Money laundering may be as old as the concept of money itself. However, modern-day legend claims that the term "money laundering" originated from Mafia ownership of laundromats in the United States, which were used as a business front to conceal earnings from illegal activities including extortion and prohibition. But what exactly does it mean to "launder" or "clean" dirty money?

Money laundering is the practice of engaging in financial transactions in order to conceal the identity, source and/or destination of money. Recent studies reveal the majority of present-day money laundering transactions to be international in nature. Estimates are that up to $1.5 trillion is laundered annually worldwide.

There are three stages of a money-laundering scheme: placement, layering and integration. Placement involves the introduction of funds from criminal activity into a financial institution or business venture. Layering involves distancing the money from its criminal source through a series of transactions – disguising the trail of the funds to avoid pursuit and detection of the origin of such funds. The third and final stage, known as integration, distributes the "cleaned" money into the mainstream, creating the appearance of legitimate wealth.

Despite the stereotypes, money laundering rarely consists of people in suits and sunglasses, with large suitcases of cash ready to put into offshore back accounts. In reality, money laundering is often attempted and achieved through sophisticated white-collar activities, crossing global jurisdictions.

Bermuda enjoys a reputation as a leading business jurisdiction that takes anti money-laundering precautions seriously, and because of this the Island attracts international businesses that wish to associate their enterprises with a pristine jurisdiction.

This reputation is earned, in part, by Bermuda's diligent attention to "KYC" – Knowing Your Client. Regulated institutions are required to verify the identity of clients with whom they are conducting business. Suspicious activity and money laundering is most likely to be detected at the KYC stage.

While law-abiding citizens and businesses may feel inconvenienced by having to meet KYC requirements prior to engaging professionals, it is critical that the standard of KYC be applied on a consistent and rigorous basis.

KYC establishes identity requirements for instructing individuals, directors, shareholders and ultimate beneficial owners in an ownership structure holding five percent or more of a company's shares.

These individuals are required to provide certified, legible copies of a passport or other government-issued identification, and proof of residence (such as a certified utility bill).

Some professional institutions require the completion of a compliance questionnaire with pertinent information and a declaration of the source of the funds being used for a particular transaction. Similar disclosure is also required for companies, partnerships and trusts.

With respect to companies, KYC requirements are met by obtaining the name and address of the company, the beneficial owners (even where these interests are held indirectly) and the persons on whose instructions the signatories of the companies are empowered to act.

A description of the company's activities and the rationale for a Bermuda-based incorporation along with evidence of authority given by the directors in relation to the activities of the company should be obtained and documented.

Red flags can appear at the KYC phase and can include: individuals who are hesitant to meet basic legislative requirements; customers who provide questionable personal identification or business documentation; no apparent business purpose for engaging in the requested transaction; or situations in which a particular businesses transaction is inconsistent with the nature of the established business or its prior operating history.

Bermuda's present legislation against money laundering is derived in large part from United Kingdom legislation.

Bermuda continually strives to enhance its comprehensive anti-money laundering legislation. By embracing and abiding by regulatory requirements, Bermuda enjoys a pristine place in the offshore business community.

November 15, 2008 was the commencement date for the amendments to four pieces of Bermuda legislation: the Proceeds of Crime Amendment Act 2007 & 2008; the Anti-Terrorism (Financial and Other Measures) Amendment Act 2008; the Financial Intelligence Agency Act 2007; and the Financial Intelligence Agency Amendment Act 2008. Some highlights of the amendments follow below.

Amendments to the Proceeds of Crime Act broaden the definition of money laundering to include the "aiding and abetting" and/or the "counselling or procuring" of the commission of money laundering.

The recent amendments also extend the government's investigative powers to the obtaining of production orders and search warrants where there are reasonable grounds for suspecting an incident of money laundering. The term "reasonable grounds" has not yet been tested and defined by the Bermuda courts. The amendments also provide the Ministry of Justice with the ability to make regulations relating to controls in order to prevent and detect money laundering and create penalties for the failure to comply with regulations. Amendments to the Proceeds of Crime Act provide administrative requirements for anti-money laundering regimes, which must be followed by financial institutions and professional advisors.

For example, accounting and legal professionals must follow legislative requirements in the maintenance of record keeping, the making of reports and the vetting of employees.

Notwithstanding the legislative enhancements, legislation is only good "on paper" until people effect its requirements on a daily basis with integrity and thoroughness.

Knowing a client's business, obtaining proper documentation and educating clients on the importance of compliance procedures will benefit not only the reputation of Bermuda but also the reputation of all businesses that have selected Bermuda as the jurisdiction in which to incorporate.

Attorney Tanya Kozak is a member of the Funds and Investment Services team within the Corporate and Commercial Practice Group of Appleby.

A copy of this column is available on the firm's web site at www.applebyglobal.com. This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer.