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Diplomacy in Action


International Narcotics Control Strategy Report
Bureau for International Narcotics and Law Enforcement Affairs
March 2006

International efforts against money laundering grew stronger and more effective in 2005. More countries, 17, have promulgated anti-money laundering and counterterrorist financing laws for the first time, or updated their existing statutes to comply with revised international norms and standards. Contributions from the international coalition of donors to help with these efforts grew as a result of G-8 and other initiatives. The capability for information and intelligence exchanges among countries in support of criminal investigations improved as seven more Financial Intelligence Units (FIUs) became members of the Egmont Group of FIUs, raising its global membership to 101 FIUs. Authorities also undertook some important money laundering investigations leading to significant seizures and prosecutions. The money laundering challenge nevertheless remains formidable. The stakes are high on both sides. Money is the oxygen for most crime, and the most threatening and dangerous criminal networks and terrorist organizations will go to any extreme to ensure that they can protect their profits or secure their financing whether this means ratcheting up retaliation against authorities who are too hot on their trail, or shifting to less visible and penetrable methods even if this means a loss of efficiency or carries other risks.

It is important to sustain and strengthen these gains because focusing on money laundering is one of the most valuable tools law enforcement has to combat international crime. A focus on money laundering can accomplish what many other law enforcement tools cannot. In the "one-size-fits-all" vein, anti-money laundering measures constitute a unique instrument that can be applied equally effectively to a wide variety of crimes—that is essentially any crime that must be financed or that is committed for profit. Once in place, anti-money laundering measures can be used without any special tailoring or tweaking to attack such threats as narcotics trafficking, alien smuggling, intellectual property theft, organized crime, environmental crime, terrorist financing, corruption, and more. Focusing on money laundering plays a supportive role in these investigations, but in many instances, money laundering investigations lead to prosecutions of the underlying crimes. Few other law enforcement measures offer such utility or efficiency.

Money laundering investigations also take advantage of one of the most important vulnerabilities of sophisticated, criminal or terrorist organizations: their risk of exposure. Terrorism and much of organized crime thrive because they take place in the shadows of open society. As long as it stays in the underground of aliases, coded messages, false documents, and clandestine operations it is often undetectable to even seasoned investigators, especially if, in the case of some crimes, its victims do not immediately see or feel its effects, or come forward to report it. When criminal activity breaches this undergound, it often provides leads and evidence authorities can use to unravel these cases. The challenge of coping with especially large amounts of money inevitably generates pressure on the criminal organizations to take placement, layering, and integration actions involving record keeping, meetings, or other events that eventually surface and expose them for identification and tracking. Full exploitation of these vital breakthroughs can lead investigators, armed with incriminating financial intelligence and evidence, to the financiers and managers of these organizations, to the heart of the syndicates. Getting this desirable outcome in many countries around the world still requires a great deal of innovation, training, equipment, and political will.

Building Awareness and Acceptance

Much recent anti-money laundering progress is due to the efforts in the United Nations, the Financial Action Task Force (FATF), the global network of FATF-style regional bodies (FSRBs), and in individual countries, to raise international awareness and inspire national commitment to attack money laundering—and its associated problem of terrorist financing. Indeed, much has already been achieved on this front through the creation and global acceptance of international norms and standards to fight money laundering and terrorist financing. For nearly two decades, the norms and standards have been embodied, with periodic updates and revisions to take into account new money laundering methods, patterns, and threats, in the FATF Forty Recommendations on money laundering and, following the "9/11" attacks, the Special Eight, now Nine, Recommendations on Terrorist Financing. FATF has subsequently succeeded in getting these recommendations universally recognized even though most nations do not belong to this 33-member international body. For instance, the negotiators' background notes for both the 2000 UN Convention on Transnational Organized Crime (UNTOC) and the 2003 UN Convention Against Corruption (UNCAC) call upon States Parties to use as a guideline the relevant initiatives of regional, inter-regional and multilateral organizations against money laundering, thus, calling upon State parties to use the FATF recommendations. The UNTOC came into force in 2003, 90 days after the 40th country deposited its instrument of ratification, and the UNCAC similarly came into force in 2005. The FATF Recommendations achieved another milestone when the UN Security Council also acknowledged their primacy as the international anti-money laundering and counterterrorist financing gold standard by declaring in UN Security Council Resolution 1617 that the UNSC " Strongly urges all Member States to implement the comprehensive international standards embodied in the Financial Action Task Force's (FATF) Forty Recommendations on Money Laundering and the FATF Nine Special Recommendations on Terrorist Financing" .

