This year’s Volume II of the INCSR on Money Laundering highlights continuing threats and vulnerabilities posed by money laundering and terrorist financing to U.S. national security and to the stability of the global financial system. The 2008 Volume II also reflects the current and latest trends used by criminals and terrorists to launder, move, and store the fruits of their illicit activities. Some of these methodologies include: the continuing use of banks and money service businesses as gateways to the global financial system; bulk cash smuggling; trade-based money laundering and value transfer; legal entities such off-shore financial centers and international business centers; casinos and “virtual” casinos; and new payment methods sometimes also identified as “e-money.”
Twenty-five years ago, the Department of State was mandated by Congress to examine the challenges and threats from narcotics-related money laundering. Although it is sometimes difficult to obtain data on money laundering systems and trends, via reporting reflected in this edition from our worldwide diplomatic posts and the domestic law enforcement and regulatory communities, we are able to glean increasingly greater insights. We can say with certainty that the use of offshore financial centers, casinos, and the Internet is demonstrably growing at alarming rates. Virtual money laundering is a reality and at this time is immune to traditional money laundering countermeasures. If ignored, ‘virtual’ money laundering will pose a threat to our financial sector. In the following section, we expand on one facet of the virtual threat: “mobile payments.” Similarly, in years past, Volume II has taken a leading role in early-on highlighting other typologies of concern such as the Black Market Peso Exchange (BMPE), bulk cash smuggling, and trade-based money laundering. These laundering systems are now widely recognized by many governments around the world, the Financial Action Task Force (FATF), and other international organizations.
In 2007, we continue to see that increasingly sophisticated criminal organizations, terrorists, kleptocrats and other illicit actors seek out the weak links in global anti-money laundering and counter-terrorist finance countermeasures. This report also gives numerous examples of the determination of law enforcement to dismantle these illicit activities. As of year-end 2007, nine more jurisdictions have criminalized money laundering beyond drugs, bringing the total to 180 jurisdictions that have done so. Similarly, 19 more jurisdictions have criminalized terrorist financing, bringing the total to 137.
In assessing progress in both domestic and global anti-money laundering/counter-terrorist finance efforts, historical perspective is sometimes useful. We can measure incremental steps of progress, highlight continuing areas of concern, and learn how to better focus scarce training and assistance resources. A review also reinforces the importance of these efforts. For example, the International Monetary Fund (IMF) estimates the magnitude of money laundering is about 3-5 percent of the world’s Gross Domestic Product (GDP). Using 2007 World Bank data, global GDP is approximately $72.3 trillion. In other words, international money laundering can be estimated at between approximately $2.17 and $3.61 trillion a year, which is larger than the current U.S. budget. Ten years ago, the generally accepted estimate of international money laundering was in the range of $300-$500 billion. Although international economic growth accounts for a large percentage of the increase in international money laundering, there is also a greater understanding of new threats, methodologies, and diverse laundering systems. Throughout the 25 successive editions of this report, we have continued to see how, outside of crimes of passion, criminals are still primarily motivated by greed.
Volume II of the INCSR is a valuable tool to assist in our “look back.” For example, a number of worrisome laundering “trends and typologies” were included in the 1997 and 1998 editions of the Money Laundering and Financial Crimes Section. The entries make familiar reading today, particularly if compared to threats articulated in the U.S. interagency 2007 National Money Laundering Strategy.
Ten years ago, one of the primary money laundering concerns was the Black Market Peso Exchange (BMPE). Earlier editions of this report have described how the Colombian cartels sell U.S. currency derived from drug trafficking to black market peso brokers in Colombia, who, with their U.S.-based agents, place the currency into U.S. bank accounts while trying to circumvent Bank Secrecy Act reporting requirements. The exchangers then sell monetary instruments drawn on their bank accounts in the United States to Colombian importers who use these instruments to purchase foreign trade goods. The 1998 report stated that the BMPE “is the single most efficient and extensive money laundering scheme in the Western Hemisphere.” A review of this year’s country reports shows that the BMPE is alive and well. In fact, there is increasing realization that similar black market exchange systems are found in diverse locales such as the Tri-Border region of Argentina, Brazil, and Paraguay; trade goods in Dubai and elsewhere are being purchased with Afghan drug proceeds; and Chinese and European manufactured trade items are being purchased through narcotics-driven systems similar to the BMPE.
