the funds are always of illicit
origin, whereas in the case of terrorist financing, funds can stem from
both legal and illicit sources. The primary goal of individuals or entities
involved in the financing of terrorism is therefore not necessarily to
conceal the sources of the money but to conceal both the funding
activity and the nature of the funded activity. In both cases, the actor
makes an illegitimate use of the financial sector. An effective antimoney laundering (AML)/counter financing of terrorism (CFT)
framework must therefore address both risk issues: it must prevent,
detect and punish illegal funds entering the financial system and the
funding of terrorist individuals, organizations and/or activities.
Corruption – Both corruption and money laundering are of great
concern for the IMF. Anti-corruption and AML work are linked in
numerous ways. ML schemes make it possible to conceal the unlawful
origin of assets. Corruption is a source of ML as it generates large
amounts of proceeds to be laundered. Corruption may also enable the
commission of a ML offense and hinder its detection, since it can
obstruct the effective implementation of a country's judicial, law
enforcement and legislative frameworks.
c. Magnitude of the problem – Recent reports show that the estimated amount
of money laundered globally in one year is 2 - 5% of global GDP, or $800 billion - $2 trillion in current
US dollars. In accordance with police statistics, a 30% increase in the number of cases of money
laundering was reported in Sweden for 2010. In 2011, in an investigation into the suspected
laundering of more than GBP 200 million, 15 people were arrested across England. Such evidence
underlines the seriousness of the problem governments have pledged to address.
C.
Stages of Money Laundering:
Money-laundering is broken down into a three-stage process:
 PLACEMENT: initial entry of the funds into the financial system. This
involves moving the funds away from direct association with the
crime. It can often be the riskiest stage, potentially raising greatest
suspicion. The placement stage both relieves the criminal from
holding such large funds and places the funds into a legitimate
financial arena.
 LAYERING: moving funds through a series of transactions to conceal
their origin. This involves a series of transactions designed to take
the focus off of the large, lump sum of money that has just entered
the financial system. Intricate and internationally focused, this stage

often results in the launderer moving funds across country borders.
He/she puts the funds into a series of financial options and markets
overseas and keeps them constantly moving to divert others’
attention and focus. In countries with weak legislation, launders
more easily can move the funds without detection.
INTEGRATION: regaining possession of the funds. At this stage, the
laundered money is returned to the criminals involved. But, this
time, it appears to have been obtained from legal, legitimate
sources. What was once cash placed into the system has now been
moved through a series of financial operations and can now be used
by the criminals for any purpose.
D. Methods of Money Laundering:
The crime of money laundering can be realized in many ways:
 Illegal money import - The smuggler himself, eventually by making use
of a messenger or by international transport brings physically the dirty
money to a foreign country where the regulation of money market is
less developed and/or the legislation prefers the banking secret.
Thereafter, as a result of different financial transactions, the money is
mixed with the money of legal origin.
 Smurfing - A team of couriers (nominal partner) place small amount
deposits every day in financial institutions. All deposits are below the
amount which would call the attention of the banks (value below report
limit). When the money is drawn later on, the origin can be certified
with the documents belonging to it.
 Overpayment on tax account: As a result of "incidental procedure
error", the private person or the company effects an overpayment of
considerable amount to the competent tax office. Then after
observation of the error - following filling in of a self-control form - the
overpayment is retransferred by the tax office to the bank account of
the tax payer, and the origin of money is already certified.
 Self-financing Loan: The "client" places the dirty money in a foreign
country or in a financial haven. After that he transfers the money to a
bank in any other country, and then applies for a loan at his own bank,
the guaranty, collateral being the deposited money. The bank grants the
loan, which will be invested into properties, companies respectively into
different financial instruments. In case of any suspicion arisen (e.g.
sudden richness) the person concerned can refer without fear to the
bank loan. This technique can exploit the different countries' regulations
concerning banking secret.

Underground/alternative banking
Some countries in Asia have well-established, legal alternative banking
systems that allow for undocumented deposits, withdrawals and
transfers. These are trust-based systems, often with ancient roots, that
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leave no paper trail and operate outside of government control. This
includes the hawala system in Pakistan and India and the fie chen
system in China.
Shell companies
These are fake companies that exist for no other reason than to launder
money. They take in dirty money as "payment" for supposed goods or
services but actually provide no goods or services; they simply create
the appearance of legitimate transactions through fake invoices and
balance sheets.
Investing in legitimate businesses
Launderers sometimes place dirty money in otherwise legitimate
businesses to clean it. They may use large businesses like brokerage
firms or casinos that deal in so much money it's easy for the dirty stuff
to blend in, or they may use small, cash-intensive businesses like bars,
car washes, strip clubs or check-cashing stores. These businesses may be
"front companies" that actually do provide a good or service but whose
real purpose is to clean the launderer's money. This method typically
works in one of two ways: The launderer can combine his dirty money
with the company's clean revenues -- in this case, the company reports
higher revenues from its legitimate business than it's really earning; or
the launderer can simply hide his dirty money in the company's
legitimate bank accounts in the hopes that authorities won't compare
the bank balance to the company's financial statements.
II. MONEY LAUNDERING IMPACTS DEVELOPMENT:
A. Background:
The IMF is concerned about the possible consequences of money laundering and the
financing of terrorism on its members' economies and financial systems. These include
risks to the soundness and stability of financial institutions and financial systems,
increased volatility of international capital flows, and a dampening effect on foreign
direct investment. Money laundering and terrorist financing activities can undermine
the integrity and stability of financial institutions and systems, discourage foreign
investment, and distort international capital flows. Money launderers exploit both the
complexity inherent in the global financial system as well as differences between
national anti-money laundering laws and systems, and they are especially attracted to
jurisdictions with weak or ineffective controls where they can move their funds more
easily without detection. In an increasingly interconnected world, problems in one
country can quickly spread to other countries in the region or in other parts of the
world.
B. The Financial Sector: Money Laundering undermines domestic capital
formation
 Money Laundering erodes financial institutions:
Banks, equity markets, and non-bank financial institutions (NBFIs), such
as insurance companies, are a favoured means of laundering illicit funds
both internationally and within developing countries. The development
of sound, reliable banks and NBFIs is a crucial element in overall
economic development: indeed, such institutions have come to be
recognized as essential for such development and—particularly in
developing countries—customer trust is fundamental to the growth of
sound financial institutions. Money laundering activity increases the
probability that individual customers, or the institution itself, will be
defrauded by corrupt individuals within the institution. The possibility is
even greater in a developing country that criminal interests can
eventually control an entire financial institution. Developing country
financial regulation and supervision tends to be less rigorous than that
in developed countries, which themselves have problems with criminal
penetration of institutions or lower-level fraud.

Money laundering weakens the financial sector's role in economic
Growth :
Confidence and reputation play a special role in developing economies'
financial systems. Money laundering's negative impact on economic
growth is of particular concern in a developing-country context for at
least 2 reasons. First, in many of these countries the largest, most
sophisticated financial institutions have historically relied heavily on
public funds rather than private deposits. Second, financial institutions
in developing countries are often undergoing a transition from being
state-owned to private-investor ownership and control. Even outside
the realm of anti-money-laundering efforts, developing countries may
be unable to gain full access to international economic resources as a
result of money laundering problems.
C. The Real Sector: Money Laundering depresses Growth
 Money laundering distorts investment and depresses productivity:
Criminal organizations can transform productive enterprises into sterile
investments (investments that do not generate additional productivity
for the broader economy) by operating them for the purposes of
laundering illicit proceeds rather than as profit-maximizing enterprises
responsive to consumer demand and worthy of legitimate investment
capital. Commitment of the economy's resources to sterile, as opposed
to productive, investments (or to normal consumption expenditures
that drive productive investments through higher demand) ultimately
reduces the productivity of the overall economy.
 Money laundering facilitates corruption and crime at the expense of
economic development:
Money laundering reduces criminals' cost of crime, thereby increasing
the level of crime. An efficient money-laundering channel is a key
"input" to crime because the financial proceeds from crime are less
valuable to the criminal (in a sense, an "unfinished product") than are
laundered funds. Higher crime and corruption reduces economic
growth. The damaging economic effects of corruption facilitated by
money laundering are particularly acute in the public sector in many
developing countries because of the larger role the government often
plays in providing goods and services.
D. The External Sector: Money Laundering distorts capital and trade flows
 Outbound flows: facilitating illicit capital flight
The obvious effect of illicit capital flight is to worsen the scarcity of
capital in developing countries. Money laundering can be seen as a key
element in illicit capital flight from throughout the developing world.
Each of the major episodes of rapid, large -scale illicit capital flight from
developing (and transition) countries has been facilitated with
identifiable centres of money laundering activity.
 Inward capital flows: depressing foreign investment
A large body of economic research shows that a high incidence of ML
activity deters inward portfolio investment and foreign direct
investment to developing economies. The effect of extensive money
laundering in a developing country is in many ways more serious
because of the special benefits, such as technology, labour skills and
know-how, and immediate access to international distribution channels,
which such foreign resources bring to developing economies.
 Trade: distorting prices and content
A money laundering technique that does not directly involve the
financial system or expenditures in the real domestic economy is the use
of inaccurate pricing of imports or exports to hide the transfer of funds
during the layering process within what appears to be a value -for -value
transaction. When such transactions are extensive, the impact on a
country's entire external sector can be substantial. In other words, the
demand for foreign exchange was being inflated by money-laundering
activities using trade channels, thus driving up the "price" of foreign
exchange, which is the exchange rate.
