Money Laundering Explained
On October 18, the Ministry of Internal Affairs (MIA) reported detaining employees of Cartu Bank, who were carrying a large amount of cash (according to the reports, EUR 1 million and USD 2 million were seized) and were suspected of engaging in grand money laundering. Criminal proceedings were then instituted against Cartu Bank under Article 194(3) of the Criminal Code of Georgia (grand money laundering). Given the sudden importance of this issue, we wanted to provide some explanation of what money laundering is and the mechanisms in place to prevent it. According to the Georgian legislation, the term “money laundering” implies legalization of illicit gains obtained through illegal activities (such as illegal arms sales, activities of organized crime, drug trafficking, corruption, computer fraud schemes, etc.). “Money laundering” also implies concealing the origin, location, movement, the real owner or possessor of the illegal gain. In other words, money laundering serves to “clean” (i.e. put in the laundry) illegally obtained money by obscuring its origins through transfers to parties that can make lawful use of the money. Legalizing the money obtained through unlawful activities (i.e. transforming it into legal money or property) is very important for criminal groups but poses a significant threat to the economy and the financial systems of countries worldwide. Consequently, there are a number of mechanisms in place in Georgia and internationally that serve to prevent the laundering of money transferred into Georgia. Within Georgia, Georgian law defines institutions responsible for monitoring to detect attempted money laundering, including all banks, among others. They are required to verify the legality of money transferred into their accounts. If a transfer originates from either a “high risk country” or a “non-cooperative institution” as designated by the National Bank of Georgia, the monitoring institution is required to perform an analysis of the transaction, as these sources of money are viewed as being especially likely to be involved in money laundering attempts. If the monitoring institution’s analysis leads to a reasonable assumption of illegality regarding the money in its account, the institution must notify the National Bank of Georgia’s Financial Monitoring Service, which, if it agrees with the bank’s assessment, will provide files to the relevant agencies of the Prosecutor’s Office and the MIA. Internationally, many banks operate under the auspices of the Financial Action Task Force (FATF), an authoritative international organization combating money laundering and terrorist financing. The FATF requires countries to implement systems to prevent money laundering, in addition to whatever measures may be required by their respective national laws. Turning to the specific case of Cartu Bank, the bank’s president, Nodar Javakhishvili, issued a statement soon after the MIA action explaining the purpose of the money. According to Javakhishvili’s statement, the number of money withdrawals from Cartu’s accounts, as well as the number of requests for money transfers to the accounts of other banks, had increased during the past few days. He explained that the bank had to replenish its cash resources in order to prevent service delays for its clients. According to the statement, the managers of Cartu Bank determined it needed to replenish its supply of paper notes to satisfy demand for cash withdrawals from its depositors. Therefore, Cartu Bank made electronic transfers of EUR 1 million and USD 2 million from its accounts in Commerzbank and Deutsche Bank, respectively, to Cartu-held accounts in another Georgian commercial bank, Bank of Georgia, which had the necessary quantity of notes available at the time. Bank of Georgia then provided Cartu Bank with an equivalent amount in paper bills. It was when the bills were being transferred from Bank of Georgia that they were seized by the MIA. It is presently unknown what the sequence of events was that led to the aforementioned bank transaction being deemed a case of money laundering. Neither the United States or Germany, from which the transfers were made on the National Bank of Georgia’s list of suspect countries, nor are Commerzbank or Deutsche Bank on the list of non-cooperative institution. In fact, the USA and Germany are members of FATF, and thus the funds which Cartu Bank transferred would have already been subject to scrutiny for possible money laundering under FATF in those countries. While assessing the aforementioned events, we hope that, in the near future, Georgian law enforcement bodies will present detailed information regarding the grounds that led them to carry out the operation, and provide further evidence concerning this case that has drawn the public’s interest.