The 1998 edition of this report stated that bulk cash smuggling is “one of the most utilized” money laundering techniques in the United States and around the world. Almost ten years later, this assessment still holds true. In 2007, the National Money Laundering Strategy stated that,
“The smuggling of bulk currency out of the United States is the largest and most significant drug-money laundering threat facing law enforcement. Deterring direct access to U.S. financial institutions by criminals does not prevent money laundering if illicit proceeds can still reach U.S. accounts through indirect means.”
As if to illustrate these observations, in January 2007, a Colombian National Police Money-Laundering Unit, trained by U.S. law enforcement authorities, seized a record $80 million worth of drug proceeds in cash and gold in one law enforcement operation in Cali, Colombia. At the time, this was the largest cash seizure in the Western Hemisphere. The record was short lived. Two months later, Mexican law enforcement authorities, working with U.S. law enforcement, raided a Mexico City residence and discovered over two tons of currency, mostly in $100 banknotes, totaling $205 million, as well an additional $2 million equivalent in other currencies. These high-profile seizures give added impetus to efforts taking place around the world to implement the FATF’s Special Recommendation IX on bulk cash smuggling. The dollars, euros, pesos, various other currencies, and gold seized in the two raids constitute the face of modern day crime transactions. The seizures also highlight the global nature of the international narcotics industry, the enormous sums of money involved, and the complexity of the money laundering challenge.
The 1998 edition of the Money Laundering and Financial Crimes section discussed how the international gold trade is being used to launder significant amounts of criminally derived funds. The report stated, “There is an obvious need for countries to have better tools to combat this problem and to monitor the international movement of gold.” Ten years after this statement, it has become increasingly apparent that precious metals and stones are used to launder money, transfer value, and finance terror. (Both al Qaeda and the Taliban have publicly announced various “rewards” offered in gold for acts of terror carried out by jihadists.) Gold is both a commodity and, depending on the form, a de facto bearer instrument. A review of this year’s edition shows that Vietnam, Saudi Arabia, Taiwan, Japan and other countries all have various forms of reporting requirements on the international transportation of gold. For example, in May 2007, the Saudi Ministry of Finance announced that people coming into and going out of the Kingdom of Saudi Arabia are required to declare to customs officials at exit and entry points the amount of cash, precious stones, jewelry, and metals such as gold that they carry with them exceeding 60,000 Saudi riyals (approximately $16,000).
More than a decade ago, U.S. criminal investigators first became concerned about trade-based money laundering by examining glaring anomalies in the international gold trade. It took the intelligence and law enforcement communities far too long to understand that historically and culturally trade is used in various forms of value transfer and to provide counter valuation in alternative remittance systems such as hawala. Shortly after September 11, the Department of State, in collaboration with the Departments of Homeland Security (DHS) and Treasury, made the combating of trade-based money laundering a key part of our anti-money laundering efforts. Since then, others have recognized this urgency, including the FATF.
Trade fraud is found around the world. It is particularly damaging in those developing countries hard-pressed for revenue. For example, according to this year’s submission on Bangladesh, customs duties account for approximately 40-50 percent of annual government income. To help address these vulnerabilities, the State Department’s Bureau of International Narcotics and Law Enforcement Affairs (INL) provided funding to DHS to establish prototype Trade Transparency Units (TTUs) in the South American Tri-Border countries of Argentina, Brazil, and Paraguay. TTUs examine import and export data to identify anomalies that could be indicative of customs fraud, trade-based money laundering, and/or underground finance. The concept is simple, efficient, and expanding. It was specifically endorsed in the 2007 National Money Laundering Strategy where it was noted that, “Often the most complex money laundering methods involve the use of international trade to disguise funds transfers.”
Ten years ago, this report also noted that,
“Nonbank financial institutions (NBFIs) continue to be used as sites for money laundering in the United States despite a number of efforts at both federal and state levels, with over 200,000 NBFIs in the United States, monitoring of these businesses for money laundering is a complicated matter.”
The 2007 National Money Laundering Strategy acknowledged the continuing problem and called for the enhancement of financial transparency in what is now generally called money services businesses (MSBs). MSBs include money transmitters, check cashers, currency exchangers, hawaladars, as well as issuers, sellers, and redeemers of money orders, traveler’s checks, and stored value. According to the report, less than 20 percent of MSBs are registered with Treasury’s Financial Crimes Enforcement Network (FinCEN), as is required. A review of FATF mutual evaluations and current country reports in this year’s edition reveal that most jurisdictions are similarly struggling with issues of registration, transparency, and reporting in the MSB industry. This should come as no surprise. The 1997 INCSR discussed the challenges of regulating exchange houses and remittance systems such as “hawala in the Middle East, cambios in Latin America, and NBFIs of all types in the Western financial community.” The report prophetically added, “Systems for regulating them to discourage their use to launder the proceeds of crime are essential, but will fail unless they take into account the very informality that makes them effective and desirable.”
Ten years ago, new payment technologies were in their infancy. The 1998 INCSR predicted that,
“Electronic money (e-money) has the potential to make it easier for criminals to hide the source of their proceeds and move those proceeds without detection. While the application of new technologies to electronic or cyber-payments is still in its infancy, it is prudent to recognize their potentially broader impact. The technology exists which could permit these systems to combine the speed of the present bank-based wire transfer systems with the anonymity of currency.”
The envisioned era is here. The rapid growth of global mobile payments (m-payments) demands particular attention. There are less than one billion bank accounts worldwide but approximately three billion cell phones. In some areas of the world, sending and receiving money or credit by phone is now commonplace. While m-payments have enormous potential for good, the risk that criminal and terrorist organizations will co-opt m-payment services is real. Financial transparency is problematic. Regulators and law enforcement are finding themselves hard-pressed to respond to rapid development in e-payment methodologies.
The 2007 National Money Laundering Strategy report discusses the promotion of transparency in the ownership of legal entities, particularly corporations, limited liability companies (LLCs), and trusts. This issue was elaborated on nearly a decade ago in earlier editions of the INCSR, which highlighted the growing threat posed to global financial stability by the 60 offshore financial centers (OFCs), whose defining characteristic is to a lesser or greater degree, the lack of transparency. An OFC is a jurisdiction where an intentional effort has been made to attract foreign business by deliberate government policies such as the enactment of tax and other fiscal incentives: “business friendly,” lax or nonexistent supervisory regimes; freedom from common regulatory constraints, such as exchange controls and disclosure requirements; and secrecy enforced by law. OFCs also enable the formation of international business companies (IBCs), banks, trusts (some with “flee clauses”), and other vehicles formed by management and trust companies, or by intermediaries such as lawyers or accountants. Particularly troublesome are “off-the shelf” IBCs, purchased via the Internet, with nominee directors from a different country that effectively provide anonymity to the true beneficial owners.
Although 13 of the 15 jurisdictions listed by the Financial Action Task Force on its initial 2000 list of Non-Cooperative Countries and Territories (NCCTs) had OFCs or were themselves offshore financial jurisdictions, a ten-year review shows that the FATF exercise has done little to stop the growth of the offshore financial sector. In fact, the opposite appears to be true. For example, in 1998, the British Virgin Islands licensed 300,000 IBCs; today more than 800,000 are registered. Similarly, after the U.S. and the international community forced the closing of Nauru’s nearly 400 shell banks, 300 banks, nearly all thought to be “shell banks,” were found to be registered in the Comoros. The government of Moldova, in spite of being advised of the risk of doing so, recently considered developing its own OFC. Likewise, Jamaica is considering opening an OFC in 2009. Recently, the Government of Ghana has established an offshore financial sector, mandating that the Bank of Ghana authorize offshore banks.
The 2007 National Money Laundering Strategy stated that casinos are cash-intensive businesses that often provide financial services and money laundering opportunities. In fact, the concern that the exchange of cash for casino chips and related money transfer and account services make casinos vulnerable to money laundering has been with us for many years. Today, the number of gaming establishments in the U.S. is growing, driven by Native American tribes. Casinos on Native American reservations bring in more money than Las Vegas and Atlantic City combined. Money laundering schemes using casinos have been reported by both domestic and foreign law enforcement.
In most parts of the world there is extensive casino development. Countries hope that gaming will provide added revenue and employment. However, particularly in the developing world, there are few anti-money laundering regulations and little oversight or control. For example, in Latin America, there is rapid casino development, but only Panama and Chile have viable AML programs in the gaming industry. Peru recently passed a new gaming law, aimed at identifying the owners of hundreds of currently unregulated gambling establishments. In the Caribbean, the industry is largely unregulated, except for in the Bahamas and the Grenadines. Casinos exist in most of sub-Saharan Africa, but only South Africa has a regulatory structure that deals with casinos. Most countries in Asia have gaming industries and observers have expressed concerns about money laundering vulnerabilities. According to the Macau country report, gaming revenue in the first nine months of 2007 exceeded the 2006 total and accounts for well over 50 percent of Macau’s gross domestic product (GDP). Macau is fast approaching Las Vegas as an international gambling destination. Eastern European and Central Asian countries also face AML challenges with the industry. Diverse jurisdictions need to take their “first steps” in addressing the very real anti-money laundering threats related to casinos. It is only developed countries such as Australia, the United States, and those in Western Europe that regularly incorporate money laundering countermeasures that meet international standards in their gaming industry. However, even those countries with relatively strong oversight, the money laundering threat posed by casinos continues to grow.
So, too does the threat of “virtual casinos”—gambling via the Internet. A decade ago, 15 of the 60 offshore jurisdictions were known to have registered “virtual casinos” in their jurisdiction. Although a few such sites were located in the OFCs in the Pacific, the vast majority were located in the Caribbean Basin, with Costa Rica and Antigua and Barbuda, each reportedly having licensed hundreds of virtual casinos, with typical fees a decade ago reportedly ranging from $75,000 (for a sports betting shop) to $100,000 (for a virtual casino license.) As reported in the 1999 INCSR, the Pacific island jurisdictions were thought to generate nearly $1.2 million a month from these license fees. Internet gambling executed via the use of credit cards, Internet payment service providers, and offshore banks represents yet another powerful vehicle for criminals to launder funds from their illicit sources and to evade taxes. These Internet gaming sites are a particularly difficult problem for law enforcement, as the beneficial owner may live in one country, with the anonymous corporation registered in another country, and the server located in yet a third country. Although illegal for use by U.S. citizens, thousands of U.S. individuals have Internet gaming accounts with Internet gaming providers in foreign jurisdictions. Current estimates are that these gaming sites earn between $6 to $8 billion dollars annually from U.S. citizens alone. As such, Internet gaming has the potential of becoming a greater money laundering threat than actual physical casinos.
In spite of the continued threats by money launderers and terrorist financiers, a brief historical review of countries’ AML/CTF efforts does demonstrate success stories. For example, the following is a small sampling from the country reports of miscellaneous “steps” towards progress in 2007:
Unfortunately, the review also highlights countries that are regressing, such as Uzbekistan, which suspended its AML law for the next six years, as well as continuing global AML/CTF pariahs: particularly North Korea and Iran. U.S. Treasury press releases and a 2007 entry in the U.S. Federal Register cited “the involvement of North Korean Government agencies and front companies in a wide variety of illegal activities, including drug trafficking and the counterfeiting of goods and currency.” In October 2007, the FATF released a statement of concern noting that:
“Iran’s lack of a comprehensive AML/CTF regime represents a significant vulnerability within the international financial system. FATF calls upon Iran to address on an urgent basis its AML/CTF deficiencies. FATF members are advising their financial institutions to take the risk arising from the deficiencies in Iran’s AML/CTF regime into account for enhanced due diligence.”
Iran is currently the only country for which FATF has publicly identified such a significant AML/CTF vulnerability. Both North Korea and Iran are still designated by the U.S. State Department as state sponsors of terrorism.
The “year in review” summary of the 1997 edition asked a question in bold type face that is just as pertinent today: “Are the laws being implemented?” A review of the 2008 country reports prompts the following question: “Are the laws being enforced?” Unfortunately, the ten-year time frame shows that far too many countries that boast solid AML/CTF standards and infrastructures are still simply not enforcing their laws. This is true in all corners of the world and for both developed and developing countries alike.
A review of recent data demonstrates that some jurisdictions are having trouble converting their anti-money laundering policies and programs into investigations, prosecutions, and convictions. In some cases, the lack of enforcement is due to lack of capacity, but in far too many others it is due to a lack of political will. In addition, too many jurisdictions are getting caught up in the AML/CTF process and losing sight of the objective.
Over the last ten years, we have made substantial progress collecting financial intelligence. In the United States alone, approximately 18 million pieces of financial intelligence are collected every year. Countless million more financial intelligence reports are produced overseas. We have nearly succeeded in creating global financial transparency in traditional financial institutions. During the past decade, the Egmont Group of financial intelligence Units has grown almost exponentially and now has 106 members. However, success should not be measured by the number of suspicious transaction reports received, analyzed, and disseminated—although undoubtedly the reporting of financial intelligence has a deterrent effect. Financial intelligence is simply the process; the means to an end. Rather, the objective continues to be anti-money laundering and counter-terrorism finance convictions. Convictions, combined with asset seizure and forfeiture are the true deterrents, the most meaningful “measurable,” and the bottom line. Far too many jurisdictions continue to fall short in this regard.
Almost twenty years ago, in an early experiment in international anti-money laundering cooperation, the U.S. Customs Service and the Italian Guardia di Finanza (fiscal police) jointly combated Italian/American organized crime—the mafia—by examining illicit money flows between Italy and the United States. Appropriately enough, the task force was called Operation Primo Passo or “first step.” At the time, Italy’s anti-money laundering infrastructure was in its infancy and prosecutions and convictions were problematic. Today, a review of the 2008 Money Laundering and Financial Crimes section of the INCSR shows that Italy’s anti-money laundering/ counter-terrorist financing system is now called “comprehensive” by the International Monetary Fund. With approximately 600 money laundering convictions a year, Italy has one of the highest rates of successful prosecutions in the world. Countries that are currently taking their “first steps” in constructing viable AML/CTF regimes together with countries that continue to struggle to implement policies, procedures and norms should be heartened by the 20 year Italian example, and of more recent successes in Chile, Colombia, Poland, Slovenia, Serbia, and South Korea. With skill, dedication, courage, training, equipment, and political will, much can be accomplished, although a review of continuing money laundering threats demonstrates that much remains to be done. Most importantly, a renewed focus on money laundering enforcement measured by successful investigations and prosecutions is required.
The USG training and technical assistance program has been very effective in helping countries take the necessary steps to combat money laundering and the financing of terrorism. Primarily coordinated and funded by the State Department’s Bureau of International Narcotics and Law Enforcement Affairs (INL) and the Office of the Coordinator of Counterterrorism (S/CT), our continuing goal is to simultaneously strengthen regional anti-money laundering organizations, and build comprehensive AML/CTF regimes in individual countries. Working with the USG interagency legal, law enforcement, and financial regulatory communities, as well as with multi-lateral organizations and partner countries, we seek to maximize the institution-building benefits of our assistance by delivering it in both sequential and parallel steps. The steps are tailored to each country’s unique needs as determined by threat assessments and concentrate on the following core areas: legal, regulatory, financial intelligence, and enforcement.
The experience of nearly two decades has demonstrated that generally, regional training, while more expensive than bilateral training, is ultimately more effective. Regional training greatly enhances the probability of neighboring countries cooperating and sharing information with one another. Likewise, long-term training, whether regional or bilateral, is considerably more expensive but infinitely more effective than the usual one-week seminars and short-term training courses that characterize USG efforts. Long-term training and resident advisors enable trainees to take “ownership” of the process, which enhances implementation and sustainability. Unfortunately, primarily due to demands of daily work requirements, the number of USG expert long-term trainers is insufficient to meet global demand. During the past decade, a significant portion of INL’s anti-money laundering budget has been used to fund long-term mentors from the UNODC Global Program against Money Laundering as well as through large regional programs with residential mentors in the Caribbean and Pacific. The overriding challenge in our global efforts to provide continued expert effective training and technical assistance is the continued dilemma of there not being enough resources to meet increasing demand for our programs particularly to fund a sufficient number of long-term resident mentors where they are desperately needed. To partially offset our inadequate budget, we have also co-funded mentors in the Mekong Delta and Central Asia regions with the World Bank.
A periodic review of our training and assistance efforts sometimes highlights disappointments and frustrations, but also demonstrates hard-won success. We believe such review is essential to sustain and strengthen gains. Moreover, we are focusing increasingly scarce financial resources and quality trainers in areas that demonstrate the greatest need and the political commitment necessary to develop viable, sustainable anti-money laundering/terrorist financing regimes.
Our review also underscores the truisms that money is the lifeblood of terrorism and that focusing adequate resources on the money trail is still one of the most valuable tools law enforcement has to combat international crime. Similarly, international criminals have tremendous financial resources and spare no expense to corrupt government and law enforcement officials. They also have extensive worldwide networks to support their operations and are inherently nimble, adapting quickly to change. To effectively address this serious threat, we know that we must use our best efforts to apply and coordinate all of the available resources of the federal government and work closely with our foreign counterparts. Sustained global cooperation and support is the surest path to success as we drain the money supply that the criminal networks need to stay in business. To accomplish this, we must continue to support the international community with the tools, capabilities, and resources needed to reduce the growing threats posed by transnational crime, money laundering, and illicit activities.