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Diplomacy in Action

2009 INCSR: Introduction

Bureau of International Narcotics and Law Enforcement Affairs
February 27, 2009


Volume II of the 2009 International Narcotics Control Strategy Report, Money Laundering and Financial Crimes, highlights the continuing vulnerabilities and potential threats to stability and security posed by global money laundering, terrorist finance, and other financial crimes. This year’s report demonstrates anew that criminals and terrorists continue to disguise their illicit financial activities. Tainted funds have the potential to destabilize economies, weaken the integrity of the international financial system, subvert rules-based international commerce, and corrupt governments. New and cutting edge money laundering methodologies represent tremendous challenges for the financial, regulatory, legal, intelligence, and law enforcement communities.

Earlier editions of this volume have chronicled progress made in formulating and implementing anti-money laundering and counterterrorist financing (AML/CTF) measures. The 2009 INCSR describes recent AML/CTF developments, as well as emerging trends that could merit increased attention.

Growing Threats

Threat Convergence of Illicit Drug Wealth, Organized Crime, and Terrorism. In 2008, Khan Mohammed became the first known Taliban to be convicted of drug trafficking. His case demonstrates the linkages between the proceeds of narcotics, organized crime, and terrorism. In a groundbreaking operation by the U.S. Drug Enforcement Administration, an Afghan farmer acting in an undercover capacity secretly recorded Mohammed conspiring to purchase weapons and engage in trafficking narcotics. Mohammed was arrested and, with the cooperation of the Afghan government, brought to the United States for trial in late 2007. In December 2008, Mohammed was sentenced in U.S. District Court for the District of Columbia to two terms of life in prison on drug trafficking and narcotics terrorism charges.

Afghanistan produces more than 90 per cent of the world’s opium. As is discussed below, in this volume’s Afghanistan country report, much of the narcotics trade is facilitated by the Taliban. The profits generated by the drug trade enable the Taliban to operate not only in Afghanistan but across parts of Central Asia and Pakistan. Drug terror-threat convergence is also found in Colombia with the Revolutionary Armed Forces of Colombia (FARC), and in Peru with the Sendero Luminoso (Shining Path). In fact, approximately half the 44 U.S. Department of State designated Foreign Terrorist Organizations have ties to narcotics trafficking.

Trade-Based Money Laundering (TBML). As is made clear in many of the 2009 country reports, trade is used to launder money and transfer value around the world. Estimates of the annual dollar amount laundered through trade range into the hundreds of billions. Some academics have argued that TBML is the most prevalent form of money laundering in the United States. In recent years, analysts and policy makers are increasingly recognizing the existence of trade-based money laundering.

The 2003 edition of this volume introduced the TBML concept. In 2007, TBML was included as a priority threat in the 2007 National Money Laundering Strategy. In recent years, the Financial Action Task Force (FATF) has begun to recognize the need to formulate international countermeasures to address TBML and in June 2008, the FATF produced a best practices paper on the subject. The FATF could emphasize its importance by adding TBML as its tenth “Special Recommendation on Terrorist Financing”. The Wolfsberg Group, an association of 12 of the world’s largest banks, calls for enhanced due diligence to prevent TBML tied to drug cartels, terrorist organizations, sanctions violators and weapons proliferators. Also, a nascent but growing network of Trade Transparency Units (TTUs) has revealed the extent of transnational TBML through the monitoring of import and export documentation. The United States established a TTU within the U.S. Department of Homeland Security Bureau of Immigration and Customs Enforcement (ICE) that generates both domestic and international investigations. The number of cases initiated by the INL-funded TTU network continues to grow. In 2008, Mexico’s TTU investigated seven cases; Colombia, four; Paraguay, six; Brazil, one; and Argentina, two. Unfortunately, financial institutions’ compliance programs and corresponding suspicious transaction reporting—which are the backbone of most countries’ AML/CTF regimes—are not yet structured fully to detect TBML.

Service-Based Laundering. Just as TBML depends primarily on commodity invoice fraud (particularly over-and-under invoicing), a similar mechanism is used in service-based industries to launder money and illegally transfer funds across borders without detection. Marketing surveys, accounting and legal services, and concert promotions are just a few examples of service-based industries that can conceal international fraud. Fraudulent invoices and supporting documentation can be used to justify payment or the transfer of money for real or fictitious services from one jurisdiction to another. In this manner, some service-based industries may be laundering money, evading taxes, engaging in fraud, and conducting other financial crimes. Pursuing service-based fraud and money laundering is a challenge because there is no commodity to follow. Moreover, investigations are often stymied because law enforcement agencies have difficulties sorting out jurisdictional issues.

Mobile Payments and Stored Value Cards Laundering. The potential threat of mobile payments for money laundering and other financial crimes was highlighted in the 2008 edition of the INCSR. In the digital age, it is increasingly difficult to “follow the money;” and some argue that money launderers and terrorist financiers may attempt to exploit mobile payments. FATF calls mobile payments “new payment methods” or NPMs. They are also sometimes called “e-money” or “digital cash.” Examples include Internet payment services, digital precious metals, electronic purses, and mobile payments or “m-payments.” Driven by the convergence of the financial and telecommunications sectors, the rapid global growth of m-payments raises particular concern. M-payments can take many forms but are commonly point of sale payments made through a mobile device such as a cellular phone, a smart phone, or a personal digital assistant (PDA).

A related risk is the growing threat from stored value cards (SVCs) as a mechanism for money laundering and terrorist financing. SVCs are cards with data encoded in either a magnetic strip or a computer chip, for example, prepaid credit cards, or gift cards, that are preloaded with a fixed amount of electronic currency or value. The SVCs can be redeemed or transferred to individuals and/or merchants in a manner similar to spending physical currency. An ICE/Internal Revenue Service investigation into a stolen credit card number network operating in Mexico found that a co-conspirator was paid by a criminal organization with gift cards issued by U.S. retailers. The gift cards were then used to purchase mobile phone cards, which were smuggled into Mexico and sold at a profit. SVCs also pose a challenge in detection, since they fit in a wallet and look like any other plastic card. As we noted in 2008, much work and creative thinking will be necessary to prevent exploitation and misuse of SVCs by money launderers and terrorist financiers while simultaneously maintaining the advantages they offer and protecting both user privacy and the integrity of the global financial system.

Virtual World Laundering. Virtual reality universe games are increasingly popular around the world. Some of these cyberspace games are not just a source of entertainment but a venue for real commercial activity. Players buy and sell virtual property, goods and services. Some games also allow players to convert genuine currency deposits to virtual currency and then back to real currency at fixed exchange rates. Such capabilities in virtual world games have potential implications for money laundering and other financial crimes. It is now possible to set up an account by furnishing false identification, fund the account with illicit proceeds, and have a co-conspirator in a criminal enterprise on the other side of the world withdraw funds. For example, in 2008 South Korean authorities arrested a group involved with the laundering of $38 million in virtual currencies. Observers also fear that terrorist groups may use virtual worlds to meet, chat, plan activities, and perhaps transfer funds. The added venue and jurisdictional challenges of following virtual money and value trails in and out of the virtual world compound the challenges regulatory and law enforcement agencies already face in the real world.

Suspect Internet Value Transfer. The Internet is being used today by money launderers in a variety of ways including Internet gaming and the misuse of on-line payment providers. Some suspect Internet value transfer services avoid financial transparency reporting requirements and other standard regulatory and law enforcement countermeasures. There have been instances where terrorist fundraisers have directed that “contributions” be made via suspect on-line payment providers.

On-line payment providers serve as an electronic alternative to traditional paper settlement methods such as cash, checks and money orders. They connect subscribers, card holders, on-and-offline resellers, as well as online businesses and traditional merchants. For some providers, U.S. dollar-based money can be sent to anyone that has a valid email address, whether or not that address is a subscriber. In the United States, these payment providers are subject to many of the rules and regulations governing nonbank financial institutions and they are registered and licensed as a money service business. However, this is not the case in many jurisdictions, and even where regulations do exist, they are difficult to enforce. Due diligence and “know your customer” requirements often do not exist for online gaming and online payment providers. Users can add credit to their accounts via bank payments. Banks in some countries will transfer money directly into payment provider accounts. Users can also use Internet banking to make transfers directly from any computer. Credit card payments are accepted. And for those who do not wish to use banks, a user can purchase “refill coupons” at a variety of brick and mortar retailers. The nexus of Internet, value transfer, and Internet auctions is a more difficult to detect, virtual mirror to traditional TBML.

Growing Linkage Between Tax Evasion and Money Laundering. According to the Internal Revenue Service (IRS), “Money laundering is the means by which criminals evade paying taxes on illegal income by concealing the source and the amount of profit. Money laundering is in effect tax evasion in progress.” For investigators, separating money laundering from tax evasion is increasingly difficult. Although the intent differs, many of the same methodologies are used. One citizen’s tax haven can be the same as a money launderer’s hidden offshore account. For example, because of the difficulty in determining the true beneficial owners of international business companies (IBCs), they are favored mechanisms to both launder illicit proceeds and evade taxes. As noted in the country reports, the British Virgin Islands and Hong Kong each have nearly 500,000 international business companies (IBCs) registered in their jurisdictions.

Extant Challenges

Lack of Capacity Among Some of the Most Vulnerable Countries. While most countries in the world have committed themselves to upholding the FATF standards, there are many countries that find themselves unable to construct comprehensive AML/CTF regimes, precluding effective implementation. There is often a lack of public understanding about money laundering and financial crimes. Additionally, those charged with monitoring, inspecting, regulating, investigating, and prosecuting violations may suffer a lack of resources that could contribute to inadequate training, and competition for scarce resources. In some countries, systemic corruption also serves as an impediment to the development and implementation of viable anti-money laundering/counterterrorist financing regimes.

Lack of Money Laundering and Terrorist Financing Prosecutions and Convictions. A review of country reports shows that far too many countries that boast solid AML/CTF standards and infrastructures do not enforce their laws. This is true in all corners of the world and for both developed and developing countries alike. In many instances, the lack of enforcement is due to lack of capacity, but in some cases it is due to a lack of political will. The country reports in this INCSR volume document how countries are making progress in enacting enabling legislation and refining reporting requirements that financial institutions, money service businesses, and even nonfinancial businesses must follow to file suspicious transaction reports (STRs)—but the implementation of these measures is stymied. An AML/CTF legal framework, promulgating regulations, the number of STRs filed, and the creation of financial intelligence units (FIUs) are closely tracked metrics. However, there are limited corresponding increases in prosecutions and convictions—the true measure of success.

A review of the 2009 country reports indicates both progress and challenges continue to exist in combating money laundering, terrorist financing, and other financial crimes. The following examples illustrate advances and regression:

  • By December 2008, 180 countries had criminalized money laundering to include predicate crimes beyond narcotics—an increase of 17 countries since 2004.
  • In 2008, 13 countries criminalized terrorist financing bringing the total to 149 countries that have criminalized terrorist financing—an increase of 36 countries since 2003.
  • In Paraguay, the General Attorney’s Office processed 40 money laundering cases that resulted in 15 convictions.
  • Ghana passed its first anti-money laundering law.
  • The FIUs of Moldova and the Turks and Caicos became members of the Egmont Group. Total Egmont membership now totals 107.
  • In December, the Egmont Group expelled Bolivia’s FIU because of the Bolivian government’s refusal to criminalize terrorist financing.
  • With approximately 600 money laundering convictions annually, Italy ranks second to only the United States in successful prosecutions.
  • In Iran, the Islamic Parliament and Guardian Council approved a new Iranian money laundering law. The law, however, lacks specificity and does not adhere to international standards.
  • Serbia adopted a new National Strategy Against Money Laundering and Terrorism Financing.
  • Cote d’Ivoire’s FIU became operational.
  • Russia’s FIU estimates that Russian citizens may have laundered as much as $370 billion in 2008.
  • The Hungarian FIU seized over 4.5 million euros (approximately $5,694,850) in illicit proceeds, and froze a total of 7 million euros (approximately $8.850,500).
  • The Government of Mexico took on internal corruption in 2008 and launched “Operation Clean House” aimed at ending corruption inside its enforcement agencies. By December, eight enforcement agents had been apprehended and accused of leaking confidential information to drug cartels.
  • In Indonesia, the scale of the terrorism threat is evidenced by 423 arrests and 367 convictions of terrorists in recent years. However, there has been little success in following the terrorists’ money trail and no prosecutions focused on the financing of terrorism.
  • In 2008, substantial property assets were seized relating to a Miami, Florida Medicare fraud scandal involving the Benitez brothers. Of the $110 million in fraudulent funds seized, over $30 million were invested in assets in the Dominican Republic.
  • In June, Spanish authorities dismantled an international criminal organization accused of drug-related money laundering and cocaine smuggling operations, arresting 21 individuals including nationals of Spain, Colombia, Peru, and Romania.
  • In September, Germany participated in a multi-national customs cash smuggling enforcement operation that included many of the European Union countries as well as a number of North African nations. Frankfurt-based representatives of the U.S. Department of Homeland Security Bureau of Immigration and Customs Enforcement (ICE) assisted in the coordination of the operation by providing real-time intelligence support to the German command center. During the week-long effort, 181 cases of money smuggling were discovered and 5.5 million euros (approximately $6,960,250) were seized.
  • In Panama, approximately 46,178 IBCs were registered in Panama in 2007 and 40,825 through the first ten months of 2008. Panama has no requirement to disclose the beneficial owners of any corporation or trust; bearer shares are permitted for corporations; and nominee directors and trustees are allowed. The result is that illicit funds can be laundered and taxes evaded with little fear of detection and prosecution.
  • The Dominican Republic, Grenada, Jamaica, Trinidad and Tobago plan to open “international financial centers”, most of which offer the same services as offshore financial centers.
  • In India, the analysis of suspicious transaction reports by the FIU led to the arrest of several suspected terror operatives not involved in the Mumbai attack.
  • The European Commission referred Spain, Poland, Belgium and France to the European Court of Justice over non-implementation of the Third Money Laundering Directive, which requires members to update their AML regimes to comport with the most current international standards, particularly with regard to regulation and terrorism financing. The deadline for transposition of the Directive was December 15, 2007.
  • Kazakhstan authorities initiated 54 money laundering cases in 2007; 41 were prosecuted, resulting in eight convictions. Kazakhstan estimated that approximately $400 million was “lost to corruption.” In 2008, 21 money laundering cases were successfully prosecuted. Kazakhstan estimated $1.6 billion was lost to corruption.

As history demonstrates again and again, political stability, democracy and free markets depend on solvent, stable, and honest financial, commercial, and trade systems. The Department of State’s Bureau of International Narcotics and Law Enforcement Affairs looks forward to continuing to work with our U.S. and international partners in furthering this important work and strengthening capacities globally to combat money laundering and expose the illicit networks of criminal organizations, the web of corruption, and help unravel conspiracies to commit terror acts.

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