III. CASES OF MONEY LAUNDERING:
A. France - Beginning in late 2001, French authorities launched a series of
investigations into officials of France’s leading banks in connection with fraud, tax
evasion, and money laundering. According to press reports, “thousands of French
cheques, some of them stolen, were ‘endorsed’ or signed over to new beneficiaries
before being cashed at money-changers in Israel”, and then the proceeds were
returned to France through correspondent banking relationships. The amounts
involved exceeded $70 million.
B. Germany - Since its bankruptcy in 1995, Dusseldorf prosecutors have been
investigating 10 former employees of a private bank, BVH, on "suspicion of fraud,
disloyalty and money laundering". It has now been alleged that the bank laundered
funds in the form of bogus credits, and redirected them to a firm believed to have
belonged to Osama Bin Laden's Al-Qaida network.
C.U.S.A In 1996, Harvard-educated economist Franklin Jurado went to prison for cleaning
$36 million for Colombian drug lord Jose Santacruz-Londono. People with a whole lot of dirty
money typically hire financial experts to handle the laundering process. It's complex by
necessity: The whole idea is to make it impossible for authorities to trace the dirty money
while it's cleaned.
IV. INTERNATIONAL RESPONSE:
A. The United Nations:
 The Vienna Convention: In 1988, the UN, through the United Nations
Drug Control Program (UNDCP) initiated the United Nations
Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic
Substances (Vienna Convention), an international agreement to combat
drug trafficking and money laundering. The convention defines the ML
and calls upon countries to criminalize the activity.
 The Palermo Convention:
In 2000, the UN adopted The International Convention Against
Transnational Organized Crime (Palermo Convention). The Convention
focuses on criminalizing money laundering, establishing regulatory
regimes to deter and detect all forms of money laundering, authorizing
the cooperation and exchange of information among administrative,
regulatory, law enforcement and other authorities and promote
international cooperation.
 International Convention for the Suppression of the Financing of
Terrorism(1999)
 Security Council Resolution 1373(2001)
 Global Programme against Money Laundering
 The Counter-Terrorism Committee
B. The Financial Action Task Force on Money Laundering:
Formed in 1989 by the G-7 countries, the FATF is an intergovernmental body whose
purpose is to develop and promote an international response to combat money
laundering and the financing of terrorism. FATF is a policy-making body, which
brings together legal, financial and law enforcement experts to achieve national
legislation and regulatory AML and CFT reforms. The following are its primary
functions:
 Monitoring members’ progress in implementing anti-money laundering
measures.
 Reviewing and reporting on laundering trends, techniques and
countermeasures.
 Promoting the adoption and implementation of FATF anti-money
laundering standards globally.
FATF has adopted a set of 40 recommendations, The Forty Recommendations on Money
Laundering (The Forty Recommendations), which constitute a comprehensive framework for
AML and are designed for universal application by countries throughout the world.
C. The Basel Committee on Banking Supervision:
The Basel Committee on Banking Supervision (Basel Committee) was formed in 1974
by the central bank governors of the Group of 10 countries. It formulates broad
supervisory standards and guidelines and recommends statements of best practices
on a wide range of bank supervisory issues. Three of the Basel Committee’s
supervisory standards and guidelines concern money laundering issues.
 Statement of Principles on Money Laundering
 Core Principles for Banking
 Customer Due Diligence
D. International Association of Insurance Supervisors(1949)
E. International Organization of Securities Commissioners
F. The Egmont Group of Financial Intelligence
V. CRITICAL THINKING:
1. What is the difference between money laundering and terrorist financing?
2. What factors are considered by law enforcement when it assesses whether or not an
institution or its personnel are guilty of aiding and abetting money laundering?
3. What is the history of money-laundering in your country?
4. Have there been any major events of illicit fund transfer to or out of the country?
5. What sources of illicit funds are of particular concern?
6. What percentage of your country’s annual income is laundered money, in
comparison with other nations?
7. Has your country’s economic system been harmed by money-laundering?
8. How has it affected inflation rates and the value of money within your country’s
financial system?
9. What measures has your country taken to curb money-laundering and terrorist
financing, both domestically and internationally? What steps can your country still
take?
10. How does the global illicit drug trade affect your country’s economy?
11. Of the amount of money associated with the drug trade, how much of that is
laundered?
12. Has your country been directly affected by terrorist acts? If so, what does your
country know about the ways terrorists have gained their funding?
13. Has your country been accused of obstructing cooperation on the issue?
14. Is your country sufficiently equipped to implement obligations?
VI. TERMS AND CONCEPTS:
1. Paper trail- Documents (as financial records) from which a person's actions may be
traced or opinions learned.
