Introduction
In 1999, money laundering exploded onto the front pages of the world's newspapers. In August, news headlines claimed that $15 billion in funds from Russia might have been laundered through banks in New York. Newspapers have continued to follow this story. In September 1999, U.S. Treasury Secretary Summers testified before the House Banking Committee on this issue, placing international money laundering directly into the spotlight. The investigation continues and indictments of a former bank official, two other individuals and the three companies have been filed. As the 2000 INCSR goes to press, guilty pleas from two of the individuals and the three companies have been entered. The large movements of money out of Russia and through American banks continue to focus the attention of the world on the problem of money laundering. Around the globe, there were both positive and negative developments in this field.
September marked the release of the Administration's National Money Laundering Strategy for 1999. This Strategy, prepared pursuant to the Money Laundering and Financial Crimes Strategy Act of 1998, highlighted the federal government's effort to address the problem of money laundering on a coordinated and comprehensive level. One of the four major goals of the Strategy is to strengthen international cooperation to disrupt the global flow of illicit money, and there are a number of action items in the Strategy that specifically address international money laundering.
Another major money laundering development in 1999 was the issuance of financial advisories concerning Antigua and Barbuda by the United States and the United Kingdom in April. The issuance of these advisories demonstrated that the United States and other nations will take tough, concrete action against governments that do not seriously address the problem of money laundering and do not adequately supervise financial institutions within their jurisdictions. The U.S. advisory, which advised financial institutions to give "enhanced scrutiny to all financial transactions routed into or out of Antigua and Barbuda," was issued because of negative changes in Antigua and Barbuda's anti-money laundering laws. These changes threatened to "create a 'haven' whose existence will undermine international efforts of the United States and other nations to counter money laundering and other criminal activity."
Issuance of these advisories is part of a coordinated campaign to identify and engage, and if necessary isolate, those jurisdictions that are not adequately addressing the problem of money laundering and to induce them into fulfilling their responsibilities as members of the international community. For example, the National Money Laundering Strategy has as one of its objectives that the United States should "apply increasing pressure to jurisdictions where lax controls invite money laundering." Action items included under this objective include a mandate to consider unilateral action where appropriate, including the issuance of bank advisories.
There is also multilateral support for stronger measures against non-compliant jurisdictions. The Financial Action Task Force has embarked upon an initiative to consider steps to be taken regarding countries and territories (including among FATF members) that fail to provide effective international administrative and judicial cooperation in money laundering cases. The first step in this process was to develop criteria for defining the non-cooperative countries and territories. The second step is to identify the jurisdictions that meet these criteria. The third step will be to agree upon the necessary international action to encourage compliance by the identified non-cooperative jurisdictions. The FATF is well underway on this initiative. Further, the FATF has already issued a press release expressing its concern about Austria, a FATF member, with respect to its failure to eliminate the anonymous passbook savings accounts that are available in Austria. Austria must begin to eliminate these accounts or face suspension of its FATF membership in June 2000. The FATF's willingness to take action against one of its members indicates that it will not shrink from fully pursuing this initiative.
In 1999, FATF agreed to expand its membership and invited three new countries to join as observers. These strategically important countries are Argentina, Brazil and Mexico. Full membership will be extended to each country once they satisfy FATF membership requirements.
Also during 1999, the Financial Stability Forum was created by the G-7 Finance Ministers to enhance international cooperation and coordination in the area of financial market supervision and surveillance. The Forum met for the first time in April and agreed to focus initially on three issues: the implications of highly leveraged institutions, the offshore financial services sector and short-term capital flows. This focus benefits efforts being undertaken in other various international initiatives to combat global money laundering and financial crime.
Any investigation of money laundering in the United States that involves the proceeds of a crime committed in a foreign country requires evidence that would establish the commission of the crime in the foreign country. Consequently, a successful money laundering prosecution in the United States requires the assistance and cooperation of the jurisdiction where the proceeds were generated. Such cooperation, in turn, requires that the countries involved have good working relationships between law enforcement agencies and have laws that allow and facilitate the exchange of information and evidence. Without such cooperation, it is difficult to investigate and prosecute international movements of money. Several bills to promote anti-money laundering cooperation have been introduced recently in the United States Congress.
Finally, it should be noted that two international crime conventions are also seeking to strengthen the international efforts against money laundering. In December 1999, the United Nations General Assembly adopted the International Convention for the Suppression of Terrorist Financing. This Convention requires States Parties to criminalize the providing or collecting of funds with the intent or knowledge that they are to be used to conduct certain terrorist activity. The Convention also contains important advances in the area of mutual legal assistance, including a provision that States Parties may not refuse a request for mutual legal assistance on the ground of bank secrecy. In addition, a new UN Convention against Transnational Organized Crime is being negotiated for General Assembly adoption in 2000. This Convention is expected to contain provisions to criminalize the laundering of proceeds beyond drug proceeds and to enhance anti-money laundering regulations, enforcement and cooperation worldwide.
Over the past year, it is encouraging that while anti-money laundering jurisdictions and organizations have been marshaling their forces, new colleagues have joined their ranks. Positive developments on this front include major initiatives in Eastern and Southern Africa, South America and the Asia-Pacific region. Each of these initiatives strengthens the global anti-money laundering community.
Why We Must Combat Money Laundering
People who commit crimes need to disguise the origin of their criminal money so that they can use it more easily. This fact is the basis for all money laundering, whether that of the drug trafficker, organized criminal, terrorist, arms trafficker, blackmailer, or credit card swindler. Money laundering generally involves a series of multiple transactions used to disguise the source of financial assets so that those assets may be used without compromising the criminals who are seeking to use the funds. Through money laundering, the criminal tries to transform the monetary proceeds derived from illicit activities into funds with an apparently legal source.
Money laundering has devastating social consequences and is a threat to national security because it provides the fuel for drug dealers, terrorists, illegal arms dealers, corrupt public officials and other criminals to operate and expand their criminal enterprises. In doing so, criminals manipulate financial systems in the United States and abroad. Unchecked, money laundering can erode the integrity of a nation's financial institutions. Due to the high integration of capital markets, money laundering can also negatively affect national and global interest rates as launderers reinvest funds where their schemes are less likely to be detected, rather than where rates of return are higher because of sound economic principles. Organized financial crime is assuming an increasingly significant role in money laundering that threatens the safety and security of peoples, states and democratic institutions. Moreover, our ability to conduct foreign policy and to promote our economic security and prosperity is hindered by these threats to our democratic and free-market partners.
In recent years, crime has become increasingly international in scope, and the financial aspects of crime have become more complex, due to rapid advances in technology and the globalization of the financial services industry. Modern financial systems permit criminals to order the transfer of millions of dollars instantly though personal computers and satellite dishes. Money is laundered through currency exchange houses, stock brokerage houses, gold dealers, casinos, automobile dealerships, insurance companies, and trading companies. Private banking facilities, offshore banking, shell corporations, free trade zones, wire systems, and trade financing all have the ability to mask illegal activities. The criminal's choice of money laundering vehicles is limited only by his or her creativity. Ultimately, this laundered money flows into global financial systems where it can undermine national economies and currencies. Money laundering is thus not only a law enforcement problem but a serious national and international security threat as well.
There is now worldwide recognition that we must deal firmly and effectively with increasingly elusive, well-financed and technologically adept criminals who are determined to use every means available to subvert the financial systems that are the cornerstone of legitimate international commerce. Global events over the past year involving offshore financial centers and new cyber money laundering trends point to the necessity of promptly addressing this growing threat.
Money launderers also negatively impact jurisdictions by reducing tax revenues through underground economies, competing unfairly with legitimate businesses, damaging financial systems, and disrupting economic development. Money laundering is now being viewed as a central dilemma in dealing with all forms of international organized crime because financial gain means power. Fighting money launderers not only reduces financial crime; it also deprives criminals and terrorists of the means to commit other serious crimes.
The United States and other nations are victims of tax evasion schemes that use various financial centers around the world and their bank secrecy laws to hide money from tax authorities, thus undermining legitimate tax collection. Financial centers that have strong bank secrecy laws and weak corporate formation regulations, and that do not cooperate in tax inquiries from foreign governments, are found worldwide. These financial centers, known as "tax havens," thrive in providing sanctuary for the deposit of monies from individuals and businesses that evade the payment of taxes in their home jurisdictions and to keep the money they have deposited from the knowledge of tax authorities. Billions of funds on which tax is properly due (marks, lira, pounds, et cetera) are held on deposit in these tax havens.
It makes no difference whether the funds on which tax is due emanate from illegal activity or revenue earned legally. Tax evasion and money laundering are activities that are aided by financial centers that have strong bank secrecy laws and a policy of non-cooperation with foreign tax or law enforcement authorities.
Offshore Financial Centers (OFCs)
Recent events of the past few years have led to a marked increase in 1999 in the efforts of the international financial community to identify and eliminate deficiencies in regulatory systems that may have the potential to threaten global financial stability. Simultaneously, the international financial community has been examining jurisdictions engaged in cross-border transactions to determine the extent to which individual jurisdictions adhere to standards and norms designed to thwart money laundering, tax evasion and other transnational financial crimes.
No sector in the global financial system is undergoing more intense scrutiny than the offshore financial services sector. Nearly sixty jurisdictions, scattered around the globe, comprise this constantly expanding sector (see offshore chart in this chapter.) A recent study found that by the end of 1997, the share of cross-border assets held in the offshore sector ($4.8 trillion) accounted for more than half all cross-border assets held globally.1
It is not only the sheer volume of cross-border assets held by the offshore financial centers that has riveted the attention of the world's regulators, supervisors, law enforcement organizations and international financial institutions. While the OFCs serve many legitimate functions in international commerce and financial planning,2 some of the products and services provided by the OFCs when combined with certain aspects of the regulatory and legal regimes within the sector can be used for criminal purposes. In particular, the lack of transparency that characterizes the offshore sector has acted as a powerful magnet to governments, groups and individuals desirous of hiding their financial activity from public scrutiny.
Although there is little consensus regarding the exact definition of an offshore financial center, certain characteristics distinguish traditional onshore financial centers from those termed "offshore." Unlike the onshore jurisdictions, the vast majority of OFC jurisdictions restrict access to their OFC financial services and products to non-residents. Further, many OFCs conduct financial transactions only in currencies other than the local currency.
OFC jurisdictions also differ from onshore jurisdictions in their regulatory regimes and legal frameworks. In general, OFC jurisdictions lack the stringent banking regulatory and supervisory regimes found in developed onshore jurisdictions. In many OFC jurisdictions, banks are not required to adhere to a wide range of regulations normally imposed on onshore banks. Formation of a bank is more easily accomplished in OFC jurisdictions; in some, a bank can be formed and registered and its ownership placed in the hands of nominee directors via the Internet. However formed, there are few, if any, disclosure requirements. Bank transactions frequently are free of exchange and interest rate restrictions, minimal or no capital reserve requirements are required, and transactions are mostly tax-free. Some 4,000 banks are thought to have been licensed and registered in the offshore sector by December 1998.3 How many are merely "brass plate banks" is not known. Other non-bank financial industries, such as the insurance and securities industries are subject to even less, if any, regulation than is the banking industry in the offshore sector.
While there are well-regulated OFC jurisdictions, a principal attraction of the sector itself is the existence of legislative frameworks that, to varying degrees, are designed to provide anonymity, to promote regulatory and supervisory arbitrage, and to provide mitigation or evasion of home-jurisdiction tax regimes.5 Even OFC jurisdictions with well-regulated banking systems normally provide loosely regulated non-bank financial services, such as the insurance and securities industries. Common to the sector are the confidential formation and management of a variety of international business companies (IBCs) 5 and exempt companies, trusts, investment funds and insurance companies, replete with nominee directors, nominee officeholders and nominee shareholders. While all these services or products are legitimate in and of themselves, it is the skillful use of these products, combined with the loose regulation and enhanced secrecy of the OFC jurisdictions that attract those intent on criminal behavior. Additionally, many of the OFC jurisdictions also provide bearer shares for corporations and banks, in addition to specific forms of trusts designed to protect individual assets as well as to provide anonymity to the beneficial owners of corporate entities.
This lack of transparency, coupled with a concomitant reluctance or refusal of many OFC jurisdictions to cooperate with regulators and law enforcement officials from other jurisdictions, attracts those with illegitimate purposes. Drug traffickers, terrorists, money launderers, tax evaders and other criminals have found the OFCs a particularly inviting venue in which to conduct and conceal their nefarious activities.
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1 Luca Errico and Alberto Musalem, Working Paper of the International Monetary Fund, "Offshore Banking: An Analysis of Micro-and Macro-Prudential Issues," 1999, p.10.
2 OFCs maintain that their carefully crafted laws and regulations provide beneficial business and financial planning options for their clients, including but not limited to: sophisticated trade financing, estate planning for high net worth individuals, tax mitigation for individuals and corporations, avoidance of exchange controls, liability containment for ships and airplanes, sophisticated insurance management options, investment opportunities that transcend home jurisdiction marketing regulations, preservation of assets, investment of overnight funds, and freedom from certain home jurisdiction regulatory requirements.
3 UNODCCP, Working Paper of the United Nations Office for Drug Control and Crime Prevention " The UN Offshore Forum," January 2000, p.6. Forty-four percent of all offshore banks are thought to be located in the Caribbean and Latin America, 29% in Europe, 19% in Asia and the Pacific and 10% in Africa and the Middle East.
4 The United Kingdom, Japan and the United States provide for the registration and operation of non-resident banks and corporations. However, they are normally excluded from analyses of offshore jurisdictions for reasons relating to the transparency of their stringently regulated regimes and their open access to law enforcement authorities which differentiate them from OFCs discussed in this analysis. In macro-economic terms, they are described as "primary OFCs," having advanced settlement and payment systems and operating in liquid regional markets where both the source and use of funds are available. These characteristics also distinguish them from the OFCs discussed herein. (Economic description derived from Errico and Musalem, p.12.)
Improper Use of OFCs
The opacity of the offshore sector appeals to sovereign states as well. A 1999 working paper of the International Monetary Fund (IMF) concluded that OFCs played a contributory role in the recent financial crises in Asia and Latin America by providing a hiding place for losses of loans from the international financial institutions. In 1997, Malaysia hid some $10 billion in losses in its OFC. Thailand, between 1993-1996, disguised poor lending decisions by "rolling over" its losses into its offshore sector. In the 1995 banking crisis in Argentina, $3-$4 billion of depositor and creditor losses were incurred due to the failure of Argentina's offshore banks operating in the OFCs in the Caribbean and in Uruguay. Similarly, in Venezuela's 1994 banking crisis, the offshore financial sector was used to hide billions of dollars by shifting assets and liabilities through unmonitored offshore establishments.2
Another example of disguising financial irregularities involved the Russian Central Bank (CBR) and the Isle of Jersey OFC. FIMACO, established as an IBC in Jersey at the end of the Soviet-era with a capitalization of only $1,000, became a wholly owned subsidiary of Eurobank, a subsidiary of the CBR, in 1992. Between 1993 and 1997, the CBR and Eurobank transferred just under $2.5 billion through FIMACO in order to inflate CBR reserve levels in order to mislead the IMF. Investigation into these transactions have found no evidence to date that any funds had been misappropriated or stolen.3
IBCs
As noted above, FIMACO was an IBC formed in the Jersey OFC with an initial capitalization of only $1,000. Although FIMACO's beneficial owner was eventually revealed, a primary attraction of IBCs is their ability to hide the identity of the beneficial owner by the use of nominee directors and officeholders. When combined with the use of bearer shares, IBCs present impenetrable barriers to law enforcement. Formed nearly instantaneously via the Internet in many OFCs, IBCs offering prepackaged anonymity (shelf companies) are convenient and accessible vehicles for those engaged in money laundering, tax evasion and other financial crimes. The well-advertised OFC in the British Virgin Islands (BVI) is reported to register nearly four hundred new IBCs each month. With more than 300,000 IBCs on its registers, the BVI may be the repository of more than 12% of all IBCs registered globally.1
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1 IBC is the term used to describe a variety of offshore corporate entities which, by design, can only transact business outside the jurisdiction in which they are formed. IBCs are characterized by rapid formation at low cost, broad powers, low to no taxation, minimal reporting requirements and secrecy. Many OFCs also permit IBCs to issue bearer shares.
2 Errico and Musalem, pp.37-38.
3 PricewaterhouseCoopers, "Report to V.V. Gerashenko, Central Bank of Russia, re: FIMACO," August 1999.
Asset Protection Trusts
Although IBCs play an important legitimate role in international commerce, they also play an important role in money laundering, as do a variety of trusts. One form of trust, the Asset Protection Trust (APT), protects the assets of individuals from civil judgments in their home jurisdictions. A common provision of APTs is that challenges or claims against the assets of the trust must be brought before the courts of the jurisdiction of the APT domicile within a relatively short period of time (usually two years). Many APTS contain "flee clauses," requiring the immediate transference to another OFC if the APT is threatened by inquiry. Used in combination with one another, IBCs, mini-trusts, bearer shares and APTs, these instruments make it nearly impossible for competent authorities to generate paper trails or to identify the beneficial owner of companies, while they simultaneously protect those engaging in serious financial crime from civil or criminal prosecution.
Economic Citizenship
Other practices found in some offshore and onshore jurisdictions can be problematic for law enforcement. The selling of varying degrees of citizenship ("economic citizenship") for a contribution to the State, can be found in both onshore and offshore jurisdictions. However, when combined with "special benefits" such as an instant change of name and the ability to travel to many countries without a visa on a new passport, economic citizenship can be misused by criminals. Currently, six OFCs sell economic citizenship: Belize, Dominica, Grenada, St. Kitts and Nevis and St. Vincent and the Grenadines in the Caribbean and Nauru, in the Pacific.
Virtual Casinos
The Internet has spawned "virtual" casinos and sports betting shops, claiming to have their physical locations in the Caribbean Basin (see the OFC chart). While the details of gambling in cyberspace are discussed elsewhere in this Report, it is instructive to note that with the exception of St. Vincent and the Grenadines, all Caribbean Basin OFCs that sell economic citizenship also sell virtual casino licenses. In the Pacific, only the offshore jurisdictions of Niue and the Cook Islands are known to sell these licenses. Wherever actually located, virtual casinos are extremely profitable for the governments that sell the licenses ($75,000 for a sports betting shop, $100,000 for a virtual casino licenses-a typical fee) and, quite possibly, that share in the operator's profits. As was reported in the 1999 INCSR, the Pacific jurisdictions were thought to have generated nearly $1.2 million dollars a month in these license fees, principally in the Cook Islands. Reports suggest that in 1999, monthly income rose by 25% to $1.5 million. Internet gambling executed via the use of credit cards and offshore banks represents yet another powerful vehicle for criminals to launder funds from illicit sources and to evade taxes.
Sharing Control with the Private Sector
The reality is that, even in the better-regulated OFCs, opportunities for sovereign states to disguise losses and for criminals to engage in the placement and layering of illicitly gained funds are on the increase. New technologies and the creative abilities of unethical attorneys, accountants and other professional "gatekeepers" provide opportunities to manipulate the system. Two Pacific jurisdictions, the Marshall Islands and Niue, appear to have entered into various awkward sharing arrangements, whereby an external agent controls entry to the market, thereby assuming fundamental regulatory functions, nominally in the hands of the government. Entry to the Marshall Islands OFC and regulatory control of the OFC appear to be in the hands of the Reston, Virginia branch of a multi-national company, while entry into the Niue OFC is controlled by a Panamanian law firm.
Similar arrangements can be found in some Caribbean Basin OFCs as well. In the Belize OFC control of the registration of IBCs and ships was ceded to the private sector at its outset. In the case of Antigua and Barbuda, ceding control to an external agent played a major role in that government's decision to change legislation to create a haven for those engaged in money laundering. After intensive but fruitless negotiations with the Government of Antigua and Barbuda, the United States, followed by the United Kingdom issued financial advisories in April 1999 warning their own financial institutions to view with suspicion all transactions to, through and from Antigua and Barbuda, or involving any of its Nationals. One result of these advisories was the closing of all but 18 of Antigua and Barbuda's 57 offshore banks. Another beneficial result of the advisories has been the passage of new legislation, which reportedly has corrected many defects of the former laws pertaining to banking. Under the 1998 defective IBC Act the regulatory function of IBCs effectively was in the hands of private sector agents responsible for marketing the sector. It is expected that the act will be revised to reflect the complete separation of government regulatory functions from marketing, the latter of which is a private sector function. More recently, St. Lucia, despite the specific advice of the United States to the contrary, enacted legislation that places all but nominal regulatory control of its proposed OFC into the hands of the private sector. If the reports of the contents of the recently brought into force legislation are accurate, St. Lucia will have transferred control of its OFC to the private sector.
Entering into such arrangements is not a necessary pre-condition, however, to attracting dubious activity. Nauru, a Pacific Island with a population of only 10,000 individuals, has nearly 400 offshore banks registered to a single post office box. Reports by the Central Bank of Russia in 1999 allege that during 1998-1999, nearly $70 billion was either "booked" to Russian-owned banks registered in Nauru or transferred through Nauru's correspondent banks to OFCs in the Caribbean and Europe. Much smaller amounts of the $70 billion are alleged by the Central Bank to have been booked to, or transferred through, the Vanuatu OFC and through Palau. As is frequently the case, the markets reacted to these allegations quickly. Deutsche Bank issued a message to the nearly 300 correspondent banks within its system to stop processing dollar denominated transactions from the three Pacific jurisdictions. Republic National Bank, Bankers Trust and the Bank of New York followed suit.1
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1 UNODCCP, p.6. Of the nearly 2.5 million IBCs registered globally, 37% were registered in the Caribbean and Latin America, 25% in "Europe, 30% in Asia and the Pacific and 8% in Africa and the Middle East
Current International Initiatives
The damage to the reputation of an individual OFC resulting from governments or markets reacting to reports of irregular or illicit activities is significant as is the unavoidable collateral damage to the reputation of the offshore sector as a whole. For that reason, better-regulated OFCs understandably resent being tarred by the same brush as those which are not well regulated.
During the past year or so, the threats presented by a lack of transparency and oversight to an increasingly interdependent global financial system have been examined in variety of fora. While all these initiatives are important, the following will have a direct and immediate impact on the offshore sector and on the reputation of individual offshore jursidictions.
United Kingdom White Paper on the Offshore Industry in the Overseas Territories
Anthony Edwards' extensive review of the British Crown Dependencies of Guernsey, Jersey and the Isle of Man was presented to Parliament in November 1998. Edwards concluded that while "prudential regulation of banks, investment business and insurance is generally of a high standard," there were specific areas in which all the Channel Islands could improve.1 For example, the use of instruments such as asset protection trusts and bearer shares provided obstacles to international law enforcement.
Following the Edwards report, a White Paper on the offshore industry in the British Overseas Territories (Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Montserrat and Turks and Caicos) was issued in March 1999. That paper describes potential changes designed to ensure that those jurisdictions' regulatory regimes are effective, transparent and offer adequate accessibility for the legitimate investigation of criminal activity, including money laundering, other financial crimes as well as tax fraud and tax evasion The potential changes would also apply to the Channel Island jurisdictions.
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1 Anthony Edwards, "Review of Financial Regulation in the Crown Dependencies," presented to Parliament by the Secretary of State for the Home Department, November 1998, p. vi.
The Organization for Economic Co-operation and Development (OECD) Program to Counteract Harmful Tax Practices
While the British Crown Dependencies and Overseas Territories will face new regulations, including to withhold taxes, that may not be the case with smaller sovereign offshore jurisdictions located around the world. In pursuit of their effort to combat harmful tax practices, OECD governments are in the process of identifying jurisdictions that function as tax havens, and the OECD is taking steps to eliminate the adverse consequences that those jurisdiction have on the world economy. The identified jurisdictions will be encouraged to eliminate the harmful features of their regimes as part of an ongoing co-operative dialogue with the OECD Forum on Harmful Tax Practices. In situations in which those discussions are unsuccessful, coordinated countermeasures by OECD member countries are foreseen.
Mandated by the 1998 Report on Harmful Tax Competition to produce a list of tax havens, the Forum, over the last year has engaged in extensive factual review and dialogue with the jurisdictions initially identified for review (with the exception of a small number that chose not to participate). On the basis of these consultations, the Forum met in November 1999 in Paris to undertake an initial technical evaluation of whether each jurisdiction meets the criteria for being a tax haven, as set out in the 1998 Report. Those preliminary findings were presented to the Committee on Fiscal Affairs, the OECD's senior tax policy body in January 2000.
As defined in the 1998 Report, a tax haven is a jurisdiction that (i) imposes no or only nominal taxes (generally or in special circumstances), (ii) offers, or is perceived to offer, itself as a place to be used by non-residents to escape taxation in their jurisdiction of residence, and (iii) possesses "confirming criteria." Those confirming criteria are: 1) lack of effective exchange of information, 2) lack of transparency, and (3) attracting businesses that conduct no substantial activities. These criteria are consistent with the nature of the tax poaching schemes that are the object of the OECD's work: schemes that impede the ability of home jurisdictions to enforce their own tax laws.
Currently, private dialogues are underway with those jurisdictions under review, and any list of tax havens would be submitted to the OECD Council in June 2000. Publication of the Forum's findings is not expected until after the June 2000 Ministerial. The report is expected to distinguish between uncooperative tax havens and jurisdictions that choose to commit themselves to work towards eliminating the harmful aspects of their regimes. No distinction will be made between jurisdictions that are independent states and those that are dependencies.
Financial Action Task Force (FATF) Ad Hoc Group on Non-Cooperative Countries and Territories (NCCT)
The Financial Action Task Force, is engaged in a process designed to identify non-cooperative jurisdictions in the fight against money laundering and to encourage them to implement international standards in this area. The year-old initiative began with the development of twenty-five criteria1 to identify detrimental rules and practices that impede international cooperation in the fight against money laundering. The criteria address the following issues:
- Loopholes in financial regulations that allow no, or inadequate supervision of the financial sector, weak licensing or customer identification requirements, excessive financial secrecy provisions, or lack of suspicious transaction reporting systems.
- Weaknesses in commercial requirements including the identification of beneficial ownership and the registration procedures of business entities.
- Obstacles to international co-operation, regarding both administrative and judicial levels.
- Inadequate resources for preventing, detecting and repressing money laundering activities.
The FATF has set up four regional review groups to begin reviews of a number of jurisdictions, both within and outside the FATF membership. Jurisdictions to be reviewed are being informed of the work to be carried out by the FATF. The reviews will involve the gathering of all relevant information, including laws and regulations as well as any mutual evaluation reports, self-assessment surveys or progress reports, if available. The factual information on each jurisdiction's regime will then be analyzed with respect to the twenty-five criteria and a draft report will be prepared and sent to the jurisdictions concerned for comment. Once the reports are completed, the FATF will address further steps to encourage constructive anti-money laundering action and is expected to publish a list of non-cooperative jurisdictions.
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1 The twenty-five criteria are set forth in the Annex - to the Money Laundering and Financial Crimes section.
The Financial Stability Forum (FSF) Working Group on Offshore Financial Centers
The FSF established the OFC Working Group in April 1999. The Working Group is comprised of officials of industrial and emerging market economies, international institutions, and regulatory and supervisory groupings. The Working Group's purpose is to evaluate the impact on global financial stability of the uses made by market participants of financial offshore centers. The Working Group is reviewing the uses and activities of OFCs. Those OFCs with weaknesses in financial supervision, cross-border cooperation, and transparency allow financial market participants to engage in regulatory arbitrage of several forms, undermining efforts to strengthen the global financial system. The Group considers that the key to addressing most of the problems with these OFCs is through the adoption and implementation of international standards, particular in cross-border cooperation. The Group's work is focused on identifying the relevant international standards whose implementation would address these issues, and developing recommendations on mechanisms for assessing compliance in the implementation of the standards and ensuring appropriate incentives to enhance such compliance.
The OFCs in the New Millennium
Were all problematic OFCs to implement all the recommendations of the international organizations, the opportunities presented to those intent on using the OFCs for criminal purposes in the opening decades of the 21st century would still increase greatly with the introduction of new technologies. Governments will have to devote substantial resources to cope with issues that promise to be as complex than those currently associated with cyberspace.
But the Internet need not be a weapon wielded primarily by those with criminal intent. A cursory search on the Internet reveals dozens of websites promising instantaneous access to the OFCs. Not infrequently, regulators of the named OFC jurisdictions state that they have no contractual connection to the agents advertising their access and are, in fact, being victimized by being named in these websites.
A novel idea might resolve this problem. To protect against reputational damage, each OFC jurisdiction could construct a website in which it names its contracted agents and also names those who are fraudulently advertising their connection to the OFC. Alternatively, a multinational entity, such as the United Nations might consider providing this service. Additionally, a global website could track fraudulent OFCs such as The Kingdom of EnenKio Atoll, the Republic of Melchizedek and the Republic of Lomar, which exist only in cyberspace. These fraudulent entities are responsible for defrauding individuals of hundreds of millions of dollars through the selling of economic citizenship and other criminal schemes.
Beyond the challenges that new technologies pose for regulators and law enforcement authorities, another lingering issue not yet sufficiently addressed by those committed to achieving transparency in the offshore sector, is the critical role played by licensed professionals in aiding and abetting criminal behavior in the OFCs Achieving transparency would require convening groups representing governments and licensed professionals (such as lawyers, accountants, auditors, company formation agents and notaries) to consider developing clear standards, guidelines and rules to govern conduct in order to avoid putting professionals "in a place in which their obligations to client and to country clearly conflict."2 The United States Government considers this to be a very serious issue and is closely studying it and all its ramifications. While this problem is not unique to the OFCs, it is of particular import in the OFC sector.
Ultimately, the concerted joint effort of regulators, law enforcement officials, and regulated licensed professionals working closely with those providing financial services in all jurisdictions will be necessary to combat all financial crimes, including money laundering and tax evasion, while diminishing the perceived potential threat of the offshore financial sector to global financial stability.
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1 Jonathan M. Winer, "The Coming Wave of Transparency Reform: A Tidal Shift", keynote address at the Seventeenth Cambridge Symposium on Economic Crime" September 1999, p.8.
Explanatory Notes To the Offshore Financial Centers Chart
Given the intrinsically secretive nature of OFCs, public information is frequently difficult to obtain. Industry publications, discussions with officials responsible for managing the OFCs, finance ministry officials, embassy reports, analyses from U.S. agencies, studies of international organizations and other governments and secondary sources provided the data for the chart.
Jurisdictions which are considering establishing OFCs, Nepal and Palau for example, are not included on the chart. Excluded also are jurisdictions which provide low or no taxes to individuals but offer no other services normally associated with the offshore financial service sector.
Within most categories presented on the chart, the designations Y and N are used to denote the existence (Y) or the non-existence (N) of the entity or service in a specific jurisdiction. Where there is no (or only fragmentary) information regarding specific categories, the corresponding cells on the chart are left blank. In some categories, symbols other than, or in addition to Y or N are employed. Explanations for additional symbols are provided below.
Explanations of the categories themselves are either provided in the preceding text, are considered to be self-evident, or are provided below.
Category Designations on the Offshore Financial Centers Chart
Offshore Banks: The number is provided if known. A Y in this category indicates that although the OFC registers offshore banks, the number of such banks is not known. A P indicates that the jurisdiction refuses to reveal the number of registered offshore banks. An N indicates that there are no offshore banks in the jurisdiction. A blank cell indicates that the United States does not know if offshore banks are offered within the OFC.
Trust and Management Companies: These are companies which provide fiduciary services, serve as marketing agents, representatives, lawyers, accountants, trustees, nominee shareholders, directors and officers of international business corporations. Y=Yes; N=No; Blank cell=Unknown.
International Business Corporations (IBCs) &Exempt Companies: Numbers provided when known and public; in many cases, the numbers are significantly underreported. A Y indicates that IBCs and/or Exempt Companies are offered but the number is not known. A P means the jurisdiction refuses to reveal the information; a blank cell indicates that it is not known whether IBCs are offered.
Bearer Shares: Y = Yes; N = No; Blank Cell = Unknown.
Asset Protection Trusts (APTs): Y = Yes; N = No; Blank Cell = Unknown
Insurance and Re-insurance Company Formation: Y = Yes; N = No ; Blank Cell = Unknown
Provides "Economic Citizenship": Passports are sold by jurisdictions that enable their holders to evade taxation and legal remedies by law enforcement agencies of their "home countries". Y = Yes; N = No.
Services Advertised on the Internet: The Internet has been an extraordinary boon to OFCs. For minimal cost, remote and little known jurisdictions and agents can advertise globally, describing the services provided by the OFCs and providing almost instantaneous registration There is no distinction on the chart between government sponsored websites and those sponsored solely by the private sector. Y = Yes, N = No; Blank cell = Unknown
Internet Gaming: Licenses granted by jurisdictions enable grantees to establish "virtual casinos" on the Internet." Pay via credit card. Y= Yes; N= No; Blank Cell = Unknown
Criminalized Drug Money Laundering. A D in this column indicates that the jurisdiction has passed a law criminalizing narcotics-related money laundering only. BD indicates that the money laundering encompasses other crimes in addition to narcotics related money laundering. N = no legislation criminalizing money laundering.
Suspicious Activities Reports: An M indicates that reporting suspicious transactions to law enforcement by banks, and in some jurisdictions, other financial institutions is mandatory. A P indicates that reporting is voluntary. N=no requirement to report.
Cooperates with International Law Enforcement: Y= Yes; N=No; Blank Cell = Unknown
Membership in International Organizations: These multinational organizations have been formed to combat money laundering or to establish sound supervisory regimes; the Asia/Pacific Group, the Financial Action Task Force, the Caribbean Financial Action Task Force, the Council of Europe Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures, the Offshore Group of Banking Supervisors and the Organization of American States Inter-American Drug Control Commission. N = not a member in any of these organizations.
Mutual Legal Assistance Treaties (MLATs): In money laundering cases, MLATs can be extremely useful as a means of obtaining banking and other financial records from our treaty partners. A Y in this column on the chart indicates that the United States has an MLAT with a specific jurisdiction or with the jurisdiction which is responsible for the international relations of the jurisdiction and which has extended application of the treaty to that jurisdiction. An R designates a country or jurisdiction with which the United States has signed an MLAT which has been ratified by the United States but is not yet in force. A D in this column indicates that the OFC jurisdiction is an overseas territory of the United Kingdom and is covered under the MLAT with the United Kingdom. Madeira, as was, Macau, is an autonomous region of Portugal, which does not have an MLAT with the United States. Similarly, Aruba and the Netherlands Antilles are part of the Netherlands, which does not have an MLAT with the United States. Hong Kong's MLAT.
Offshore Financial Centers Chart -- [Excel file]
Money Laundering Trends
In last year's Report, we noted that there was relatively little change in the predicate offenses that generate illicit proceeds. A review of U.S. suspicious activity reports (SAR),1 investigative activity, prosecutions and convictions during 1999 continues to suggest that sources of illicit proceeds are consistent with those reported in prior years. Specifically, drug trafficking, bank fraud, medical and commercial fraud appear most often as predicate offenses.
Money laundering and evasion of currency reporting requirements continue to be major problems in the United States. All income from illegal activity, such as narcotics trafficking, illegal gambling, Internet, bankruptcy and health care fraud, embezzlement, public corruption and other crimes for profit involve some degree of money laundering.
From 1986 when money laundering was made a separate crime in the United States, through September 1998, there were more than 5,900 convictions or guilty pleas for federal money laundering offences. In fiscal year 1997 through 1999, U.S. Attorneys charged approximately 2,000 defendants each year.
__________________ 1In the United States, financial institutions are required to report suspicious transactions to the competent authorities.
Money Laundering and Tax Evasion
During fiscal year 1999 (October 1, 1998 to September 30, 1999), the Internal Revenue Service (IRS) initiated 2,076 money laundering investigations; many worked jointly with other U.S. law enforcement agencies. Of those, 1,710 were recommended for prosecution. The approximate total dollar amount of proceeds laundered on the 1,710 cases was over $7 billion.
In recent years, the IRS has seen a proliferation in tax evasion schemes using trusts, bank accounts, and corporations in offshore financial centers (OFCs). Currently, there are sophisticated promotions of trust schemes that involve a series of trusts formed domestically and in OFCs that are also utilizing foreign bank accounts and international business corporations (IBCs). These promotions are directed to individuals with incomes usually greater than $100,000. Promoters are selling these fraudulent trust packages for $10,000 to $75,000 that purportedly detail how individuals can take their businesses offshore and avoid federal income tax. These promotions are in reality elaborate tax evasion and money laundering schemes, whose multiple layers make it difficult, if not impossible, to determine beneficial owners and to track transactions.
For example, in one sophisticated scheme, promoters instruct individuals to transfer their businesses, including income earned during the year, to a trust, tax-exempt or asset Management Company (AMC). Next, promoters instruct clients to form a trust with nominee directors in an OFC. All income earned by the business that was transferred to the AMC is then distributed to the foreign trust. The trustee of the foreign trust is the AMC. The promoters then instruct individuals to form a second foreign trust also located in an OFC. All the income, less some fraudulent expenses, is distributed from the first foreign trust to the second foreign trust. The first foreign trust is the trustee of the second foreign trust and Certificates of Beneficial Interest (CBIs) are issued to the first foreign trust or other foreigner controlled by the taxpayer. At this point, according to the promoters, the income transferred to the second foreign trust is now outside U.S. tax jurisdiction. Promoters claim that since the source of the income and the beneficiary are foreign, there is no U.S. tax return filing requirements.
Since the business income is now offshore, individuals need to repatriate their earnings back into the United States. The most popular method used to do this is to open a foreign business account with an anonymous IBC in an OFC and deposit business earnings into that account. In other cases, individuals are purchasing offshore banking licenses and forming their own financial institutions (as has been documented in Belize and Nauru). The earnings are returned to the individual by the use of a debit or credit card or through wire transfers. In the case of debit or credit cards, the individual uses the cards for cash access through ATMs in the United States or to pay everyday living expenses. Since these cards are issued by banks in OFCs, it is very difficult for U.S. law enforcement to document the transactions. In some instances, the business earnings are wire transferred back to the United States. This scheme occurs in OFCs around the world.
