Increasingly the term money laundering is becoming more inclusive of other forms of financial crime, and sometimes used more generally to include misuse of the financial system (involving things such as securities, digital currencies, credit cards, and traditional currency), including terrorism financing, tax evasion and evading of international sanctions.

• Tax evasion deserves special note because the proceeds laundered in order to evade tax burden may in fact have originated from legitimate sources, and as such, there is no predicate crime. 
• However, FATF Recommendations include Tax crimes (direct and indirect) in its list of designated Categories of Offences.

• The Fourth Directive of the EU (DIRECTIVE (EU) 2015/849 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL) addressed the matter as follows:

  • It is important expressly to highlight that ‘tax crimes’ relating to direct and indirect taxes are included in the broad definition of ‘criminal activity’ in this Directive, in line with the revised FATF Recommendations. Given that different tax offences may be designated in each Member State as constituting ‘criminal activity’ punishable by means of the sanctions as referred to in point (4)(f) of Article 3 of this Directive, national law definitions of tax crimes may diverge. While no harmonisation of the definitions of tax crimes in Member States' national law is sought, Member States should allow, to the greatest extent possible under their national law, the exchange of information or the provision of assistance between EU Financial Intelligence Units (FIUs).

• Under US laws:

  • A violation of the money laundering statutes includes a financial transaction involving the proceeds of a specified unlawful activity (SUA), i.e. a “predicate offense” with the intent to:

    1) Promote that activity;

    2) Violate IRC sec. 7201 (willful attempt to evade tax);

    3) Violate IRC sec. 7206 (which criminalizes false and fraudulent statements made to the IRS).

• Statutory action by a country's legislature or case law can deem tax evasion a predicate offense as outlined above.

Some jurisdictions define money laundering as obfuscating sources of money, either intentionally or by merely using financial systems or services that do not identify or track sources or destinations.

Most anti-money laundering laws, and regulatory expectations regarding compliance with such laws, pair up money laundering with terrorism financing when designing and implementing the regulatory and enforcement mechanisms directed at combating financial crimes.   Although money laundering techniques are utilized in terrorism financing activities, there are features unique to financing of terrorism that require highlighting. 

Source of Funds:

The key difference between the two is as follows: the predicate crime generates the illegitimate/illegal funds which requires laundering setting into motion the process of money laundering.  In contrast, in terrorism financing the triggering event is at the end of the chain; i.e. funds are laundered (disguised or obfuscated) first in order to commit the crime at the end of the process.  As such, in case of terrorism financing the source of funds maybe perfectly legal.  This, of course, does not preclude illicit/illegal proceeds from being used for terrorism financing purposes—which frequently is the case. 

Motivation:

Terrorism activities are primarily motivated by religious or political reasons.  Therefore it is essential to understand and investigate potential terrorism financing activities with a broader context in mind.  In contrast, motives such as profiteering, engaging in luxury consumption or enhancing one's influence (for e.g. increasing the size and reach of an organized criminal group), are the primary motivators in money laundering of proceeds of predicate crimes, such as drug trafficking. 

Methods:

The following example further highlights the similarities and differences in money laundering vs terrorism financing. 

Illegal activities such as drug dealing generates multiple streams of cash which need to be collected and sent higher up in the hierarchy of the organization.  One of the methods utilized is smurfing.  Smurfing utilizes several individuals (smurfs) to deposit illegally earned funds in different accounts at different locations which are then pipelined into another account/institution in order to avoid easy detection.

Comparatively, a charitable or religious organization which owns several accounts in different institutions/jurisdictions is likely to deposit charitable donations in such accounts which are often in smaller denominations. The charitable organization then will collect such funds into another account to finance its operations and activities. Although on the surface this may resemble smurfing like activity, further analysis reveals the differences between the two activities:

• the source of funds—illegally earned as opposed to legally earned donations;
• the motivation of the actors—profit as opposed to noble charitable motives to help fellow human beings; and
• the end use of the funds—profit as opposed to for the betterment of society.

Subverting legitimate nonprofit and charitable organizations

Unfortunately, terrorist organizations are prone to use charitable organizations, by subverting the more noble causes for which charitable/non-profit organizations are established and given special privileges by the government.  The terrorist organizations may use charitable organizations as a front to present a benign face to society, mislead charitable donors by purporting to engage in charitable activities, but use the funds collected under the guise of doing charitable humanitarian work to engage in terrorist activities. Such use of charitable/nonprofit organizations by some bad actors, however, should not, prompt compliance professionals to generalize overly about charitable/nonprofit organizations as vast majority of such organizations indeed do much needed humanitarian and charitable work in an effort to genuinely address deep issues afflicting our world.

Economic Sanctions are imposed on entities or individuals (list based) or are levied against an entire country (country programs).  As such, screening for such individuals, entities and/or countries is the foundation of a sanctions compliance program.   However, money laundering methods and techniques are used to evade sanctions-primarily by disguising or obfuscating the involvement of a sanctioned individual, entity or a sanctioned country in a transaction.