Meanwhile, FATF's Non-Cooperative Countries and Territories (NCCT) initiative to spur greater international anti-money laundering cooperation and compliance is phasing down after years of effective implementation. Initiated in 2000, FATF focused this "name and shame" initiative at strategic countries and jurisdictions with woefully inadequate anti-money laundering regimes. Since inception of the NCCT tool, FATF has placed 23 jurisdictions on the NCCT list. Faced with the pressure of international censure and open to training and technical assistance from the United States and other donor nations and organizations, most of the NCCTs have taken the corrective measures FATF prescribed. Consequently, there has been a steady annual reduction in listed jurisdictions. In 2005, FATF removed the Cook Islands, Indonesia, Nauru, and the Philippines from the list leaving only Burma and Nigeria as the remaining NCCTs.

Increasingly, the global network of FATF-style regional bodies is the mechanism responsible for ensuring compliance and implementation of the FATF Recommendations. 129 countries belong to one or another of the seven FSRBs that now cover most of the world. To be a member of one of these FSRBs, a country must commit to adopting and eventually implementing the FATF Forty plus Nine, and to making itself subject to mutual evaluations intended to identify weaknesses and vulnerabilities in its anti-money laundering/counterterrorist financing regimes and ways to correct them. The two newest FSRBs that were formed in 2004—the EurAsian Group on Combating Money Laundering and Financing of Terrorism (EAG) which covers Russia, Central Asia, and China, and the Middle East and North African Financial Action Task Force (MENAFATF) which covers 14 countries in those regions—have become operational. In its first year, the EAG conducted an assessment of the training and technical assistance needs of its member states, and then held a conference bringing together the member states with observers, international financial institutions, multilateral bodies, and other potential donors. Similarly, MENAFATF issued three detailed working papers on the subjects of hawala, charities and cross-border cash couriers. The efforts are producing results. The number of jurisdictions that have criminalized money laundering to include predicate crimes beyond narcotics increased to 172 in 2005 from 163 in 2004. Similarly, 10 more countries criminalized terrorist financing in 2005, bringing the total number of countries with such laws to 123.

The United States meanwhile continues to exert bilateral pressure through application of Section 311 of the USA PATRIOT Act in appropriate circumstances. Section 311 of the USA PATRIOT Act authorizes the Secretary of Treasury, after consultation with various U.S. agencies including the Board of Governors of The Federal Reserve, the Secretary of State and the Attorney General and other relevant federal agencies, to designate a foreign jurisdiction, financial institution, class of transactions, or type of account as being of "primary money laundering concern," and to impose one or more of five remedies known as "special measures." Four of the special measures impose information-gathering and record-keeping requirements upon those U.S. financial institutions that maintain accounts for specific jurisdictions, institutions or types of accounts as described in the 311 designation. Under the fifth special measure, the Secretary of Treasury can issue rules that prohibit U.S. financial institutions from establishing, maintaining, administering or managing any correspondent account or a payable-through account for or on behalf of the designated primary money laundering concern. In 2005, the USG designated two Latvian banks, VEF Banka and Multibanka, and Macau-based Banco Delta Asia S.A.R.L. as primary money laundering concerns. These rules have not yet been finalized. According to the Federal Register Notice, Banco Delta Asia S.A.R.L. provided financial services for more than 20 years to multiple North Korean government agencies and front companies that are engaged in illicit activities, and worked with DPRK officials to accept large deposits of cash, including counterfeit U.S. currency and agreeing to place that currency in circulation. In addition to the activities of the DPRK, investigations revealed that Banco Delta Asia S.A.R.L. serviced a multi-million dollar account on behalf of a known international drug trafficker. The Latvian government has taken steps to improve its anti-money laundering laws and successfully prosecuted four individuals for money laundering in 2005. Shortly after the U.S. Treasury Department published its proposed rule against Macau's Banco Delta Asia, the bank went into receivership and is governed by three interim managers appointed by the Macau government.