Money Laundering: New Technologies and Terrorist Financing
The use of automated teller machines (ATMs) is a recently identified method of money laundering that came to light during a comprehensive review of SARs. Other forms of electronic transactions, including via the Internet and with smart cards, are also of concern to U.S. officials responsible for fighting money laundering. Terrorist financing also has been included in this section due to the high priority placed on this problem by U.S. law enforcement authorities.
Automated Teller Machines
A review of SARs filed from July 1997 through June 1998 identified a significant number of reports noting a Bank Secrecy Act (BSA) violations and citing instances of ATM activity. Reports were filed by more than 60 different banks in 32 states, the District of Columbia and Guam. The reporting indicates that ATMs are being used domestically and abroad to deposit and withdraw large sums of cash on a recurrent basis with the apparent purpose of evading detection by law enforcement authorities.
Domestically, the SARs indicate structuring of cash transactions to avoid the Currency Transaction Report (CTR) filing requirement. Customers do this by making multiple ATM cash deposits and withdrawals in combination with same day bank counter activity aggregating more than $10,000.
Internationally, the SARs reveal that, in many instances, cash or wired funds in accounts based in the United States were subsequently withdrawn from ATMs located in jurisdictions with a high risk for money laundering or drug trafficking. The size and number of the withdrawals within short time frames are indicative of potential money laundering.
Online Banking1
The sources of illicit proceeds and schemes used to launder those proceeds remain generally unchanged from prior years. However, there has been a significant increase in the use of online banking services to carry out specific steps in the money laundering cycle. In particular, an increase in the exploitation of online banking for both the layering and integration phases of money laundering has been observed.
Institutions offering online banking use the Internet as the delivery channel to facilitate consumer and business financial transactions, such as funds transfers, bill payment, and account balance review. An online banking customer accesses his or her accounts from an Internet browser--software that runs the banking programs resident on the institution's Internet server.
Although many online banks offer virtually the same services as do traditional brick-and-mortar banks, Internet banking is viewed by many analysts as an important means of maintaining an increasingly sophisticated customer base, of developing a new customer base, and of capturing a greater share of depositor assets. Because Internet banks generally have lower operational and transactional costs than do traditional banks, they are often able to attract new customers with offers of low-cost checking accounts and favorable interest returns on deposits and investments.
Despite lingering customer fears about security, reliability, and privacy, many industry analysts believe that online banking in the United States is positioned for dynamic growth. More than 1,200 U.S. banks and credit unions purchased Internet banking technology in 1998, and it is believed that about 7,200 banks and credit unions did the same by the end of 1999.
The growth of electronic banking has introduced various new challenges for regulatory and law enforcement authorities. Governments must continually evaluate industry developments in order to formulate strategies to ensure continued growth of online banking, while minimizing the risk for financial fraud and money laundering.
Today's online bank may consist of no more than a computer server and a telecommunications connection. Depending on its location, an online bank may be subject to a wide range of oversight and supervision--from very robust and effective policies and programs, to very lax or nonexistent regulatory regimes. In addition, an online bank whose practices come under suspicion by regulatory and law enforcement authorities may be difficult to investigate because of the remote and global projection capabilities of the Internet and other telecommunications technologies. The victims of a bank fraud and the perpetrators of a money laundering scheme each may be half-a-world away from the physical location of the bank's computer servers. Online payment technologies may also pose other unique problems vis-?-vis concealed transactor identities and insufficient or non-existent audit trails.
As the phenomenon of online banking continues to spread globally, so too will the threat for criminal abuse by individuals and organizations engaged in money laundering, fraud and other financial crimes. Electronic banks, particularly those that operate in traditional bank secrecy jurisdictions, offer many unique services that may be misused for the purpose of laundering illicit funds.
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1 "Online banking" is often used as an umbrella term to describe Internet banking, PC banking and telephone banking. This discussion focuses exclusively on the issues associated with Internet banking.
Internet Banking and Gambling
Electronic commerce, or E-commerce, is a growing application within the Internet being used for both legitimate and illegitimate businesses. E-commerce comes in many legitimate forms such as electronic funds transfer and electronic banking. This particular area of Internet banking has undergone regulatory scrutiny in the United States primarily to identify banking customers through verification of driver license, residential address, telephone, social security and passport information. However, in the international electronic banking markets, few regulatory or due diligence oversights address the verification of Internet customers.
For example, offshore Internet banks are often associated with offshore Internet gaming businesses, which further facilitate the laundering of illicit cash. The countries associated with offshore Internet banking do little to conduct on-site review and regulation of these "cyberbusinesses." This poses unique challenges to U.S. law enforcement agencies.
Jurisdictions that have provided a haven for offshore Internet gaming argue that the offshore locations and licenses put the Internet operation outside the jurisdiction of U.S. law. Those cases, however, that have been adjudicated by United States courts, indicate that the act of entering the bet and transmitting the information from the United States via the Internet constitutes gambling activity within the United States and is sufficient to confer jurisdiction to U.S. courts. However, a number of non-cooperative jurisdictions in the Caribbean continue to utilize Internet gaming as a means to target U.S. gamblers and provide a sanctuary for offshore Internet money launders.
Encryption and Electronic Money
United States law enforcement agencies are concerned about cryptography (the art of ciphering and deciphering messages in code). Cryptography has allowed the development of electronic money (e-money). The basic technology that has furthered the use of e-money allows banks and their customers to protect their financial transactions through the use of encryption "keys." By utilizing encryption keys, the banks and individuals can encrypt e-money to be an identified or an anonymous transaction. Identified e-money contains information revealing the identity of the person who originally withdrew the money. Anonymous e-money is similar to paper cash. Once anonymous e-money is withdrawn from an account, it can be spent, given away or laundered without leaving a transaction trail. These types of transactions serve as a conduit for money launderers to facilitate their illicit cash businesses.
Electronic Communication
The Internet is also known as a new forum for public and private speech. This speech is carried-out via electronic mail (e-mail), chat rooms and bulletin boards. These forums are often used by potential money launderers to provide misleading and inaccurate stock and commodity market information. The idea of the money launderer is to provide penny stock or initial public offering stock information that misleads investors to interpret the electronic communication as potential (unofficial) investment advice. This information causes many investors to purchase or sell stocks by anticipating an increase or decrease in market prices. The criminals then use these market adjustments to realize millions of dollars in profits. These profits are then placed into stock transactions via the Internet with commingled lawful cash transactions.
Web Page Crimes
Legitimate vendors have established elaborate web pages in support of their product display, service catalogs, and have utilized a variety of secure payment options to facilitate purchases. These web pages allow for business-to-business or business-to-consumer transactions. Vendors can choose to host their web stores locally or host their web stores remotely through an Internet Service Provider (ISP). These web stores have been used by white collar criminal networks as a mechanism to conduct a wide variety of criminal schemes, including money laundering. Many criminal associates and enterprises also have established their own web pages. One of the schemes involves the use of identity theft and credit cards. In this scheme, criminal enterprises utilize merchandise purchases to launder illicit cash with merchandise sales. Many of these thefts come from criminals who can duplicate legitimate web pages to intercept legitimate consumer purchases (called "web spoofing"). These thefts occur specifically to obtain credit card and identity information from the consumer. Once the information is captured, the thief forwards the intercepted information to the legitimate web page vendor. The legitimate vendor sends the purchase confirmation to the consumer. Many consumers will not know of the theft until the unauthorized merchandise purchases are noted on the consumer's credit card bill.
Smart Cards
Another concern to U.S. law enforcement officials is the developing use of smart cards to facilitate the laundering of illicit cash. Smart cards allow users to bypass paper money by adding cash value to a computer chip embedded on the front of the card. The microchip keeps track of how much money is on the card after each deposit and purchase. Because the cash value is stored on the card, there is no need for the merchant to dial up a bank or credit card company's computer to get approval for a transaction.
Smart cards can be used for direct purchases, computer-to-computer purchases and automatic teller machine withdrawals. This advanced technology has enabled individuals with a pre-loaded value card to withdraw currencies in 53 countries throughout the world.
Although smart cards have been widely accepted in Europe and Asia, consumers in the United States have been slow in welcoming the technology. However, money launderers have determined that smart cards are a far easier way to move large sums of money than bulk cash shipments.
Internet Fraud Center
These new technologies and criminal applications of the Internet have caused U.S. law enforcement officials to encounter difficulty in handling complaints by consumers and even problems in receiving complaints from victims. In many cases, the victim does not know where or even what agency to report an Internet crime. When a law enforcement agency receives a complaint, it is difficult to determine exactly where the crime took place. In response, the Federal Bureau of Investigation (FBI) has opened the Internet Fraud Center (IFC). The IFC will be a conduit for Internet criminal complaints received domestically and internationally. The IFC was designed by the FBI to address Internet crimes regardless of the violation or where the crime originated or was committed. This information will then be disseminated to the appropriate law enforcement agency for further investigation.
The IFC will allow U.S. law enforcement to apply better investigative resources to address criminal enterprises utilizing the Internet to commit their criminal activity in the year 2000 and beyond.
Terrorist Financing
In 1998, terrorists mounted approximately 273 attacks killing 741 people worldwide. Most notable were the August 1998 bombings of the U.S. Embassies in Dar Es Salaam, Tanzania and Nairobi, Kenya--allegedly orchestrated and financed by Usama Bin Ladin and his al-Qa'ida terrorist organization. The simultaneous attacks claimed 301 lives and injured more than 5,000 people.
Terrorist groups differ from other criminal networks in the motives behind their crimes. Unlike drug traffickers and organized crime groups that primarily seek monetary gain, terrorist groups usually have non-financial goals, such as publicity, dissemination of ideology, political legitimacy, and political influence. As a result, uncovering and interdicting the finances of a terrorist organization with existing anti-money laundering laws and FATF guidelines requires that policy makers and law enforcement officials recognize that terrorists' revenues, expenditures and methods of moving funds may differ from profit-oriented organized crime networks.
While not seeking financial gain as an end in itself, international terrorist groups need money to attract and retain adherents and to support a presence locally and overseas. Hizballah, HAMAS, Bin Ladin's al-Qa'ida, and others also need funds for media campaigns, to buy political influence, and even to undertake social projects--largely with the aim of maintaining membership and attracting sympathetic supporters. Indeed, for many terrorist groups, the planning and execution of violent attacks probably comprise a small part of their total budget. It is much more difficult to investigate the financial dealings of a terrorist organization if most of its funds are earmarked for legitimate political, social, and humanitarian activities.
Although many countries have passed laws that prohibit money laundering for all crimes--including terrorism--the laws usually have been applied to terrorists only in cases where they have taken part coincidentally in fraud, drug trafficking, or some other crime that generated illicit proceeds. More needs to be done on a comprehensive basis to prevent money laundering from facilitating terrorist activities.
Global Money Laundering Typologies
Asia and the Pacific
Structuring of transactions to avoid the prevention and detection of money laundering by threshold-based reporting requirements continues to be a significant problem in the United States as evidenced by a review of the SARs. This problem is further exacerbated by use of cashier's checks and money orders to facilitate physical transportation of funds. For example, one case involved a scheme to structure currency deposits into U.S. financial accounts in amounts just under $10,000 and then to wire transfer these funds to individuals in Hong Kong, Singapore, Bangkok and Vietnam. Additionally, the scheme involved sending cashier's checks and negotiable instruments via the U.S. Postal Service. The structured financial transactions involved the purchase of over $1 million of American Express money orders. The investigation revealed that an illegal money transmitting business was utilized to transfer over $20 million to individuals outside the United States. One of the defendants pled guilty to filing false tax returns and received a sentence of six months plus three years probation. The other defendant was convicted of conspiracy, operating an illegal wire transmitting business, structuring, and tax evasion.
Central and Eastern Europe
A review of SARs filed from January 1997 through February 1999 was undertaken to determine if SAR data could be used to construct a meaningful typology of suspicious financial activity that could be linked to Russia and jurisdictions in Eastern Europe and Eurasia (EEAE). This research identified approximately 500 SARs filed during this period reporting transactions or transactors associated, directly or indirectly, with Russia or one of jurisdictions in EEAE - (Estonia, Latvia, Lithuania, Belarus, Ukraine, Moldova, Armenia, Azerbaijan, Georgia, Turkmenistan, Kazakhstan, Uzbekistan, Kyrgyzstan and Tajikistan). The SAR narrative field proved to be invaluable in identifying the relevant transactions and transactors and provided the vast majority of the information of value used in building the typology.
The national SAR database was searched to extract and then analyze SARs that include a reference in the narrative to Russia or the EEAE jurisdictions. An analysis of SAR data showed extensive, large dollar wire transfer activity, typically involving apparent connections between multiple accounts, companies, banks, and countries often involving a Russia-based bank or company, or a Russian citizen.
There are many variations of the overall paths of the wire transfer activity. However, a basic pattern that emerges from SAR data is that bank accounts based in the United States are identified as either primary reception or origination points for large wired sums, coming in from, or destined for, Russia and neighboring countries. It further appears that some of these U.S.-based accounts may also serve as conduit accounts from which large sums are then wired offshore, often to money laundering havens. Similarly, wires may also be received from offshore havens or other foreign locations.
With few exceptions, there appears to be no significant net flow in favor of any frequently cited country, including the United States. In many instances, the activity seems to have no purpose other than to move a transaction through a series of financial institutions, domestically and internationally. Such activity may reflect what law enforcement officials call "layering," or the transfer of funds to and from various locations and accounts for the express purpose of concealing the nature, origin or beneficiaries of the transactions.
Large wire transfer activity associated with Russia and the EEAE is most often identified by the banks as being unusual or suspicious for two reasons. First, the suspect has been unwilling or unable to provide sufficient information about the beneficiary or sender of the wire, or second because inadequate identifying information has traveled with the transaction through a chain of activity.
A second type of unusual or suspicious activity often reported involving Russia and EEAE is that which is not normally expected or commensurate with the stated business of the account holder. Similarly, relatively dormant accounts appear suddenly to experience a noteworthy and unexplained increase in wire transfers or other financial transactions. In some instances, the banks have reported suspected front companies, since it may be discovered by the bank that a given business entity is apparently non-existent (i.e., not operating at its stated address).
The account holders of the U.S.-based bank accounts with active wire transfer activity involving Russia and EEAE include primarily the following types of businesses: import, export and trade; investment and finance; management companies; car dealer, parts and sales; construction; electrical and computer; medical supplies; consulting and marketing; oil; and telecommunications and media companies. While any of these business types can be used as a front for illicit financial activity, international trade entities, investment and financial management companies and construction companies are believed by U.S. and foreign law enforcement authorities to have been used as cover for the movement of criminal proceeds into or out of Russia.
There is also evidence from the SARs pertaining to large dollar wire activity which involves correspondent accounts that a Russian bank maintains at an U.S.-based bank (i.e., through which correspondent account the Russian bank transacts U.S. dollar-denominated wire transfers on behalf of its customers). Banks that are monitoring and reporting such activity as suspicious appear to be doing so because of concerns about the identity of actual transactors, unusually large amounts involved, or atypical patterns of account activity.
Jurisdictions that appear may have some links to these transactions include the British Virgin Islands, Canada, the Cayman Islands, People's Republic of China, Cyprus, Germany, Ireland, Israel, Italy, and Switzerland. With the exception of the Cayman Islands, each of these jurisdictions experienced a significant increase from 1997 to 1998 in suspicious transactions linked to Russia or the other former Soviet Republics.
On average, approximately 75% of these reported violations are BSA-related-i.e., involving structuring or money laundering. In filings which report wire transfer activity, these jurisdictions are, by a slight margin, more often the destination of wires sent out from a suspicious account, rather than the origination point of wires sent to a suspicious account
Many of these SAR filings refer to more than one of the jurisdictions listed above, indicating that money is being transferred to or from a number of these jurisdictions from the account in question. The country most often mentioned in conjunction with other jurisdictions on this list was Switzerland.
Of the NIS themselves, the three countries that exhibited a marked percentage increase in activity, as reported in the SARs, from 1997 to 1998 are Armenia, Latvia and Ukraine. These are also the three republics with the most overall SAR filings after Russia itself.
The study also involved an updated review on SARs filed since March 1999 (the cut off date for the original data set). That review indicates that activity identified by financial institutions as suspicious and involving Russia and the NIS continues to be consistent with the current typology. The review also indicates that there has been an increase in reporting since that time by some banks, often in response to subpoenas or other requests for information from law enforcement agencies.
Latin America
Operation Casablanca
This case was first discussed in last year's Report and the following information is an update to this ongoing investigation.
In May 1998, the United States Customs Service concluded Operation Casablanca, the largest, most comprehensive and significant drug money laundering case in the history of U.S. law enforcement.
This undercover money laundering investigation resulted in the seizure of over $98 million in U.S. currency ($67 million from bank accounts and $31 million in cash from drug traffickers), over 4 tons of marijuana and two tons of cocaine. The indictment, which was issued in U.S. District Court in Los Angeles, charged 26 Mexican bank officials and three Mexican banks, CONFIA, SERFIN, and BANCOMER with laundering drug money. The indictment alleged that officials from 12 of Mexico's largest 19 banking institutions were involved in money laundering activities. Additionally, bankers from two Venezuelan banks, BANCO INDUSTRIAL DE VENEZUELA and BANCO DEL CARIBE were charged in the money laundering scheme.
Operation Casablanca was significant for a number of reasons: (1) because of the sheer volume of the amounts of money involved, and (2) because it represents the first time Mexican banks and bank officials have been directly linked to laundering the Cali and Juarez cartels' U.S. drug profits, and (3) because it uncovered a systematic scheme to launder money via a large number of Mexican institutions.
The money laundering scheme worked in the following manner:
- Undercover agents were introduced to financial managers from both the Cali Cartel and the Juarez Cartel and obtained contracts to "pick up" drug proceeds on the streets of major U.S. cities.
- The agents were also introduced to Mexican bankers who then opened bank accounts for them.
- The funds that were "picked up" were then transported back to Los Angeles, California where they were deposited in U.S. Customs Service-controlled undercover bank accounts.
- The funds were then wire transferred to accounts opened by the Mexican banking officials. After taking out their commission, these officials then issued Mexican bank drafts drawn on the U.S. accounts of the Mexican banks. These bank drafts were delivered back to the undercover agents in the U.S. either in person or via courier.
- The funds were then disbursed at the direction of the money launderers. A large percentage of the money seized during Operation Casablanca was as the result of the use of "substitute assets" laws. Substitute assets are assets owned by a business or individual and seized by the government in lieu of the actual property (in this case money) that was used to further a criminal enterprise.
As a result:
- BANCOMER and SERFIN each pled guilty to criminal money laundering violations and together forfeited a total of $16 million to the government. Each bank was also fined $500,000.
- CONFIA settled the indictment with a civil plea and forfeited $12 million.
- 28 individuals, including 12 Mexican bankers and their associates, have pled guilty to money laundering and/or drug smuggling charges.
- 3 Mexican bankers were convicted, and 3 Mexican bankers were acquitted of money laundering charges in trials in Los Angeles.
- Three Venezuelan bankers were convicted in December 1999 on money laundering charges.
- $64 million of the $98 million seized during this investigation has been forfeited to the government of the United States.
Alien smuggling as a money laundering predicate offense in the United States has grown from being a problem primarily involving neighboring countries to involve transportation of illegal immigrants from all regions of the world. Proceeds from this type of crime have unique characteristics and result in highly complex financial investigations for our immigration authorities and for other law enforcement agencies that have collateral jurisdiction, such as the U.S. Postal Inspection Service.
In a recent case, postal inspectors and special agents from the Immigration and Naturalization Service (INS) uncovered an alien smuggling/money laundering scheme. On September 30, 1999, an anti-smuggling task force of the INS and Internal Revenue Service (IRS) executed a federal seizure warrant at the Bank of America, New York, New York. The warrant covered the contents of an operating account maintained by a gold exchange company in Dubai, United Arab Emirates. Nearly $300,000 was seized from the operating account.
Over the past three years, the INS and agencies involved in the alien smuggling task force also have been conducting an international alien smuggling investigation based in Dallas, Texas. The investigation revealed that alien smuggling proceeds in the form of structured postal money orders and other monetary instruments have been funneled through the UAE-based gold exchange company's account in New York to members of alien smuggling organizations located abroad. A number of the organization's members have pled guilty in Dallas, Texas to alien smuggling and money laundering, and they are now cooperating defendants. The co-conspirators stated they used the gold exchange company's account to launder money and transfer alien smuggling proceeds.
Investigators concentrated on identifying the movement of the illegal proceeds and the financial institutions in which the proceeds were deposited. An Indian national living in the eastern United States structured large postal money order purchases at several post offices in his city. The Indian national, who was arrested on alien smuggling and money laundering charges in November 1998, transferred these money orders plus checks received at a post office box (usually via Express Mail), through a network of co-conspirators to the UAE-based currency exchange. During questioning, he stated that the Hawala or Hundi alternative remittance system provided a mechanism for him to send currency between the United States and India. Further, he indicated the primary reason to utilize the Hawala system was to transfer money to smugglers in India or to reimburse smuggling fees to relatives in India who had provided money to smugglers in India.
With the assistance of FinCEN, a complete analysis is being conducted on a number of deposits into the operating account. As of December 31, 1999, the analysis disclosed a large percentage of the deposits consisted of structured postal and non-postal money orders, cashier's checks and traveler's checks. The investigation is continuing.
Other Money Laundering Trends and Typologies
Black Market Peso Exchange System
The Black Market Peso Exchange system is the primary money laundering conduit used by Colombian narcotics traffickers in repatriating revenues to Colombia and is the single most efficient and extensive money laundering scheme in the Western Hemisphere. Specifically the process begins when a Colombian drug cartel arranges the shipment of drugs to the United States. The drugs are sold in the U.S. in exchange for U.S. currency that is then sold to a Colombian black market peso broker's agent in the United States. The U.S. currency is sold at a discount because the broker and his agent must assume the risk of evading the Bank Secrecy Act (BSA) reporting requirements when later placing the dollars into the U.S. financial system.
Once the dollars are delivered to the U.S.-based agent of the peso broker, the peso broker in Colombia deposits the agreed upon equivalent in Colombian pesos into the cartel's account in Colombia. At this point, the cartel has laundered its money because it has successfully converted its drug dollars into pesos, and the Colombian broker and his agent now assume the risk for introducing the laundered drug dollars into the U.S. banking system, usually through a variety of surreptitious transactions. Having introduced the dollars into the U.S. banking system, the Colombian black market peso broker now has a pool of laundered dollars to sell to Colombian importers. These importers then use the dollars to purchase goods, either from the U.S. or from other markets, which are transported to Colombia, often via smuggling in order to avoid applicable Colombian law.
The exact size and structure of the BMPE system cannot be determined with any degree of precision. However, based on anecdotal law enforcement evidence, informants' statements, and Colombian law enforcement and intelligence officials, it is believed that between $3 billion and $6 billion is laundered annually. Other sources of demand for BMPE dollars include capital outflows by Colombian residents, who seek either to conceal the funds from the Colombian authorities or simply to take advantage of the favorable BMPE exchange rate.
The BMPE system and the contraband imports it finance would likely have faded in significance following the liberalization of exchange controls in the early 1990s. However, narcotics traffickers increased their reliance on the system to launder their illicit drug proceeds. Continued Colombian trade restrictions and high tariffs, coupled with the fact that the growing supply of "narco-dollars" lowers the BMPE exchange rate to a level below the official rate, act to perpetuate this money laundering scheme.
To combat the BMPE, the U.S. Government has proposed the formation of an international task force of experts from Colombia, Aruba, Panama, and Venezuela to examine the BMPE as a money laundering system. As proposed, the BMPE task force would report its findings and recommended policy options to senior government officials from the respective jurisdictions. Pending agreement by all involved governments, the first meeting of the task force could occur as soon as June 2000.
Money Services Businesses (MSBs)
The United States has categorized businesses that offer alternative financial services as MSBs. The use of currency exchange houses and money remittance businesses to dispose of criminal proceeds remains among the most often cited threats in our domestic fight against financial crimes. The prolific use of the wire remitter industry by narcotics organizations is evidenced by historical data obtained from the prior Geographical Targeting Order (GTO) covering metropolitan New York City, northern New Jersey, and Puerto Rico, and from the various wire remitter investigations that are ongoing across the country.
Criminal organizations are drawn to the use of wire transmitter businesses because they provide a swift and relatively anonymous means of laundering their money. Their preference for this mode is enhanced by the lack of money laundering regulations and controls imposed on the wire transmitter industry by the government. Although wire transmitter businesses are subject to the currency transaction reporting provisions of BSA, they are not currently required to file suspicious activity reports when they become aware of possible criminal activity occurring through their institutions. Non-bank wire remitters, are being illegally used in the following ways:
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Structuring |
The traffickers or associates will go from transmitting agent to transmitting agent, with cash, conducting wire transfers in amounts under the reporting requirements ($10,000) in order to evade the Currency Transaction Report (CTR) filing requirements. This method, known as "smurfing," began with banks in the 1980s. |
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Collusion: |
The rogue transmitting agent may agree, for a fee, to take sums greater than $10,000 and upon depositing the money with the bank, have the CTR filed in his name, thus effectively insulating the trafficker. The transmitting agent may attempt to structure the deposit with his own financial institution in order to evade the filing requirement. |
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Direct Ownership: |
The trafficker may purchase a transmitting outlet and install his associate as the agent. This can be done at very little cost and would allow wholesale transmission of funds abroad. |
The Hawala System
The hawala (or hundi) alternative (or parallel) remittance system is the key factor in money laundering and other financial crimes committed in and associated with South Asia. It is closely related to the "black" or "off the books" economies in the region. The size of the underground economies in South Asia are estimated to be 50 to 100 percent the size of the "white" or "documented" economies.
Hawala operates on trust and connections ("trust" is one of several meanings associated with the word "hawala"). Customers trust hawala "bankers" or "operators" (known as hawaladars) who use their connections to facilitate money movement worldwide. Hawala transfers take place with little, if any, paper trail, and, when records are kept, they are usually kept in code. Contrary to various media reports, hawala is an ancient system; it was the primary money transfer mechanism used in South Asia prior to the introduction of Western banking. Today, hawala continues to be used for many legitimate transfers for cultural reasons, and it also often operates in conjunction with Western banking operations.
In 1999, there were significant developments in "Operation Seek and Keep." This Operation concerned the investigation of an international alien smuggling and money laundering ring. Aliens were smuggled from South Asia to the United States. Many of the aliens' had their fees paid by U.S. businessmen, who were in effect purchasing indentured servants to help them operate a variety of businesses. The Operation Seek and Keep Task Force, which consisted of representatives from the U.S. Immigration and Naturalization Service, FinCEN, Internal Revenue Service, Customs Service, Postal Inspection Service and Federal Bureau of Investigation identified both the routes by which aliens were smuggled and the means by which the proceeds from this operation were laundered. In late 1998, all but a handful of the major subjects in this case were apprehended. In 1999, most of these subjects began prison sentences, and work is continuing to locate the remaining fugitives.
Hawala was the primary means by which money was moved by the alien smugglers, and the hawala operators assisted them with laundering the criminal proceeds and the arrangements for payment of alien smuggling fees. Throughout 1999, members of the Task Force analyzed telephone and other transcripts and conducted detailed interviews with several of the subjects to develop a fuller understanding of the financial aspects of the case. This work resulted in the identification of an account belonging to a Dubai-based firm that appears to have been a party to the money laundering operations. This account is now the object of an asset forfeiture proceeding.
In another U.S. case, a nationwide network of criminals appears to be channeling money to a Dubai-based trading company. Once the money reaches Dubai, hawala is used to move it to various destinations in Asia and elsewhere.
In Pakistan, the newly established Musharraf government is attempting to recover national assets allegedly stolen by former (and deposed) Prime Minister Nawaz Sharif. There are also similar allegations about former Prime Minister Benazir Bhutto and her husband, Asif Zardari. Bhutto and Zardari are accused of having used a combination of hawala, offshore centers in Europe and Dubai-based businesses to launder money.
Dubai, India and Pakistan form a "hawala triangle" responsible for significant international money laundering activities that go far beyond South Asia. While interdiction of non-bank money laundering systems such as hawala is difficult enough in itself, this difficulty is sometimes compounded by the lack of insufficient effective money laundering countermeasures in Dubai and the other Emirates.
The Market for Gold and Other Precious Metals
Gold is known to play a significant role in international money laundering. Gold, just like certain currencies (e.g., the U.S. dollar, Swiss franc, and British pound) is a nearly universal commodity for international commerce. The attractiveness and value of a particular currency depend on a complex and often unstable variety of political and economic conditions. Gold has been a key medium of exchange since antiquity and will, in fact, most likely always enjoy this position, as it appears nearly immune to the consequences of changing global fortunes.
Gold serves as both a commodity and, to a lesser extent, a medium of exchange in money laundering conducted in Latin America, the United States, Europe and Asia. In this cycle, for example, gold bullion makes its way to Italy via Swiss brokers. There it is made into jewelry, much of which is then shipped to Latin America. In Latin America, this jewelry (or the raw gold from which it was made) then becomes one, if not the most important, of the commodities in the black market peso exchange. Other commodities include various consumer goods and electronic equipment.
Gold is often shipped from South America to the United States where it is refined and sold to domestic customers. Payments owed for the imported gold are documented as being used to pay for goods shipped to South America. This scheme also serves, often fraudulently, as a source of U.S. dollars for the black market peso exchange. Often, the sales to the domestic customers are made through jewelry supply distributors to individuals who are "engaged in jewelry manufacture." Some of the gold thus obtained is cast and disguised as shapes that resemble common objects such as nuts, bolts or tools. These items are then smuggled out of the United States back to the South America. The cycle can then repeat over and over. This gold scheme has the capacity to launder hundreds of millions of dollars in illegal proceeds and defraud the foreign countries of millions of dollars of tax revenue.
In money laundering associated with the hawala (hundi) alternative remittance system (or practices based on or associated with it), gold often plays a somewhat different role: that of the primary medium of exchange in certain transactions. Even though many hawala transactions take place without a gram of gold, many of these transactions moving money to South Asia involve gold for two reasons: first, the combined historical, religious and cultural importance gold enjoys in the region; and second, the increasing distrust in the value of local currencies. (Many South Asian nations prohibit speculation on their currencies, and exchange rates are fixed by the central banks). Worldwide, gold is often used as a hedge against inflation. In South Asia, gold is often the primary means of preserving and protecting wealth.
In one case, a gold dealer operating in a major U.S. metropolitan area was also operating as the "banker" for various jewelry shops in the region. These jewelry shops give him the checks and cash they receive for purchases, and he processes these through his own bank accounts. In return, he gives them gold scrap and gold jewelry for use in their businesses. He retains a few percentage points of the money he receives from them for his "services" (as well as the legal risk he is incurring). The owners of the jewelry shops do not have to deal with the bureaucracy of banking and, because there is almost no paper trail of their sales, they enjoy a greatly reduced tax liability.
In another case, an U.S.-based hawaladar (hawala operator) is facilitating the smuggling of aliens from South Asia to the United States. He receives payments from people who want to have aliens smuggled. He then makes contact with a hawaladar in South Asia, and instructs him to make the necessary payment to an alien smuggler. In order to settle his accounts with the South Asian hawaladars, the U.S. hawaladar sends U.S. postal money orders to a precious metals house in the Persian Gulf. This allows the South Asian hawaladars to receive payment in gold, held either by the precious metals house in their name or delivered to them in South Asia.
In both these cases, currency is being converted into gold. Even though the first case does not involve hawala transfers, many of the techniques associated with hawala (e.g., coded documents, the use of gold) are present, and, because most of the participants in this case are South Asian, it underscores the cultural significance that is attached to gold there. In the second case, there is no doubt that gold is the preferred medium of exchange, and the thriving gold markets in the Persian Gulf make the necessary conversions and payments possible.
What Can be Done to Combat Money Laundering
In an electronic world in which the banking system operates through linked computers 24 hours a day, there must be increased global emphasis upon thorough vetting of personal, company and financial institution accounts at the bank of origin. There is no substitute for a thorough know-your-customer policy, especially as applied to those placing currency into the system and converting it to an account susceptible to immediate transfer outside the jurisdiction.
Considerable attention also must be focused by anti-money laundering authorities on establishing international standards, obtaining agreements to exchange information, establishing linkages for cooperative investigations, and overcoming political resistance in various key jurisdictions to ensure such cooperation.
Governments need laws and regulations that: establish corporate criminal liability for bank and non-bank financial institutions for money laundering violations; apply to all financial transactions, not just to cash transactions at the teller's window; apply anti-money laundering measures to serious crimes, not just drug trafficking; criminalize investments in legitimate industry if the investment proceeds were derived from illegal acts; and enable the sharing of financial and corporate ownership information with law enforcement agencies and judicial authorities.
Governments also need strategies that focus on changes in both the operations of financial systems and the methods criminals develop to exploit them--strategies that look at specific governments and specific financial systems.
U.S. Money Laundering Countermeasures
The National Money Laundering Strategy For 1999
In light of the ongoing threats posed by money laundering, Congress recently passed, and the President signed, the Money Laundering and Financial Crimes Strategy Act of 1998, which calls for the development of a five year anti-money laundering Strategy. The National Money Laundering Strategy for 1999 is the first of five annual reports to be submitted to Congress.
The Strategy is organized around four broad goals: strengthening domestic enforcement; enhancing the measures taken by banks and other financial institutions; building stronger partnerships with state and local governments; and bolstering international cooperation. It sets forth an ambitious agenda of actions designed to advance these goals. It establishes a Steering Committee led by the Deputy Secretary of the Treasury and the Deputy Attorney General, to oversee implementation. Treasury will work with Departments of Justice and State and other existing anti-money laundering experts within U.S. Government, and will provide the U.S. Congress with a second of five National Money Laundering Strategy annual reports in February 2000. An additional 180-day review of the Strategy will begin in March 2000.
Specifically, the Strategy calls for (1) designating high-risk money laundering zones at which to direct coordinated law enforcement efforts; (2) rules requiring the scrutiny of suspicious activities in a range of financial institutions, from money transmitters to broker-dealers and casinos; (3) submission of the Administration's Money Laundering Act of 1999, to bolster the domestic and international crimes-from arms trafficking to public corruption and fraud-subject to U.S. money laundering prosecutions; (4) a 90-day review of measures that would restrict the use of correspondent accounts in the United States by certain offshore or other institutions that pose money laundering risks; and (5) intensified pressure on nations that lack adequate counter-money laundering controls to adopt them. The following are priority Strategy action items which will be implemented immediately:
- Promote adoption of supervisory and regulatory actions (to include items such as increased regulatory reporting, increased external and internal audits, differentiated risk weights or provisioning) in response to specified jurisdictions that fail to make progress in implementing effective international standards, including those related to money laundering.
- As part of Treasury's effort to understand the implications of counter-money laundering programs for personal privacy, it will conduct a 180-day review in which it will expand on and outline privacy protection efforts in the context of anti-money laundering programs.
- The Strategy encourages regulatory and cooperative public-private efforts to prevent money laundering. It enhances the defenses of U.S. financial institutions against use by international criminal organizations. Thus, Treasury and Justice will convene a high-level working group of federal bank regulators and law enforcement officials to examine what guidance would be appropriate to enhance bank scrutiny of certain transactions or patterns of transactions in potentially high-risk accounts. The federal bank supervisory agencies, in cooperation with Treasury, will conduct a review of existing bank examination procedures relating to the prevention and detection of money laundering at financial organizations.
- The Strategy assures that all types of financial institutions are subject to effective Bank Secrecy Act requirements. As such, Treasury will issue a final rule for the reporting of suspicious activity by money service businesses and casinos, and it will work with the Securities and Exchange Commission to propose rules for the reporting of suspicious activity by brokers and dealers.
- The Strategy calls for the improvement of coordination and effectiveness of international enforcement efforts. The G-7 nations will be urged to consider an initiative to harmonize rules relating to international funds transfers so that the originators of the transfers will be identified. In addition, Treasury, State and Justice will consider establishing a program to deny or revoke visas in all cases where couriers are being used to repatriate drug currency.
- Treasury and Justice, in an effort to identify and target major money laundering systems, will issue joint memoranda to investigators and prosecutors recommending that investigative and prosecutorial guidelines include considerations for below-threshold cases that offer the potential of having a systemic or financial sector-wide effects on money laundering.
- Treasury, in consultation with Justice, will begin designation of High-Risk Money Laundering and Related Financial Crimes Areas (HIFCAs) and inaugurate the Financial Crime-Free Communities Support (C-FIC) program. This program will help strengthen partnerships between federal, state and local governments to fight money laundering throughout the United States.
- The Strategy shepherds the coordinated efforts of the Congress, states and localities, the private sector and the international community, and it lays out a road map for combating money laundering and other financial crimes.
On May 12, 1998, President Clinton released the first International Crime Control Strategy in U.S. history. The Strategy provides a framework for integrating all facets of the federal government's response to international crime. It is an outgrowth of Presidential Decision Directive 42 (discussed below). One of the eight goals of the Strategy is to counter financial crime. This reflects the high priority that the United States attaches to preventing the continued use of financial instruments and systems in the perpetuation of international crime.
The objectives of the Strategy to fight financial crime include combating money laundering by denying criminals access to financial institutions and by strengthening enforcement efforts to reduce inbound and outbound movement of criminal proceeds.
Other objectives include seizing assets of international criminals through aggressive use of forfeiture laws and enhancing bilateral and multilateral cooperation against all financial crime by working with foreign governments to establish or update enforcement tools and standards.
Finally, one of the more important objectives is the targeting of offshore centers for international fraud, counterfeiting, electronic access device schemes and other financial crimes. During 1999, this sector became an important global focus for numerous countries and multilateral organizations as noted in the offshore financial centers chapter in this report.
As can be seen throughout this report, the administration is fully engaged in implementing all aspects of the Strategy's components to counter financial crime.