2. Dirty Money- Goods or money obtained illegally.
3. Inflation- A continuing rise in the general price level usually attributed to an increase
in the volume of money and credit relative to available goods and services.
4. Typologies- The various techniques used to launder money or finance terrorism.
5. Reputational Risk - the potential that adverse publicity regarding a bank’s business
practices and associations, whether accurate or not, will cause a loss of confidence
in the integrity of the institution.
6. Operational risk- the potential for loss resulting from inadequate or failed internal
processes, people and systems, or external events.
7. Legal risk - the potential for law suits, adverse judgments, unenforceable contracts,
fines and penalties generating losses, increased expenses for an institution, or even
closure of such an institution.
8. Concentration risk - the potential for loss resulting from too much credit or loan
exposure to one borrower.
9. Front companies- business enterprises that appear legitimate and engage in
legitimate business but are, in fact, controlled by criminals.
10. Safe harbour laws - laws that protect financial institutions and employees from
criminal and civil liability when reporting suspicious transactions to competent
authorities in good faith.
11. Financial Intelligence Unit - A central, national agency responsible for receiving
(and, as permitted, requesting), analysing, and disseminating to the competent
authorities, disclosures of financial information (i) concerning suspected proceeds of
crime, or (ii) required by national legislation or regulation, in order to counter
money laundering.
12. Domestic money-laundering flows- Illegal domestic funds are laundered within the
developing country's economy and reinvested or otherwise spent within the
economy.
13. Inbound funds - for which the predicate crime occurred abroad, are either initially
laundered ("placed") abroad or within the developing country, and ultimately are
integrated into the developing economy.
14. Outbound funds - they typically constitute illicit capital flight from the developing
economy, do not return for integration in the original economy.
15. Flow-through funds- they enter the developing country as part of the laundering
process and largely depart for integration elsewhere, thus playing little or no role in
the economy itself.
16. Fei Chen- Or flying money, an invention of the Chinese. The process works as
follows: e.g. the dirty money is deposited in a gold shop in Hong Kong - for which the
owner gets an over stamped dollar note. Later on this is presented at a
moneychanger in the Chinatown of an American city and the owner gets his cash
which can be further covered through new transactions.
17. Hawalah Network - An informal value transfer system based on the performance
and honour of a huge network of money brokers, which are primarily located in the
Middle East, North Africa, the Horn of Africa, and South Asia. The system works as
the market is two-directional. That is, there are persons in both countries who have
large amounts of cash surplus (organised criminals, terrorists) and who are ready to
pay in a big way for the possibility to make use of a paper free banking system.
18. Customer Due Diligence - Adequate due diligence on new and existing customers in
order to protect financial institutions and ensure a high degree of transparency. The
basic steps of CDD measures are the appropriate identification of a customer and/or
beneficial owner, the verification of the identity of the customer or beneficial
owner, as well as the collection of information on the customer's purpose and
nature of the business relationship.
19. Fictitious negotiable instruments- Are instruments that have been fraudulently
produced and have no underlying or intrinsic value. They are negotiated, often with
supporting fraudulent documentation to underwrite loans or to be sold to individual
investors, pension funds, or retirement accounts.
20. Predicate Crimes- crimes whose proceeds are laundered.
VII. RECOMMENDATIONS WHILE FORMULATING A RESOLUTION:
1. Analysing the level of efficiency of the conventions and resolutions already put in
place by the UN and other decision-making bodies.
2. Looking at the amount of money delegated to money-laundering investigations and
deciding whether to increase or decrease that amount.
3. The possibility of developing further investigations into high-profile companies
and/or investors who might be laundering money and facilitating the financing of
terrorism.
4. More closely monitoring paper trails left by those involved in the laundering of
money.
5. Finding innovative ways to, at any point, infiltrate the three-stage process associated
with money laundering.
VIII. LINKS FOR FURTHER RESEARCH:
1. http://www.unodc.org/unodc/en/money-laundering/programmeobjectives.html?ref=menuside
2. http://www.unodc.org/unodc/en/moneylaundering/introduction.html?ref=menuside
3. http://www.unodc.org/unodc/en/money-laundering/links.html
4. http://www.unodc.org/unodc/en/money-laundering/InstrumentsStandards.html?ref=menuside
5. http://www.imf.org/external/np/leg/amlcft/eng/aml1.htm#customer
6. http://www.unodc.org/unodc/en/money-laundering/globalization.html
7. http://www.imf.org/external/np/leg/amlcft/eng/aml4.htm#antimoney
8. http://www.unac.org/en/link_learn/monitoring/susdev_bodies_crime.asp
9. http://www.un.org/en/ecosoc/docs/2004/resolution%202004-29.pdf
10. http://www.imf.org/external/np/ml/2001/eng/021201.pdf