Engineering Structural Change

Once countries have accepted international norms and standards to combat money laundering and terrorist financing, the first level of commitment most of them make to this cause is to institute structural changes in their anti-money laundering regimes so they can legally, administratively, and operationally abide by and implement these standards. Many countries, faced with this often difficult and relatively expensive task turn to the United States and other international donors for help. The United States plays a leading role in this regard by providing assistance bilaterally, regionally, and through contributions to multilateral organizations.

Our bilateral efforts focus mostly on the terrorist-financing threat and are concentrated in some two dozen countries whose financial sectors are particularly vulnerable to abuse. To address those concerns, the State Department works through the Terrorist Finance Working Group, co-chaired by the Bureau of Counterterrorism and the Bureau of International Narcotics and Law Enforcement Affairs, and coordinates training and technical assistance provided by experts from various U.S. government (USG) agencies that help these strategic countries develop viable anti-money laundering and counterterrorism finance regimes. Through December 2005, State Department-led interagency teams have comprehensively assessed the capabilities and vulnerabilities of 20 of these countries and have provided assistance to 23. The State Department maximizes the institution-building benefits of its assistance by delivering it in both sequential and parallel steps. The steps, while tailored to each country's unique needs as determined by the assessments, include help in the following areas:

  • drafting and enacting comprehensive anti-money laundering and terrorist finance laws that have measures that enable states to freeze and seize assets that comply with the FATF's revised Forty Recommendations and its Special Nine Recommendations on Terrorist Financing; 

  • establishing a regulatory regime to oversee the financial sector;

  • training law enforcement agencies, prosecutors and judges so that they have the skills to successfully investigate and prosecute financial crime; and 

  • creating and equipping Financial Intelligence Units (FIU) so that they can collect, analyze, collate, and disseminate suspicious transactions reports and other forms of financial intelligence to both help develop cases domestically and share information internationally through FIUs in other countries as part of transnational investigations.

Even with the focus on terrorist financing, we continue to address money laundering in its broader context, especially in key narcotics-producing countries (such as Colombia and Mexico) and in countries where powerful organized crime syndicates pose an especially significant threat to the stability of weak or emerging regimes, as in Central Asia. We are increasingly focusing on regional approaches in a cost-saving effort to spread our assistance more widely.

A good example of this effort is the updated anti-money laundering training that now includes an emphasis on counterterrorist financing which the State Department's Bureau of International Narcotics and Law Enforcement Affairs (INL) funds through its global network of International Law Enforcement Academies (ILEAs). INL funds and manages foreign-based ILEAs in Hungary, Thailand, Botswana, and, coming fully on line in 2006, El Salvador. The ILEA program brings together mid- to senior-level law enforcement officials, including investigators, prosecutors, judges, and legislators, from neighboring countries in a particular region for specialized anti-money laundering and terrorist financing instruction taught by experts from the Departments of Justice, Homeland Security, Treasury, and elsewhere in the U.S. government. ILEA's regional concept is particularly effective in generating trust and networking among participants, which facilitates task-force development and cross-border law enforcement cooperation.

This model inspired the recently completed, five year long Caribbean Anti-Money Laundering Program (CALP), a multilateral undertaking of the United States, the United Kingdom and the European Union. CALP employed a team of resident experts who provided regional and bilateral training to the 21 Caribbean member countries of CARIFORUM for the purpose of developing viable anti-money laundering regimes, including the ability post 9/11, of countering terrorist financing. This training was responsible for helping to remove several countries in the region from the FATF NCCT list. To replicate the success of the CALP in the Pacific, the Department of State is now funding the Pacific Island Forum (PIF) to create the Pacific Anti-Money Laundering Program (PALP). This four-year program, to be coordinated with efforts in the region by the UN Global Programme against Money Laundering, the Asia/Pacific Group on Money Laundering (APG), Australian anti-money laundering agencies, and the International Monetary Fund, is aimed at building comprehensive anti-money laundering/counter terrorist financing regimes in the 14 Pacific Islands Forum member states that are not members of FATF. Six of these 14 PIF countries that will participate in the PALP are also members of the Asia Pacific Group (APG)—the FSRB for this region.

The United States is engaged in other forms of cost-saving "burden sharing." For instance, the G-8, in its 2003 Summit, committed to creating the Counter-Terrorism Action Group (CTAG). Under CTAG, the G-8 countries and other key donors work to coordinate their provision of counterterrorist financing and other counterterrorism training and technical assistance. The CTAG partnered with the FATF, asking it to assess the needs of a small list of countries to which CTAG wanted to provide coordinated technical assistance. By mid-2005, twelve CTAG members, including the United States, had delivered more than 200 coordinated, cost-saving, technical assistance programs in several aspects of combating terrorism and terrorist finance to more than 150 countries through bi-lateral and regional training. The United States also continues to work closely with the United Kingdom, Australia, Spain, Japan, the UN Global Programme against Money Laundering, the IMF and the World Bank on country and regional programs, coordinating the use of both limited human and financial resources to avoid duplication and provide synergistic programming. The United States ratified the Organization of American States (OAS) InterAmerican Convention Against Terrorism in 2005, and continues to work very closely with the OAS Inter-American Drug Abuse Control Commission (CICAD) Office of Money Laundering and the OAS Counter-Terrorism Committee in developing viable anti-money laundering regimes capable of thwarting terrorist financing in this hemisphere.

Operationalizing Efforts

The biggest hurdle to achieving significant international success against money laundering has been operationalizing these reforms: to actually use the laws, the training, and the resources to undertake important money laundering investigations leading to asset seizures and forfeitures and to arrests, prosecutions, and convictions of major criminals and terrorists. Examples of the effective use of a country's money laundering laws can be seen in the investigative and prosecution work occurring in every part of the world. The Prosecutor General's Office in Latvia maintains a specially-cleared unit to prosecute cases linked to money laundering. In the first ten months of 2005, the unit referred eight criminal cases to court for criminal offenses relating to money laundering. In one court case involving seven defendants, four of them received sentences for money laundering. During 2005, Israel, a former FATF NCCT, has been the nexus of several high profile money laundering cases. In March 2005, the International Crimes Unit (ICU) of the Israeli National Police (INP) raided Bank Hapoalim and its trust company, in what was described as the biggest money laundering scandal ever in Israel. The police froze over 180 accounts with more than $376 million, and some 24 employees were detained, including the manager and four senior executives. The investigation is ongoing. In South America, Peru continues to make strong efforts at uncovering and recovering millions of dollars believed to be the proceeds of money laundered by Vladmiro Montesinos, former director of the Peruvian Intelligence Service. In 2005, Peru obtained its first two convictions for money laundering. One case was for laundering drug proceeds, the other for public corruption; currently there are three money laundering cases being prosecuted for money laundering. In the Asia/Pacific regions, Thailand had 57 successful money laundering convictions, while Palau had its first successful prosecution. In all these countries, State Department funded training has played an important role in the development of their anti-money laundering regimes.

Yet, the international community is underachieving on this front. Part of the problem is the elusiveness of the threat that continues to thwart efforts by even the best investigators; and part continues to be the lack of political will and corruption. Traditionally, anti-money laundering measures concentrate on the large amounts of money that move through traditional financial institutions. Law enforcement has long understood that the placement of cash into banks is where criminal money launderers and the financiers of terrorism are most vulnerable. However, despite our real success in establishing an international system of financial transparency to detect suspicious activity in banks and increasingly non-bank financial institutions, criminal money launderers continue to find ways to circumvent our financial safeguards, as do the financiers of terrorism. The U.S. Department of Treasury reports that 47 countries worldwide have frozen a total of approximately $150,000,000 of terrorist assets since September 11- $44 million by the United States. Of the $150,000,000 frozen, only $64,600,000 has been forfeited, a figure that Treasury reports has remained essentially unchanged since 2002.

In 2006, we have a clearer understanding of our vulnerabilities and recognize that anti-money laundering laws and regulations do not always reach alternative and underground systems for moving dirty money, or transferring value, or financing terrorism. New tools and techniques are needed to surface and expose this activity. This is particularly true in the battle against terrorist finance. For example, in 2005, the FATF issued Special Recommendation IX on cash couriers. As a result, during the last year, countries around the world have worked to implement cross-border currency reporting requirements that will assist law enforcement in monitoring bulk cash shipments.

Additionally, new and effective anti-money laundering measures must be developed to counter the well-established practice of trade-based money laundering. Trade is the common denominator in many entrenched underground or alternative systems such as hawala, the black market peso exchange, the misuse of the international gold and diamond trade, and other value transfer systems. Over and under invoicing are common techniques to provide countervaluation in value transfer and settling accounts. To help address these vulnerabilities, INL provided funding to the Department of Homeland Security's Office of Immigration and Customs Enforcement (ICE) in 2005 to establish prototype Trade Transparency Units (TTUs) in the Tri-Border countries of Argentina, Paraguay and Brazil. TTUs examine anomalies in trade data that could be indicative of customs fraud and trade-based money laundering. This is also a positive step with respect to compliance with FATF Special Recommendation VI on Terrorist Financing via alternative remittance systems. In a legacy U.S. Customs pilot program examining suspicious trade data in Colombia, investigators were also able to detect examples of the black market movements of value connected to the terrorist organization Revolutionary Armed Forces of Colombia (FARC). TTUs in the Tri-Border area have the potential to reveal discrepancies in trade data that could lead to successful investigations and prosecutions for trade-based money laundering, tax evasion and other crimes, and perhaps reveal links to terrorist financiers and organizations.

At the urging of the United States and others, the international community is beginning to recognize and address the close link between corruption and money laundering. Kleptocrats and other corrupt officials rely on money laundering as a means to stow away and enjoy the fruits of their corrupt actions. Public corruption can facilitate such laundering, and cause regulatory authorities and law enforcement to turn a blind eye. The Financial Action Task Force formally recognized the link between corruption and anti-money laundering at its October 2005 plenary session at which it agreed to explore with the Asia/Pacific Group on Money Laundering the "symbiotic relationship among corruption, money laundering and terrorist financing" and how the FATF's experience could be used to "combat these combined threats". The United Nations Convention Against Corruption (UNCAC), which entered into force in December 2005 and currently has over 180 signatories or parties, calls for extensive action in the area of money laundering and asset recovery, and is quickly becoming the new global international standard for fighting corruption. UNCAC and the growing international anticorruption movement are sure to provide complementary benefits to ongoing anti-money laundering efforts worldwide.

Despite the progress the international community has made to combat money laundering and stanch the flow of terrorist financing, the United States and the global community continue to face a large and dynamic threat that will require a prolonged commitment of resources to sustain and intensify efforts. More innovative methods such as Trade Transparency Units will be required to attack traditional systems of transferring value, laundering money and financing terrorism, and more efficient use of scarce resources, such as emphasizing regional training, will become increasingly necessary. All of this must play out against a backdrop of countries having the political will to go beyond important first steps of accepting their responsibilities to combat money laundering and terrorist financing and creating the structures to do so, to actually launching and completing the investigations against the powerful criminals and threatening terrorists who put us so much at risk.

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