Presidential Decision Directive (PDD)-42
During 1995 the President signed PDD-42, ordering the Departments of Justice, State, and Treasury, the Coast Guard, the National Security Council, the intelligence community, and other federal agencies to increase and integrate their efforts against international crime syndicates and money laundering.
During 1999, U.S. officials continued efforts to address PDD-42, specifically targeting the nation's fight against international crime by going after the profits of crime. In consultation with the Secretary of State and the Attorney General, the Secretary of the Treasury has been identifying the most egregious overseas sanctuaries for illegally obtained wealth and negotiating with those governments to end the safe havens sought by international criminals. Negotiations have resulted in strengthened anti-money laundering regimes and weakened safe haven status. United States authorities have improved coordination among themselves and expanded cooperative programs with foreign law enforcement agencies. Training and technical assistance have been targeted to assist foreign police forces, prosecutors, judges, and bank supervisors to become more effective crime fighting agencies, while strengthening and generating contacts for information-sharing with U.S. counterparts.
A key component of the International Crime Control Strategy and PDD-42 has been the imposition of sanctions under the International Emergency Economic Powers Act (IEEPA). The U.S. now has at its disposal two powerful economic sanctions options against narcotics traffickers, the entities they own or control, and those persons acting for them or supporting their narcotics trafficking activities.
In addition to IEEPA, the U.S. Government also will use the new Foreign Narcotics Kingpin Designation Act ("the Kingpin Act"). In December of 1999, the President signed into law the Kingpin Act, which provides him with a statutory framework for imposing sanctions against foreign drug kingpins when such sanctions are appropriate. The Kingpin Act is modeled after the highly effective Specially Designated Narcotics Traffickers ("SDNT") program that Treasury's Office of Foreign Assets Control ("OFAC") administers against the Colombian cartels pursuant to Executive order 12978, which was issued in October, 1995 under the authority of IEEPA. Nearly 500 individuals and entities have been identified as SDNT's in the five years since the Colombia program's inception.
Both the Kingpin Act and the IEEPA-SDNT program prohibit U.S. persons from engaging in transactions, trade and services involving foreign narcotics kingpins and derivative designees. The objective of both laws is to deny drug kingpins, their businesses and agents access to the U.S. financial system and to the benefits of trade and transactions involving U.S. businesses and individuals. The long-term effectiveness of designations under the Kingpin Act, as well as designations under an IEEPA program, will depend heavily upon Treasury's authority to make derivative designations of entities and individuals as is being done in the IEEPA-SDNT program against Colombian cartels.
The Kingpin Act, moves beyond the IEEPA-SDNT Colombia model to target the activities of significant foreign narcotics traffickers ("drug kingpins") and their organizations on a worldwide basis. In keeping with PDD-42's emphasis on interagency cooperation, the Kingpin Act requires that the Departments of Treasury, Justice, State and Defense and the CIA coordinate to develop a list of recommended kingpins for presidential designation by June 1 of each year. The statute permits kingpin designations at other times as well.
In keeping with PDD-42's emphasis on international cooperation and collaborations, to the extent feasible, the United States will continue to coordinate carefully with the host government concerning the drug kingpins, and it will continue to work cooperatively with appropriate host governments authorities to pursue additional measures and leads against those significant foreign narcotics traffickers. For instance, the cooperation of the Government of Colombia has been important to the success of the IEEPA-SDNT program against narcotics cartels in that country.
Enforcement Cases
Cayman Island Bank Assist Russian Money Launderers
The FBI conducted an undercover operation to determine the existence and extent of a Russian-based business using the United States to launder money. As a result of this investigation, the FBI found a Cayman Island bank being used to support money launderers in the United States and Russia.
The bank supplied the Russians and the FBI undercover agents with instructions on how to covertly bypass U.S. currency transaction reports and provide bogus merchandise invoices to enable the businesses to substantiate expending payments that in fact were deposits to the secreted offshore bank account.
An indictment was returned against the Chief Executive Officer of the Cayman Island bank for facilitating money laundering in the United States.
Diploma Mill College
A New Orleans-based FBI investigation into mail order colleges discovered an offshore money laundering operation facilitating the frauds. The investigation involved mail order correspondence schools that offered external degree studies. These entities solicited students through printed advertisements in magazines and major newspapers. These entities had a national and international student registration of over 15,000 students. However, none of these entities were recognized by any collegiate accrediting body.
The students being targeted by these entities were generating over $2 million per semester in student fees. The victim-students would pay their fees by check, credit card or bank draft. Approximately $36 million was obtained and laundered by the use of this deception to obtain students.
The mail order entities used many shell companies to conceal the source of the income they generated. Over 12 different bank accounts were located by the FBI. Some of the accounts owned or controlled by these entities were located in the Cayman Islands and were maintained under various company names. The accounts were used by the owners to buy drugs, produce pornographic movies, and establish a quasi-militia organization with anti-government objectives.
The investigation allowed the FBI to issue seizure warrants for bank accounts totaling over $10 million. Later, the home of a company official, valued at approximately $2 million, was forfeited to the FBI. All of the "university" officials were convicted of various charges of mail fraud, wire fraud, and money laundering.
Forfeiture Of $50,000,000
On May 27, 1999, a Federal Judge in the Southern District of Florida issued a final order forfeiting $50,000,000 to the United States. The funds represent the narcotics proceeds traceable to Paul Edward Hindelang. Hindelang, a convicted narcotics smuggler, plead guilty in the 1980's to importation of narcotics. The plea agreement signed by Hindelang called for him to forfeit all illegal proceeds generated through his narcotics trafficking. Based on information developed by the U.S. Customs Service and the Monroe County Sheriffs Office, an investigation was initiated into allegations that Hindelang failed to identify all his illegal assets. The investigation revealed that Hindelang concealed his narcotics proceeds through the use of nominee accounts in the names of individuals, associates and corporations in Switzerland, Turks and Caicos Islands, the Cayman Islands, Costa Rica and Panama.
This forfeiture represents the largest single forfeiture in the history of the Treasury Department and the largest single asset sharing disbursement, $25 million, to any law enforcement agency.
Forfeiture of Mustang Ranch
On July 9, 1999, the world famous Mustang Ranch Brothel in Story County, Nevada was forfeited to the U.S. Government based on a guilty verdict in a three-week jury trial. The trial was the result of a thirty-three-count indictment charging Joseph Conforte, A.G.E. Enterprises, A.G.E. Corporation and other individuals with money laundering, wire fraud and racketeering.
The indictment was based on a joint investigation between the U.S. Customs Service, Internal Revenue Service and the Federal Bureau of Investigation that alleged Conforte, the owner of the Mustang Ranch, skimmed over $6 million from the Mustang Ranch during bankruptcy proceedings. Conforte laundered this money by opening bank accounts in fictitious names in Switzerland. Conforte, who remains a fugitive, utilized the laundered money to set up various corporations to re-purchase the Mustang Ranch from the IRS after it had been seized by the IRS for failure to pay back taxes.
Along with the Mustang Ranch, a restaurant, six parcels of land, a trailer park, and 264 acres of land were forfeited. The value of these properties is estimated to be in excess of $6 million. In addition, the jury issued a monetary judgment against A.G.E. Corporation and A.G.E. Enterprises in the amount of $20,000,000 each. The total amount of the forfeiture ordered by the jury is in excess of $46,000,000.
Former Mexican Deputy Attorney General Arrested On Money Laundering Charges
On August 26, 1999, at the conclusion of a four-year investigation, former Mexican Deputy Attorney General Mario Ruiz Massieu was arrested by the U.S. Customs Service pursuant to an indictment returned in Houston, Texas charging him with laundering over $9 million in narcotics proceeds. The investigation was initiated based on a request by the Mexican government for assistance in locating Massieu for questioning in the assassination of his brother Jose Francisco Ruiz Massieu, the former Secretary-General of Mexico's ruling political party, Partido Revolucionario Institutional (PRI).
The U.S. Customs Service arrested Ruiz Massieu in 1995 as he attempted to depart the U.S. without reporting over $46,000 in currency. The ensuing investigation revealed that between 1993 and 1995, twenty-five cash deposits totaling over $9 million were made to an account in the name of Mario Ruiz Massieu. In 1997, following a civil trial in Houston, Texas, a federal jury ruled that the $9 million in Massieu's account were proceeds derived from drug trafficking and forfeited the money to the United States.
Offshore Comes Onshore
Owen K. Stephenson and Ronald G. Sparks were indicted in November, 1998 on 30 counts of mail fraud, money laundering and conspiracy. The two California men had conspired to run an Anadarko bank scheme that fraudulently pulled in more than $7,000,000 from investors and depositors.
Sparks and Stephenson initially met with Apache tribal officials in November, 1996 to discuss creating a tribal bank that would provide low-interest loans to Apache Tribal members. In order to establish the framework for the bank, in April, 1997, the Apache Business Committee enacted a banking code, by which First Americans Bank, LTD was created. However, by May, 1997, Sparks and Stephenson, while continuing negotiations with the Apache Tribe, were already advertising on the Internet for investors and depositors. They boasted of giving "offshore" banking secrecy using the sovereignty of the Apache Tribe in Oklahoma.
Once the money was received from unsuspecting investors and depositors, it was deposited in corporate accounts Sparks and Stephenson controlled at Citizens Bank in Lawton, Oklahoma.
Sparks and Stephenson were both tried and convicted of money laundering, mail fraud and conspiracy. Sparks was sentenced to 11 years and 3 months in prison and ordered to pay over $6,000,000 in restitution. Stephenson is currently a fugitive.
Offshore Money Laundering Operation
John M. Matthewson of San Antonio, Texas, former chairman and owner of Guardian Bank && Trust recently was sentenced in August 1999 to six months home confinement followed by five years of supervised release after pleading guilty to conspiracy to commit money laundering and wire fraud, and assisting clients in tax evasion. The light sentence was due to Mr. Matthewson's deteriorating health and his willingness to share information with authorities.
The scheme established by Matthewson involved the establishment of shell corporations and the opening of offshore bank accounts in fictitious names at Guardian Bank and Trust, a Cayman Island Bank. As part of the scheme, from 1990 to 1994 Guardian Bank received payments from U.S. depositors and, in return, provided false and inflated sales invoices to create the appearance that goods and services were purchased and the transactions were legitimate. Matthewson instructed his bank to issue bogus invoices, which allowed the depositors' businesses to take fraudulent tax deductions on federal tax returns.
Matthewson also arranged the issuance of Visa gold credit cards in the names of anonymous IBCs that permitted U.S. depositors access to their money in the offshore account without revealing the existence or ownership of the account. Matthewson further assisted in the creation of Dutch corporations that were used to issue sham mortgages that gave the appearance that depositors of his bank were borrowing money from a legitimate lender. These sham mortgages allowed depositors to use unreported funds from their offshore accounts at Guardian, to create sham tax deductions for mortgage interest, and to redeposit mortgage interest into secret offshore accounts.
Operation Calecia
Benito Ramos-Salcido and Sergio Campo-Salcido were the leaders of a Mexican drug organization until Benito Ramos-Salcido was murdered in 1996. Sergio Campo-Salcido allegedly continued to direct the smuggling of hundreds of kilograms of cocaine into the United States and used the proceeds to purchase pieces of real estate in California in the names of his wife, Raquel Trujillo-Yanez, Benito Ramos-Salcido's widow, Claudia Mendoza-Ibarra, and CLRA, Inc., a company owned by the two women. Trujillo and Mendoza used CLRA, Inc. and these properties as a means to launder the proceeds generated by the drug organization. John L. Matkin acted as a business manager and assisted the organization in the purchase and development of the properties. All four were indicted on money laundering conspiracy and narcotics conspiracy charges. Mendoza and Matkin pleaded guilty to the money laundering charges while Campos and his wife are fugitives believed to be living in Mexico. In the United States, the case involved the seizure of real estate valued at $4 million, jewelry worth $180,000, and $27,000 in cash. As a result of cooperation between IRS and Mexican authorities, records were supplied to the Mexican officials who seized approximately $9 million from Mexican bank accounts controlled by Campos, Trujillo and Mendoza. This money is in the process of being forfeited. The Mexican Office of the Attorney General (PGR) and the Secretariat of the Treasury (Hacienda) are also attempting to locate real property assets owned by the targets in Northern Mexico for possible forfeiture.
Operation Juno
Operation Juno was initiated after the seizure of approximately 386 kilograms of liquid cocaine, which had been concealed and shipped in frozen fish from Cartagena, Colombia, in July, 1995, and shipped under the name of the Colombian company "COLAPIA S.A.," whose U.S. distribution center was in the Atlanta area. The subsequent investigation of "COLAPIA S.A." indicated that the company owner was a partner of Arfranio ("Phanor") Arizabaleta Arzayur, a prominent Cali, Colombia, narcotics trafficker. The operation resulted in the indictments of Armando Mogollon, Hector Fabio Botero, Juan Montoya, Juan Carolos Arias, and Samuel Vallejo, all of Colombia. The indictments charged that from October, 1996 to August, 1999 the defendants conspired to launder drug money and traffic in narcotics.
In September 1996, the Drug Enforcement Administration (DEA) and the Internal Revenue Service (IRS) began an undercover money laundering "sting" investigation called "Operation Juno," based out of a rented office building in suburban Atlanta. DEA and IRS Special Agents gained permission from the Attorney General to open a legitimate stockbrokerage firm, which served to validate the undercover money laundering operation. No stock trades were ever executed through the undercover stockbrokerage firm.
Members of the Arzayur organization referred Operation Juno to other drug trafficking organizations in need of financial and money laundering services. At the request of one of the five indicted defendants in this case, Operation Juno picked up drug proceeds usually ranging between $100,000 and $500,000 in U.S. currency. Pickups were made in Dallas, Houston, New York, Newark, Providence, Miami, Chicago, Madrid, Spain, and Rome, Italy. Juno later wire-transferred the monies from the collection city to an undercover bank account in Atlanta.
Along with the five named defendants, 40 arrests have been made in the United States during the course of the investigation. In addition, 15 other defendants are in the process of being arrested in New York and Chicago. Civil seizure warrants are also being brought against bank accounts worldwide. Approximately $26 million in drug proceeds were targeted for seizure. $10 million was seized during the investigation, and the balance is being seized in 59 accounts at 34 U.S. banks, and 282 accounts at 52 foreign banks.
Bilateral Activities
Training and Technical Assistance
During 1999, a number of U.S. law enforcement and regulatory agencies provided training on money laundering countermeasures and financial investigations to their law enforcement, financial regulatory, and prosecutorial counterparts around the globe. These courses have been designed to give financial investigators, bank regulators, and prosecutors the necessary tools to recognize, to investigate, and to prosecute money laundering, financial crimes, and related criminal activity. Courses have been provided at U.S. locations as well as within the jurisdictions to which the programs were targeted.
Department of State
The Department of State's Bureau of International Narcotics and Law Enforcement Affairs (INL) developed a fiscal year 1999 $3.4 million dollar program for providing law enforcement, prosecutorial and central bank training to countries around the globe. A prime focus of the training program was a multi-agency approach to develop or enhance financial crime and anti-money laundering regimes in selected jurisdictions. Supported by and in coordination with INL, the Department of Justice (DOJ), Treasury Department component agencies, the Office of the Comptroller of the Currency (OCC)), the Board of Governors of the Federal Reserve (FRB), and non-government organizations offered law enforcement, regulatory and criminal justice programs worldwide.
During 1999, INL funded over 70 programs to combat international financial crimes and money laundering in 40 countries. Nearly every federal law enforcement agency assisted in this effort by providing basic and advanced training courses in all aspects of financial criminal activity. In addition, many federal agencies were provided funding to conduct multiagency financial crime assessments and develop specialized training in specific jurisdictions worldwide to address assessment findings.
In May, 1999, an INL-led multi-agency team delivered a weeklong money laundering seminar in Ankara, Turkey, which focused on investigative techniques, suspicious transactions reporting, information systems, mutual legal assistance and organized crime. The audience included members of the Turkish judiciary, police, customs, banking community, and FIU. A similar November, 1999 seminar in Nicosia, Cyprus, dealt with money laundering on the Internet, offshore financial centers, bank secrecy, Russian organized crime, and wire transfers.
Also in 1999, INL led a team from DOJ, the U.S. Customs Service, DEA, and the Federal Reserve Board of Governors that conducted a weeklong money laundering and training assessment in Lebanon. The team met with Lebanese law enforcement, banking and judicial personnel, as well as U.S. embassy officials.
As in previous years, INL training programs continue to focus on the interagency approach and bring together, where possible, law enforcement, judicial and central bank authorities in assessments and training programs. This approach allows for an exchange of information and a dialogue usually not undertaken by those attending the training seminars. This approach has proven successful in various parts of the globe, from Asia, Central and South America, Russia, the New Independent States (NIS) of the former Soviet Union, and Central Europe. INL also provides funding for many of the regional training and technical assistance programs offered by the various law enforcement agencies, including those at the International Law Enforcement Academies (ILEA).
The following summary provides a glimpse of training activities undertaken in 1999 by U.S. law enforcement agencies.
Drug Enforcement Administration (DEA)
International Asset Forfeiture and Money Laundering Seminars are a part of the U.S. Department of Justice Asset Forfeiture Program conducted by the Drug Enforcement Administration Office of Training, International Training Section. The intent of these seminars is to share, compare, and contrast U.S. legislation with that of other countries, building a relationship and fostering communications with foreign narcotics enforcement and prosecutorial personnel. On average, the yearly budget allotted is $420,000 to complete five seminars. Each seminar provides instruction to 35 to 50 high-level drug law enforcement and money laundering specialists.
DEA's primary focus for its training courses include specialized training for central bank regulators, police and customs officials, and prosecutors. Course materials include training in U.S. asset forfeiture laws, asset and financial gathering techniques, financial investigation techniques, case studies, document exploitation, and international banking.
Training is designed for one-week seminars involving lectures, presentations, case studies, and practical application exercises. Guest lecturers are utilized from various areas of the U.S. Government: The Department of Justice Asset Forfeiture and Money Laundering Section, the U.S. Customs Service, the U.S. Marshals Service, and bank regulators, as well as from various divisional offices of DEA.
This training is focused on cultures with economic systems developed enough to accommodate money laundering activities. All seminars are conducted in country. During 1999, seminars were conducted in the following locations: Brussels, Belgium; Dublin, Ireland; Bangkok, Thailand and Bogota, Colombia.
Federal Bureau of Investigation
The Federal Bureau of Investigation/Money Laundering Unit (MLU) conducts training with the goal of providing international law enforcement with the ability to adequately investigate all forms of money laundering. The training emphasizes the techniques that money launderers use to conceal or disguise the true nature of illicit cash proceeds and provides law enforcement with the ability to trace the location, source, or ownership of these proceeds.
The FBI has either exclusive or concurrent jurisdiction over 133 of the 164 "Specified Unlawful Activities" (SUAs) under the United States money laundering statutes. This background has allowed the FBI to gain extensive experience in unconventional money laundering methodologies associated with various SUAs in areas such as organized crime, drugs, violent crime and white collar crime. This experience places the FBI in a unique position to provide expert training in traditional and non-traditional money laundering investigations that transcend SUAs. The FBI has also provided experts for advanced training in the areas of emerging technologies such as digital cash, smart cards, Internet banking, the Black Market Peso Exchange and bulk cash shipments. Further, FBI provides technical assistance for the new weapons that law enforcement can utilize to investigate money laundering such as Geographic Targeting Orders, the International Emergency Economic Powers Act, and Suspicious Activity Report Task Forces.
The FBI provides training independently and in conjunction with other federal, state, and local agencies within the United States and internationally. The FBI/MLU has worked with the United Nations in conferences to provide a United States perspective on successful tactics used to disrupt and dismantle money laundering enterprises. On other occasions, the FBI has provided independent money laundering training and briefings at the FBI Academy in Quantico, Virginia and at FBI headquarters, in Washington, D.C.
During 1999, the FBI participated in money laundering training courses in: Santiago, Chile; Bogota, Colombia; Nicosia, Cyprus; London, the United Kingdom; Tokyo, Japan; and Auckland, New Zealand. Federal Law Enforcement Training Center (FLETC).
During 1999, FLETC conducted numerous law enforcement programs at its Glynco, Georgia facility and internationally. As part of its training program, FLETC conducted two International Banking & Money Laundering Training Programs during the year. One course was held in Tyumen, Russia and was attended by 48 students. The other course was delivered to 40 students in Kiev, Ukraine.
Financial Crimes Enforcement Network
FinCEN, the U.S. financial intelligence unit (FIU), has an international training program that focuses on providing training and technical assistance to a broad spectrum of foreign government officials, financial regulators, law enforcement personnel, and bankers. This training covers a wide variety of topics, including money laundering typologies, the creation and operation of FIUs, establishment of comprehensive anti-money laundering regimes (including assistance in the drafting of anti-money laundering legislation), computer systems architecture and operations, and assessments of country-specific money laundering regimes and regulations.
FinCEN also works closely with the Egmont Group of FIUs in providing training and technical assistance to various jurisdictions in establishing and operating their own FIUs.
During 1999, FinCEN consulted with a number of jurisdictions including Ukraine and Chile, on drafting and revising their anti-money laundering legislation.
FinCEN also took part in a number of seminars on money laundering and investigative techniques (Moldova, Russia, Dominican Republic, Turkey, Cyprus), as well as seminars or high-level discussions specifically targeted on FIU development (Bulgaria, Bolivia, Dominican Republic, Russia).
During the course of the year, FinCEN hosted numerous foreign visitors and provided orientation and training in FIU development and various money laundering related topics, including officials from Paraguay, Costa Rica, Venezuela, Jamaica, El Salvador, Brazil, People's Republic of China, Thailand, Singapore, Chinese Taipei, and Panama.
FinCEN also provided technical assistance to Bolivia regarding equipment for Bolivia's FIU.
Internal Revenue Service
The Internal Revenue Service, Criminal Investigation Division (IRS) International Training Program is one segment of the IRS International Strategy. IRS focuses its training on investigative techniques courses involving financial crime and money laundering. The goal of this training is to provide assistance to foreign governments in establishing or enhancing money laundering, criminal tax and asset forfeiture laws. In addition the training program provides assistance in the investigation of violations of these laws and promotes enhanced anti-money laundering regimes that conform to international standards.
IRS develops and conducts training courses independently, as well as with other agencies. In some instances these courses are developed jointly with other law enforcement agencies to address a specific need. IRS participates on an ad hoc basis with other agencies as part of their curriculum and correspondingly invites other agencies to participate in IRS training.
Training lead by IRS during 1999 included:
- Financial Investigative Techniques training in Budapest, Hungary, Khabarovsk, Russia and Lagos, Nigeria.
- Money laundering training in Vilnius, Lithuania, Santo Domingo, Dominican Republic and Bogota, Colombia.
- Advanced Money Laundering training in Mexico City, Mexico.
- Suspicious Activity Report utilization training in Mexico City, Mexico.
- Complex Financial Investigations training in Bangkok, Thailand taught jointly with the U.S. Customs Service.
IRS also participated in training sponsored by other agencies in Russia, Uruguay, Mexico, Ghana, Moldova, Armenia and Romania.
Secret Service
The Secret Service continues to be extensively involved in training foreign government officials and law enforcement in the areas of financial fraud schemes and counterfeit U.S. currency investigations. This past year, the Secret Service taught foreign officials to identify and investigate violations that impact on their jurisdictions as well as those of the Secret Service. Specific financial fraud schemes involving credit cards, smart cards, electronic fund transfers, fictitious financial instruments, "419" advance fee fraud, cellular telephone fraud, skimming, telemarketing fraud, identity theft and other types of schemes were highlighted. These violations represent the underlying Specific Unlawful Activities (SUA's) that provide the nexus for the Secret Service to conduct money laundering investigations.
The goal of the Secret Service foreign training program is to train and assist the foreign participants with their financial systems, and to establish a permanent conduit for information exchange and liaison. The previously mentioned SUA's were highlighted in an effort to concentrate all available resources on the root of the criminal activity.
Training programs have varied depending on the foreign participants. The training initiatives throughout 1999 proved invaluable in fostering a heightened awareness for foreign government officials and law enforcement in the identification of systemic weaknesses within financial systems. In training foreign law enforcement officials, the Secret Service conducted comprehensive programs that included an emphasis on crimes involving electronic commerce.
Smart cards, generally issued by non-banking financial service providers, such as large brokerage houses, operate completely outside of any U. S. government regulations. This lack of regulatory oversight creates vulnerability as no record is created or maintained on the transfer of data. In theory, financial information and monetary funds can be accessed, manipulated, and transferred to or from an account, or from card to card, with no "footprint" being made. Systems that support this industry can move billions of dollars a day through computer networks that often are not regulated or controlled by any government entity.
Skimming is the unauthorized capture and replication of data from a person's credit card through the use of a small, hand-held device, which can later be used to download the information for illicit purposes. The ease and speed which information can be gathered and used for illegal purposes in a skimming operation represents a threat to financial institutions around the world. The Secret Service has trained foreign law enforcement officials about the type of equipment, manner of operation, and distribution methods for the information taken from unsuspecting credit card holders. It has been estimated by industry sources that skimming outside of the United States alone affects approximately one hundred seventy five different businesses per week. This large number of compromised points of sale has the potential to cause many millions of dollars in fraud losses.
During 1999, the Secret Service, using INL-provided funds, conducted training for foreign law enforcement and financial institutions in Hungary, Nigeria, Ghana, Egypt, Thailand, and Romania. The Secret Service also independently conducted training for law enforcement and financial institutions in Romania, Bulgaria, Germany, the United Kingdom, Peru, Chile, Argentina, South Africa, France, the Netherlands and Italy.
This past year, Secret Service's Counterfeit Division, in conjunction with other U.S. Treasury agencies, participated in the International Currency Audit Program in Argentina, Chile, and Peru.
United States Customs Service
The U.S. Customs Service (USCS), Office of Investigations, Financial Investigations Division continues to be extensively involved in the INL-sponsored multi-agency international money laundering training program. Drawing on its expertise in undercover drug money laundering as well as traditional money laundering investigations related to all types of criminal activity, the USCS strives to impart its considerable experience to law enforcement, regulatory and banking officials of all jurisdictions identified by INL.
As host or co-host with numerous other federal agencies, the USCS conducted anti-money laundering and financial crime seminars domestically and abroad for officials from sixteen different jurisdictions. Approximately 1,220 students and officials received USCS anti-money laundering training in 1999. In addition, the USCS participated in a joint training program sponsored by the Department of Justice and the Mexican Attorney General's Office in Mexico City, Mexico.
The countries that received training in 1999 are: Australia, Belgium, Hong Kong, Republic of Indonesia, Israel, Japan, Malaysia, New Zealand, Peoples Republic of China, Republic of the Philippines, Russia, Singapore, South Korea, Taiwan, Thailand, and Turkey.
International Law Enforcement Academies (ILEAs)
Europe
The ILEA in Budapest, Hungary offers a core law enforcement training course targeted at mid-level managers in the police and criminal justice services of Central Europe and the New Independent States. Over 1,000 officials from 25 countries have successfully completed this course. In addition to this program, ILEA Budapest also offers regional seminars and specialized training courses. More than 1,500 criminal justice officials have participated in such courses.
Asia
The ILEA for Southeast Asia opened in March 1999, in Bangkok, Thailand. The curriculum and structure of this Academy is similar to that in Budapest, except for the duration of the core course and an added emphasis in narcotics matters. ILEA Bangkok also offers specialized courses in a wide range of topics. Over 600 officials from 10 Southeast Asian nations have attended these courses.
The Americas
For the Western Hemisphere, we offered a core course similar to Bangkok's - tailored to regional needs - for officials from Central America and the Dominican Republic. Two pilot courses were conducted in Panama in 1997 at a temporary site. Sixty-four participants attended these courses. All activities of this Academy have been temporarily suspended, pending a review to determine its permanent location.
Africa
Plans are well underway to establish an ILEA to serve the Southern Africa region. The overall format for this new Academy will be similar to the other three, adjusted to suit the needs of the region. The interagency group responsible for the ILEAs is taking steps aimed at the establishment and operation of an ILEA for Southern Africa.
Treaties and Agreements
Mutual Legal Assistance Treaties (MLATs) allow generally for the exchange of evidence and information in criminal and ancillary matters. In money laundering cases, they can be extremely useful as a means of obtaining banking and other financial records from our treaty partners. MLATs, which are negotiated by the Department of State in cooperation with the Department of Justice facilitate cooperation in criminal matters, including money laundering and asset forfeiture, are in force with the following countries: Antigua and Barbuda, Argentina, Australia, Austria, the Bahamas, Belgium, Canada, Grenada, Hong Kong, Hungary, Israel, Italy, Jamaica, Latvia, Lithuania, Mexico, Morocco, the Netherlands, Panama, the Philippines, Poland, South Korea, Spain, St. Lucia, St. Vincent and the Grenadines, Switzerland, Thailand, Trinidad and Tobago, Turkey, the United Kingdom, the United Kingdom with respect to its Caribbean overseas territories (the Cayman Islands, Anguilla, the British Virgin Islands, Montserrat, and the Turks and Caicos Islands), and Uruguay. MLATs have been ratified by the United States but not yet brought into force with the following countries: Barbados, Brazil, Colombia, Czech Republic, Dominica, Estonia, Luxembourg, St. Kitts and Nevis, and Venezuela. Additional MLATs have been signed, but are not yet in force with: Cyprus, Egypt, France, Greece, Nigeria, Romania, Russia, South Africa, and Ukraine. The United States has also signed the Organization of American States MLAT. The United States is actively engaged in negotiating additional MLATS with countries around the world.
In addition, the United States has entered into executive agreements on forfeiture cooperation, including: (1) an agreement with the United Kingdom providing for forfeiture assistance and asset sharing in narcotics cases and (2) a forfeiture cooperation and asset sharing agreement with the Kingdom of the Netherlands. The United States has asset sharing agreements with Canada, Colombia, Ecuador and Mexico, as well as exchanges of letters on asset sharing with Anguilla, the British Virgin Islands, the Cayman Islands, Montserrat, and the Turks and Caicos Islands, which supplement the MLAT between the United States and the United Kingdom on their behalf.
Financial Information Exchange Agreements (FIEAs) facilitate the exchange of currency transaction information between the U.S. Treasury Department and other finance ministries. The U.S. has FIEAs with Colombia, Ecuador, Mexico, Panama, Paraguay, Peru, and Venezuela. In addition, Treasury's Financial Crimes Enforcement Network (FinCEN) has Memoranda of Understanding or exchanges of letters in place with the financial intelligence units (FIUs) of Argentina, Australia, Belgium, France, the Netherlands, Slovenia, Spain, and the United Kingdom to facilitate the exchange of information.
The United States has Customs Mutual Assistance Agreements (CMAAs) with the European Community and with the following jurisdictions: Argentina, Australia, Austria, Belarus, Belgium, Canada, Colombia, Cyprus, Czech Republic, Denmark, Finland, France, Germany, Greece, Honduras, Hong Kong, Hungary, Ireland, Israel, Italy, Japan, Kazakhstan, South Korea, Latvia, Lithuania, Mexico, Mongolia, the Netherlands, New Zealand, Norway, Panama, Poland, Portugal, Romania, Russian, Slovakia, Spain, Sweden, Ukraine, United Kingdom, Venezuela and Yugoslavia. (The U.S. view is that the Socialist Federal Republic of Yugoslavia (SFRY) has dissolved and that the CMAA continues to apply to the successors that formerly made up the SFRY - Bosnia and Herzegovina, Croatia, the Former Yugoslav Republic of Macedonia, Slovenia, and the Federal Republic of Yugoslavia (Serbia and Montenegro).) CMAAs have also been signed, but are not yet in force, with the People's Republic of China and Turkey.
All of the agreements are patterned after a World Customs Organization Model CMAA. Since assistance can be provided in the enforcement of any laws related to customs, the U.S. Customs Service uses these agreements to assist in the gathering of information and evidence for criminal and civil cases involving trade fraud, smuggling, violations of export control laws, and most recently, in the growing effort to combat narcotics smuggling and money laundering.
Asset Sharing
Pursuant to the provisions of 18 U.S.C. ? 981(i), 21 U.S.C. ? 881(e)(1)(E), and 31 U.S.C. ? 9703(h)(2), which permit the United States to share forfeited assets with foreign jurisdictions under certain conditions, the Departments of Justice, State and Treasury have aggressively sought to encourage foreign governments to cooperate in joint investigations of drug trafficking and money laundering, offering the inducement of sharing in forfeited assets. A parallel goal has been to encourage spending of these assets to improve narcotics law enforcement. The long-term goal has been to encourage governments to improve asset forfeiture laws and procedures, so that they will be able to conduct investigations and prosecutions of drug trafficking and money laundering which include asset forfeiture. The United States and its partners in the G-8 are currently pursuing an aggressive program to strengthen asset forfeiture and sharing regimes. To date, Canada, the Cayman Islands, Jersey, Switzerland, and the United Kingdom have shared forfeited assets with the United States.
From 1989 through December 1999, the international asset sharing program, administered by the Department of Justice, resulted in the forfeiture in the United States of $386,431,072 of which $167,257,174 was shared with foreign governments which cooperated and assisted in the investigations. In 1999, the Department of Justice transferred forfeited proceeds to: Anguilla ($328,529); Colombia ($5,825,000); Ecuador ($14,328); Switzerland ($4,671,878); and the United Kingdom ($410,984). Prior recipients of shared assets (1989-1996) include: Argentina, the Bahamas, the British Virgin Islands, Canada, the Cayman Islands, Colombia, Costa Rica, Ecuador, Egypt, Guatemala, Guernsey, Hungary, the Isle of Man, Israel, Liechtenstein, Luxembourg, Paraguay, Romania, St. Maarten, Switzerland, the United Kingdom and Venezuela.
The international asset sharing program administered by the Department of Treasury has been in existence since 1995. In 1999, the program resulted in the forfeiture in the United States of approximately $7,889,000 of which $2,944,667 was shared with foreign governments which cooperated and assisted in the investigations. In 1999, the Department of Treasury transferred forfeited proceeds to: Canada ($42,119); Egypt ($999,187); Honduras ($139,720); Portugal ($85,840); Switzerland ($938,576); and the United Kingdom ($739,225). Prior recipients of shared assets (1995-1998) include: Aruba, the Bahamas, Canada, the Cayman Islands, Guernsey, Jersey, Mexico, Qatar, Switzerland, and the United Kingdom.
Multilateral Activities
Financial Action Task Force
The Financial Action Task Force on Money Laundering (FATF), which was established at the G-7 Economic Summit in Paris in 1989, is an inter-governmental body whose purpose is the development and promotion of policies to combat money laundering. These policies aim to prevent proceeds of crime from being utilized in future criminal activities and from affecting legitimate economic activities.
The FATF currently consists of 26 jurisdictions and two international organizations. Its membership includes the major financial center countries of Europe, North America and Asia. One of the guiding principles of the FATF is that money laundering is a complex economic crime which cannot be effectively controlled by conventional law enforcement methods alone, and that finance ministries, financial institutions, and regulators must work closely with law enforcement agencies in combating money laundering. Accordingly, the FATF is a multi-disciplinary body, bringing legal, financial and law enforcement experts into the policy-making process.
During 1999, FATF concluded its second round of mutual evaluations. Since FATF's creation in 1989, the 26 FATF countries and territories have now undergone two in-depth examinations of their anti-money laundering regimes. A large majority has reached an acceptable level of compliance with the forty Recommendations for combating money laundering, which were drawn up in 1990 and revised in 1996. Summaries of the mutual evaluation examinations (Spain, Finland, Luxembourg, Ireland, Hong Kong, China, New Zealand, Iceland, Singapore, Portugal, Turkey, Aruba and the Netherlands Antilles) which were conducted during FATF's tenth round of work (1998-1999) are contained in its latest annual report . In January 1999, the FATF carried out a mission to the Gulf Cooperation Council's headquarters in Riyadh to discuss how to improve the implementation of effective anti-money laundering systems among the GCC members.
In 1999, the FATF focused on several major initiatives. Perhaps the greatest achievement during 1999 was the addition of three new observer members. In September 1999, Argentina, Brazil and Mexico attended their first FATF Plenary Meeting and were officially welcomed as observers. Mutual evaluations of the three observer members are underway and the FATF hopes to complete all three mutual evaluations by June 2000. After each new observer member undergoes a successful mutual evaluation, it will become a full member. The FATF will continue to address the issue of new members this year with the goal of maintaining a certain level of geographical balance throughout the globe.
In February 1999, the FATF published its annual money laundering typologies report . This report discusses recent money laundering trends and methods, emerging threats, and significant countermeasures implemented by governments around the world. Law enforcement experts focused this year's typologies exercise on several specific issues. These include offshore financial centers and non-cooperative jurisdictions, vulnerabilities of new payment technologies, the potential use of the gold market in money laundering operations, and the use of large denomination banknotes and potential implications of the Euro currency changeover. The report highlights the importance of Suspicious Activity Reports and Financial Intelligence Units in preventing, detecting and prosecuting money laundering.
As a result of Austria's lack of compliance with the customer identification requirements of the FATF Forty Recommendations, the FATF issued a press release on February, 11, 1999 which expressed its deep concern regarding Austria's failure to take action to eliminate their anonymous savings "passbook" accounts. This warning asks FATF member governments to persuade the Government of Austria to put an end to these accounts and calls on financial institutions worldwide to give special attention to transactions associated with these accounts.
In response to the G-7 Finance Ministers Conclusions from the 1998 Birmingham Summit, the FATF formally created an Ad Hoc Group on Non-Cooperative Countries or Territories. This group has established criteria to define the rules and practices which characterize a non-cooperative country or territory. The Ad Hoc group is also expected to identify jurisdictions that pose a serious threat to the international community and recommend steps that can be taken by FATF and/or G-7 Finance Ministers to encourage such jurisdictions to comply with international norms. (See the offshore section of this report for further information regarding this effort.)
Also in relation to the G-7 Finance Ministers' 1998 Conclusions, the FATF discussed ways that anti-money laundering systems can "contribute to deal more effectively with tax related crimes." In this regard, in order to help close the "fiscal excuse" loophole in the reporting of suspicious transactions, FATF members adopted the following Interpretative Note to Recommendation 15:
In implementing Recommendation 15, suspicious transactions should be reported by financial institutions regardless of whether they are also thought to involve tax matters. Countries should take into account that, in order to deter financial institutions from reporting a suspicious transaction; money launderers may seek to state inter alia that their transactions relate to tax matters.
During 1999, an Ad Hoc Group was also created for Africa to coordinate anti-money laundering efforts and establish one or more FATF-style regional body(s). In November, the Eastern and Southern African Anti-Money Laundering Group (ESAAMG) was officially established with seven signatories to the group's Memorandum of Understanding . The formal establishment of a similar FATF-style regional body for the countries of central and western Africa (the Intergovernmental Task Force against Money Laundering in Africa - ITFML / Africa ) took place in December 1999 at the Summit of the Economic Community of Western African States (ECOWAS). This group covers the 15 countries of West Africa, from Mauritania to Nigeria. These initiatives were warmly welcomed as they have furthered the increasing network of FATF-style bodies throughout the globe.
Work continued on the study to estimate the magnitude of money laundering in an Ad Hoc Group chaired by the United States. The purpose of this study is to confirm that money laundering is a significant element in the global financial system and to quantify the amount of money laundering activity. Each participating country has formed an advisory board of experts for the purpose of identifying the quantifiable sources of data. Once determined, this figure will allow policy makers and the public, through press reporting, to appreciate the critical value of anti-money laundering programs and their relationship to ensuring the integrity of the global financial system.
The United States hosted the 1999-2000 Experts Meeting on Money Laundering Typologies on November 18-19, 1999 in Washington, DC. This meeting represented the first time countries outside of the FATF participated in the FATF Typologies Exercise, making it an unprecedented and truly global review of anti-money laundering activity. In addition to sharing information on specific cases of money laundering activity within the jurisdictions in attendance, there were presentations describing on-line banking, alternative remittance systems, company formation agents and international trade. In early February 2000, the FATF released the 1999-2000 typologies report to the public.
Asia/Pacific Group on Money Laundering (APG)
The Asia Pacific Group on Money Laundering (APG) was formally established in February 1997 at the Fourth Asia/Pacific Money Laundering Symposium in Bangkok, Thailand. The APG currently consists of 17 members from South Asia, Southeast and East Asia and the South Pacific. The establishment of this group is a positive step toward recognizing that money laundering is a significant international issue which affects the Asia/Pacific region, and that jurisdictions within the region need to cooperate in combating money laundering. During the August 1999 annual meeting in Manila, the Republic of Indonesia joined the APG.
The APG conducted a typologies workshop in March, 1999, in Tokyo, Japan, addressing the issue of underground banking systems and money laundering. A significant outcome of the March workshop was the creation of a working group, which will study the problem of underground banking in more depth. It was also agreed that the APG should address the issue of improved control and monitoring of alternative remittance systems and underground banking during its consideration of additional measures to the 40 Recommendations of the Financial Action Task Force. The next typologies meeting is scheduled for March 1-2, 2000 in Bangkok, Thailand and will focus on the use of false identities for money laundering purposes.
The APG held its Second Annual Meeting in Manila, the Philippines, on August 4-6,1999. The Asian Development Bank and the Philippines hosted the meeting. The APG has now agreed on a strategic plan that includes, among other initiatives, self-assessment exercises, mutual evaluations, a training strategy, typologies exercises, an annual report, and a members-only section of its meetings. The FATF 40 Recommendations have been reconfirmed as the basis for the work of the APG. Initial discussions are taking place on holding a financial services forum for the area, and a region-wide mutual legal assistance workshop is being considered. Four jurisdictions have agreed to undergo assessments of their level of international co-operation during the first quarter of 2000. The next annual general meeting of the APG will take place in early June, 2000, in Australia.
Caribbean Financial Action Task Force (CFATF)
The Caribbean Financial Action Task Force, an FATF-style regional body comprised of 25 jurisdictions, continues to progress and to advance its anti-money laundering initiatives within the Caribbean basin. In October 1999, the British Virgin Islands assumed the Chairmanship of the CFATF, following the Cayman Islands.
Members of the CFATF subscribe to a Memorandum of Understanding that delineates the CFATF's mission, objectives and membership requirements. All members are required to make a political commitment to implement the 40 Recommendations of the FATF, as well as the CFATF's additional 19 Recommendations, and to undergo peer review in the form of mutual evaluations to assess their level of implementation of the Recommendations. Members are also required to contribute to the CFATF budget and to participate in the activities of the body. In October 1999, Spain joined the five original Cooperating and Supporting Nations (COSUNs) of CFATF (Canada, France, the Netherlands, the United Kingdom, and the United States) bringing the number of COSUNs to six. All COSUNs are committed to providing financial and other support to the CFATF. Mexico has applied for COSUN status, pending its joint FATF-CFATF mutual evaluation, scheduled to occur in March 2000. The Inter-American Development Bank was welcomed as an observer organization in CFATF.
Several changes occurred within the CFATF Secretariat during 1999. In March 1999, Calvin Wilson, previously the CFATF's Deputy Director, was promoted to Executive Director of CFATF. Pierre LaPaque was seconded by the French Government to serve as CFATF's Deputy Director.
The CFATF mutual evaluation program made significant progress during 1999. The CFATF revised its mutual evaluation procedures setting a timetable for more expeditious completion and approval of evaluation reports. Six mutual evaluation on-site visits took place in 1999. Seven mutual evaluation reports were completed and approved by the CFATF Council of Ministers. In May 1999, the CFATF conducted a successful training program for its mutual evaluation examiners.
Also during 1999, the CFATF revised its 19 Recommendations, updating them to make them consistent with the revised FATF 40 Recommendations and the current money laundering situation in the region. A typologies exercise was conducted on the illegal trade in firearms and its impact on the drug trade and money laundering in the region.
Council of Europe (COE)
The Council of Europe's Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures (PC-R-EV) continued to make significant progress in its second year. Its mutual evaluation program is on schedule, with 7 mutual evaluation on-site visits conducted during 1999-to Andorra, Bulgaria, Croatia, the Former Yugoslav Republic of Macedonia, Liechtenstein, Poland, and Romania; an on-site visit to Estonia took place in January 2000. At the PC-R-EV's June 1999 plenary meeting, three mutual evaluation reports were adopted - on Andorra, Hungary, and Lithuania. Progress reports were provided by Cyprus and Slovenia. This brings the total number of on-site visits conducted to 15 since the inception of the PC-R-EV evaluation program in April 1998, with a total of 8 mutual evaluation reports adopted by the plenary (Andorra, Cyprus, Czech Republic, Hungary, Lithuania, Malta, Slovakia, and Slovenia). The terms of reference of PC-R-EV were amended in 1999 to permit the provision of technical assistance and to enable any interested FATF member government to follow the work of the PC-R-EV as an observer.
PC-R-EV conducted a typologies exercise February 7-11, 2000 in conjunction with its fifth plenary meeting. This exercise focused on organized crime and money laundering. Mutual evaluation reports on Liechtenstein, Poland, and Romania were adopted during the February plenary, with progress reports provided by the Czech Republic, Malta and Slovakia. A second training seminar for examiners is planned for fall 2000.
OAS/CICAD
During 1999, the Organization of American States Inter-American Commission on Drug Abuse Control (OAS/CICAD) carried out three major initiatives related to money laundering. These included:
- A peer review process which will include indicators of progress in implementation of members' national anti-money laundering programs,
- Several actions by the Experts Group on Money Laundering Control, most notably a revision of the Model Regulations on Money Laundering Control to reflect new elements such as expansion of predicate offenses to include serious crimes and mandatory suspicious transaction reporting, and;
- Completion of on-site surveys to assess training needed by each CICAD member and to determine what courses will best assist them in implementation of the Buenos Aires Communiqu?.
CICAD's Experts Group on Money Laundering Control concluded the updating of the Model Regulations, the on-going assessment of countries' anti-money laundering activities under the Buenos Aires Action Plan, and two typologies exercises and provided guidance to the Secretariat on implementation of money laundering prevention training programs.
A needs assessment of five South American countries under the joint Inter-American Development Bank (IDB)/OAS pilot project for the prevention of money laundering in financial institutions was successfully concluded. Training, in the form of regional seminars, is expected to commence early in 2000. The OAS/CICAD Group of Experts has also identified two additional key areas for training and technical assistance: FIU development and the training of judges and prosecutors. OAS/CICAD has completed two variations of a project proposal for Judicial/Prosecutorial training and is now attempting to identify suitable donors. Finally, a project proposal for the funding of FIU development by the IDB is in the final stages of completion.
The United Nations
The United Nations Office for Drug Control and Crime Prevention (ODCCP) has played a major role in promoting understanding of the offshore financial sector. In June 1998, the ODCCP introduced to the General Assembly Special Session on Drugs the findings of a study it had commissioned. That study, Financial Havens, Banking Secrecy and Money Laundering, provided the first global view of the systemic risks inherent in the criminal abuse of the offshore financial services industry. The ODCCP, through its Global Program Against Money Laundering, has served a unique function as the only multinational global entity providing comprehensive anti-money laundering training and technical assistance to legislators, law enforcement officials, prosecutors and judges, regulators involved in compliance matters, as well as bankers and providers of other financial services.
In view of the activities of the OECD, the FATF and the FSF, there can be little question that many OFC jurisdictions will require training and technical assistance to create or improve their money laundering counter measures. The United Nations Offshore Forum (UNOF) will offer a comprehensive range of anti-money laundering training and technical assistance to offshore jurisdictions. Only those offshore jurisdictions that express a firm political commitment to adhering to a number of international standards and norms will be admitted to the program.
Believing that the cross-border sharing of information is vital to combat money laundering, particular emphasis will be placed on developing the infrastructure necessary to establish a financial intelligence unit. The UNOF plans to design a database, which will track global anti-money laundering programs. In addition to training and technical assistance, the UNOF is considering providing longer term on-site assistance to develop institutions and advise and assist on ongoing major money laundering investigations and prosecutions.
Financial Intelligence Units (FIUs) and the Egmont Group
The fight against money laundering has been an essential part of the overall struggle to combat illegal narcotics trafficking and the activities of organized crime. The measures governments have developed to counter money laundering can also help stem corruption, terrorist financing, and other serious crime. Banks and other financial institutions are an important source for information about money laundering and other financial crimes.
In the 1990s, governments around the world began to work together to mitigate the corrosive dangers that unchecked financial crimes posed to their economic and political systems. To address this threat, many governments created specialized agencies to deal with the problem of money laundering. In the beginning, there was no unifying concept of what functions these agencies should perform, and it was almost by accident that they had in common the function of receiving and processing financial disclosures. At about this time, the heads of these organizations began to become more visible on national delegations represented in various international meetings and conferences. Through these informal contacts, they shared common experiences and determined that it might be useful to meet and discuss these commonalties. These first contacts led to a meeting on June 9, 1995 at the Egmont-Arenberg Palace in Brussels, Belgium to discuss financial intelligence units or FIUs. Chaired jointly by FinCEN and the Cellule de Traitement des Informations Financieres (CTIF) of Belgium, the meeting in Brussels enabled participants to become acquainted with the already existing FIUs (14 nations) and to open communication channels. Now known as the Egmont Group, these FIUs meet yearly to find ways to cooperate, especially in the areas of information exchange, training, and the sharing of expertise.
During the Egmont Plenary in November, 1996, in Rome, the Egmont Group came to an agreement on the definition of an FIU. FIUs are centralized agencies that, at a minimum, receive, analyze, and disclose to competent authorities information provided by financial institutions (and other mandated entities) concerning possible money laundering and other financial crimes. FIUs offer law enforcement agencies around the world an important new avenue for information collection and exchange.
The Egmont Group as a whole meets once a year, and working groups (Legal, Technology/Training, and Outreach) meet three times a year to discuss issues related to money laundering and to conduct common business. The Legal Working Group deals with exchange of information. The Technology/Training Working Group looks at ways to communicate more effectively, identifies training opportunities for FIU personnel and examines new software applications that might facilitate the analysis work of these personnel. A significant program developed by this working group is the FIU personnel exchange program. Exchanges between FIUs have occurred all over the globe with good results. The Outreach Working Group works to create a global network of FIUs to facilitate international cooperation. The Egmont Group has no secretariat. Administrative functions are shared by FIUs on a rotating basis.
There are currently 48 operational FIU units worldwide, with many others in various stages of development. FIUs operate in:
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Aruba |
Cyprus |
Italy |
Paraguay |
|
Australia |
Czech Republic |
Jersey |
Portugal |
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Austria |
Denmark |
Latvia |
Slovakia |
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Belgium |
Finland |
Lithuania |
Slovenia |
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Bermuda |
France |
Luxembourg |
Spain |
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Bolivia |
Greece |
Mexico |
Sweden |
|
Brazil |
Guernsey |
Monaco |
Switzerland |
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British Virgin Islands |
Hong Kong |
Netherlands |
Taiwan |
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Bulgaria |
Hungary |
Netherlands Antilles |
Turkey |
|
Chile |
Iceland |
New Zealand |
United Kingdom |
|
Costa Rica |
Ireland |
Norway |
United States |
|
Croatia |
Isle of Man |
Panama |
Venezuela |
During the plenary meeting in May 1999, 10 new units (bolded above) joined the Egmont roster. One of the main goals of the Egmont Group is to create a global network of FIUs to facilitate international cooperation. Although FIUs operate differently, FIUs exchange information with their counterparts under certain specific conditions. This information could be suspicious or unusual transaction reports from the financial sector as well as government administrative data and public record information. Many FIUs can be of assistance in providing financial intelligence rapidly to other FIUs. One of the most significant accomplishments of the group's efforts has been the creation of a secure Internet web site. Egmont's International Secure Web System-developed primarily by FinCEN-permits members of the group to communicate with one another via secure e-mail, posting and assessing information regarding trends, analytical tools, and technological developments. In other words, this system provides the ability to facilitate practical, rapid exchanges of information that could enhance the efforts of the fight against money laundering. FinCEN, on behalf of the Egmont Group, maintains the Egmont Secure Web.
The ongoing development and establishment of FIUs exemplify how countries around the world continue to intensify their efforts to focus on research, analysis and information exchange in order to combat money laundering and other financial crimes.
Ideas for the Future
In addition to well-known technical elements to combat money laundering, the following concepts are being pursued to varying degrees around the world and are possible innovations to current international practice that would provide for greater reach for law enforcement authorities and less impunity for financial criminals.
Asserting Jurisdiction Over and Access To Records
Mutual legal assistance treaties are a major new mechanism by which jurisdictions may cooperate with one another in retrieving essential evidence of financial crimes. The UN Convention on Transnational Organized Crime currently under negotiation in Vienna may create a universal system for mutual legal assistance in cases involving conspiracy and money laundering by organized crime. However, jurisdictions can exercise self-help as well, making the right to do business in their territory contingent on agreement to make records available to law enforcement authorities. Such a provision, if universally adopted, would do much to protect shareholders, depositors, and creditors from having no remedy in the event of something going wrong. Simultaneously, the G-8 and the Council of Europe need to complete their work on problems of high-tech and computer-related crime. This work includes the difficult jurisdictional issues raised by electronic communication and on rules for search, seizure and use of electronic records which may be located thousands of miles distant from where the crime itself took place. Progress on these issues will be necessary to reduce the threat posed if some jurisdictions do not require records to be maintained or do not permit records maintained in their jurisdiction to be accessed in cases involving financial crime.
Refusing To Accept Bank Secrecy In Cases Involving Financial Crime
Jurisdictions cannot protect their citizens or residents from financial crime if financial criminals are able to shield their criminal conduct through the use of bank secrecy. Jurisdictions that do not permit law enforcement authorities to gain access to financial records in cases involving allegations of criminal conduct from terrorism to tax crime turn themselves into safe havens for financial criminals. Just as the European Union has sued one of its members, Austria, to stop its issuance of anonymous passbook savings accounts, the Financial Action Task Force and other international bodies need to consider taking appropriate measures regarding jurisdictions that have become safe havens for financial criminals. Such measures need not be anything that would impair the ability of financial markets to function normally. Such an approach could develop into a two-tier system for international banking transactions. The top tier jurisdictions that provide the requisite access would have their transactions treated normally. Jurisdictions not permitting overseas regulators or law enforcement officials to have access to financial records would have their transactions subjected to additional regulatory or enforcement review, such as through an automatic presumption that the transaction is suspicious. This type of two-tier system would reflect the actual risks to the global financial system inherent in having portions of that system inaccessible to law enforcement investigations.
Eliminating Differential Treatment of Offshore Financial Center Transactions
The OFC concept is based on, in part, the notion that what is necessary to regulate transactions involving the citizens of one's own jurisdiction is not necessary in handling transactions involving the citizens of other jurisdictions. Its impact, however, has been to encourage some financial institutions to deliberately structure themselves so that they are not regulated by anyone. Recently, one such institution, Caymanx Bank, structured itself so that its operations in the Isle of Man were offshore to the Isle of Man because it was a subsidiary of an institution in the Cayman Islands. It was also offshore to the Cayman Islands because it was only doing business in the Isle of Man. As a result, its activities were effectively free of regulation, and its clients' records were advertised on the Internet as being free of oversight by the authorities of any jurisdiction. Whatever the economic justification for such differential treatment in the past, when national laws impose tariffs on many forms of economic activity, treating as offshore anyone's transactions one licenses makes no sense. Such differential treatment is especially inappropriate when everyone is using the same technological infrastructure and when it is increasingly difficult to determine the national origin or citizenship of any individual or corporate user of this global system. Jurisdictions that continue to offer unregulated or under-regulated offshore services will develop reputational problems that drive off legitimate businesses. Also, firms based in OFC jurisdictions that are inadequately regulated could be subjected to additional due diligence by major clearinghouse banks.
Eliminating The "It's Only Tax Evasion" Loophole
One of the great difficulties in developing information on a timely basis in financial crime cases is the problem of proving that monies hidden in shell companies, international business corporations, or trusts are the proceeds of criminal activity other than tax evasion. In the United States, some of the most important federal prosecutions of serious organized crime figures responsible for contract killings, drug trafficking, and other extraordinarily serious crime, have succeeded only through the making of tax cases. In such domestic organized crime prosecutions, the inability of criminals to explain where their money came from, and the clear frauds involved in their handling of the funds, made criminal prosecutions successful. By contrast, the generally accepted principle that there is nothing wrong with handling mere "tax evasion" money offshore has created a swamp in which financial criminals breed. Jurisdictions could eliminate the "tax evasion" loophole through two techniques: including tax evasion among the grounds for the elimination of bank secrecy in the provision of documents to law enforcement and amending mutual legal assistance agreements to include tax offenses. If such an approach became generally accepted, jurisdictions that continued to make themselves available for tax evasion aimed at other jurisdictions might well find that the potential damage to their reputation from remaining outside this new system outweighed the potential income from continuing to offer these services. The G-7 initiative to coordinate, where appropriate, fiscal fraud and anti-money laundering enforcement efforts is a welcome step in this direction.
Cooperating In Repatriation of Assets and Broadening Civil Remedies for Victims of Financial Crime
Too often, victims of financial crime find themselves unable to reach the assets of those who have victimized them. Governments need to look at mechanisms designed to permit early immobilization of assets of financial criminals and mutual assistance in ensuring that the immobilization is international, not merely domestic. They may also wish to consider providing for an adequate array of civil causes of action for victims of financial crime against institutions that have facilitated the crime as well as against the actual perpetrators. Governments may wish to determine where and when financial institutions doing business in their territories should be held at risk for losses occasioned through the use of their institutions by financial criminals. Failure to adopt and implement mechanisms to ensure the "know your customer" principle in a case where the "customer" proved to be engaging in a pattern or practice of fraudulent activity could lead to civil liability to victims. Such a finding of civil liability could in turn lead to enhanced compliance practices throughout the entire industry.
Linking Future Global Financial Assistance by Multilateral Lenders to Strengthened Governmental Supervision and Enforcement
Future global economic assistance to any jurisdiction or region needs to be more closely tied to taking specific rule of law actions that strengthen the ability of the governments involved to carry out essential regulatory and enforcement functions. This need not involve conditionality, but instead concurrent initiatives such as agreement to strengthen the role of central banks in auditing and inspecting the banks they regulate and to further protect them from political influence. Such audits could help ensure that central banks enforce safety and soundness provisions consistent with international standards and audited by international auditors, with goals, outputs, and benchmarks for reform defined. Among the actions to be undertaken would be to establish public, transparent standards for uniform business operation regulations, as well as requirements for the issuance and regular renewal of business licenses and permits. The International Monetary Fund and the World Bank would be two helpful initiators of this kind of approach, were they to have the support of the member states who fund them in undertaking this essential add-on to their past financial assistance programs.
Legislating Transparency in Government and Public Disclosure for Public Officials
Transparent government decision-making in procurement, regulatory, administrative and other decision-making processes inhibit bribery and corruption, both of which are nearly inescapable factors in criminal exploitation of financial systems and institutions. The adoption of laws, regulations, procedures and practices designed to promote integrity of public servants and to prevent or disclose and punish acts of official corruption is closely related to mechanisms that increase the integrity of financial systems used by the public and private sector alike. Implementing an initiative of the International Crime Control Strategy, in February 1999 in Washington, the Vice President hosted and chaired the first Global Forum on Fighting Corruption: Safeguarding Integrity Among Justice and Security Officials. Senior officials from ninety countries addressed Guiding Principles and practices that are effective to promote integrity and control or combat corruption in specific aspects of public service, including regulation of the financial sector, customs, judicial, procurement and budget officials. Their declaration called on governments to adopt comprehensive national effective practices, based on those in the Guiding Principles, and to assist each other to implement them through processes of mutual evaluation. The United States has continued to promote the definition of standards and norms for governments, based on these Guiding Principles, in global and regional fora. General recognition and adoption of such effective practices would assuredly make it easier for states to take other steps needed to combat financial crime, by reducing the ability of would-be financial criminals to purchase the kind of legislative, executive or judicial environment needed to facilitate their activities.
Money Laundering Comparative Table
Each year, U.S. officials from agencies with anti-money laundering responsibilities meet to assess the money laundering situations in more than 175 jurisdictions. The review includes steps taken or not taken to address financial crime and money laundering, each jurisdiction's vulnerability to money laundering, the conformance of its laws and policies to international standards, the effectiveness with which the government has acted, and the government's political will to take needed actions.
The 2000 INCSR assigned priorities to more than 160 jurisdictions using a classification system consisting of three differential categories titled Jurisdictions of Primary Concern, Jurisdictions of Concern, and Other Jurisdictions Monitored.
INCSR priorities draw upon a number of factors which indicate: (1) the extent to which the jurisdiction is or remains vulnerable to money laundering, notwithstanding its money laundering countermeasures, if any; (2) the nature of the money laundering situation in each jurisdiction (for example, whether it involves drugs or other contraband); (3) the ways in which the U.S. regards the situation as having international ramifications; (4) the situation's impact on U.S. interests; (5) whether the jurisdiction has taken appropriate legislative actions to address specific problems; (6) whether there is a lack of licensing and oversight of offshore financial centers and businesses; (7) whether the jurisdiction's laws are being effectively implemented; and (8) where U.S. interests are involved, the degree of cooperation between the foreign government and U.S. government agencies. There are approximately two dozen sub-factors that are also considered. These sub-factors (Category Criteria) are explained below.
A government can have comprehensive laws on its books and conduct aggressive anti-money laundering enforcement efforts, but still be classified as a jurisdiction of Primary Concern. In such jurisdictions the volume of money laundering continues to be substantial and continued vigilance and effective enforcement by the government is essential to successfully combat money laundering.
When the severity of the money laundering problem places a jurisdiction in the Primary Concern category and other deficiencies exist, this categorization indicates that this jurisdiction needs to take immediate action to develop or enhance its anti-money laundering regime and will receive near-term priority attention from the U.S. Government. In categorizing a jurisdiction as a Primary Concern jurisdiction, the U.S. belief is that near-term remedial action by that jurisdiction is needed to address the problems cited in the individual country summaries or reflected in the Comparative Chart. Jurisdictions categorized in the Jurisdictions of Concern category need to develop or to enhance their anti-money laundering regimes. Specific attention to OFCs, their licensing and regulation, may be necessary to protect respective financial systems from criminal abuse. Jurisdictions in the Other Jurisdictions Monitored category are not of immediate concern, but will be monitored for changes in money laundering activity.
Category Criteria
As any financial system can be penetrated, every jurisdiction has the potential of becoming a money laundering center. There is no precise measure of vulnerability for any financial system, but a checklist of what drug money managers reportedly look for provides a basic guide.
Failure to criminalize money laundering for all serious crimes or limiting the offense to narrow predicates.
Rigid bank secrecy rules that cannot be penetrated for authorized law enforcement investigations or that prohibit or inhibit large value and/or suspicious or unusual transaction reporting by both banks and non-bank financial institutions.
Lack of or inadequate "know your client" requirements to open accounts or conduct financial transactions, including the permitted use of anonymous, nominee, numbered or trustee accounts.
- No requirement to disclose the beneficial owner of an account or the true beneficiary of a transaction.
- Lack of effective monitoring of cross-border currency movements.
- No reporting requirements for large cash transactions.
- No requirement to maintain financial records over a specific period of time.
- No mandatory requirement to report suspicious transactions or a pattern of inconsistent reporting under a voluntary system; lack of uniform guidelines from which to identify suspicious transactions.
- Use of bearer monetary instruments.
- Well-established non-bank financial systems, especially where regulation, supervision, and monitoring are absent or lax.
- Patterns of evasion of exchange controls by legitimate businesses.
- Ease of incorporation, especially where ownership can be held through nominees or bearer shares, or where off-the-shelf corporations can be acquired.
- No central reporting unit for receiving, analyzing and disseminating to the competent authorities large value, suspicious or unusual financial transactions that might identify possible money laundering activity.
- Lack of or weak bank regulatory controls, or failure to adopt or adhere to the Basle
- Principles for International Banking Supervision, especially in jurisdictions where the monetary or bank supervisory authority is understaffed, underskilled or uncommitted.
- Well-established offshore financial centers or tax-haven banking systems, especially jurisdictions where such banks and accounts can be readily established with minimal background investigations.
- Extensive foreign banking operations, especially where there is significant wire transfer activity or multiple branches of foreign banks, or limited audit authority over foreign-owned banks or institutions.
- Limited asset seizure or confiscation authority.
- Limited narcotics, money laundering and financial crime enforcement and lack of trained investigative personnel.
- Jurisdictions with free trade zones where there is little government presence or other supervisory authority.
- Patterns of official corruption or a laissez-faire attitude toward the business and banking communities.
- Jurisdictions where the U.S. dollar is readily accepted, especially jurisdictions where banks and other financial institutions allow dollar deposits.
- Well-established access to international bullion trading centers in New York, Istanbul, Zurich, Dubai and Mumbai.
- Jurisdictions where there is significant trade in or export of gems, particularly diamonds.
- Jurisdictions with large parallel or black market economies.
- Limited or no ability to share financial information with foreign law enforcement authorities.
|
Upgrades |
Downgrades |
Additions |
|
Grenada --> Other-Concern |
Montserrat --> Concern-Other |
Brunei --> Other |
|
Nauru --> Concern-Primary |
Nepal --> Concern-Other |
Cameroon --> Other |
|
St. Lucia --> Other-Concern |
Trinidad and Tobago --> Concern-Other |
Comoros -- > Other |
|
Lesotho --> Other | ||
|
Macedonia --> Other | ||
|
Namibia --> Other |
Comparative Chart
The following comparative chart (preceded by a Glossary of Terms) identifies the actions taken by each of the jurisdictions to combat money laundering. This reference chart provides a comparison of a broad range of elements that define legislative activity and identify other characteristics that can have a relationship to money laundering vulnerability.
Glossary of Terms
"Criminalized Drug Money Laundering": The jurisdiction has enacted laws criminalizing the offense of money laundering related to drug trafficking.
"Criminalized Beyond Drugs": The jurisdiction has extended anti-money laundering statutes and regulations to include non-drug-related money laundering.
"Record Large Transactions": By law or regulation, banks are required to maintain records of large transactions in currency or other monetary instruments.
"Maintain Records Over Time": By law or regulation, banks are required to keep records, especially of large or unusual transactions, for a specified period of time, e.g., five years.
"Report Suspicious Transactions": An "M" (for "mandatory") indicates that by law or regulation, banks are required to record and report suspicious or unusual transactions to designated authorities. A "P" indicates that by law or regulation, banks are permitted to record and report suspicious transactions. An effective know-your-customer policy is considered a prerequisite in this category.
"Financial Intelligence Unit": The jurisdiction has established a central, national agency responsible for receiving (and, as permitted, requesting), analyzing, and disseminating to the competent authorities disclosures of financial information concerning suspected proceeds of crime, or required by national legislation or regulation, in order to counter money laundering. These reflect those jurisdictions that have met the Egmont definition of an FIU.
"System for Identifying and Forfeiting Assets": The jurisdiction has enacted laws authorizing the tracing, freezing, seizure and forfeiture of assets identified as relating to or generated by money laundering activities.
"Arrangements for Asset Sharing": By law, regulation or bilateral agreement, the jurisdiction permits sharing of seized assets with third party jurisdictions which assisted in the conduct of the underlying investigation.
"Cooperates w/Domestic Law Enforcement": By law or regulation, banks are required to cooperate with authorized law enforcement investigations into money laundering or the predicate offense, including production of bank records, or otherwise lifting the veil of bank secrecy.
"Cooperates w/International Law Enforcement": By law or regulation, banks are permitted/required to cooperate with authorized investigations involving or initiated by third party jurisdictions, including sharing of records or other financial data.
"International Transportation of Currency": By law or regulation, the jurisdiction, in cooperation with banks, controls or monitors the flow of currency and monetary instruments crossing its borders. Of critical weight here are the presence or absence of wire transfer regulations and use of reports completed by each person transiting the jurisdiction and reports of monetary instrument transmitters.
"Mutual Legal Assistance": By law or through treaty, the jurisdiction has agreed to provide and receive mutual legal assistance, including the sharing of records and data.
"Non-Bank Financial Institutions": By law or regulation, the jurisdiction requires non-bank financial institutions to meet the same customer identification standards and adhere to the same reporting requirements that it imposes on banks.
"Disclosure Protection Safe Harbor": By law, the jurisdiction provides a "safe harbor" defense to banks or other financial institutions and their employees who provide otherwise confidential banking data to authorities in pursuit of authorized investigations.
"Offshore Financial Centers": By law or regulation, the jurisdiction authorizes the licensing of offshore banking and business facilities.
"States Parties to 1988 UN Drug Convention": The jurisdiction is a party to the 1988 United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, or the country that is responsible for the jurisdiction's international relations has extended the application of the Convention to the jurisdiction.
Annex to the Offshore Financial Centers Section
FATF Criteria for Defining Non-Cooperative Countries or Territories
Loopholes in financial regulations
(i) No or inadequate regulations and supervision of financial institutions 1. Are there effective regulations and supervision, if any, for all financial institutions in a given country or territory, onshore or offshore, on an equivalent basis with respect to international standards applicable to money laundering?
(ii) Inadequate licensing and rules for the creation of financial institutions, including assessing the backgrounds of their managers and beneficial owner
Is it possible for individuals or legal entities to operate a financial institution without authorization or registration or with very rudimentary requirements for authorization or registration?
3 Are there measures to guard against holding of management functions and control or acquisition of a significant investment in financial institutions by criminals or their confederates?
(iii) Inadequate customer identification requirements for financial institutions
4. Do anonymous accounts or accounts in obviously fictitious names exist?
5. Are there effective laws, regulations, agreements between supervisory authorities and financial institutions or self-regulatory agreements among financial institutions on identification by the financial institution of the client and beneficial owner of an account?
Is it mandatory to verify the identity of the client?
Is it a requirement to identify the beneficial owners where there are doubts as to whether the client is acting on his own behalf?
Is there an obligation to renew identification of the client or the beneficial owner when doubts appear as to their identity in the course of business relationships?
Are financial institutions required to develop ongoing anti-money laundering training programs?
Is there a legal or regulatory obligation for financial institutions or agreements between supervisory authorities and financial institutions or self-agreements among financial institutions to record and keep, for a reasonable and sufficient time (five years), documents connected with the identity of their clients, as well as records on national and international transactions?
7. Are there legal or practical obstacles to access by administrative and judicial authorities to information with respect to the identity of the holders or beneficial owners and information connected with the transactions recorded
(iv) Excessive secrecy provisions regarding financial institutions
8. Can secrecy provisions be invoked against, but not lifted by competent administrative authorities in the context of enquiries concerning money laundering?
9. Can secrecy provisions be invoked against, but not lifted by judicial authorities in criminal investigations related to money laundering?
(v) Lack of efficient suspicious transactions reporting system
10. Is there an efficient mandatory system for reporting suspicious or unusual transactions to a competent authority, provided that such a system aims to detect and prosecute money laundering?
11. Are there monitoring and criminal or administrative sanctions in respect to the obligation to report suspicious or unusual transactions?
B. Obstacles raised by other regulatory requirements
(i) Inadequate commercial law requirements for registration of business and legal entities
12. Are there adequate means for identifying, recording and making available relevant information related to legal and business entities (name, legal form, address, identity of directors, provisions regulating the power to bind the entity)?
(ii) Lack of identification of the beneficial owner(s) of legal and business entities
13. Are there obstacles to identification by financial institutions of the beneficial owner(s) and directors/officers of a company or beneficiaries of legal or business entities?
14. Are there regulatory or other systems which allow financial institutions to carry out financial business where the beneficial owner(s) of transactions is unknown, or is represented by an intermediary who refuses to divulge that information, without informing the competent authorities?
C. Obstacles to international co-operation
(i) Obstacles to international co-operation by administrative authorities
15. Do laws or regulations prohibit international exchange of information between administrative anti-money laundering authorities or do not grant clear gateways or subjecting exchange of information to unduly restrictive conditions?
16. Are relevant administrative authorities prohibited from conducting investigations or enquiries on behalf of or for account of their foreign counterparts?
17. Has obvious unwillingness to respond constructively to requests (e.g. failure to take the appropriate measures in due course, long delays in responding) been observed?
18. Are there restrictive practices in international co-operation against money laundering between supervisory authorities or between FIUs for the analysis and investigation of suspicious transactions, especially on the grounds that such transactions may relate to tax matters? (ii) Obstacles to international co-operation by judicial authorities
19. Is the laundering of the proceeds from serious crimes being criminalised?
20. Do laws or regulations prohibit international exchange of information between judicial authorities (notably specific reservations to the anti-money laundering provisions of international agreements) or place highly restrictive conditions on the exchange of information?
21. Has obvious unwillingness to respond constructively to mutual legal assistance requests (e.g. failure to take the appropriate measures in due course, long delays in responding) been observed?
22. Does the jurisdiction refuse to provide judicial co-operation in cases involving offences recognized as such by the requested jurisdiction especially on the grounds that tax matters are involved?
D. Inadequate resources for preventing and detecting money laundering activities
(i) Lack of resources in public and private sectors
23. Are the administrative and judicial authorities provided with the necessary financial, human or technical resources to exercise their functions or to conduct their investigations?
24. Is there inadequate or corrupt professional staff in governmental, judicial or supervisory authorities or among those responsible for anti-money laundering compliance in the financial services industry?
(ii) Absence of a financial intelligence unit or of an equivalent mechanism
Is there a centralized unit (i.e., a financial intelligence unit) or of an equivalent mechanism for the collection, analysis and dissemination of suspicious transactions information to competent authorities?
Money Laundering Country/Jurisdiction Table -- [Excel file]
Money Laundering Comparative Chart -- [Excel file]
Afghanistan (Other). Afghanistan's importance as an opium poppy production center is not paralleled in the money laundering sector: Afghanistan is not a center for money laundering. Financial institutions barely exist. The country is neither an important regional financial center nor an offshore financial center.
Afghanistan does play a key role in the heroin trade, the proceeds of which appear to be laundered outside the country, particularly in the United Arab Emirates, or through the hawala alternative remittance system. Reports indicate that the Taliban, the Northern Alliance, and other factions are involved in narcotics trafficking.
The hawala (or hundi) alternative remittance system is known to be used to remit money to Afghanistan. Although most remittances represent money being sent home by Afghan expatriates, some may represent the sale of narcotics produced in or moved through Afghanistan as part of a larger money laundering scheme.
Contraband smuggling, including the smuggling of narcotics, generates funds. Private investment of drug trafficking profits reportedly contributed to a surge in building construction and other licit commercial activity in Kandahar City during 1998. Profits are also invested in improving trafficking capabilities by purchasing fast, all-terrain vehicles and acquiring more potent weaponry.
There are no U.S. training or other programs aimed at combating money laundering in Afghanistan. Albania (Concern). The significant presence of organized crime and the weakness of government structures make Albania a transit country for narcotics and arms trafficking, as well as for the smuggling of contraband goods and illegal aliens, all of which put Albania at risk for money laundering. Organized crime groups use Albania as a base of operations for criminal activities in other countries. Criminal proceeds are easily laundered in Albania, since official corruption is rife and government enforcement controls are weak or nonexistent. Albania's government is still in the process of asserting its authority in many areas of the country following the collapse of the Albanian economy and ensuing civil strife of 1997.
Article 287 of the Albanian Criminal Code of 1995 criminalized all types of money laundering. With the assistance of several European regional organizations, Albania is drafting comprehensive anti-money laundering legislation that should meet international standards. Albania participates in the Council of Europe's PC-R-EV. In September 2000, Albania will undergo a mutual evaluation conducted by the PC-R-EV. The report may provide detailed suggestions to improve Albania's anti-money laundering program.
As Albania considers adopting anti-money laundering legislation, it must deal with more fundamental issues such as establishing enforcement and judicial systems capable of supporting an effective anti-money laundering regime. It also faces huge obstacles in reigning in the influence of organized crime that generates money laundering proceeds, and corruption that could undermine the best of anti-money laundering measures.
Algeria (Other). There is no evidence of widespread money laundering in Algeria, although there are unofficial reports of money laundering being carried out in conjunction with various types of smuggling. Algeria has not enacted any type of anti-money laundering legislation. There is a requirement that a declaration be made of any type of foreign currency brought into the country, but it is not clear how strictly this regulation is enforced.
Algeria is a party to the 1988 UN Drug Convention.
Anguilla (Other). Anguilla is a United Kingdom Caribbean Overseas Territory (COT), and therefore subject to the laws of the United Kingdom. Anguilla has a small offshore financial services sector, which includes offshore banks, trusts and international business companies. For its 8,000 inhabitants, Anguilla has 2 offshore banks, both subsidiaries of major banks, and 1,500 international business companies.
The extent of money laundering in Anguilla is unknown, but the relatively large size of this tiny Caribbean island's offshore financial sector makes it an attractive location for money laundering. Rumors of bulk currency transport persist.
Legislation adopted in 1995 brought Anguilla into compliance with the requirements of the 1988 UN Drug Convention. The legislation includes provisions for asset seizure and forfeiture. Anguilla, along with its COT brethren, has increased its regulation over its financial sector; for instance, it has promulgated guidelines stating that new bank licenses will be issued only to subsidiaries of established banks with effective parent-bank supervision. Anguilla's existing anti-money laundering regime and practices will be assessed against international standards under a contract signed in 1999 with an international consulting firm, providing for an independent, in-depth review of financial regulatory practices.
Anguilla is subject to the U.S./UK MLAT and the U.S./UK extradition treaty. Its operational contact with the United States and the other United Kingdom Overseas Territories is close and effective. Anguilla, through the UK, is a party to the 1988 UN Drug Convention. Anguilla is also a member of the CFATF.
Antigua and Barbuda (Primary). Until early 1997, Antigua and Barbuda had an active and virtually unregulated offshore financial service industry, which, combined with stringent bank secrecy, made the country an attractive site for money launderers. The country took steps in 1997 and 1998 to address problems and assert control by passing sound anti-money laundering legislation. However, in October 1998, individuals suspected of involvement in money laundering and other illicit economic activities used their considerable financial influence to weaken Antigua's anti-money laundering legislation. Certain amendments to the Money Laundering (Prevention) Act and the 1982 International Business Corporations (IBC) Act distorted the regulatory regime and undermined the ability of law enforcement to investigate and prosecute financial crimes.
These developments resulted in the issuance of a financial advisory by the U.S. Treasury Department in April 1999. Shortly thereafter the United Kingdom issued a similar advisory, and France publicly expressed its concerns. The U.S. Advisory, which advised financial institutions to give "enhanced scrutiny to all financial transactions routed into or out of Antigua and Barbuda," was issued because changes in Antigua and Barbuda's money laundering laws threatened to "create a 'haven' whose existence will undermine international efforts of the United States and other nations to counter money laundering and other criminal activity, a concern of which the United States has repeatedly made the Government of Antigua and Barbuda aware".
Since the issuance of the advisories, the Government of Antigua and Barbuda (GOAB) has rescinded most of the objectionable legislation and enacted most of the new legislation which, if effectively implemented, would bring the GOAB into compliance with international norms governing offshore financial services. Additionally, the GOAB is taking other steps to clean up its financial services sector. As a result of an intensive two year review of the licensed offshore banks, the GOAB revoked the licenses of approximately two-thirds of the offshore banks for failing to provide an approved financial audit and to meet the increased capitalization requirements, and, more importantly, for participating in illegal activities such as fraud and money laundering. Numerous criminal investigations in the United States have revealed that several of the offshore banks, most of which have been closed, engaged in financial transactions with funds of questionable origin. Currently there are about 18 offshore banks operating in Antigua and Barbuda, down from about 47 in 1998.
During 1999, the GOAB also increased its bilateral and multilateral cooperation on various law enforcement initiatives. In July 1999, the GOAB became the first country in the eastern Caribbean to bring the new Extradition Treaty and MLAT with the United States into force. Despite difficulties and delays in 1998, the GOAB has provided substantive assistance to U.S. law enforcement and prosecutors investigating and prosecuting fraud and money laundering cases involving the Antiguan-licensed Caribbean American Bank and European Union Bank. A request for the extradition of William Cooper, a director of Caribbean American Bank and owner of Antiguan American International Bank, is currently pending. The GOAB also worked closely with Canadian authorities in the investigation and successful prosecution of a major money laundering case, receiving over $400,000 in shared forfeited assets. Additionally, the GOAB has instituted its own case against former Ukrainian Prime Minister Lazarenko for money laundering. Lazarenko allegedly used an Antiguan offshore bank to conceal monies stolen from the Ukrainian government.
The GOAB created and staffed the Supervisory Authority mandated by the Money Laundering (Prevention) Act and issued regulations to implement the mandated suspicious financial transaction reporting system. In accordance with these new regulations, the Supervisory Authority has received a number of reports of suspicious activity. However, Internet gambling is largely unregulated in Antigua, although the GOAB has indicated it is developing regulations to control this burgeoning industry.
During the past year, the GOAB has amended its Money Laundering (Prevention) Act and IBC Act to correct deficiencies and bring them into compliance with international standards. GOAB cooperation in investigative and forfeiture matters has also improved. The new laws, combined with an increase in resources allocated to regulation of the international financial services sector and a demonstrated willingness to investigate and prosecute suspect individuals and transactions, suggest that the GOAB is now committed to creating a regulatory and anti-money laundering regime which meets international standards. In the future, GOAB must focus its efforts on fully implementing the Money Laundering (Prevention) Act, ensuring compliance with the new regulations of the IBC Act, and enhancing international cooperation on law enforcement matters.
Argentina (Concern). Argentina is neither an important regional financial center, a significant tax haven nor an offshore banking center. Until recently most of the money laundering occurring in Argentina was believed to be primarily related to bribery, contraband and tax evasion. However, there is increasing evidence that cells of the powerful Colombian and Mexican drug cartels are laundering millions of dollars in Argentina, particularly through the purchase of diverse and lavish real estate properties. The ongoing investigation into the financial activities of Maria Henao Vallejos, widow of Colombia drug lord Pablo Escobar, while residing in Argentina may confirm long-term suspicions of narcotics-related funds being laundered in Argentina. As a ramification of the U.S. Customs Service Operation Casablanca, an international investigation is being conducted into the Buenos Aires-based bank Mercado Abierto on suspicions that it may have laundered millions of dollars for the late Mexican drug kingpin Amado Carrillo Fuentes. It is believed that most of the laundered funds had been sent to Argentina through various U.S. banks, and once the funds arrived into an account at Mercado Abierto they were invested in luxury apartments and cattle ranches in Argentina. These investigations continue with the full cooperation of the Government of Argentina (GOA).
Argentina's current anti-money laundering program is based on Drug Law No. 3,737 of October 1989, which criminalized narcotics-related money laundering, and a series of communications issued by the central bank of Argentina aimed at the prevention and detection of money laundering activities through the financial sector. Among other things, these communications require banks and non-banks to identify customers; discontinue accounts with parties using obviously fictitious names; prohibit the payment by tellers of checks above $50,000 issued to third parties; report to the central bank personal data on account holders where cash over $50,000 is deposited monthly, or $200,000 annually; and report suspicious transactions. Compliance with the requirement to report suspicious transactions remains low.
The GOA has made several attempts at expanding the scope of this legislation and at creating a financial intelligence unit (FIU). In September 1999, the House approved a bill proposing to expand the list of predicate offenses beyond narcotics-related activities to include terrorism, trafficking in arms, human beings and human organs, crimes against the public administration, extortion, and kidnapping for ransom. The bill would also create a multi-agency autonomous FIU that would act in coordination with the Office of the Public Prosecutor sector. However, this bill remains under review by the Senate, where a Committee has weakened some of the provisions already approved by the House. The Senate version of the bill eliminates penalties for negligent or imprudent behavior resulting in money laundering, requires that criminal intent be demonstrated, and proposes that the FIU destroy all case records if a year passes without any action being taken in an investigation. The jurisdiction of the FIU continues to generate debate: the House bill makes it into a multi-agency autonomous body, while the Senate version gives the central bank control of the proposed unit.
The United States will continue to support the GOA's effort to join the FATF, since this signals Argentina's commitment to join the international community's fight against money laundering. However, it is imperative that Argentina enact a comprehensive anti-money laundering program in the very near future, since failure to do so could become a roadblock to future full FATF membership. Argentina is a party to the 1988 UN Drug Convention and an active participant in the OAS/CICAD. Argentina has bilateral agreements for financial information exchange with over 25 countries, including the United States. In September 1999, Argentina was accepted as an observer member of the FATF, and will undergo FATF's evaluation of its anti-money laundering program in early 2000. Armenia (Other). Armenia is a transit country for narcotics trafficking and smuggling, due to lax border controls between Commonwealth of Independent States (CIS) countries and Armenia's location along an important Iran-CIS trade route. The primary destinations are Western Europe and other CIS countries. While its current economic situation creates a favorable money laundering environment, Armenia is not a major financial or money laundering center.
Economic crime is primarily connected to smuggling, tax evasion, looting of privatized companies, embezzlement of state funds and diversion of foreign assistance. High unemployment, low salaries, a large underground economy, corruption, and organized crime provide classic conditions for money laundering. Criminal groups operating in Armenia maintain ties to those in other CIS countries and with Armenian communities abroad.
Although there is no evidence that foreign illegal proceeds are laundered in Armenia, Armenian authorities admit that enforcement agencies have not focused on investigating money laundering operations. Investigators have a poor understanding of the concept of money laundering and inadequate resources to pursue cases. Schemes to launder domestically generated illegal funds include the under-invoicing of imports, false invoicing, double bookkeeping, and use of the banking system.
The government has made the prosecution of economic crimes a government priority as part of an ongoing reform process. A new criminal procedure code went into effect on January 12, 1999. There are no anti-money laundering measures applicable to either banks or non-bank financial institutions but a complete new criminal code, including provisions dealing with economic crime (such as the criminalization of money laundering), is expected to be passed in 2000.
Bank secrecy laws create difficulties in obtaining bank records for investigations. In addition, the gray economy affects the banking system due to the dollarization of the economy (forty percent of public expenditures are derived from foreign remittances) and the magnitude of cash circulating outside the banking sector. Even if anti-money laundering regulations are introduced, they would regulate only a fraction of Armenia's domestic financial transactions.
Armenia is a party to the 1988 UN Drug Convention.
Aruba (Concern). Aruba, with its free zones, casinos, and especially its growing offshore industry, is vulnerable to being used for money laundering. The Government of Aruba (GOA) has undertaken a number of measures in recent years to strengthen its anti-money laundering system. Money laundering is a criminal offense in Aruba, and money laundering offenses extend to all predicate offenses, including tax offenses. Aruban anti-money laundering legislation provides for the creation of a financial intelligence unit (MOT Aruba), which became operational in 1996. The legislation also specified know your customer requirements, requirements for the reporting of unusual transactions, and record-keeping requirements. However, the money laundering law requires proof of an underlying crime, a standard that has so far proven extremely difficult for police, who lack the sophisticated methods necessary to build a successful case. The GOA also established four committees, consisting of representatives of both Aruba and The Netherlands, to review specific industries and make recommendations. Each of the initial committees has completed its work. The GOA has approved the recommendations and appointed implementation committees, and the necessary legislation has been drafted and is being discussed. The four committees are the following:
The Mixed Committee Gaming Industry, which recommended bringing casinos under the Reporting and Identification Ordinances and the creation of an independent Gaming Board;
The Mixed Committee Aruba Free Zone, which compiled recommendations to monitor the free zone. These recommendations will be put in place soon;
A Mixed Committee to assess the system of organization, registration and supervision of legal entities in Aruba. This Committee seeks to address the supervision of the Aruba offshore sector by ensuring that the identity of the ultimate beneficial owner is known to the trust company, and that know your customer policies are implemented; and
A Mixed Committee to implement a system requiring the reporting of imported or exported cash or monetary instruments of more than $10,000.
A new asset seizure law is in effect in Aruba that currently states that the prosecution must prove that the defendant knew the assets came from illegal activities, in addition to proving the underlying crime.
The Director of the Free Zone Aruba has worked to keep money laundering activities from shifting from the recently regulated financial sector into the still largely unregulated trade sector. He has prepared standards that could ultimately be used to deter corruption in free zones throughout the Caribbean.
Aruba is rapidly developing as an international financial services center. Services include finance companies, offshore banking companies, royalty companies, investment and holding companies, and the Aruba Exempt Company (AVV). Aruba introduced the concept of the AVV in 1988 to enhance the attractiveness of the approximately 3,000 offshore companies in Aruba, which are represented by 100 trust companies. The most important feature of the AVV is its complete exemption from all taxes. Instead, a registration fee of $280 is charged each year. The capital of an AVV may be divided by the designation of stock shares. Registered shares as well as bearer shares are allowed, and preference shares may also be issued. The minimum authorized capital for an AVV is $5,600. The AVV cannot participate in the economy of Aruba. The AVV is exempt from several obligations, including the filing of an annual financial statement and currency restrictions. These advantages, combined with the general tax exemption, make the AVV a very attractive entity in the offshore sector. The trust offices provide a wide range of corporate management and professional services to the AVVs. The trust offices also look after the interests of the shareholders, stockholders, or other creditors of the AVVs.
The Aruban banking sector is small, consisting of 15 financial institutions: six onshore commercial banks, two offshore banks, two mortgage banks, two credit unions, and three other credit institutions (an investment company, a finance company and a local governmental bank). All 15 institutions are under the direct supervision of the Central Bank of Aruba (CBA). There are also ten life insurance companies and seven general insurance companies. The CBA supervises the life insurance companies, whereas the general insurance companies are unsupervised. There are also 11 casinos, all of which belong to hotels.
The Aruba MOT has an extremely capable and dedicated staff. The Aruba MOT faces the same problems as its counterpart, the Netherlands Antilles MOT, in that both are understaffed and risk becoming overwhelmed with the huge volume of unusual transactions they must process. Both units need to develop more on-line databases, instead of relying on manually inputting voluminous data. As part of the Kingdom of the Netherlands, Aruba is a member of the FATF. Aruba underwent a second mutual evaluation report by the FATF in January 1999. Aruba is also an active member of the CFATF. The Aruba MOT is a member of the Egmont Group.
The Netherlands and the United States have an MLAT that applies to Aruba. Aruban judicial authorities have maintained an excellent record of cooperating with the United States under the MLAT.
Despite the progress it has made in its anti-money laundering regime, Aruba has not yet successfully prosecuted any money laundering cases. The U.S. continues to urge that the GOA amend its anti-money laundering legislation to shift the burden of proof from the prosecutor to the defense With this amendment, and once Aruba's anti-money laundering program is fully implemented, successful prosecutions of money launderers should follow.
Australia (Primary). Financial fraud and narcotics trafficking are the major sources of criminal proceeds laundered in Australia. A comprehensive money laundering study commissioned by the Australian government in 1995 estimated that approximately $ 2.8 billion is laundered in or through Australia, or offshore, each year. Organized crime groups involved in narcotics trafficking launder a large part of these proceeds. Besides domestic Australian groups, ethnic Chinese, Italian, Colombian, Japanese, Lebanese, Vietnamese, and Romanian organized crime groups are known to operate in Australia. Alternative remittance systems are used by some of the organized crime groups to move and launder their funds. Detecting and investigating the movement or laundering of funds through these alternative remittance systems is extremely difficult. Other major money laundering methods include the use of wire transfers structured below the threshold required for mandatory reporting, large wire transfers, cross border exports of cash, representative offices of foreign banks, currency exchange businesses, and real estate purchases.
Three legislative acts form the basis of Australia's anti-money laundering regime. These are the Proceeds of Crime Act (POCA) of 1987, the Mutual Assistance in Criminal Matters Act (MA) of 1987, and the Financial Transaction Reports Act (FTR) of 1988. The POCA criminalized money laundering for all serious offenses. It contains provisions to assist in the collection of evidence for money laundering investigations and prosecutions in the form of production orders, search warrants, and monitoring orders. The MA allows Australian authorities to assist other countries in identifying, freezing, seizing, and confiscating the proceeds of crime.
The purpose of the FTR is to discourage financially motivated criminals and to provide financial intelligence to law enforcement and revenue collection agencies. It specifies anti-money laundering measures applicable to the financial sector. The provisions of the Act apply to financial institutions; insurance businesses; securities dealers; trustees; sellers of monetary instruments; bullion dealers; gaming establishments and services; persons who collect, hold, or deliver currency on behalf of others; and persons who prepare payrolls for others in whole or in part from collected currency. These are required to report suspicious transactions, cash transactions of approximately $8,000 or more, and international funds transfers into or out of Australia. The FTR contains provisions for customer identification requirements for account holders.
The Australian Transaction Reports and Analysis Centre (AUSTRAC) is the agency created to receive and process reports required under the FTR. It is Australia's financial intelligence unit. The FTR assigns AUSTRAC a regulatory role vis a vis the wider financial services sector of the Australian economy. AUSTRAC also monitors the movement of currency across Australia's borders.
AUSTRAC supports Australian law enforcement and revenue agencies by monitoring, analyzing and disseminating financial intelligence. Partner agencies have online access to AUSTRAC's database. AUSTRAC produces specialized reports based on in-house software applications to extract information from its database. In addition, AUSTRAC runs automated monitoring of its database to identify financial activity that indicates money laundering, other serious crime and tax evasion. AUSTRAC's database can also provide an alert system to its partner agencies when a report matching specific criteria enters the database.
Australia plays a very active role in international anti-money laundering fora. It is a member of the FATF and has implemented the FATF Forty Recommendations for combating money laundering. Australia continues to promote the adoption of anti-money laundering systems by countries in the Asia/Pacific region through its funding and hosting of the Secretariat of the Asia/Pacific Group on Money Laundering and by raising the issue of money laundering to a priority concern by the Asia Pacific Economic Cooperation Forum. AUSTRAC has provided assistance to a number of countries such as Poland, Thailand, South Africa, Japan, Canada, and Korea to establish anti-money laundering systems and to develop their financial intelligence units.
An MLAT is in force between the United States and Australia. AUSTRAC and FinCEN have signed an MOU for the exchange of information. Australia also has bilateral agreements with the UK, New Zealand, Belgium, France and Denmark, allowing the exchange of information on money laundering.
Australia has a comprehensive and an effective anti-money laundering regime. It fully complies with the FATF Forty Recommendations. Australia is studying possible amendments to its legislation in order to keep up with the rapidly changing financial services sector and to counter the opportunities that new technologies may offer criminal enterprise, especially in the evolving field of electronic commerce. Australia's approach to combating money laundering and its demonstrated ability to adapt to change serve as a model for other countries to emulate.
Austria (Primary). Austria is not an important regional financial or banking center but it is a potentially attractive site for money laundering due to the existence of Sparbuch (literal meaning: "savings book") accounts. Austria's failure to terminate these anonymous accounts has led the FATF to threaten to suspend Austria's membership after June 15, 2000 if Austria fails to take decisive action against the Sparbuch accounts. Russian organized criminal groups have established front and shell companies through Austrian fiduciaries to launder money.
Money laundering was added to Austria's Penal Code as a criminal offense in 1993. Austria's Banking Act of 1994 also prohibits money laundering, and requires customer identification for bank transactions involving over $15,000 for customers without a permanent business relationship with the bank. Banking records must be maintained for at least five years after termination of the business relationship with the customer. In 1998, Austria tightened its money laundering regulations in both the Act and the Penal Code. Banks, insurers and bureaux de change are currently required to report suspicious transactions to Austria's financial intelligence unit (FIU), the Central Department for Combating Organized Crime (Reporting Office) (EDOK). The FIU is located in the Federal Ministry of Internal Affairs and participates in the Egmont Group. During 1998, Austria's banks reported 254 suspicious transactions, of which 16 resulted in criminal proceedings. Of the proceedings initiated in 1998, only two resulted in convictions; the low number was primarily due to lack of evidence. During the first ten months of 1999, banks reported 177 suspicious transactions.
Austria has legislation allowing freezing and forfeiture of assets. However, there is little evidence of enforcement to date. Legislation implemented in 1999 provides for asset seizure and forfeiture of illegal proceeds. Courts may freeze assets in the early stages of an investigation. The amended extradition and judicial assistance law provides for expedited extradition, expanded judicial assistance and acceptance of foreign investigative findings in the course of criminal investigations, as well as enforcement of foreign court decisions. Austria has not enacted laws for sharing narcotics-related assets with other governments, but MLATs can be used as an alternative vehicle to accomplish equitable distribution of forfeited assets.
The Sparbuch anonymous accounts violate the EU anti-money laundering directive and are not in full compliance with the FATF Forty Recommendations. Although Sparbuch accounts are technically available only to residents of Austria, no identification is required to open the account. The account can be opened in any name; in fact, a common name in which these accounts are opened is "?berbringer" (passbook holder). The account has an identifying number assigned by the bank. Access to the account is controlled by a password selected by the owner of the account. Anyone presenting the passbook and knowing the password can withdraw funds.
However, two additional and significant restrictions on these accounts make them less attractive to potential money launderers. First, all transactions must be made in person-wire transfers of deposits or withdrawals are not permitted. Second, all settlements from Sparbuch accounts must be made in cash. The requirement for in-person transactions greatly reduces the Sparbuch's utility as a money laundering tool. In many money laundering schemes, funds are wired to an anonymous account for subsequent layering and integration. This is obviously not possible with the Sparbuch account. In addition, the requirement for cash settlements makes it difficult if not impossible to use the account to convert cash into another form, a common use of accounts in money laundering schemes. Sparbuch accounts are offered or brokered (in probable violation of the Austrian residency requirement) by many businesses on the Internet. Banks oppose the elimination of Sparbuch accounts out of fear that account holders will transfer money out of Austria to avoid taxes, and because the task of identifying ownership of the 26 million Sparbuch accounts is formidable.
Despite the availability and anonymity of the Sparb?ch accounts, U.S. law enforcement agencies indicate there is no evidence that these accounts are being used to launder drug money. Even though the restrictions on the Sparb?ch accounts do not hinder their typical use (such as the use of several Sparbuch accounts to pay different bills or having a separate Sparbuch for each grandchild), they do, in fact, make them less than attractive as a money laundering vehicle. Austria is a party to the 1988 UN Drug Convention and a member of the FATF. In 1996, Austria abolished anonymous securities accounts, in compliance with the FATF Forty recommendations and EU regulations. In 1997, it tightened restrictions on trustee accounts. However, the FATF decided at its February 2000 meeting to suspend Austria's membership as of June 15, 2000, unless the Austrian government, by May 20, 2000, (1) commits to eliminating the system of anonymous passbooks by the end of June 2002 and (2) introduces and supports legislation to prohibit the opening of new passbooks and to eliminate the existing passbooks.
An Austria-U.S. MLAT has been in force since August 1, 1998. Austrian cooperation with U.S. investigative efforts has been excellent.
The Government of Austria should come to terms with the commitments it has made to the EU and the FATF. Both of these organizations have called on the Austrian government to eliminate Sparbuch accounts.
Azerbaijan (Other). Azerbaijan is not an important center for narcotics-related money laundering. There is presently little or no laundering taking place in Azerbaijan on behalf of international narcotics groups. However, because of Azerbaijan's geographic location, drug trafficking and the related movement of drug proceeds in or through the country may increase. Banking in Azerbaijan is still in its nascent stages and is in many cases unreliable. Banking laws are changing on a regular basis; many banks are forcibly closed because they fail to meet minimum capital requirements. The two largest state-owned banks of Azerbaijan are presently being privatized. Neither would be attractive as establishments to deposit or launder funds. Large scale money laundering by local businesses to avoid invasive taxes and customs fees is probably done primarily in the non-bank financial system and black markets, not in banking. The transportation of illegal source currency falls within the purview of the Organized Crime Division of the Interior Ministry as well as the Ministry of National Security. However, they appear to be more concerned about the transport of such funds for anti-state activities (anti-government propaganda, terrorism) than for their connection with money laundering.
Azerbaijan's current legislation does not prohibit money laundering and is inadequate to combat police and judicial corruption effectively. Parliament is currently debating a new criminal code that will authorize the police to retain seized assets used in the commission of a crime and assets acquired as a result of criminal activity.
Azerbaijan is a party to the 1988 UN Drug Convention.
The Commonwealth of The Bahamas (Primary). The Bahamas is an important regional financial and offshore center. Its bank secrecy laws and liberal international business company (IBC) regime make it vulnerable to money laundering and other financial crimes. Bahamian central bank officials have stated that in the recent past Russian banks have applied for offshore banking licenses, but were rejected. There is a strong suspicion on the part of government officials that the insurance sector may also be used for laundering funds.
International Business Companies (about 67,000) and offshore banks (about 400) are two of the several services available in the Bahamas' offshore financial sector. Under the 1989 International Business Companies Act, investors can operate an IBC as long as it does not carry on any business with Bahamian residents or own interest in real estate in the Bahamas. An IBC cannot be a bank, insurance or trust company. It does not require a license and normally takes a day to form upon reserving the name, and presenting a Memorandum and Articles of Association to the Registrar General. A minimum of two shareholders is required, although the shares can be transferred to a single person. The shareholders can be nominees; therefore, the name of the beneficial owner never appears on the register. An annual report must be filed containing information on shareholders, number of shares, amount of capital, and the names, addresses and occupations of the directors and managers, but the annual report does not have to include financial statements. The annual reports, accounts, and the names of the director, officers or shareholders do not need to be public knowledge, and the books and records do not have to be maintained in the Bahamas. The offshore banks are governed by the 1992 Companies Act and can be public or private. All offshore banks must submit annual statements that do not have to include financial statements. The banks' records can be maintained anywhere. The shareholders can be nominees, but in applying to the Central Bank of Bahamas for non-resident status, the name of the beneficial owner must be disclosed.
Overall, with the passage of the Money Laundering (Proceeds of Crime) Act (1996), its December 1996 regulations, and the 1996 Central Bank of The Bahamas Guidance Notes, the Bahamas now has a comprehensive anti-money laundering regime in place. Under these legislative and regulatory mechanisms, the Bahamas criminalized the laundering of the proceeds of serious crimes and required banks and other financial institutions (including insurance companies, casinos, credit card issuers, money transmitters, trust companies and securities dealers) to identify customers and maintain records of significant transactions ($20,000 or above) for five years.
Banks are required to report suspicious financial transactions to the Bank Supervision Department of the Central Bank of The Bahamas, which, after review and analysis, forwards any relevant disclosures to the Director of Public Prosecutions (DPP) of the Attorney General's Office. The 1996 Central Bank Guidance Notes provide a definition of money laundering, assist in interpreting the 1996 Act and its regulations, describe examples of what may constitute suspicious transactions, and discuss the internal controls and procedures that should be implemented. These Guidance Notes are not mandatory, although a court, in deciding whether an individual or institution has complied with the 1996 Regulations, may take them into account.
The Bahamas is party to the 1988 UN Drug Convention and a member of the CFATF, and continues to express interest in furthering its anti-money laundering efforts by creating a financial intelligence unit (FIU) and joining the Egmont Group of FIUs. Given the size and diversity of The Bahamas' financial sector, the government should expedite efforts to create a separate FIU that would collect and analyze financial information and exchange information with similar units worldwide in the pursue of money laundering investigations.
Bahrain (Concern). Bahrain is a regional financial and offshore center and as such is potentially vulnerable to money laundering. The Government of Bahrain (GOB) has provided a number of incentives to foreign investment, including the elimination of corporate withholding taxes and the removal of restrictions on the repatriation of profits (including those of offshore companies). According to a press report of June 1999 quoting a Canadian money laundering consultant, the Bahraini Ministries of Interior and Commerce and the Bahrain Monetary Agency (BMA), which functions as the central bank, have identified and collected information on money laundering schemes in Bahrain, but the lack of an anti-money laundering law has made it difficult for authorities to follow through on prosecution. The most common sources of illegal proceeds include narcotic trafficking, fraud, and illegal trade involving sanctions evasions. Another major source of illegal money flow results from the sale of oil reserves outside of OPEC production agreements.
Bahrain has not yet criminalized money laundering. However, banking laws require the reporting of suspicious transactions to the BMA and establishment of know-your-customer rules. It is not known how strictly these regulations are enforced. The BMA is expected to introduce legislation to combat money laundering sometime in 2000, and to issue even tighter banking regulations. These regulations are reportedly to address such areas as the reporting of large transactions, providing specific guidelines for accepting transactions, and more monitoring of banking activity. While details of the proposed legislation are not available, it is expected to enable the filing of criminal charges against institutions and individuals in cases of money laundering.
Bahrain is known for its offshore banking units (OBUs), which currently number 49. The BMA licenses the OBUs, which must be audited yearly by outside firms that have been approved by the BMA. OBUs may deal only with non-residents (except for agencies of the GOB and all their activities must be in a foreign currency. With the approval of the BMA, OBUs may participate in domestic development projects. OBUs must be fully staffed, and the majority of the staff must be Bahraini nationals. All books and records must be available at all times for examination by the BMA. OBUs must submit half-yearly statistical returns. They are exempt from taxes and are not subject to any restrictions involving foreign exchange payments or receipts.
The GOB also permits international business companies (IBCs) with limited liability from parent companies. There are two types of IBCs in Bahrain: the first is the offshore resident company, whose principal offices are in Bahrain but which operates exclusively offshore. Such a company must be a joint stock company with a minimum capital of $54,000. If it deals in financial activities, it requires a license from the BMA. The second type of IBC is the offshore non-resident company. This category consists of joint stock companies other than those involved in insurance or investments. These may be exempted from the requirement of maintaining an office in Bahrain, and may instead appoint a law or auditing firm in Bahrain as their resident address. Such firms require a minimum capital of $6,750. Registration of an IBC can take as little as seven days. There are no restrictions on remittances sent abroad. The government-sponsored offshore services are advertised on the Internet.
Bahrain is represented at the FATF by the GCC, of which it is a member. Bahrain is a member of the OGBS and has agreed to undergo a mutual evaluation by this body. No date for the evaluation has yet been set. Bahrain is a party to the 1988 UN Drug Convention.
Bahrain should act expeditiously to enact anti-money laundering legislation and should ensure that its offshore sector is subject to prudent supervision.
Bangladesh (Other). Bangladesh is not an important regional financial center, or an offshore financial center. Money laundering activities here are not primarily related to drug trafficking but rather to evasion of Bangladesh income taxes and illegal import of consumer goods. There is no evidence that proceeds from drug trafficking are laundered in Bangladesh.
Bangladesh has not criminalized money laundering. Banking regulation and enforcement is spotty. Goods are readily smuggled across Bangladesh's long and porous borders, and black market goods are available in the local market. Some illegal drugs are also smuggled across the border. Bangladesh laws allow for the seizure of assets related to illegal smuggling or corruption.
Bangladesh is a party to the 1988 UN Drug Convention, and is a member of the Asia/Pacific Group on Money Laundering.
Barbados (Concern). The Government of Barbados (GOB) has taken several steps to provide a defense against the threat of money laundering, including enacting offshore banking laws and oversight and comprehensive anti-money laundering legislation, but it must fully enforce these measures to protect the nation's domestic and offshore financial sectors.
In December 1998, the Parliament enacted the Prevention of Money Laundering Bill, criminalizing any transaction involving, or possession or concealment of, money or property that is the proceeds of crime. The law creates a centralized unit, the Anti-Money Laundering Authority, to supervise financial institutions in accordance with the Act. Penalties for money laundering include up to 25 years in prison and a $1 million fine. The law also contains asset seizure and forfeiture provisions.
The law applies to a wide range of institutions, including domestic and offshore banks, international business companies (IBCs), and insurance companies. These institutions are required to identify customers, maintain records, and report suspicious transactions and transactions exceeding $5,000 to the Anti-Money Laundering Authority. After reviewing these disclosures, the Authority will forward this information to the Commissioner of Police if it has reasonable grounds to suspect money laundering. The Authority may also issue training requirements and regulations for institutions. Although the legislation is officially in force, the Anti-Money Laundering Authority has not yet been established and no regulations have been issued.
The GOB criminalized money laundering in 1990 in its Proceeds of Crime Act, No. 13. This law authorizes asset confiscation and forfeiture and provides a disclosure protection safe harbor for individuals reporting suspicious activities. In 1997, the central bank issued its Anti-Money Laundering Guidelines for Licensed Financial Institutions. The Guidelines follow international standards against money laundering, but lack any enforcement authority.
Barbados is an offshore center, offering offshore banking, international trusts, exempt insurance companies, international business companies (IBCs) and foreign sales corporations (FSCs), which are specialized companies permitting persons to engage in foreign trade transactions from within Barbados. Unofficial sources report Barbados has about 40 offshore banks, 360 exempt insurance companies, and at least 2,000 IBCs and 1,800 FSCs. In 1998 the GOB indicated it had $10 billion in offshore deposits.
The Off-Shore Banking Act (1980) gives the central bank authority to supervise and regulate offshore banks, in addition to the nine domestic commercial banks. The Ministry of Finance issues licenses after the central bank receives and reviews applications and recommends applicants for licensing. Offshore banks must submit quarterly statements of assets and liabilities, and annual balance sheets to the central bank. Profits from offshore banks are subject to 2.5% tax rate for profits up to $5 million and less, but not less than 1%, for greater profits. In late 1999, the GOB proposed new legislation designed to facilitate access by regulators to offshore bank records. It broadens the central bank's ability to share information on licensees with regulators in jurisdictions where the licensees have a holding company, subsidiary, or affiliate.
The International Business Companies Act (1992) provides for general administration of IBCs. The Ministry of International Trade and Business vets and grants licenses to IBCs after applicants register with the Registrar of Corporate Affairs. Barbadian IBC's must pay a 2.5 percent tax on profits up to $7.5 million, plus a one percent tax on profits in excess of $7.5 million. Bearer shares are not allowed, and financial statements of IBCs are audited if total assets exceed $500,000. Barbados has bilateral tax treaties that eliminate or reduce double taxation with the UK, Canada, Finland, Norway, Sweden, Switzerland, and the United States. Canada's treaty allows IBC and offshore banking profits to be repatriated to Canada tax-free after paying the 2.5% tax in Barbados. As a result, the Barbadian offshore financial services industry continues to expand, driven largely by Canadian-based companies.
In 1996, the United States and Barbados signed an MLAT and an extradition treaty. The United States ratified both treaties in January 1999, and the GOB has signaled that it is prepared to exchange instruments of ratification, the final step necessary to bring the treaties into force.
The GOB needs to maintain strict control over vetting and licensing of offshore entities, and pass legislation to facilitate compliance by offshore banks to prevent abuse of the offshore sector. It should also establish the Anti-Money Laundering Authority, provide it the necessary resources to enforce compliance by financial and commercial sectors, and enable it to fully cooperate with foreign authorities to investigate and prosecute money laundering and other financial crimes.
Belarus (Other). Belarus is neither a major regional or international finance center, nor a significant country for drug-money laundering. The money laundering environment in Belarus shares many of the same characteristics found in the Baltic States and Russia. Financial institutions used to launder proceeds include banks and non-bank financial institutions such as casinos, currency exchanges, real estate companies and businesses that receive large deposits. Common methods used to launder assets continue to be false invoicing schemes, keeping double books, and contract fraud. The absence of anti-money laundering laws and the failure to criminalize money laundering will significantly hinder the attempts made to combat money laundering and any associated crimes.
Local authorities do not believe that money laundering is an immediate problem. However, they state that bank secrecy and the lack of money laundering legislation may in the future attract drug traffickers to launder their profits in local casinos.
Current Belarusian laws used to combat money laundering focus on the underlying crime that generates illegal proceeds. Belarus requires banks to report transactions of more than $10,000, and to maintain records on customer identification and transactions indefinitely. However, banks are not required to report or record unusually large or suspicious transactions. Belarusian banks are not presently required to develop anti-money laundering programs but would be required to do so by an anti-money laundering law currently being drafted. No specific laws establishing and regulating non-bank financial institutions have been passed to replace the 1996 Temporary Regulations on Non-Banking Financial Institutions in the Republic of Belarus.
Belarusian law does not provide for the seizure of assets resulting from illicit gain. Belarus is a party to the 1988 UN Drug Convention.
Belgium (Concern). Belgium is a country of concern for money laundering, primarily because of its role as a transit country for narcotics trafficking. Although narcotics trafficking proceeds constitute the major source of criminal proceeds, other sources include tax evasion, organized crime, financial fraud, and commercial fraud. The main money laundering methods identified by Belgian authorities include the use of currency exchange bureaus, international wire transfers, and deposits into bank accounts. Many instances of money laundering in Belgium are internationally connected. Narcotics traffickers from the Netherlands, Africa, South Asia, and South America operate and launder their proceeds in Belgium. Belgian authorities have identified organized crime networks involving nationals, residents, or financial institutions from Central and Eastern Europe and countries of the former Soviet Union.
Belgium criminalized money laundering by supplementing Article 505 of Belgium's Penal Code dealing with the receiving of criminal proceeds. The supplemental provisions of 1990 broadened the concept to one of "extended" receiving of criminal proceeds. The Act of 11 January 1993, On Preventing the Financial System From Being Used for Money Laundering Purposes, codified most of the provisions of the FATF Forty Recommendations. These concern customer identification, record keeping requirements, suspicious transaction reporting, a financial intelligence unit, and internal anti-money laundering procedures and training for all Belgian banks and non-bank financial institutions.
As provided for in the Law of 11 January 1993, the Financial Intelligence Processing Unit (CTIF-CFI) came into existence on 1 December 1993. The organization is an independent administrative authority that is supervised by the Belgian Ministries of Justice and Finance. Its mission is to receive and analyze all suspicious transaction reports made by financial institutions (and other persons and entities as specified by the law) subject to the reporting requirements. CTIF-CFI operates as a filter between financial institutions and judicial authorities. Upon identifying credible indicators of money laundering relating to specific predicate offenses among the disclosures it receives, CTIF-CFI reports these cases the Crown Prosecutor in Brussels.
When a financial institution knows or has reason to suspect that a transaction relates to money laundering, it must inform CTIF-CFI before executing the financial operation and indicate, when possible, the deadline for completing the operation. After analyzing all data and finding credible indications of money laundering, CTIF-CFI will submit the information, along with appropriate justifications, to the Crown Prosecutor in Brussels for further investigation and/or prosecution. In order to safeguard the integrity of money or property that is linked to instances of money laundering (and thus subject to seizure by judicial authorities), CTIF-CFI has the authority to block the completion of a suspect financial transaction before the deadline indicated by the reporting institution. The delay may extend to a period of up to 24 hours.
CTIF-CFI is composed of six financial experts, including three magistrates (prosecutors) appointed by the King. A magistrate serves as president of the organization. Besides a secretariat with personnel to provide administrative support, the organization has its own investigations department consisting of six inspectors. CTIF-CFI also has three liaison officers (from the Gendarmerie and Judicial Police) responsible for maintaining contacts with various law enforcement agencies. The strict confidentiality to which CTIF-CFI members and staff are subject does not apply in the same way to communications made in the framework of international cooperation. Exchange of information may take place on the basis of international treaties to which Belgium is signatory or by reciprocity with foreign counterpart agencies possessing secrecy obligations analogous to those of CTIF-CFI.
Belgium is a member of FATF, and CTIF-CFI is a member of the Egmont Group. Belgium has implemented the EU Directive on Money Laundering.
Belgium and the United States signed an MLAT in 1988. It was ratified by the United States in 1989 and by Belgium in March 1998, and entered into force in January 2000.
Belgium has a very effective and consistent anti-money laundering regime that meets, and in some areas exceeds, international standards. Belgium is considering additional legislative measures aimed at improving what is already a well-planned anti-money laundering system.
Belize (Concern). Belize authorities have expressed concern over the increase during the past year in the number of individuals found bringing large amounts of currency into the country in briefcases or concealed under clothing. Authorities have also detected instances of Belize-flagged ships being used to transport drugs and violate UN sanctions. A better understanding of Belize's money laundering dynamics may surface once the Money Laundering Unit being created within the Police Department starts its fieldwork.
Belize's August 1996 Money Laundering Prevention Act meets most of the standards prescribed by the CFATF, which Belize joined in October 1996. The Act criminalized the laundering of proceeds derived from narcotics trafficking, blackmail, counterfeiting, extortion, false accounting, forgery, fraud, illegal deposit taking, robbery and theft involving more than $10,000, terrorism, arms trafficking, and kidnapping. It also introduced the mandatory reporting of suspicious financial transactions by banks and other financial institutions. The Central Bank of Belize, as the supervisory authority designated to receive the reports of suspicious transactions and monitor compliance with the law, issued the implementing regulations in January 1998. Although the laundering of proceeds derived from numerous illicit activities was criminalized in August 1996, law enforcement authorities have yet to try a single case under this law.
Belize's August 1996 offshore banking legislation is the latest in a series of laws to establish an offshore sector that began with the passage of the International Business Companies (IBC) Act in 1990 and the Offshore Trusts Act in 1992. However, Belize remains a minor player in the offshore banking arena. The central bank has received numerous inquiries about offshore banking licenses, and in August 1997 two Central American banks received conditional approval for licensing; however, they never started operations. In August 1998, the central bank approved an offshore banking license for Provident Bank and Trust Limited, which started operation in September 1998.
There are approximately 11,000 registered international business companies (IBC's) in Belize, up from 8,000 last year. While there is no requirement to file audited accounts with the authorities, an IBC is required to keep records that reflect the financial position of the company. There is no disclosure of the beneficial ownership to the authorities. Even though the IBC Act prohibits IBCs from engaging in banking or insurance, an IBC may own and control a bank, since the ultimate ownership of the bank is obscured. IBC records are maintained by Belize International Services Limited, a subsidiary of CHI Corporation, traded on the NASDAQ and formerly known as BHI Corporation. Central bank officials have stated that the system of accounts for the IBCs, for which the central bank of Belize keeps no record, represents a loophole that might allow for money laundering. Although the central bank is required to regularly report the total amount of all IBC account holdings, the patterns and changes of individual accounts are not seen by any central bank authorities unless ordered. There is no registry at all for offshore trusts, since the Offshore Trust Law did not specify an oversight or regulatory body, thus making it impossible to determine the beneficial owners of an offshore trust. In May 1999, Belize created the International Financial Services Commission to regulate and supervise the offshore activities; however; the vast majority of the Commission is composed of offshore practitioners themselves.
The Government of Belize needs to remain vigilant of its growing offshore financial sector, particularly the regulatory authorities. It should also consider establishing a financial intelligence unit to receive suspicious transactions.
Bermuda (Other). A British Overseas Territory, Bermuda remains one of the world's premier offshore international financial and business centers, with a large number of international business companies (IBCs). The Government of Bermuda (GOB) has made considerable progress in combating financial crime in recent years. Both the proceeds of Crime Act 1997 and the Proceeds of Crime Act Regulations 1998 came into force in January 1998. These measures criminalized money laundering, mandated the reporting of suspicious transactions, provided safe harbor protection for those making such disclosures, mandated customer identification and cash transaction record keeping procedures, and developed internal reporting procedures. The GOB issued extensive guidance notes to all financial institutions subject to the laws.
The Proceeds of Crime Act is being amended to include offenses that were not covered as indictable crimes under the original legislation. Implementation is being deferred pending resolution of concerns expressed by the international business community. Additionally, an extension to the Proceeds of Crime Act is being discussed that would substantially increase the amount of reporting, internal controls, and training that must be implemented. It would also provide the Bermuda Monetary Authority (BMA), Bermuda's central bank, with the authority to investigate the finances of a convicted person and to confiscate crime-related cash and property. A National Anti-Money Laundering Committee, chaired by the GOB's Financial Secretary, is focusing on enhancing public awareness of financial crime.
The Financial Investigation Unit within the Bermuda Police Service, which serves as Bermuda's financial intelligence unit, has been receiving a steady stream of suspicious activity reports and investigating money laundering activity since early 1998.
In 1998, the offshore banking sector in Bermuda consisted of approximately three offshore banks and 37 trust companies. As in the case of domestic banks, the BMA has regulatory authority over these entities. Authority to issue licenses for the offshore sector is vested with the Minister of Finance, who may seek the advice and assistance of the BMA. Approximately 10,000 IBCs are registered in Bermuda. The GOB has always been aware of the potential use of IBCs for money laundering, and scrutinizes closely all applications for the incorporation of new IBCs.
Continued supervision and enforcement of rules in the offshore banking sector in Bermuda are necessary to discourage infiltration by organized crime and money launderers. The GOB is paying close attention to this issue, with an eye to full compliance with international standards of financial activity as mandated by the 1999 United Kingdom White Paper on Overseas Territories.
Bolivia (Concern). Most money laundering occurring in Bolivia is related to contraband smuggling rather than to narcotics trafficking. Still, Bolivia's tradition of bank secrecy facilitates the laundering of illegally obtained earnings and the evasion of taxes. The Government of Bolivia (GOB) is making efforts to implement and enforce the anti-money laundering measures available under the Controlled Substances Law No. 1008, and the March 1997 reforms made to the Penal Code (Law 1768) that criminalized the laundering of proceeds related to illicit narcotics, organized crime and public corruption. In June 1999, the Bolivian Special Narcotics Task Force arrested former military official Marino Diodato and members of his ring believed to have connections to a major Italian Mafia organization dealing in, among other things, narcotics, arms trafficking, and money laundering. The Diodato investigation continues, and over $5.7 million of the organization's assets have been seized, raising serious concerns about the extent of the Mafia presence in Bolivian society.
Bolivia is six months into the transition for full implementation of the new Code of Criminal Procedures enacted in 1999, and progress is already noticeable, particularly in the selection and training of judges, prosecutors and police. This new Code established an accusatorial, oral, public criminal procedure designed to be more rapid and transparent and to improve the judicial system and administration of justice through public proceedings and citizens' participation. It also enhances the abilities of law enforcement bodies by allowing the use of undercover agents and controlled deliveries of narcotics in criminal investigations.
Anti-money laundering regulations issued in July 1997 (Decree 24771) introduced mandatory customer identification and record keeping (10 years) requirements, and the reporting of unusual and/or suspicious financial transactions to the Financial Investigations Unit (FIU) created in late 1998 within the Superintendency of Banks and Financial Institutions. Efforts to staff and equip the unit continue, albeit at a slow pace.
Prior to December 1995, the GOB's seizure and disposition of the assets of individuals accused and/or convicted of narcotics-related crimes was governed by the Controlled Substances Law No. 1008, which permitted the sale of seized property upon Supreme Court affirmation of the conviction of the defendant. To accelerate the disposition process, in 1995 Supreme Decree No. 24196 was issued, which permitted the sale of seized assets with the consent of the accused and in certain other limited circumstances. Overall, judges have refused to enforce Decree No. 24196 on the basis that it is unconstitutional, since it deprives the accused of his/her property without due process, i.e., without a final Supreme Court determination that the accused was guilty. It was hoped that provisions contained in the 1999 Code of Criminal Procedures would remedy the situation by permitting the sale of certain types of property with or without the consent of the accused, on the grounds that the asset might lose value or cost too much to maintain. However, the Constitution does not make distinctions between the types of property. Therefore, these provisions in the new Criminal Code do not further the Government's efforts. The GOB should quickly resolve the internal conflicts and ambiguities afflicting the FIU and the seized assets program, both essential components of an effective anti-money laundering program.
Bosnia and Herzegovina (Other). A significant hub for narcotics transshipment to Western Europe, Bosnia is nevertheless neither a regional financial nor a money laundering center. Cooperation between Bosnian Serb and Croat law enforcement agencies is improving and has resulted in several major drug seizures and exposed some official corruption. However, the growing narcotics trade remains closely linked to organized crime, public sector corruption and ethnic extremism.
Although local banking laws generally conform to the Basle Committee's core principles, Bosnian participation in international financial fora is extremely limited. Bosnia's anti-money laundering legislation, which includes requirements to report suspicious transactions and to conduct due diligence, is stringent on paper. In practice, the law is not enforced in this primarily cash-based and largely unregulated economy.
As a result, government control over the banking industry is tenuous at best and the potential for financial crime is widespread (indeed, the banking system in Bosnia is very underdeveloped and lacks many of the attributes of a normal banking regime). Capitalizing on the prevalence of public sector corruption and the absence of the political will necessary to institute and enforce meaningful reforms, criminal elements linked to narcotics trafficking have engaged in major financial crimes, including bank fraud and money laundering. Regulatory officials have been subject to threats in the course of their duties.
Botswana (Other). Despite the government's keen interest in making it one, Botswana is not a financial center. Botswana is not a money laundering center either. Botswana has tough legislation against illicit drug production and trafficking, as well as against money laundering associated with the drug trade. In this connection, Botswana has implemented legislation that allows the courts to identify, freeze and require the forfeit of drug-related assets. The Bank of Botswana has the power to provide information regarding large currency transactions to law enforcement agencies.
Botswana law enforcement authorities have reacted positively to U.S. Government-sponsored anti-narcotics training and have expressed interest in the high-technology training necessary to combat bank fraud and money laundering.
Brazil (Primary). Money laundering related to drug trafficking and white-collar crime continues to be a problem in Brazil. The highly developed financial sector, increasing local drug consumption and trafficking, and the absence of laws against money laundering until 1998 all have contributed to make Brazil a money laundering center. The administration of President Ferdinand Enrique Cardoso has demonstrated a firm commitment to fighting this problem, and implemented regulations in 1999 to increase the effectiveness of Brazil's anti-money laundering regime.
In 1998, Brazil passed the comprehensive Law 9613, criminalizing money laundering for various offenses, penalizing offenders with up to 16 years in prison, expanding asset seizure and forfeiture provisions, and providing a "safe harbor" for good-faith compliance. It also created the Council for the Control of Financial Activities (COAF) as the country's financial intelligence unit (FIU). The COAF is housed within the Ministry of Finance and is composed of 21 members, consisting of 13 permanent personnel and 8 representatives from other regulatory and law enforcement agencies, including the central bank and Federal Police.
In 1999, Brazil began to fully implement this law by issuing twelve regulations pertaining to a wide array of financial and commercial sectors. The COAF issued eight regulations which pertain to: real estate, factoring companies, gaming and lotteries, dealers in jewelry and precious metals, bingos, credit cards, commodities trading, and dealers in art and antiques. The existing regulatory bodies (the central bank, the Securities and Exchange Commission (CVM), the Examiner of Private Insurance Companies (SUSEP), and the Office of Supplemental Pension Plans [PC] ), issued four parallel regulations. These regulations require customer identification, record keeping, and reporting of suspicious transactions. The central bank, CVM, and SPC regulations also require reporting of large transactions. All of the above regulations include a list of guidelines that may indicate the occurrences of criminal activities. By the end of 1999, the COAF had already received over 250 reports of suspicious transactions. A similar regulation pertaining to the commodities and futures market is to be issued in early 2000. The central bank also established a dedicated financial crimes unit in the bank's audit department.
Regulations issued in October 1998 require that individuals transporting more than $5,500 in cash, checks or traveler's checks across the Brazilian border fill out a customs declaration that is sent to the central bank. Financial institutions remitting more than $5,500 must also make a declaration to the central bank.
Recognizing these efforts, the FATF invited Brazil to become a member in June 1999. In May 1999 the COAF was also admitted as a member of the Egmont Group of FIUs.
Throughout 1999, media attention in Brazil has been dominated by the Panel of Congressional Inquiry (CPI) investigations that have exposed widespread criminal networks operating in at least 14 of Brazil's 26 states, connecting drug trafficking networks, judges, members of Parliament and the police, and related money laundering schemes. Although the commission has no official powers of arrest, it does have strong investigative powers that have enabled it to get waivers of bank secrecy rules and to track bank, tax and telephone records. The CPI estimated that $28 billion a year in drug money moves through Brazil, and indicated that the town of Campinas, near S?o Paulo, was the center for money laundering activity.
A two-year Federal Police investigation, "Operation Northeast", uncovered what was believed to be the largest money laundering scheme in northeastern Brazil, in the state of Cear?. The case involves a local businessman who allegedly used his 15 companies to launder at least $150 million-the same companies linked to previous investigations. As a result of the evidence already uncovered, the central bank canceled the authorization for these companies to operate in the exchange market and suspended an application by the group to set up a finance and investment company. A Federal Police task force is also working on this ongoing investigation.
The border region with Paraguay also remains a center for the laundering of proceeds, mainly from illegal operations in nearby Ciudad del Este, through local businesses and exchange houses. Officials stated that nearly 40 percent of the businesses in Foz de Iguazu were companies created as fronts to launder profits by local organized crime. A central bank official indicated that $18 million was being laundered daily in banking agencies in Foz de Iguazu. One method is to employ Paraguayans and Brazilians living in Brazil to open special non-resident, "CC-5" accounts, which can legally send money abroad, in the Brazilian border cities. Criminals also employ "laranjas" (oranges), poor people who essentially sell the use of their names to illegal businesses. The public prosecutor in the town of Cascavel identified the accounts of 310 such poor people from whose accounts $5 billion was transferred out of the country. Documents showed that in 1997, $18 million was transferred abroad from the account of one man alone, who earns $150 per month.
In the face of the CPI and Federal Police investigations in 1999, several exchange houses in Foz de Iguazu shut down operations. Although some agencies may still operate illegally, increased scrutiny has resulted in a decrease in the number of exchange houses authorized by the central bank from 40 to 15.
Although the laundering of proceeds from drugs and other crimes remains a major problem in Brazil, recent efforts by the government show that Brazil is taking the problem seriously. High-profile Congressional investigations have led to dozens of arrests and brought new energy and enthusiasm for rooting out drug trafficking, corruption and related money laundering. In October 1997, Brazil and the United States signed an MLAT that has been ratified by the United States but is not yet in force. New financial regulations should help the COAF, central bank, and other regulatory agencies collect and track information, and investigate and successfully prosecute financial crimes. When fully implemented, these new measures should demonstrate Brazil to be a regional leader in the global fight against money laundering.
British Virgin Islands (Concern). The British Virgin Islands (BVI), a United Kingdom (UK) Caribbean Overseas Territory (COT), is one of the larger offshore financial centers in the Caribbean. Money laundering occurs in the BVI, particularly at the layering and integration stages. UK Foreign Secretary Robin Cook has directed the UK overseas territories to enforce the highest international standards of financial regulation to preclude their being used for money laundering. The BVI continues to focus its efforts on thwarting money laundering.
On September 29, 1999, the Anti-Money Laundering Code of Practice 1999 was approved by the Governor-in-Council of the BVI. The Code provides guidance for all licensed financial service activities and establishes clear and definite procedures for the identification and verification of clients, maintenance and retention of records, and maintenance of a register of money laundering inquiries. The Code also makes relevant institutions and persons subject to due diligence audits by the Director of Financial Services or other designated individuals, to ensure compliance with the Code. Previously, these audits were conducted informally. The Code also mandates the appointment of compliance officers, establishing internal reporting procedures for identifying and reporting transactions, and training staff. The Code complements the Anti-Money Laundering Guidance Notes for the BVI Financial Sector prepared by the Territory's Joint Anti-Money Laundering Coordinating Committee.
The Proceeds of Criminal Conduct (Designated Countries and Territories) Order, 1999 was also approved on September 29, 1999 by the Executive Council of the BVI. The Order provides that, subject to certain modifications, the Proceeds of Criminal Conduct Act, 1997, applies to an order made by a court in a designated country or territory for the purpose of recovering payments or other rewards received in connection with money laundering or their value. It also applies to proceedings that have been, or are to be, instituted in a designated country or territory and may result in an order being made there. The Order also provides that the value of any property recovered in a designated country or territory for assistance in the enforcement of an order is to be treated as reducing the amount payable in the territory under a confiscation order made by the High Court.
The Proceeds of Criminal Conduct Act expands the scope of anti-money laundering legislation to cover the proceeds of all serious crime. The Act is closely modeled on British law and creates four types of offenses: assisting another to retain the benefit of the proceeds of criminal conduct; acquisition, possession or use of the proceeds of criminal conduct; concealing or transferring the proceeds of criminal conduct; and tipping off. Under the Act, suspicious currency transactions must be forwarded to a Reporting Authority, whose chairman is the director of the Financial Services Department.
The Financial Investigations Unit (FIU) within the Financial Services Department is responsible for the investigation of fraud and money laundering. Three individuals staff the Unit: an Inspector detailed from the UK police force (the Head of the Unit), a Sergeant and an Acting Sergeant. The FIU receives reports of suspicious transactions from the Reporting Authority, individuals and businesses. The reports are analyzed at the FIU. Most investigations relate to international business companies (IBCs) and other offshore entities. The FIU has an excellent relationship with other BVI government agencies and has no difficulty obtaining information from these agencies on suspects in investigations. The FIU was admitted to the Egmont Group at the Plenary meeting in Bratislava on May 27, 1999.
There have been no prosecutions for money laundering in the BVI.
Financial services remain the largest sector of the BVI economy. The BVI has developed as an important jurisdiction for international finance and commerce, the incorporation and management of offshore companies, and the provision of offshore financial and corporate services. There are now over 300,000 IBCs registered in the BVI. A 1988 amendment permits a bank, insurance, or reinsurance company to be an IBC, but does not allow a registry agent forming other companies to be one. A company that is not an IBC must be established under the stricter Companies Act and is taxed at a rate of 15 percent. An IBC can be used for investment and property holding and for financial management, including offshore banking, trading, copyrighting, licensing, unit trusts, mutual funds, and personal trusts. IBCs can have offices in the BVI and be managed from within the Islands without being subject to BVI income taxes and stamp duties. An IBC is not allowed to do business with individuals who reside in the BVI.
Offshore banks can be formed in the British Virgin Islands only by backers who are financially strong and are willing to file and publish audited financial statements. There are currently 13 offshore banks in the BVI. Registered agents adhere to a strict Code of Conduct, which is being given statutory authority by the BVI government. The Code covers know-your-customer procedures, reporting requirements and record keeping procedures. All banking institutions and trusts must obtain a license from the Government before doing business. BVI policy with respect to bank licensing is that, unless the bank is predominantly locally owned and doing business in the BVI, offshore banking activities will not be permitted unless the bank is a branch, subsidiary or affiliate of a well established bank with a proven track record that is subject to effective supervision by the bank supervisory authority. Such banks must have a principal office on the Islands and appoint at least two directors and two individuals who will serve as authorized agents and as intermediaries between the licensee and the Governor or Inspector of Banks and Trust Companies.
In addition to banking institutions and trusts, insurance companies in the BVI must be licensed. Insurance companies are discouraged from selling directly to the public, but re-insurers and captive insurance companies (an insurance company owned by the entity it insures) are attracted by the BVI's quick and easy organization procedures. Captives may be taken over "off the shelf." The absence of controls on the types of insurance captives may write has drawn many companies interested in self-insuring to the BVI.
The BVI's 1992 Trustee (Amendment) Act made trusts more attractive. The Act releases the settler from forced or statutory inheritance provisions by stating that he is not bound by any rule of inheritance or succession laws of the country in which he is domiciled. The life of the trust can be up to 100 years. The law also grants complete exemption from BVI taxation to non-residents of the BVI unless a trust asset is land or a business conducted in the territory.
To ensure that international criminals do not abuse its territories, the UK has proposed that a study be conducted of its Overseas Territories' financial services industries. The Government of the BVI has joined the Governments of Bermuda, the Cayman Islands, Anguilla, the Turks and Caicos Islands, and Montserrat in requesting a review. The study will cover all banking practices and banking legislation.
As a member of the CFATF, the BVI underwent a CFATF mutual evaluation in July 1999, and assumed the CFATF chairmanship in October 1999.
The MLAT between the United States and the United Kingdom concerning the Cayman Islands was made applicable to the BVI in 1990.
The BVI's regulatory legislation meets international standards, such as those established by the FATF and the OGBS. However, the BVI must fully implement its Proceeds of Criminal Conduct Act to have an effective anti-money laundering program.
Brunei (Other). Brunei is neither an illicit drug consumer nor trafficking country, and there are no strong indications that Brunei is being used for money laundering. Nevertheless, the Government of Brunei (GOB) has in place a strong anti-drug program, and has drafted anti-money laundering legislation. The legislation was still undergoing legal review in late 1999 but the GOB announced that the law would be put into place soon. Anticipating such a law, in 1999 Brunei authorities initiated a cooperative effort with regional U.S. anti-drug officials to investigate a potential money laundering scheme.
Asset forfeiture laws are used in Brunei's drug-related cases.
Brunei is a party to the 1988 UN Drug Convention.
Bulgaria (Concern). The economic factors associated with Bulgaria's transition to a market economy, and the resulting instability, have created favorable conditions for financial crime and money laundering to flourish, especially in the mid- and late-1990s. Bulgaria serves as a major narcotics transit country along the Balkan Route, especially for narcotics destined to Western Europe through Romania. Both foreign and domestic sources of illegal proceeds are laundered in Bulgaria. Foreign sources of suspected illegal proceeds transit Bulgarian banks and are eventually transferred abroad. These transactions are conducted in violation of Bulgarian foreign exchange and other laws. Bulgarian banks are used as conduits for funds that are suspected of being connected to drug trafficking or other crimes committed abroad. Besides narcotics trafficking, the major sources of criminal proceeds laundered in Bulgaria have included smuggling, financial institution fraud, auto theft, alien smuggling, prostitution, tax evasion, tax fraud and extortion.
The types of financial institutions used to launder proceeds have included banks, casinos, currency exchanges, real estate companies, used car dealerships, and non-bank financial institutions such as brokerage firms and insurance companies. Bulgarian banks are used to launder funds from foreign sources, especially from former socialist countries of Eastern Europe and the former Soviet Union, Turkey and other Middle Eastern countries. The types of monetary instruments used to launder proceeds include cash-primarily U.S. dollars and German marks-bank drafts, travelers' checks, and wire transfers.
Bulgaria's anti-money laundering legislation, Law on Measures against Money Laundering, became effective on July 24, 1998. Money laundering was simultaneously criminalized by the addition of Articles 253 and 253a to the Bulgarian Criminal Code. The criminal provisions apply to all proceeds derived from all serious crimes.
The anti-money laundering law provides for a definition of money laundering, the types of transactions and financial institutions covered by the law, customer identification, recordkeeping requirements, suspicious transaction reporting, a financial intelligence unit, and the establishment of internal rules for financial institutions to implement an anti-money laundering program.
The Bureau of Financial Intelligence (BFI) of the Ministry of Finance is Bulgaria's financial intelligence unit and has jurisdictional responsibly for money laundering violations. The BFI is a member of the Egmont Group. Ministry of Finance "Decree on the Structure and the Organization of Bureau of Financial Intelligence Activities" formally established the functions of the BFI. The BFI is an administrative agency composed of three main divisions. One division collects, processes, analyzes and stores suspicious transaction reports. The second division is responsible for international relations and the international exchange of information. The third division exchanges information with Bulgarian agencies.
Bulgaria is a member of the Council of Europe and participates in the Council of Europe's PC-R-EV. In November 1999, Bulgaria underwent a mutual evaluation by the PC-R-EV. The evaluation provided detailed suggestions to improve Bulgaria's anti-money laundering program.
Bulgaria has made commendable progress in adopting and implementing anti-money laundering legislation. As Bulgaria continues to implement its anti-money laundering regime, taking into account the recommendations of the PC-R-EV report will give Bulgaria a more effective regime that fully meets international standards for combating money laundering.
Burma (Primary). The sheer volume of proceeds derived from narcotics production and trafficking, and official toleration of the laundering of narcotics proceeds, make Burma a country of major concern for money laundering. Narcotics proceeds figure prominently in the Burmese economy. Although there is no reliable information on the extent of money laundering, some insurgent groups fund their activities through proceeds derived from narcotics trafficking. Domestic narcotics proceeds and proceeds laundered abroad are very significant factors in the overall Burmese economy, and widely and openly invested in business, real estate and infrastructure projects. In some cases, investments of narcotics proceeds in public works projects supplement government expenditures. Such flows may be a dominant element in some local areas. The Burmese government has encouraged ethnic cease-fire groups that have been involved in narcotics trafficking to invest in legitimate businesses instead of narcotics. However, the government has not instituted a system of safeguards to prevent the investment of drug-related proceeds.
Burma is a predominately cash-based economy, and the state controls major sectors of the economy. The state-dominated financial sector is underdeveloped by international standards. The official exchange rate of the local currency to the U.S. dollar is overvalued by 60 times the black market exchange rate. Due to strict foreign exchange controls, the non-convertibility of the Burmese currency and the pervasiveness of narcotics trafficking, ethnically based alternative remittance systems (ARSs) operate throughout Burma.
The ARS, in conjunction with import/export business, is probably the most prevalent mechanism for laundering money in Burma today. In a typical case, money earned from the sale of illicit narcotics (or black market gems or precious metals) is deposited into the underground banker's account in Thailand. The money is then either exchanged and given out by his associate (in Burmese currency) to the source of supply in Burma, or it may be used to pay off import/export debts in another country, such as Singapore. Burmese import/export companies generally deal in such items as cigarettes, electronics or fabrics, and they are often owned by underground bankers who knowingly facilitate drug traffickers' proceeds in order to expedite payment to their sister companies abroad.
Burma criminalized narcotics-related money laundering with the adoption of its 1993 Narcotics Drugs and Psychotropic Substances law. The law also allows for the seizure of assets derived from narcotics trafficking. Burmese officials admit their difficulty in implementing provisions of this law due to a lack of understanding of money laundering concepts and their inability to investigate financial crimes. Burma does not have a financial intelligence unit, nor is it active in international or regional anti-money laundering fora.
The challenge before Burma is to criminalize money laundering to include all serious crimes that generate criminal proceeds and adopt legislation that provides measures for detecting, monitoring, and enforcing money laundering activity. It should enforce existing anti-money laundering measures and should cooperate more fully with international attempts to prosecute narcotics traffickers and their money laundering operations.
Cambodia (Concern). Cambodia is not a major domestic or offshore financial center, but crime, corruption, and money laundering are on the rise. Cambodia is a source country for marijuana, and serves as a transit country for heroin trafficking from the Golden Triangle. Cambodia has experienced an increased presence of foreign organized crime activity, and narcotics-related money laundering is a growing problem. The Cambodian alternative remittance system allows criminals to easily hide and transfer their proceeds without official scrutiny. Enforcement personnel are untrained to investigate financial crimes and money laundering. Official corruption plays a major role facilitating criminal activity.
The primary sources of criminal proceeds include narcotics trafficking, smuggling, prostitution, illegal gambling, alien smuggling, and corruption. Criminal proceeds are laundered in a variety of ways, including the use of financial institutions, cross border currency movements, the purchase of real estate, investments in businesses, and credit transactions. Cambodia's growing casino industry is particularly vulnerable to money laundering because of the volume of cash turnover and connections to organized crime.
Banks play a minor financial role in Cambodia's economy-there are 30 in the country and only a few conduct significant volumes of domestic business. Cambodia is a cash intensive economy and in some regions of the country, gold is used instead of currency. The public has little confidence in the commercial banking system, and fees can be prohibitive for the average Cambodian. An alternative remittance system is available for Cambodians to transfer funds internationally. It is also an effective mechanism to transfer and launder criminal proceeds. In the early 1980s, its use became widespread by expatriate Cambodians living abroad to send earnings to their families in Cambodia. It is identical to the Chinese and Indian systems developed centuries ago to remit funds and send letters between these countries and expatriate communities established abroad. The system relies on a network of businesses such as jewelry stores, travel agencies, money exchangers, finance companies, and import/export companies. The system, which operates throughout Asia, is successful because it operates on the principle of trust that is enforced by family, social, ethnic, commercial, and organized crime ties.
Cambodia criminalized narcotics-related money laundering with the adoption in 1996 of its Law on Drug Control. Although this law focuses on narcotics trafficking, it includes general anti-money laundering provisions for customer identification, suspicious transaction reporting and the establishment of an Anti-Money Laundering Commission subordinate to the Prime Minister's Office to process these reports, record keeping requirements, and provisions for anti-money laundering training in Cambodian financial institutions The composition and functions of the Anti-Money Laundering Commission were to be promulgated through decree at a later date. These measures have not yet been implemented.
In practical terms, agency jurisdiction to enforce money laundering has yet to be determined and the Anti-Money Laundering Commission has yet to be established. Money laundering offenses are investigated by the agency charged with enforcing the predicate crimes that generate the illegal proceeds. Unfortunately, the Cambodian institutions required to effectively counter money laundering-the enforcement agencies, the courts, and financial institutions-are not trained to detect, investigate, and prosecute money laundering. For this reason, money laundering is for the most part left unchecked by Cambodian authorities.
Cambodia is a member of the Asia/Pacific Group on Money Laundering and has assisted neighboring countries in investigating money laundering operations.
Cambodia is aware of the need to enforce its anti-money laundering legislation and to take the appropriate measures to combat money laundering. It should make efforts to educate its officials and financial institutions in anti-money laundering methods and implement existing measures to monitor and enforce money-laundering activity.
Cameroon (Other). Cameroon is not a major drug-producing country, nor is it a regional or international financial center. Illicit drugs transit Cameroon, but there is no information to indicate this has led to significant money laundering activity.
Cameroon's banking system is controlled by a regional central bank serving the six member countries of the Central African subregion.
Cameroon is a party to the 1988 UN Drug Convention. There is no information indicating the status of Cameroon's compliance with the money laundering precepts of the Convention. The government initiated no new actions in 1999 to meet the Convention's goals and objectives.
Canada (Primary). Canada remains vulnerable to money laundering due to its advanced financial services, lack of reporting requirements for suspicious financial transactions, and heavy cross-border flow of currency and monetary instruments. Canada is home to virtually every ethnic organized crime group in the world. Numerous Russian organized crime figures live in or visit Toronto, Montreal, and Ottawa to launder criminal proceeds through financial institutions or stock exchanges. Italian organized crime syndicates-particularly the Sicilian Mafia-are heavily involved in drug trafficking, money laundering, gambling and extortion in Canada. Asian organized crime groups, which have been active in Canada for three decades, are involved in a variety of criminal activities such as drug trafficking and money laundering-including the use of an underground banking system to launder criminal proceeds. Canada has financial institutions which engage in currency transactions involving international narcotics proceeds that include significant amounts of U.S. dollars.
Canada's Proceeds of Crime Act, which came into force in March of 1993, contains anti-money laundering sections but criminalizes money laundering only for drug offenses and enterprise crimes. It lacks both cross-border currency reporting requirements and suspicious activity reporting (SAR) requirements (the reporting of SARs is strictly voluntary.) The legislation also lacks a currency transaction reporting (CTR) requirement. The depositor and the financial institution are only required to maintain a record of any CTR at or above $6,890 for five years. The CTRs are not forwarded to authorities unless they are requested through a subpoena. These reports are merely intended to preserve the audit trail for investigators and prosecutors.
Canada is in the process of strengthening its defense against money laundering. In 1999, the Government of Canada (GOC) introduced legislation on money laundering to address some of the FATF Forty Recommendations on countering money laundering. The legislation, currently before Parliament, will bring Canada's money laundering laws into further compliance with FATF requirements. The draft rules are the government's latest step toward stricter monitoring of large financial transactions, following years of criticism from the United States and other countries that already possess tough measures. The draft regulations contain mandatory suspicious transaction reporting requirements, reporting requirements for currency transactions exceeding $6,890, and requirements to report currency and monetary instruments in excess of $10,344 transported across the border. A new government body, the Financial Transactions and Reports Analysis Centre (FTRAC), will collect and analyze reports of suspicious transactions from financial institutions and financial intermediaries. This proposed financial intelligence unit (FIU) will make the determination as to which SARs merit investigation.
Under the proposed law, currency transactions of $6,890 or more would have to be reported to the Centre by deposit-taking institutions, currency exchanges, securities dealers, life insurance companies and casinos. Reporting requirements would also apply if an individual transacted two or more payments, totaling $6,890 or more, on a single day, as well as transactions involving five or more C$ 1,000 ($689) bills. Many dealings involving payment for professional fees or services would be exempt from the reporting regime. Transition teams to set up this agency were already in place by the end of 1999.
The GOC intends to have FTRAC recognized by the Egmont Group as an FIU. The new anti-money laundering regulations will authorize FTRAC to negotiate and set guidelines so that it can share information with foreign counterparts.
Canada is a member of the FATF, and underwent a second FATF mutual evaluation in May 1997. Canada also participates in the CFATF as a Cooperating and Supporting Nation.
Canada has long-standing agreements on law enforcement cooperation with the United States, including extradition and Mutual Legal Assistance Treaties.
Canada should be encouraged to expeditiously enact the regulations requiring the mandatory reporting of suspicious transactions, large currency transactions, cross-border movements of currency and monetary instruments, and the establishment of an FIU. The Government should ensure that the FIU meets Egmont standards, especially with regard to information sharing. Canada also needs to expand money-laundering offenses beyond drug offenses and enterprise crimes to include all serious crimes.
Cayman Islands (Primary). The Cayman Islands, a UK Caribbean Overseas Territory (COT), has an extremely large offshore sector and thus remains vulnerable to money laundering. In March 1999, UK Foreign Secretary Robin Cook released a White Paper directing Britain's Overseas Territories to bring their financial and criminal legislation in line with that of the UK, as part of an agreement granting UK citizenship to citizens of Britain's Overseas Territories. In response, the Government of the Cayman Islands has taken new steps to strengthen its defenses against money laundering. In 1999, an anti-money laundering committee, consisting of representatives of both the public and the private sector, completed a code of practice, which was sent to the Executive Council for final approval. Additionally, the banking industry and the mutual funds industry drafted codes of conduct focusing on know-your-customer issues, suspicious activity and money laundering. The insurance sector and the companies management sector (which regulates registration of international business companies) are expected to write their drafts in early 2000. Included in the drafts is the stipulation that the Cayman Islands Monetary Authority (CIMA) will supervise building societies, credit unions and money service providers, which will have to follow the same know-your-customer procedures as those laid out in the code of practice and code of conduct for the other financial institutions. CIMA will regulate and supervise these sectors to ensure that they are following the same procedures as the rest of the financial services industry. CIMA was originally established in 1997 with regulatory and supervisory authority over the financial industry. In addition to regulating the financial services industry, CIMA also manages currency and reserves.
In December 1998, the Assembly removed a clause from its Proceeds of Criminal Conduct Law that had prevented the Cayman authorities from cooperating with other jurisdictions on financial offenses. The change states that, provided the offense is a crime under Cayman law, the Islands' authorities will cooperate in the investigation and prosecution of fraud, money laundering, drug trafficking and other offenses. However, the Cayman Islands will not cooperate in investigating tax evasion, since there is no direct taxation there.
The Cayman Islands' Proceeds of Criminal Conduct Law, which criminalized money laundering from all crimes, was considered a monumental step when it was enacted in 1996. The law extended the principles of the Misuse of Drugs Law to all serious crimes and created four new offenses: money laundering, assisting in money laundering, receiving the proceeds of another's criminal conduct, and tipping off. It provided for the freezing and forfeiture of the assets of those who have engaged in criminal conduct and their recipients. The law also established an Authority to which suspicious transactions are to be reported. The Authority has the power to disclose to foreign regulators information necessary to enable those regulators to carry out functions similar to those conducted by the Authority. The law has a provision for a Code of Practice, which will set forth the practical aspects of due diligence procedures and record keeping.
The Cayman Islands had no prosecutions in courts for money laundering in 1999, but individuals have been arrested for suspicion of money laundering. The Government of the Cayman Islands has been cooperative with U.S. law enforcement in financial investigations not involving tax offenses.
The Cayman Islands has a large offshore financial sector offering strict confidentiality, and has thus historically been attractive to money launderers. There are approximately 584 offshore banks on the Islands, including a number of the world's 50 largest banks. The Cayman Islands' financial sector provides a wide range of services, including private banking, brokering, mutual funds, establishment of various types of trusts, and company management. More than 44,000 international business companies are registered in the Cayman Islands.
There are several types of offshore banking licenses available in the Caymans. The most popular type of arrangement is a private bank holding a restricted "B" license. These banks can receive or request funds only when doing business with people named on a list accompanying the application. A private bank has the power to issue letters of credit and bank guarantees and to carry on business free of taxation and currency restrictions. This permits U.S. investors to trade in Eurodollar markets freely without having to provide an accounting to the U.S. Government. A restricted "B" license is granted only to a bank or trust with a net worth of at least $34,000, or more if required by the Governor. A much higher net worth ($480,000) is required for an unrestricted "B" license, which allows the holder to conduct business freely with any client outside the Cayman Islands. Applications for this type of license are normally accepted only from a branch, subsidiary or affiliate of a major international bank with substantial capital. This type of offshore bank pays $18,290 for a banking or a combined banking and trust license, and the same amount for an annual fee. An "A" or full-service bank, allowed to conduct banking business inside and outside the Cayman Islands, must pay $97,560 annually for a license. Approval is usually granted only to international banks with a sterling reputation that are subject to consolidated supervision in another reputable jurisdiction. Cayman Islands Government policy is to grant these licenses only to major international corporations in relation to their in-house banking business.
The Governor-in-Council can refuse to grant or revoke a banking license, on advice from the regulator, if he believes the licensee is conducting business in an illegal manner or in a manner that is harmful to his clients. The application for a banking license requires a substantial amount of information, including information on investors and shareholders. Banks are required to have their accounts audited by an approved firm on an annual basis, and CIMA can require repeat audits.
The Cayman Islands and the Caribbean's other offshore financial centers have been concerned over the listing by the Organization for Economic Cooperation and Development (OECD) of 21 jurisdictions in the region (among 47 worldwide) which OECD says have harmful tax regimes. The OECD wants a review of the taxation regimes of jurisdictions that appear to offer an unfair advantage, and which might be open to international financial crimes. The Cayman Islands and Britain's other Overseas Territories in the region have accepted a proposal from London that independent experts be used to conduct a study of all banking practices and banking legislation in their financial services sectors to ensure that the sectors are not being abused by international criminals. This includes legislation on the offshore insurance industry, securities sector, companies and trusts, independent regulatory authorities, international cooperation and anti-money laundering legislation and preventive measures.
Despite close supervision, the Cayman Islands offshore sector remains vulnerable to abuse. An investigation of Eurobank in the Cayman Islands is still underway. In this case, individuals fraudulently billed customers' credit cards. CIMA shut Eurobank down on the grounds that the bank did not have strong know-your-customer procedures in place. The bank's assets are currently being liquidated. The investigation extends to the United States and relies on the Proceeds of Criminal Conduct law for evidence from the United States.
Recently, the Cayman Islands was involved in the laundering operations of Mexican bankers who were arrested in Operation Casablanca by the U.S. Customs Service. Mexico's Bancomer entered a guilty plea to U.S. charges that its employees laundered drug money through Bancomer's Cayman Islands subsidiary, Mercury Bank & Trust, Ltd.
A Cayman Islands institution was identified in the U.S. General Accounting Office's (GAO) investigation of alleged money laundering by Raul Salinas through accounts at Citibank. In a report of October 1998, the GAO said Citibank formed a private investment company (Trocca) for Salinas through its Cayman Islands affiliate, Cititrust. According to the Citibank representative, Trocca was set up primarily for secrecy, tax advantages, and facilitating the distribution of assets to Mr. Salinas's family in the event of his death.
In recent developments, possible ties between two Cayman Islands bank accounts and the Russian money laundering inquiry have emerged. Thomas Renyi, Chairman and Chief Executive of the Bank of New York, confirmed that two accounts at a Cayman Islands branch were linked to Leonid Dyachenko, the husband of former Russian president Boris Yeltsin's daughter Tatyana. CIMA said that investigators would cooperate with the U.S. Federal Reserve Bank, the regulator for the Bank of New York.
The Cayman Islands is an active member of the CFATF, and the Caymanian Financial Secretary was Chairman of the CFATF from 1998-99.
The Cayman Islands is a party to the 1988 UN Drug Convention and has an MLAT with the United States. The United States and the Cayman Islands have begun negotiations to expand the existing MLAT to cover criminal tax matters. The Cayman Islands is a member of the OGBS and serves on the informal advisory board of the UN Offshore Forum.
Due to its popular offshore banking industry and confidentiality laws, it is essential that the Cayman Islands continues its diligence in regulating and enforcing its anti-money laundering program. The Cayman Islands should be encouraged to implement its new code of practice and to expeditiously complete, and implement, its codes of conduct for its financial services industry.
Chile (Concern). Chile has a dynamic market-oriented economy and a relatively well-developed financial sector, but it has not yet become a major regional financial center, nor is it an important tax haven or offshore banking center. Money laundering remains a threat due to inadequate laws. All known cases of money laundering have been related to the narcotics-trafficking activities of Mexican cartels attempting to launder their profits through the banking sector and through investments in construction projects.
Despite arrests and investigations carried out during the past two years by the Council for the Defense of the State (CDE), the agency with jurisdiction over money laundering investigations, not a single conviction on money laundering charges has been obtained. This is due mostly to the inadequacies of the law, which requires actual seizures of drugs in Chile. In January 1995, Chile enacted Counternarcotics Law No. 19366, which criminalized money laundering related to the illicit narcotics trade. The law allows banks to report suspicious activities to the CDE, but does not require them to do so. The Law does not contain safe harbor provisions to protect banks from liability for reporting suspicious transactions, and as a result, banks rarely do so. In October 1995 a Financial Investigations Unit (FIU) was established within the CDE to receive the reports of suspicious transactions and conduct money laundering investigations. The Unit (Department for the Control of Illicit Drug Trafficking) was admitted into the Egmont Group of FIUs in 1998.
Under the 1995 Narcotics Law, the Council (for up to 60 days) and a judge (for an indefinite period) can seize assets derived from narcotics-related activities. A judge can seize narcotics-related assets and temporarily turn them over to the CDE or law enforcement until a conviction is obtained. After conviction, the assets pass to the Ministry of National Property where non-liquid assets are sold at public auction. The Law does not address sharing seized narcotics assets with other governments.
Since March 1996, currency exchange houses have been required to issue a receipt and to keep records identifying both the buyer and seller on all foreign exchange transactions over $10,000. Copies of the receipts are sent to the Internal Tax Service; the information is also available to the CDE. Failure to complete the invoice and report the transaction carries criminal sanctions. In March 1997, the Chilean Superintendency of Banks and the U.S. Federal Reserve Board of Governors entered into an agreement to cooperate in the supervision of cross-border branches and other establishments of banking organizations incorporated in both Chile and the United States. Each regulator has undertaken to notify the other of applications filed by banking organizations from the other country and of any supervisory concerns with respect to the local operations of banking organizations from the other country, and to exchange other information relevant to their ongoing supervision of operations from the other country. They will also cooperate in carrying out on-site inspections of cross-border establishments in the host country and may share information on the results of audits or examinations.
As a result of the Judicial Reform Law enacted in September 1997, Chile continues the transition from an inquisitorial to an adversarial judicial system The law also established a new Attorney General's office.
The Government of Chile (GOC) is making a concerted effort to address the inadequacies in its Narcotics Law. There is consensus among the Government agencies on the need to criminalize the laundering of proceeds from other serious crimes and to require the reporting of suspicious financial transactions. There is also consensus about the possible need for an FIU with different functions and expanded resources. As a result, the present FIU may be expanded, or a new one created under another government entity. Strengthening anti-money laundering efforts has finally received the attention of the highest levels of the GOC, including that of the new Administration. Acting on this realization will further protect Chilean financial institutions and society from the ravages of money laundering.
China (Primary). China's introduction of free-market reforms to its centrally planned economy has created new conditions for financial crime and money laundering to thrive. Legal reforms have been slow to keep pace with the rapidly evolving criminal sector. The availability of anonymous bank accounts and the Chinese underground banking system allow criminals to hide and transfer their proceeds with impunity. In addition, enforcement personnel are understaffed and underpaid, and are not trained to investigate financial crimes and money laundering Official corruption plays a major role in facilitating criminal activity and in obstructing investigations. Crime rates are spiraling with increases in narcotics trafficking, smuggling, auto theft, alien smuggling, racketeering, and intellectual property counterfeiting. Tax evasion, banking fraud, and the theft of state-owned assets have also increased. The laundering of criminal proceeds from these predicate crimes has become a particularly acute enforcement concern. Although crime rates in China are low in comparison with those of the United States and other Western countries, their growth threatens China's economic security and undermines future economic reforms.
Organized crime groups from Hong Kong, Macau, Taiwan and Japan are known to launder money through joint ventures and real estate purchases in China. Other methods used to move and launder criminal proceeds include bulk smuggling of currency, invoice manipulation, letters of credit, front companies, casinos, and the purchase of precious gems. In other schemes, illegally acquired state-owned funds are transferred to Hong Kong through gray market channels and reinvested in China as foreign capital. Not only is the Chinese state initially defrauded of its own funds through financial manipulation or outright theft, but the funds are then laundered through Hong Kong and invested in China, taking advantage of foreign investment programs that further deprive the state of revenue.
Banks play a dominant role in financing China's economy. China's state-owned banks are involved in financing up to 90 percent of Chinese business ventures This level of financial activity makes the banking system subject to theft, fraud, corruption, and other criminal activities. Local politicians direct banks within their jurisdictions to grant credit for their favored projects regardless of the merits of the venture. Inadequate regulation and supervision by the central bank, combined with government manipulation of credit transactions, are the major factors influencing bank losses.
A money laundering method widely used by ethnic Chinese communities throughout the world-and is used throughout Asia-is the underground banking system. It is the Chinese version of alternative remittance systems or parallel banking that originated in Asia centuries ago. Where the Chinese system is unavailable, the Indian version, hawala, is used to transmit money to China. Third countries such as Thailand or Singapore, where both systems are present, act as transit points. Chinese overseas workers originally used this remittance system to send earnings to their families in China. The system was established through the network of shops and commercial shipping routes of Chinese merchants who traveled throughout Asia. The network remitted funds and letters between China and Chinese communities abroad.
The underground banking system can transfer large sums of money efficiently and quickly without leaving financial records tied to the transactions. The paper trail is eliminated by avoiding official reporting requirements to Customs authorities that bulk cash or monetary instruments would attract at the border, and commercial bank reporting requirements that cash or suspicious transactions require. The system is still used for its traditional purpose, however, it is also used for tax evasion and as a means to move and launder criminal proceeds. Chinese underground banking is successful since it operates on the principle of trust that is enforced by family, social, ethnic, commercial, and organized crime ties.
China has taken modest steps to respond to money laundering. With the adoption of its Criminal Code in 1997, China criminalized money laundering for the proceeds of narcotics, organized crime, and smuggling under Article 191. Although Chinese authorities have successfully prosecuted several cases under this Article, this statute is limited in addressing China's money laundering problem. For Article 191 to be an effective enforcement tool, it must address the entire spectrum of serious crimes generating the proceeds laundered in China. Furthermore, China has yet to adopt comprehensive anti-money laundering legislation establishing the requisite mechanisms to effectively prevent and detect money-laundering activities.
Despite China's weak anti-money laundering statute, the government is adopting and examining measures to address financial crimes and money laundering. These efforts are connected to capital flight, illegal foreign exchange trading, and reforms in the banking sector.
The State Administration of Foreign Exchange with the General Administration of Customs issued a regulation that took effect in August 1999 requiring the licensing of exports of $10,000 or more in foreign currency by Chinese citizens. This regulation was issued to rein in the transfer of illegal proceeds masquerading as capital flight. These schemes include proceeds from invoice manipulation of trade goods, illegal trade in foreign exchange, falsification of foreign trade statistics, and other questionable transactions. In October 1999, the Ministry of Public Security announced the recovery in 1998 of $10 billion in illegally converted yuan, the local currency. Fearing a yuan devaluation, Chinese companies, many of them owned by state or local administrations, illegally exchanged these funds for foreign currency. Although the bulk of these funds may at first glance be attributed to capital flight, the proceeds of crime are sure to figure into these statistics. The distinction between the two is hard to determine given the shades of illegality of the funds' origins, methods of currency conversion and transfer, and the use of document falsification.
The state agencies that enforce foreign exchange laws have cracked down on illegal foreign exchange trading during 1999 through a series of enforcement operations. Under China's foreign exchange system, the government strictly regulates the exchange of yuan to foreign currency. Since 1994, only authorized banks have been permitted to conduct currency exchange. The foreign exchange is held in accounts strictly regulated by the central bank. To circumvent government scrutiny of the exchange of yuan proceeds derived from crime and other illegal activities within China, a black market in currency trading developed. Criminal proceeds in yuan must be exchanged into a convertible foreign currency to be of use outside China.
Starting in 1998 and throughout 1999, several government agencies, among them the central bank, proposed abolishing the use of anonymous accounts, a feature of China's centrally planned economy. During this era of collective ownership of property, individuals opened accounts associated with their household or family enterprise rather than under their own name. Commercial banks allowed individuals to choose obviously fictitious names when opening accounts. Neither the central bank nor any other regulatory agency exercises control over the registration of these accounts. In addition, these accounts are fully transferable. As a result, proving the beneficial ownership of these accounts is nearly impossible. On January 20, the head of the People's Bank of China (China's central bank) stated that the Bank planned to adopt a "real name system" for deposit accounts sometime in 2000 in order to aid tax collection and fight corruption. However, he added, the proposed rule change will apply only to new accounts, in order to avoid "serious disruption" to the banking system.
Private firms and state-owned banks use these accounts for purely economic reasons. They hold reserve cash accounts at more favorable interest rates than those offered by official central bank accounts sanctioned by the government. These accounts, however, facilitate tax evasion, payment of bribes, money laundering, and other illegal activities. Although China is concerned about the misuse of these accounts, the government has not yet abolished their use. The reasons cited by government officials include the lack of automation within many Chinese banks and the banking system's general lack of development.
In 1998 and 1999 China instituted a number of banking reforms to improve supervision of the banking system, including the reorganization of the central bank into nine regional branches patterned after the U.S. Federal Reserve System. The new regional branches were granted regulatory authority to prevent manipulation of credit by local politicians, and to prevent financial crime within the banking system. In addition, the performance rating of regional directors of the central bank branches is directly tied to deterring and preventing financial scandals. The central bank was also forced to divest itself of direct operation in the thousands of associated businesses it owned. Although the purpose of these reforms was to modernize the banking sector, these changes will facilitate the implementation of anti-money laundering measures in China's financial institutions, once China adopts anti-money laundering legislation consistent with international practice. The shedding of central bank's business connections will allow it to perform its supervisory functions more objectively by eliminating conflict of interest concerns.
China does not have a financial intelligence unit, although the Economic Crimes Investigations Department (ECID) of the Ministry of Public Security is charged with investigating incidents of money laundering and other financial crimes such as counterfeiting, underground banking, and tax fraud. In November 1999, an ECID delegation visited the United States to discuss money laundering and financial crime issues with a variety of agencies from the Departments of State, Justice, and Treasury. The major focus of their visit was to establish working relationships with U.S. agencies and to gather information to improve China's ability to combat money laundering and financial crimes. Money laundering topics of discussion included legislation, information automation, and suspicious transaction reporting, as well as other anti-money laundering measures.
The United States and China continue to hold discussions on cooperation in such fields as combating international organized crime, narcotics trafficking, alien smuggling, counterfeiting, and money laundering through the auspices of the U.S.-PRC Joint Liaison Group (JLG) on law enforcement cooperation. The JLG was established in May 1998 on the basis of a memorandum of understanding. The next JLG meeting will be held in Beijing in early to mid 2000.
In March 1999, during the second round of discussions of the JLG, the question of Chinese membership in the FATF was referred to Chinese government representatives for consideration. The Chinese government raised several political issues regarding FATF membership and requested additional information on the FATF that was forwarded to them in April 1999. The FATF cooperates closely with international and regional organizations concerned with combating money laundering, including the Asia/Pacific Group on Money Laundering (APG). China participated in the initial meeting of the APG and hosted the first round of working group meetings in Beijing in July 1997. However, China has not attended subsequent meetings of the APG
The United States and China are near completion of a framework for mutual legal assistance. Both sides signed a Customs Mutual Assistance Agreement in 1998 that speeds communication and enhances the flow of counternarcotics intelligence.
China does not allow the licensing of banks or corporations for offshore operations. Hong Kong, a premier offshore center, continues to service China's offshore needs. China's Special Economic Zones (SEZs) are frequently confused with offshore centers. During the early 1980s, China established four SEZs along the southeastern coast near Hong Kong and Taiwan and granted them legislative autonomy in passing laws favorable to foreign investment, as well as generous government funding for development. By 1993, thousands of SEZs were in existence, rendering the designation meaningless. The government finally revoked the preferential tax treatment of all the SEZs with the adoption of a uniform national tax code in 1994. However, with relative autonomy from Beijing in adopting economic legislation, some SEZs went quite far in embracing capitalism. The SEZ's may offer anonymous accounts, a convenient avenue for money laundering.
As first steps in combating money laundering, China must expand its money laundering legislation to include all serious crimes that generate criminal proceeds. It must also abolish the use of anonymous, numbered, or pseudonym accounts that shield the beneficial owner of the funds. Legislation that provides for controls in detecting, monitoring, and enforcing money laundering activity in the financial and commercial sectors would be a logical second step. China must make efforts to address the related issues that encourage money laundering. The slow pace of economic reform, and development of the rule of law, combined with the prevalence of corruption and organized crime, allows money laundering to flourish. These anti-money laundering actions can serve as regulatory and enforcement tools to root out financial crime, corruption, and organized crime in China and discourage the laundering of foreign proceeds.
Colombia (Primary). During 1999, significant anti-money laundering developments occurred in Colombia. In order to assist the Colombian Customs and Tax Directorate's (DIAN) efforts to identify and attack smuggling crimes, including the smuggling of consumer goods paid for with U.S. narcotics proceeds through the Black Market Peso Exchange (BMPE) system, the Colombian National Police detailed 500 officers, and anticipates raising that figure to 1000 during CY 2000. This increased anti-smuggling activity is having an effect on the BMPE and making it more difficult to repatriate U.S. narcotics dollars in the form of smuggled goods. Colombia has financial institutions which engage in currency transactions involving international narcotics proceeds that include significant amounts of U.S. dollars.
On August 12, 1999, legislation was enacted establishing, for the first time, a unified central Financial Information and Analysis Unit (FIAU). The FIAU, established within the Ministry of Finance and Public Credit, will have the authority to receive and act upon all suspicious and large value reports filed by Colombian financial institutions, as well as interact with all other Colombian public and private institutions having information concerning possible financial crimes. The FIAU should expedite money laundering investigations by the Fiscalia by providing the prosecutors with analyzed information concerning suspect transactions.
Colombia criminalized the laundering of the proceeds of all illegal activities in 1995. In 1998, the Prosecutor General's Office established a special money laundering unit to investigate and prosecute cases under the law, but there still has not been a single money laundering conviction. This is attributable in part to the high rate of turnover within the money laundering unit, making it difficult for the unit to develop the requisite expertise in this highly complex area. The unit has also encountered difficulties in developing its money laundering investigations sufficiently to prove the underlying illegal activity required for a money laundering conviction. Colombia's banks continue to comply with the reporting requirements designed to flag suspicious transactions and have been very cooperative with U.S. efforts to curtail financial transactions by individuals and entities designated as involved with narcotics trafficking.
Colombia's 1996 asset forfeiture statute permits criminal forfeiture of drug and money laundering proceeds, provides for forfeiture of substitute assets, and permits in rem forfeiture when assets are held in the name of a nominee or have been transferred. While Colombia used this statute in 1999 to seize millions of dollars of narco-related assets, the legal process of converting those seizures into forfeitures remains stalled in the judicial system. There have been only three final forfeitures since the forfeiture law was enacted in 1996. More than fifty cases are pending, including many that involve the former leaders of the Cali Cartel.
The Colombian Ministry of Justice and Law, along with the Office of the Presidency, has embarked on an ambitious effort to reform and streamline several of the procedural and other impediments to effective asset forfeiture. In June, President Pastrana issued extraordinary decrees establishing, among other things, an abbreviated forfeiture procedure and authority to liquidate certain types of property pending forfeiture. These reforms were invalidated when the Constitutional Court struck down, on procedural grounds, the underlying statute giving the President legal authority to issue such extraordinary decrees. However, the Ministry of Justice and Law has incorporated these and other reforms into new draft legislation it will propose to the Colombian Congress.
Building upon their execution of a 1998 U.S. request for assistance in the Operation Casablanca money laundering investigation, Colombia successfully executed the U.S. request for legal assistance in the BMPE money laundering investigation entitled Operation Juno. As part of Operation Juno, Colombian authorities executed seizure warrants on more than 25 banks and restrained approximately $150,000 in Colombian bank accounts.
In December 1999, the United States delivered a first installment of shared assets in the amount of $5,825,000, from U.S. forfeitures of assets belonging to deceased narcotics trafficker Jose Gonzalo Rodriguez Gacha. The United States transferred these assets in recognition of Colombian assistance in achieving the forfeitures. Pursuant to a supplemental sharing MOU signed in October of 1998, a Bilateral Committee of Colombian and U.S. law enforcement officials reviewed and approved projects to be funded in Colombia using these assets. Among the projects approved for this first installment are joint law enforcement training for Colombian law enforcement agencies, initial funds for a multi-agency law enforcement academy, training for the four specialized units of agents and prosecutors under the Attorney General, training and substantial start-up funds for the new Colombian Tax and Customs Police unit, funding for prosecutor and witness protection, initial funds for Colombia's new financial intelligence unit, expansion of wiretapping, and automated fingerprinting capabilities. Colombian law still does not permit reciprocal asset sharing to the United States.
Even though progress has been made with respect to fighting money laundering, Colombia has fallen short in its implementation of the money laundering and asset forfeiture laws. The Colombian congress has yet to pass an international asset forfeiture provision that is in line with the 1988 UN Drug Convention standards. The Government of Colombia must systematically enforce the laws and, most importantly, prosecute money launderers to disrupt and close their operations.
Comoros (Other). Comoros is neither a major producer nor consumer of illicit drugs, but it is a transshipment route. However, Comoros is not a financial center, and the small size of its financial sector --one bank -- indicates that it is not likely to be one in the immediate future. There is no information on the sources or extent of money laundering, if any.
Comoros is not a signatory to the 1988 UN Drug Convention.
Cook Islands (Concern). This self-governing group of islands in the South Pacific maintains a free association with New Zealand. Cook Islanders are citizens of New Zealand, and the Cook Islands are part of the British Commonwealth. The Cook Islands have a well-established offshore sector known for its good asset protection features. Financial transactions through the Cook Islands' offshore center have received increasing international attention because of alleged ties to Russian criminal activities. The offshore services available in the Cook Islands include International Business Companies (IBCs), banks, insurance companies, and trusts. Marketers of offshore services via the Internet promote the Cook Islands as a favored jurisdiction for establishing IBCs and for its asset protection trusts. The anonymity and confidentiality offered to financial transactions through Cook Islands IBCs appear to be particularly attractive to those linked to money laundering and other questionable activities, and may also account for the recent increase in Russian financial activity.
The International Companies Act of 1981 (amended 1982) is the legislative basis for establishing IBCs in the Cook Islands. The Act does not require the disclosure of beneficial ownership, permits bearer shares, allows the marketing of shelf companies, and allows no public access to registers of corporate directors or managers. In fact, before a corporation's records can be examined in the Companies Office Registry, the corporation must give approval in advance. Corporate documents must be written in English. Corporate entities may be listed as officers and shareholders since Cook Island IBCs have all the legal powers of a natural person except for engaging in banking and insurance activities (unless specifically licensed under the Offshore Banking Act or the Offshore Insurance Act). Resident corporate directors are not necessary, although a registered office and resident company secretary are. There is a requirement to file an annual return, but audited accounts are not required.
Although marketers of offshore services via the Internet promote the Cook Islands as a favored jurisdiction for establishing IBCs, they rate the Cook Islands as a poor choice for private international bank licenses because of regulatory controls and high capital requirements An alternative does exist: to register as an International Investment Bank (IIB) that performs investment and most functions of a traditional bank with the exception of accepting deposits. Annual licensing fees for IIBs are also much lower than for normal banks.
The Cook Islands criminalized money laundering for all serious offenses with the adoption of the Offshore Industry (Criminal Provisions) Act of 1993. The Cook Islands also adopted the related Offshore Industry (Criminal Provisions) Act of 1995-96 that provides for the protection of the Cook Islands offshore industry from serious criminal activity. The major provisions of the Offshore Industry (Criminal Provisions) Act 1995-96 apply to the six trustee companies through which all offshore transactions are conducted. These trustee companies are licensed by and maintain a close relationship with the government.
The Offshore Industry Act requires officers and employees of the trustee companies to report suspicious activities of business entities to the Cook Islands Monetary Board (Board). The suspicious activity must be related to narcotics trafficking, or the trustee companies must have actual knowledge that a person related to or involved with the business entity has been convicted of a serious crime listed under the Crimes Act of 1969. The trustee companies must provide any additional information required by the Board to substantiate the suspicion. The Board may then petition a judge of the High Court, in camera, who may then issue a court order, after due inquiry, for the offshore entity to be struck off, de-licensed, or de-registered from the appropriate register and prohibited from carrying out business in the Cook Islands. The High Court may, as part as the court order, dispose of the assets of the business entity.
Part of the asset protection attraction for setting up offshore entities in the Cook Islands is the near impossibility of proving the criminal origins of proceeds, especially of offenses committed abroad, in court. Linking criminal proceeds seized in the Cook Islands with the offense committed abroad is all but impossible, since a case may involve a complex series of financial transactions conducted by related corporations operating in several offshore jurisdictions. In addition, Cook Island investigators and prosecutors are unfamiliar with investigating these schemes. Enforcement of foreign court rulings is also a near impossibility under current Cook Islands legislation. These obstacles prevent successful prosecutions and effective cooperation with foreign counterparts for money laundering. It must be emphasized that the Act of 1995-96 is aimed at the safety and soundness of the offshore industry, rather than a means to prosecute persons engaged in money laundering.
The Cook Islands should draft additional anti-money laundering legislation that institutes measures such as suspicious transaction reporting requirements, among others, to monitor abuse of its offshore and onshore financial institutions. The standard of proof required by the Offshore Industry (Criminal Provisions) Act of 1995-96 to disbar offshore entities is too stringent for it to be an effective regulatory tool. The Cook Islands should also lift corporate secrecy for money laundering and applicable criminal investigations. Training should also be considered for Cook Island investigators and prosecutors in complex international financial transactions typical of money laundering schemes.
Costa Rica (Concern). Costa Rica is an attractive site for money laundering. Anecdotal evidence suggests that financial institutions, currency exchange houses, casinos and real estate have been used to facilitate money laundering. The absence of stringent regulatory and supervisory controls for the offshore banking sector continues to constrain law enforcement efforts and renders the financial sector vulnerable to financial crime. The sector consists of 20 foreign corporations (financial entities) and approximately 24 offshore branches of Costa Rican private banks. The foreign offshore banks adhere to the regulations established by their parent banks located outside of Costa Rica but are not subject to effective local supervision. In addition, they are required only to provide monthly balance statements and year-end audited statements to General Superintendent of Financial Entities (SUGEF).
The Costa Rican government is committed to implementing and enforcing the anti-money laundering mechanisms available through Law No. 7786 on Narcotics and Psychotropic Substances of May 1998. This law criminalized the laundering of narcotics-related proceeds and introduced requirements for the reporting of suspicious transactions, currency transactions over $10,000, and cross border transport of currency. The law also established the Joint Counternarcotics Intelligence Center (CICAD), which since June 1998 has been operating a Financial Analysis Unit (FAU) responsible for receiving and analyzing suspicious financial transaction reports and investigating money laundering. Financial institutions report the suspicious financial transactions to SUGEF, which subsequently forwards the disclosures to the FAU. In June 1999, the FAU joined the Egmont Group. The FAU exchanges information with its counterparts and is currently pursuing about 20 cases for investigation.
The Narcotics Law also strengthened the asset forfeiture program by restructuring and reorganizing the National Drug Center (CENADRO), the institution responsible overseeing the asset forfeiture program and for granting permission to law enforcement agencies to dispose of forfeited assets. CENADRO is currently arranging for the disposition of substantial assets seized as a result of the narcotics-trafficking investigation on the Hidalgo Vargas brothers.
An extradition treaty is in force between the United States and Costa Rica. U.S. law enforcement agencies work effectively and in partnership with Costa Rican public security forces in counternarcotics and money laundering investigations. Although corruption is not a serious problem in Costa Rica, the government is creating a Special Anti-Corruption Unit within the Office of the Attorney General to improve its ability to investigate and refer cases of corruption to the prosecutor.
The absence of an effective regulatory and supervisory regime for the offshore banking sector in Costa Rica remains a cause for concern. In addition, the Costa Rican government should consider expanding the scope of present anti-money laundering laws beyond narcotics to include proceeds from all serious crimes.
Cote d'Ivoire (Other). Cote d'Ivoire is an important regional financial center in West Africa, but not a tax haven nor an offshore financial center. Drugs and money continue to pass through Ivoirian ports and across porous borders, along with other smuggled goods, including light arms and stolen vehicles. To the extent money laundering exists, most results from trafficking in narcotics, principally heroin and cocaine. Money laundering is concentrated in the banking system and controlled by organizations other than local traffickers. Financial fraud is mostly limited to Nigerian-type scams aimed at foreigners, and endemic smuggling of contraband does not generate profits substantial enough to require laundering. The government does not encourage, facilitate, or engage in drug money laundering activities, nor does it license offshore banks and businesses.
Laundering of money related to any activity is a criminal offense in Cote d'Ivoire. Banks are required to report suspicious transactions and maintain records of large currency transactions and to report the data to the government, which may inspect their records. Bankers are protected by law with respect to their cooperation with law enforcement entities. Money laundering controls are not applied to non-banking institutions. The government has not addressed the problem of international transportation of illegal-source currency and monetary instruments. There are controls on the amount of currency that can be brought into and out of Cote d'Ivoire There were no arrests or prosecutions reported for money laundering in 1999.
The Government of the Cote d'Ivoire (GOC) has enacted an asset forfeiture and seizure law, which can encompass mobile and immobile property, bank accounts and legitimate businesses used to launder drug money. The law makes no provision for sharing seized assets with other governments, nor does it allow for civil forfeiture. The government has yet to apply existing drug-related asset seizure and forfeiture laws. The police lack adequate resources to track and seize assets.
According to post reporting, the GOC would respond favorably to a specific request for cooperation, to the extent feasible, but it has not entered into bilateral agreements with any countries for the purpose of exchanging information on money laundering. The government has, to date, not been formally requested to cooperate with any law enforcement agency of the U.S. Government in investigating financial crimes related to narcotics.
Croatia (Other). Croatia is not a major financial or money laundering center. Croatian money laundering activities tend to be connected to financial crimes, such as tax evasion, financial and privatization fraud, bribery and corruption, rather than the laundering of narcotics proceeds. Croatia is developing a legal structure that should help it address money-laundering problems.
Turbulent political conditions in the Balkans and a cash-based economy create concerns that the banking sector could be vulnerable to money laundering. In response, Croatia criminalized money laundering in the 1997 penal code and the 1997 anti-money laundering legislation. The anti-money laundering legislation established suspicious transaction reporting requirements for bank and non-bank financial institutions and required the reporting of any currency transaction, or a series of related transactions, exceeding $17,500. The government also established criteria for suspicious transactions. The legislation provided for the establishment of a financial intelligence unit (FIU) within the Ministry of Finance. The government plans to amend other laws, such as the foreign exchange laws, to complement the anti-money laundering measures, and to adopt common law-based enforcement tools and other techniques.
U.S. law enforcement sources report that casinos, currency exchange houses, real estate companies and banks are used in Croatia to launder funds. Monetary instruments involved include cash, bank drafts, travelers checks, credit cards, wire transfers, and letters of credit. Croatian banks have been used to launder funds from foreign sources, such as funds transferred from Russian to Croatian banks.
In September 1999, Croatia underwent a mutual evaluation, conducted by the Council of Europe's PC-R-EV. At the request of Croatian authorities, the U.S. Government supported Croatian participation in a regional 1998 conference on FIU development and scheduled training on operating an FIU. With an improvement in capabilities, Croatia will be in a favorable position to contribute to the international anti-money laundering effort.
Cuba (Other). Cuba is not an international financial center and there is no evidence of significant money laundering. The Cuban peso is not accepted outside Cuba. The Cuban government controls all Cuban banks. However, Cuban government officials have expressed concern about the potential for money laundering. Cuba's National Assembly passed legislation criminalizing money laundering in February 1999. The law makes it a crime for anyone who knows, or is in a position to know, that goods or proceeds are derived from criminal activities, to seek to hide the true ownership, nature, origin or location. The long-awaited law stipulates that persons found guilty of laundering money acquired illegally through the sale of drugs, arms, or persons are subject to penalties ranging from five to twelve years in jail. Persons entering Cuba are required to declare the amount of currency they bring into or out of the country. The Cuban Central Bank has issued guidelines encouraging banks to "know their customers", to investigate unusual transactions, and to ask bank customers to declare the source of funds for any transaction greater than $10,000.
The Cuban government retains all property seized for, or suspected of being linked to, narcotics trafficking. There were no published reports of asset forfeitures in 1999.
Cuba has solicited assistance in combating money laundering from numerous countries. France and Spain are likely to be the first countries to start cooperation and training programs with Cuba.
Cuba became a party to the 1988 UN Drug Convention in 1996.
Cyprus (Primary). Cyprus is a major regional financial and tourist center, and as such remains vulnerable to money laundering activity. Cypriot officials state that burglary, theft, fraud and drug trafficking are the major sources of proceeds to be laundered. Other financial crimes that present major problems include credit card fraud, the use of stolen or fraudulent cards, and the manipulation of data from stolen credit or ATM cards. Nigerians have also attempted to carry out their advanced-fee fraud in Cyprus. It is possible that money launderers use the legitimate facilities of Cyprus to further their activities in other countries.
Cyprus has taken strong and concrete steps to upgrade its anti-money laundering regime. Its seminal 1996 anti-money laundering law (The Prevention and Suppression of Money Laundering Activities Law) criminalized non-drug-related money laundering; provided for the confiscation of proceeds from all serious crime; codified actions which banks and financial institutions must take, including customer identification; and mandated the establishment of a financial intelligence unit (FIU). (An earlier law had criminalized drug-related money laundering). A 1998 amendment to the 1996 law extended the list of predicate offenses (to include trafficking in women, terrorism, trafficking in human organs, attempted murder, and nuclear proliferation), addressed the topic of corruption in government, and facilitated the exchange of financial information with other FIUs and the sharing of assets with other governments. A 1999 law criminalized the counterfeiting of bank instruments, certificates of deposit, and notes.
Cyprus established its FIU (the Unit for Combating Money Laundering) in January 1997 to receive and investigate suspicious transactions. The 14-member Unit is comprised of representatives from the Attorney General's Office, Customs, and Police, as well as support staff. Its statutory authority directs it to evaluate evidence generated by the Unit member organizations and from elsewhere to determine if investigation is necessary. Since its inception, the Unit has investigated over 237 suspected cases of money laundering (half referred by other governments). During the period January 1997-December 1999, the unit obtained 13 court orders to freeze bank accounts and other assets for a total of over $15 million, as well as 166 disclosure orders. There have been two money laundering convictions in Cyprus since 1997, and three cases are coming to trial. In a highly-publicized case, the former Bishop of Limassol was charged by Cypriot authorities with conspiring to defraud a British-based investor of $3.7, a crime that also involved the laundering of assets.
The Unit also conducts anti-money laundering training for Cypriot police, bankers, accountants, and other financial professionals.
Cyprus made further progress in 1999 in the fight against money laundering. Authorities froze assets totaling $2 million in the course of the year. The Central Bank issued a comprehensive handbook of its guidance notes to commercial banks, and conducted a special examination of each bank's know-your-customer policy in March and April.
Cyprus restricts the percentage of foreign ownership of property, and places controls on the transportation of currency and bullion. Cypriot law requires that all cash entering or leaving Cyprus in the amount of $1,000 or more must be declared, and any such declarations over $10,000 are sent to the Investigations Section of Cypriot Customs. In connection with its hoped-for EU accession, the Government of Cyprus (GOC) supports liberalization of the financial system, including lifting the cap on interest rates and removing restrictions on capital controls. All banks and financial institutions (as well as the insurance industry, stock exchange, cooperative banks, lawyers, accountants and other financial intermediaries) must report suspicious transactions to the Unit for Combating Money Laundering. Banking institutions must report to the central bank all cash deposits over $10,000. A declaration form must accompany all foreign currency deposits. In 1998, the central bank instructed banks and financial institutions to pay special attention to all complex, unusual large transactions, and to report electronic funds transfers in excess of $500,000 per month for a single customer. There are no statistics available on compliance with these regulations.
Cyprus's offshore sector consists of 34 banks, 100 financial services companies, seven management companies of collective investment schemes, and 15 offshore trustee companies. The central bank has in place a strict regulatory framework aimed at preventing abuses, and offshore banks are required to adhere to the same legal, administrative and reporting requirements as domestic banks. The central bank states that prospective offshore banks face a detailed vetting procedure to ensure that only banks from jurisdictions with proper supervision will be allowed to operate in Cyprus. Offshore banks must have a physical presence and not be brass plate operations. Once they are registered in Cyprus, they are subject to a yearly onsite inspection by the central bank. Offshore banks are generally restricted to foreign currency business outside Cyprus, although they may accept deposits and make loans in foreign currency to residents if the resident has obtained an exchange control permit from the central bank.
There are nearly 41,000 international business corporations (IBCs) registered in Cyprus, but the central bank stated in June 1999 that more than half of these are dormant. Only 12,000-14,000 are active, and only 1,057 employ any staff on the island, i.e., have a physical presence. According to post reporting, Russian IBCs constitute a "significant" fraction of the total. Beneficial ownership is permitted, but a list of the names of the beneficial owners is maintained at the central bank. The central bank needs to continue to upgrade its capabilities for tracking beneficial ownership. The names of beneficial owners may be released to law enforcement under a court order. Bearer shares are not permitted, and IBCs must file annual reports. The popularity of the offshore sector can be explained at least partly by the fact that Cyprus has dual-tax treaties with 26 nations, including Russia. Profits of Cypriot offshores are taxed at a rate of only 4.25 per cent, there is no tax on dividends, and foreign employees of the offshores pay only half the normal Cypriot income tax rate. IBCs may keep freely transferable currency accounts both abroad and in Cyprus. If the IBC is registered as an offshore partnership, the partnership profits are tax-free
Cyprus is a party to the 1988 UN Drug Convention. It is a member of the Egmont Group of FIUs and the Council of Europe's PC-R-EV. It is also an active member of the OGBS. In November 1999, the GOC hosted a money laundering seminar conducted by a multi-agency U.S. Government team. The seminar focused on Russian Organized Crime, "cybercrime" (such as Internet gaming and credit card fraud), and investigative methods.
In light of the GOC's stated and commendable dedication to combating money laundering, the central bank needs to continue to focus on meeting the increasing supervisory challenges of the offshore sector and on increasing its transparency. In particular, it should ensure that law enforcement has easy access to the names of beneficial owners of IBCs. In addition, commercial banks, when confronted with questionable deposits, must aggressively report such transactions instead of merely turning them away, as is sometimes the case now. They must also overcome any reluctance to share information with the central bank.
[Cyprus has been divided since the Turkish military intervention of 1974, following a coup d'etat directed from Greece. Since that year, the southern part of the country has been under the control of the Government of the Republic of Cyprus. The Northern part is ruled by a Turkish Cypriot administration that in 1983 proclaimed itself the "Turkish Republic of Northern Cyprus". The U.S. Government recognizes only the Government of the Republic of Cyprus.]
The "Turkish Republic of Northern Cyprus", which is recognized only by (and receives massive cash infusions from) Turkey, is at risk for money laundering because of the presence of a network of 24 essentially unregulated casinos, as well as suspected narcotic links with Turkey. There is also a small offshore sector comprising 40 banks and 12 international business companies. Turkish Cypriot officials believe that any money laundering that takes place most likely does so in the casinos, through such traditional methods as buying chips and never playing them, or customers "playing" each other in rigged games. Drugs are a major source of illegal proceeds, and cash smuggling is also a problem.
A new anti-money laundering law, based on EU norms and on U.S. anti-money laundering statutes, was enacted in November 1999. Under the new law, banks, financial institutions and foreign exchange dealers must report all cash transactions over $20,000 and suspicious transactions in any amount. They are to be on the lookout for structuring and to maintain records for 12 years. The law contains a safe harbor provision. Banks must follow a know-your-customer policy and require customer identification. The suspicious transaction reports will be filed with a central multi-agency committee that apparently will function as an FIU and have investigative powers.
Turkish Cypriot banking authorities work closely with the Central Bank of Turkey-the local currency is the Turkish lire, and interest rates are pegged to those in Turkey. These authorities receive reports on all cash transfers in or out of the area, as well as all transfers over $100,000. They supervise and audit (on a yearly basis) the 35 domestic banks in operation. However, the small (8 people) auditing staff is insufficiently trained.
The 40 Turkish Cypriot offshore banks may not deal in cash, only in fund transfers, and may not conduct business with residents. They are not audited and their records are not publicly available. Offshore banks are not subject to the new anti-money laundering law, but a draft bill in the pipeline will reportedly restrict the issuing of offshore licenses to those banks already having licenses in an OECD country.
The new anti-money laundering law is too recent for an evaluation of its effectiveness. In the interim, Turkish Cypriot officials need to set up a system of regulation for the casinos and obtain intensive training for bank examiners. They should also develop a prudent supervisory regime for its offshore sector.
Czech Republic (Concern). Due to a combination of economic and geographic factors, the Czech Republic has become a location for transnational crime. This is especially true for narcotics trafficking, originating mainly from the Balkan region but also from the Middle East, South Asia and South America. Besides narcotics trafficking, other sources of illegal proceeds include smuggling, auto theft, arms trafficking, financial fraud related to tax evasion, tax fraud, embezzlement, racketeering, prostitution, and trafficking in illegal aliens. The Czech Republic remains a predominately cash intensive economy, and the continued availability of anonymous savings accounts in the form of bearer passbooks may be a vehicle for money laundering. Financial institutions used to launder proceeds include banks and non-bank financial institutions such as currency exchanges, casinos, other gaming establishments, investment companies, and real estate agencies. Monetary instruments used to launder proceeds include cash, bank drafts, and stocks and bonds. Domestic and foreign organized crime groups play a major role in money laundering activities.
The Czech Republic's anti-money laundering legislation, Act N?61/1996 Concerning Some Measures Against Legalization of Proceeds of Criminal Activity and Amending Legislation Thereto, became effective on July 1, 1996. Money laundering was criminalized by the addition of Articles 251 and 251a to the Czech Criminal Code on September 1, 1995. The criminal provisions apply to all proceeds derived from all serious crimes. The Czech Government, recognizing deficiencies in the law, submitted to Parliament in November 1999 a package of legislative amendments that would, among other things, eliminate bearer accounts, extend access to tax records, and increase prison sentences for money laundering convictions. The legislative amendments are expected to pass by year-end 2000. They are designed to meet EU standards and requirements for FATF membership, for which the Czech Republic applied in October 1998.
The anti-money laundering law provides for a definition of money laundering, the types of transactions and financial institutions covered by the law, customer identification, recordkeeping requirements, unusual disclosure (suspicious transaction) reporting, a financial intelligence unit, and the establishment of internal rules for financial institutions to implement an anti-money laundering program.
The Financial Analysis Unit (FAU) of the Ministry of Finance is the organization having jurisdictional responsibility for money laundering violations. It serves as the Czech Republic's financial intelligence unit (FIU). Provisions for this unit were made in the Czech Republic's anti-money laundering legislation. Ministry of Finance Decree N?183 formally established the FAU. The decree specifically outlines how financial institutions are to comply with requirements for reporting unusual transactions to the FAU.
According to the Czech anti-money laundering law, a financial institution reporting an unusual transaction may not effect the client transaction earlier than 24 hours after receipt by the FAU of the disclosure. If the FAU requires a longer period of time to analyze the unusual transaction, it may instruct the financial institution to delay the transaction of a period of up to 72 hours after receipt of the disclosure by the FAU. The FAU must inform the financial institution within this 72 hour time frame if it intends to file a complaint with the General Prosecutor's Office, and if so, the financial institution must wait an additional 72 hours for instructions from the prosecuting authorities as to the disposition of the assets relative to the transaction. The financial institution may effect the transaction after 72 hours if it receives no further instructions from the FAU. The Czech unusual transactions reporting system does not preclude banks from contacting the criminal police if there is a strong indication of criminal violation.
The Czech Republic participates in the Council of Europe's PC-R-EV, and the FAU is a member of the Egmont Group.
The Czech Republic and the United States signed an MLAT in December 1998 that was ratified by the U.S. Senate in January 1999, and by the Czech Parliament in November 1999.
The Czech Republic has established a good legislative basis for anti-money laundering in a relatively short time. As its money laundering regime was implemented, areas for improvement were recognized by Czech authorities, who are completing the corrective legislation.
Denmark (Other). Although Denmark is a major financial center, money laundering is not considered to be a significant problem. Danish banking procedures are transparent and are subject to government review and high taxation, both of which discourage prospective money launderers and minimize improper use of the banking system. Laws enacted in 1993 require banks and other financial institutions to record and report the identities of customers engaging in large or suspicious cash transactions. These records must be maintained and made available to appropriate government authorities.
Danish law includes asset seizure and forfeiture provisions; however, this legislation applies to drug-related criminal cases only and there are no civil forfeiture provisions. Danish law limits asset forfeiture to the proceeds of a crime, and to instruments of crime such as vehicles for transporting drugs. Farms used for drug crop cultivation typically are not subject to forfeiture. Forfeited assets may not be used by law enforcement agencies, nor can Denmark share assets internationally. There were no significant asset seizures in 1999.
Denmark is a party to the 1988 UN Drug Convention. It enacted laws in 1993 to implement the EC Directive on Measures to Prevent the use of the Financial System for Money Laundering. Denmark is a member of the FATF and the Council of Europe. Its financial intelligence unit (FIU) participates in the Egmont Group of FIUs.
Dominica (Primary). Like other eastern Caribbean countries, Dominica has sought to compete in the market for financial services. In addition to offering the traditional offshore services with promises of confidentiality, low fees, and little government supervision, Dominica has also increased the number of economic citizenships granted. As a result, Dominica is increasingly attractive to international criminals and money launderers.
Dominica has greatly expanded its offshore services in the past several years, with the Offshore Banking Act 1996, the International Business Companies Act 1996, and the Exempt Insurance Act 1997. The International Exempt Trust Act 1997 allows establishment of Asset Protection Trusts that restrict seizure, expropriation or confiscation of assets by foreign authorities. The government offers Internet gaming and rapid processing of Internet gaming license applications, and is considering an Open Ship's Registry and Free Port legislation, which would establish individual tax-free locations, such as an office or building. A government-sponsored web-site advertises "asset security and protection from seizure" and "total anonymity and confidentiality." Companies can be registered on-line, and bearer shares are available. These advertisements appear to attract business, as government figures in 1999 showed an expansion of the offshore sector and indicated at least $3.5 million in revenue in 1998. The Ministry of Finance reported it had incorporated 5,800 international business companies (up from 4,600 last year), 6 offshore banks (up from 5), and 20 Internet gaming companies (up from 5). The Exempt Trust Act came into effect in 1999, and one company and six trusts were registered. The International Business Unit of the Ministry of Finance screens applications for offshore banks, but oversight of banks and businesses is minimal.
Dominica also offers economic citizenship, a phenomenon in the offshore market that has caused increasing suspicion from international law enforcement. In return for a $50,000 direct payment, or $75,000 in government bonds, applicants acquire citizenship, a passport, and possibly a new name. The process for obtaining economic citizenship in Dominica remains very loosely regulated, and Dominican officials apparently do not maintain proper control over the program. Between 200 and 300 Russians reportedly purchased citizenship by 1998, increasing suspicions of Russian money laundering activities on the island. As a result of the negative publicity this has aroused, Dominican officials claim they have stopped granting citizenships to Russians, but a review of the most recent gazettes indicates otherwise. The press reported that Dominica sold a citizenship to Australian fugitive Christopher Skase, who is charged in Australia with financial crimes. Dominica claims to have officially about 1,000 economic citizens, with fewer than 100 actually living on the island. Most of those who live in Dominica are from China and Taiwan, and the program has also come under fire as a method for Chinese or other foreign nationals to become Dominican citizens and then to enter Canada and, ultimately, the United States, without visas. Currently Canada does not require visas for Dominican citizens, as both are members of the Commonwealth, but it is considering imposing visa requirements for countries with such schemes.
Dominica is a member of the CFATF, and underwent a CFATF mutual evaluation from 12-16 April 1999.
Dominica has criminalized money laundering and placed controls on the export of money. It requires banks to report unusual foreign exchange transactions. The United States ratified the Dominica-U.S. MLAT in January 1999. The new Government of Dominica, which came into power after an election on January 31, 2000, has indicated its interest in expeditiously bringing the treaties into force.
The rapid expansion of the offshore sector without proper supervision makes Dominica fertile ground for money laundering and other financial crimes. The government of Dominica needs to enact and enforce comprehensive anti-money laundering measures, including strict regulation of the economic citizenship program, to protect the country and its financial sector from the risk of abuse by international criminals.
Dominican Republic (Primary). The Dominican Republic is a burgeoning commercial exporter, and remittances from Dominicans abroad reached $1.4 billion in 1999. Opportunities abound for the smuggling of drugs and the laundering of money. The main source of foreign exchange is dollars generated by the tourism industry, free zone companies and remittances from Dominicans living in the United States. Cash obtained from the illegal drug trade is brought into the Dominican Republic utilizing these sectors to facilitate money laundering. The Dominican Republic has financial institutions which engage in currency transactions involving international narcotics proceeds that include significant amounts of U.S. dollars. The Government of the Dominican Republic (GODR) is cognizant of the problem but still lacks a coordinated strategy to effectively combat money laundering.
In 1995, the Dominican Republic enacted drug money laundering and forfeiture laws based on the OAS/CICAD Model Regulations on money laundering. These laws provide for both domestic remedies and international cooperation. The law also requires financial institutions to establish "know your client" programs and to report suspicious and large currency transactions to the bank superintendent's office. The law gives the superintendent's office broad supervisory and information-gathering authority over all financial institutions in the country, including exchange houses and remittance institutions. A financial intelligence unit receives and analyzes the suspicious activity reports filed by the financial institutions; however, further efforts need to be directed at the quality of the analysis and the unit's timely sharing of information with the National Drug Control Directorate (DNCD).
The DNCD has responsibility for investigating narcotics-related money laundering and has authority to request the cooperation of all other government departments. It has established an operating financial investigative unit. The DNCD aggressively pursues and arrests individuals involved in the financing of illegal activities and the sale and transport of illegal substances.
In 1995, the GODR also enacted comprehensive forfeiture laws for narcotics offenses and narcotics-related money laundering. These provisions, based on the OAS/CICAD Model Regulations, provide for preventative seizures, criminal forfeiture of drug-related assets, and international cooperation in forfeiture cases. The law also permits provisional use of seized assets pending forfeiture, which can create opportunities for abuse. In 1999, Dominican authorities confiscated $94,687 in U.S. currency, Dominican currency worth approximately $1,926,852 and 353 vehicles worth approximately $4.5 million, as well as 33 residential and business properties linked to narcotics-related crimes. The Dominican National Drug Council now holds seized assets in excess of $40 million but has no mechanism to manage the divestment of the assets. Dominican authorities provided assistance to U.S. law enforcement's 1997 seizure and 1999 forfeiture of three aircraft related to the narcotics trafficking of Luis Cano.
With the assistance of the United States, the GODR is currently working on a new draft law that would criminalize money laundering related to other serious crime and institute substantial reforms to its asset forfeiture procedures. The draft legislation is tentatively scheduled for congressional debate in early 2000.
The GODR is a member of the CFATF and underwent a CFATF mutual evaluation in 1997.
In order to meet international anti-money laundering standards, the GODR needs to enact and fully implement an enhanced money laundering law as soon as possible.
Ecuador (Concern). During 1999, Ecuador suffered a major financial and economic crisis when most of its principal banks collapsed and required Government intervention. At the end of 1999, the Government controlled 75 percent of the country's banking sector, capital flight was widespread to the extent that savings accounts were frozen to control further capital flight, and the national currency was sharply devalued. This precarious economic situation reduced the attractiveness of Ecuador as a site for money laundering, particularly through the banking sector. However, due to Ecuador's proximity to drug-producing countries such as Colombia and Peru, some narcotics-related money laundering may be taking place, primarily through the real estate market.
Because the Government of Ecuador (GOE) was focusing its efforts on the severe financial and economic crisis, it carried out almost no investigations of money laundering during 1999, and introduced no new legislative or regulatory mechanisms. Ecuador's current anti-money laundering program continues to be ineffective despite the fact that narcotics-related money laundering is illegal under the 1990 Narcotics Law (No. 108), there are recordkeeping and reporting requirements on suspicious financial transactions and those over $10,000 (in cash or stock), and two operational financial investigations units exist. A series of conflicting statutes severely limits information sharing among the various GOE agencies with jurisdiction over money laundering matters. For example, the Bank Secrecy Law limits the information that a financial institution can directly provide to the police during a money laundering investigation. The Banking Procedures Law restricts information sharing on private accounts to the Superintendency of Banks, and the Criminal Defamation Law imposes sanctions on banks and other financial institutions that provide information on accounts to police or advise the police of suspicious transactions. This results in banks and financial institutions generally refusing to honor requests for financial information (through court orders) from the National Police, claiming that they are answerable only to the Superintendent of Banks. In turn, the Superintendent of Banks will not accept requests for information directly from the police, but responds to such requests only if they come from the National Drug Council (CONSEP).
The National Police operate a financial investigations unit that has received added personnel and DEA-sponsored financial investigations training. The CONSEP also has a financial unit, and the Superintendent of Banks is considering establishing one. In 1994, the GOE and the United States entered into an asset sharing agreement that allows each country to share assets seized from narco-traffickers. During December 1999, the CONSEP convened meetings to begin interagency consideration of a major reform to the Drug Law (108) that would criminalize money laundering as a stand alone crime, as well as establish procedures for the authorization of investigative techniques such as controlled deliveries, undercover operations and wiretapping.
The GOE has achieved some progress in combating corruption and enhancing the judicial system. The 1990 Narcotics Law contains provisions for prosecution of any GOE official, including judges, who deliberately impedes the prosecution of anyone charged under this Law. In collaboration with the United States, the Chief Prosecutor's Office has agreed to establish a special task force to work with the police in pursuit of corruption cases. In November 1999, the National Judicial Council fired two judges who prematurely released from custody two suspected drug traffickers, and has began investigations on other court employees involved in the case. In November 1999, the Ecuadorian Congress enacted a new Code of Criminal Procedure that is intended to fundamentally change Ecuador's criminal justice system from an inquisitorial to an accusatorial-style system. It gives powers to the Fiscalia to investigate and prosecute crimes, and changes the role of judges to that of neutral arbiters presiding over oral trials.
The GOE should finally clarify the existing legislative framework that continues to hinder the effective exchange of financial information for use in criminal investigations. Once it has resolved these legal conflicts, the GOE should consider establishing a joint task force, with participation by the financial investigative units already existent within the National Police and the CONSEP, that would conduct joint investigations and foster better interagency working relationships.
Egypt (Concern). Egypt is not considered a major financial center, and although it has bank secrecy laws, it is not an offshore center or a tax haven. There are no customer identification requirements for financial institutions in force, or any other type of anti-money laundering obligations. Presidential Decree Law No. 205 of 1990 concerning the Secrecy of Bank Accounts states that "all accounts, deposits, trusts and safes" in banks are to be "maintained secret". No access is allowed, nor is any information to be divulged, except with the written permission of the owner or his agent. Such a prohibition is in force even if the relationship between the client and bank is terminated. Names of account owners are anonymous-known only to bank officials. The only exception to bank secrecy is when felonies or misdemeanors are involved, in which case the Egyptian Attorney General may seek from the Cairo Court of Appeal access to account information, provided there is "serious" proof of such an offense. The Egyptian Anti-Narcotics General Authority (ANGA), which maintains a unit specifically charged with investigating financial crimes related to narcotics trafficking, states that bank authorities cooperate fully with law enforcement once a court order is obtained, and that banks maintain records adequate for a thorough investigation.
There is no significant black market in Egypt. About 70 per cent of money laundering is believed to be generated by drug trafficking and the rest by organized crime and terrorism. Narcotics-related money laundering usually takes the form of investment in real estate or business ventures. In a typical scheme, a money launderer will invest through a middleman (usually a relative or a trusted friend.) Money launderers rarely use the Egyptian banking system, partly due to a cultural mistrust of banks and partly due to fears that banking records (despite the bank secrecy law) would provide Egyptian authorities with readily available investigative tools.
An anti-money laundering law is pending in the Egyptian Parliament. In the interim, prosecutors are making use of a 1971 law that targets those who make money through any illegal activity ("The Law of the Socialist Prosecutor"). This law allows prosecutors to impound for up to five years the cash and property belonging to a criminal and his immediate family. The highest Egyptian criminal court, the Court of Ethics, then determines whether the impounded property was obtained as a result of illegal activity and therefore forfeit. Seized assets go directly to the Egyptian treasury. A bill is pending in Parliament under which a portion of the assets seized in narcotics cases would go to ANGA for operational use. The ANGA unit which investigates the financial aspects of narcotics trafficking will have responsibility for enforcing the anti-money laundering legislation if and when it is enacted.
In order to protect its economy from financial crime, Egypt should move swiftly to pass its draft anti-money laundering law and to issue the necessary complementary financial regulations for its financial institutions.
El Salvador (Concern). The Salvadoran banking system remains one of the largest in the region, and maintains important financial contacts with neighboring countries, Mexico, the Caribbean, and the United States. The growth of El Salvador's financial sector, its stable currency and an increase in narcotics trafficking activity in the region continue to make the country fertile ground for money laundering. Throughout 1998 and 1999, the government of El Salvador has continued to demonstrate its commitment to fight this threat.
The El Salvadoran Government took a significant step forward with the passage of the comprehensive "Law against Laundering of Money and Assets (Decree No. 498)" in December 1998 and the adoption of implementing regulations in January 2000. After a financial scandal in 1997 exposed weaknesses in the banking system, the government and financial sectors agreed on the need for new legislation and worked with U.S. officials to develop a comprehensive money laundering bill. During bilateral law enforcement discussions in August 1999, the U. S. Government praised the government's initiative.
The new law applies to a wide range of financial institutions, including banks, exchange companies, stock exchanges, insurance companies, credit card companies, casinos and real estate transactions. It criminalizes money laundering related to drug trafficking or any other criminal activity. It requires these institutions to identify their customers, maintain records for five years, train their personnel in money and asset laundering, and establish internal auditing procedures. They must also report suspicious transactions and transactions exceeding $57,000 to the Salvadoran financial investigations unit, also established in the law. The new unit will be housed within the Attorney General's office and will analyze these financial disclosures and investigate alleged money laundering violations. The law also lifts bank secrecy for money laundering investigations and contains penal sanctions, fines, and asset forfeiture provisions.
Throughout 1999, the GOES continued to work with the banking sector and U.S. Treasury officials to implement the new law and establish the financial investigations unit. The new Attorney General designated office space for the investigations unit and named a person to head the unit, which will consist of prosecutors, investigators, analysts and support staff. There are plans to expand the unit once it is fully operational. The unit staff recently visited similar units in Costa Rica and Mexico for initial training and organizational ideas. The U.S. Government has provided funding for computer and office equipment, and initial training programs for Salvadoran analysts, bankers, and investigators.
In a complimentary move, in January 2000 the National Civilian Police announced the creation of a specialized police unit to work in conjunction with the financial investigations unit. Officers drawn from the anti-narcotics, financial and criminal investigations divisions will staff the new police unit.
El Salvador is a party to the 1988 UN Drug Convention. The government has expressed interest in having its financial investigations unit join the Egmont Group.
Estonia (Other). Estonia has the strongest, most developed banking system of the Baltic states; however, it has had a money laundering problem since the early 1990s. Estonian financial institutions have been linked to the laundering of questionable foreign funds, especially from Russia and other members of the Commonwealth of Independent States. Estonia is a significant Russian trading partner, but much of the "trade" may be only a shell for the movement of funds. Corruption is a problem at the local level.
Banks may participate in other financial activities such as leasing, insurance and brokerage.
Estonia's new law against money laundering came into effect in July 1999. Under the new law, Estonian banks are now required to notify the government of cash deposits or withdrawals in excess of about $7,500 ($15,000 for non-cash transactions). However, Estonia's central bank only recently established a unit to act as a repository for this information. Criminal proceedings have been instigated in only one case of suspected money laundering. Nonetheless, the recent consolidation of the banking sector, and the takeover of Estonian banks by other European banking interests (mainly Swedish), give rise to hopes that the Estonian money laundering law will soon begin to operate effectively.
The Estonian police have established a money laundering department composed of a commissioner, two officers and a banking specialist.
Estonia is a June 1999 signatory of the Council of Europe's (COE) Strasbourg Convention. It is a member of the COE's PC-R-EV; field work on a mutual evaluation took place in January 2000. Estonia is not a party to the 1998 UN Drug Convention. Estonia has received U.S. anti-money laundering training, including courses offered in a Baltic regional context.
Ethiopia (Other). Ethiopia is not a significant threat with regard to money laundering and other financial crimes. Its lack of economic development makes Ethiopia unlikely to become a financial center or a haven for money launderers in the near future. Moreover, the government-owned commercial bank is the largest in Ethiopia. Although there are seven private banking companies, foreign investment in the banking sector is prohibited. Therefore, links to the international financial community, a preferred condition for attracting money launderers to a country, do not exist.
Ethiopia currently does not have money laundering or asset forfeiture legislation. Ethiopia is, however, a party to the 1988 UN Drug Convention.
Fiji (Other). There has been little information on money laundering cases in Fiji over the past few years. However, press reports indicate the possible involvement of Nigerian nationals in Fiji-based money laundering. In March 1999, Pacnews reported that the Fiji Police uncovered a financial crime whereby clients would receive a kit to print "perfect" $100 U.S. noted after sending money to an offshore bank account.
Responding to FATF concerns about Pacific Islands and their vulnerability to money laundering, the Fiji Reserve Bank has taken steps to prevent money laundering that should make Fiji less likely to be used as a money laundering site. The Fijian Reserve Bank has drawn up guidelines for licensed financial institutions to counter money laundering, effective July 1, 2000. The policy requires financial institutions to identify the ownership of all accounts. The Reserve Bank can inform the police commissioner of any suspicions of money laundering which result from on-site examinations. The police commissioner and director of public prosecutions are responsible for offenses under the Proceeds of Crime Act. The press reports that penalties for money laundering are a $120,000 fine or 20-year imprisonment for an individual, and a $6,000,000 fine for a corporation.
Fiji is a member of the Asia /Pacific Group on Money Laundering.
Finland (Other). Finland is neither a major money laundering country, a major financial center nor a tax haven. According to Finnish authorities, in 1999 they investigated even fewer narcotics-related money laundering cases than the ten minor ones investigated in 1998. In recent years, Finnish authorities continue to express concern about possible money laundering by Russian organized crime, as well as money laundering arising from fraud (including tax fraud) and other economic crimes. The money laundering provision in the Finnish Penal code covers the proceeds of all crimes, and there are no thresholds for predicate offenses.
The 1998 Act on Preventing and Clearing Money Laundering established a Money Laundering Clearing House (MLCH) at the National Bureau of Investigation (NBI) as the central unit to receive reports on suspicious transactions. The MLCH passes relevant cases to other units of the NBI or to local police for investigation. The Act also extended the suspicious transaction reporting requirement to all credit and financial institutions and to most non-bank financial institutions, including currency exchange offices, betting agencies, casinos, real estate agencies, pawnshops, insurance companies, and investment firms. There is still no plan to extend the Act to accountants or lawyers.
The MLCH serves as Finland's financial intelligence unit and participates in the Egmont Group. Finland is also a member of the FATF and the Council of Europe. Finland is a party to the 1988 UN Drug Convention.
France (Primary). France is an attractive location for money laundering due to its large economy, strong currency, political stability, central location in Europe, and international financial and transportation connections. Domestic organized crime groups are active in France's major cities, especially in Paris, Lyon, and Marseilles. Organized crime groups from the former Soviet Union also operate in France. France serves as a transit country for the movement and laundering of foreign criminal proceeds, such as narcotics trafficking proceeds sent to France by South American, North African, and Middle Eastern organized crime groups, and questionable proceeds arriving from Central and Eastern European countries. Money laundering methods prevalent in France include the use of bank deposits, foreign currency and gold bullion transactions, corporate transactions, and purchases of real estate, hotels, and works of art. Central and Eastern European money laundering schemes are characterized by exceptionally large transactions and the use of multiple jurisdictions such as the United States, other western European countries, and offshore centers. Organized crime investment in real estate is a problem because of the difficulty in identifying the source of funds.
France criminalized the laundering of proceeds from all crimes with the adoption of the Act N? 93-392 of 13 May 1996, entitled "On the Fight Against Money Laundering, Drug Trafficking and International Cooperation in Respect of Seizure and Confiscation of the Proceeds of Crime". Prior to passage of this Act, the French Penal Code and the French Customs Code criminalized money laundering as it related to the proceeds of narcotics and other serious crimes. Act N? 93-392 of 13 May 1996 made money laundering in itself a general offense.
France has also enacted numerous pieces of legislation that codify the FATF Forty Recommendations concerning customer identification, record keeping requirements, suspicious transaction reporting, internal anti-money laundering procedures and training for all French financial institutions and non-bank financial institutions.
France has recognized two major problems related to French money laundering prosecutions in general. First, money laundering is treated as a separate offense and French sentencing guidelines are weighted to the higher offense. In a case involving multiple charges that include a predicate crime and money laundering, the defendant would be sentenced based on the predicate crime since the penalty is greater than that for money laundering. The second is that some French courts do not allow for the joint prosecution of money laundering and the predicate offense because the judges consider them the same offense.
In the area of offshore investigations the French identify two major problems. These are the lack of international cooperation with offshore centers and fiscal (tax) secrecy. In order for French authorities to receive judicial assistance from many offshore jurisdictions, they are required to prove that the suspected offense is not tax related.
TRACFIN (Treatment of Information and Action Against Clandestine Financial Circuits) is France's financial intelligence unit (FIU). It was created by a government decree signed into law on 9 May 1990. TRACFIN is a specialized unit that conducts and coordinates, as necessary, investigations and administrative actions to detect perpetrators of crimes related to illegal financial networks, on both national and international levels. The unit is subordinate to the Ministry of the Economy and Budget.
TRACFIN receives and analyzes suspicious transaction reports made by French financial institutions that are subject to the reporting requirements. It therefore operates as a filter between the private financial sector and judicial/prosecutorial authorities. Upon identifying credible indicators of money laundering among the disclosures it receives, TRACFIN may provide such information to the National Public Prosecutor.
TRACFIN deals with the laundering of money derived from narcotics trafficking and organized crime activity. The unit is not an investigative agency; rather, it is an information centralizing unit responsible for receiving disclosures on suspicious financial transactions made by financial institutions and for analyzing the data received.
In accomplishing its mission, TRACFIN has a number of powers. It may block completion of a suspect financial transaction for a period of up to 12 hours. It can require financial institutions to furnish additional information on specific transactions that are deemed suspicious. It can seek additional related information from other sources, to include law enforcement records and government registries, as well as those maintained by foreign official entities. It may transmit credible information on suspect criminal financial activity to the French judicial authorities for further investigation and eventual prosecution.
TRACFIN has in place two coordinators at each of 4,000 banks or financial institutions in France. One of the coordinators is responsible for gathering and forwarding disclosures of suspicious transactions to TRACFIN. These disclosures can be verbal or written. The other coordinator serves as the point of contact for responding to requests for additional information from TRACFIN. Persons or organizations that do not fit the definition "financial institution" under French law-but which are nevertheless subject to the reporting requirement-provide information on suspect financial activity directly to the National Public Prosecutor.
TRACFIN consists of approximately thirty personnel. Civil administrators, operational agents from the Ministry of the Budget (Customs Service and the Public Directorate), a magistrate judge assigned as legal advisor, and a representative of the Public Accounting Directorate are included among this personnel. Operational agents assigned to TRACFIN investigate the specific suspicious disclosures received by the unit. The representative of the Public Accounting Directorate is responsible for maintaining relations with public financial organizations. The secretary-general of TRACFIN is also the Director-General of the French Customs Service.
TRACFIN may exchange information with foreign counterpart agencies that observe the same rules regarding confidentiality of information; it may not, however, pass such information to French agencies that may use the information for police or tax cases.
France is a founding member of the FATF, and TRACFIN is a member of the Egmont Group. France is a party to the 1988 UN Drug Convention. France has implemented the EU Directive on Money Laundering.
France and the United States signed an MLAT in December 1998, but the treaty is not yet in force.
France has a comprehensive anti-money laundering regime that exceeds FATF standards in many areas. French authorities continually make efforts to improve the legislative basis for combating money laundering and to bolster the methods of investigation and the effectiveness of prosecutions.
Georgia (Other). Georgia is not an important regional financial center, and its economy is too small to cover large flows of illicit foreign funds. Commercial banks are small but have the ability to clear and transfer funds electronically. Money laundering schemes are small-scale, used mostly to launder funds generated domestically through illegal activities, most of which are not connected with narcotics. Reportedly, some commercial banks have become involved in laundering funds generated by the smuggling of alcohol and cigarettes, but these proceeds are generally held in dollars outside the banking system. Although corruption is an issue in Georgia, no government official has been publicly linked to money laundering. The National Bank of Georgia plays a growing role in regulating the banking industry.
Money laundering is not specified as a criminal offense under the new Georgian criminal code, due to go into effect in June 2000, but the code will make it a crime to "transform illegal money into legal income" or to conceal the source, location, or owner of property acquired illegally. Violations are punishable by imprisonment. Suspicious transactions do not have to be reported, nor are there legal safeguards protecting banks and other financial institutions which cooperate with law enforcement agencies. There are no known instances of Georgian law enforcement agencies investigating commercial banks or other businesses for possible involvement in money laundering. There are no controls on the amount of money that may be brought into the country. There are no money-laundering controls applied to non-bank financial institutions, which are, in any event, all but non-existent. Most financial transactions in Georgia are conducted in cash.
The Constitutional Court has declared asset forfeiture and seizure legislation to be unconstitutional.
Georgia became a party to the 1988 UN Drug Convention in 1998. Apart from a cooperation agreement between the Georgian and Turkish interior ministries, there are no formal mechanisms to exchange counternarcotics information.
USAID provides technical assistance and training to the Georgian tax inspectorate in support of improvements in tax policy and regulation, which could enable the tax inspectorate to identify underreporting of income, including questionable gains from illegal sources.
Germany (Primary). Germany has one of Europe's largest economies and a diverse financial services sector. As such, it is intrinsically vulnerable to money laundering. Russian organized crime, the Italian mafia, and Albanian and Kurdish drug trafficking groups launder money through bank deposits, foreign exchange houses, and investments in small local businesses and real estate.
Germany has several pieces of legislation that address money laundering in accordance with the EU anti-money laundering directive as well as the FATF Forty Recommendations. In 1992, section 261 of the German Penal Code took effect, criminalizing money laundering for narcotics trafficking, fraud, forgery and embezzlement. The Money Laundering Act of 1993 imposes certain requirements on financial institutions. These responsibilities include obtaining customer identification for transactions over $16,000 conducted in cash, securities or precious metals. In addition, suspicious transactions are to be reported to prosecutorial authorities.
Since January 1998, money transmitters have been required to be licensed and are subject to supervision by the Federal Banking Supervisory Office (FBSO). Anti-money laundering guidelines were also issued to these businesses in 1998 including know your customer policies, policies to prevent structuring, and the filing of monthly statistics with the FBSO.
With the development of electronic commerce, the FBSO has taken a pro-active step to its regulation of this industry by requiring customer identification for non-account linked transactions. This requirement became effective in June 1998.
One of Germany's main anti-money laundering units, the Gemeinsame Finanzermittlungsgruppe Geldw?sche - Bundeskriminalamt / Zollkriminalamtmeinsame Finanzmittlunggruppe has participated in the Egmont Group, but is not a financial intelligence unit. Each of Germany's states has its own unit, as German law does not permit the creation of a centralized unit.
Germany participates in the FATF and is a member of the Council of Europe.
Germany's lack of a centralized financial intelligence unit is a significant issue with both the FATF and G7. Germany should be encouraged to resolve this issue as soon as possible through the creation of such a unit.
Ghana (Other). Money laundering occurs in Ghana, but is not considered a major problem as Ghana is not an important financial center. The proceeds laundered stem primarily from the illicit sale of diamonds, gold and narcotics. Non-bank financial institutions, such as foreign exchange bureaus, are suspected conduits for laundering. Churches have also been accused of laundering money. There were no arrests or prosecutions for money laundering in 1999.
Both drug and non-drug related money laundering are criminal offenses in Ghana. However, banks and other financial institutions in Ghana are not required to report the identities of customers engaging in significant, large currency transactions. In cases of suspected narcotics offenses, the Attorney General is given special powers to authorize a police officer to investigate, inspect and take copies of any document held by a public official, bank or a financial institution. The Attorney General may require disclosure of assets sent outside the country, their estimated value, the real owner and sources of income, earnings or assets. Bankers and others are protected in their cooperation with the law enforcement entities. Any amount of currency can be brought into the country provided it is declared to customs when entering the country and also when leaving the country.
Ghana's Narcotics Law provides for the forfeiture of equipment or property used for the commission of an offense, even if no person has been convicted of the offense. The Law has resulted in the forfeiture of approximately $880,000, comprising the assets of a drug baron wanted in the United Kingdom. Cases pending at the end of 1999 included assets valued at over $1 million. Ghana has not enacted laws for sharing seized assets with other governments.
Ghana has bilateral agreements for the exchange of money laundering information with the United Kingdom, Germany, Brazil and Italy. Cooperation with U.S. law enforcement agencies has resulted in several arrests for money laundering. The U.S. funded a "Money Laundering and Other Financial Crime" seminar, which was held in September 1999.
Ghana is a party to the 1988 UN Drug Convention.
Gibraltar (Concern). Gibraltar is a major point of entry for drugs into Europe. The Government of Spain alleges that front companies established in Gibraltar as import-export concerns are actually involved in drug trafficking, as well as money laundering schemes involving Spanish real estate.
Gibraltar has been a Dependent Territory of the United Kingdom since 1713, when Spain ceded it to Britain. The United Kingdom is responsible for its defense and international affairs. The local legislature, the House of Assembly, is responsible for local matters, including taxation and company formation laws.
Under the Drug Offences Ordinance of 1995 and the Criminal Justice Ordinance of 1995, the GOG criminalized the laundering of proceeds derived from all crimes, and introduced the mandatory reporting of unusual financial transactions by banks and other financial entities including: mutual savings entities, insurance companies, financial consultants, postal services, bureaus de changes, attorneys, accountants, financial regulatory agencies, unions, casinos, charities, lotteries, car dealerships, yacht brokers, company formation agents, dealers in gold bullion, charities, and political parties.
In January 1996, the Government of Gibraltar (GOG) established a financial intelligence unit (FIU) - the Government of Gibraltar Co-ordinating Centre for Criminal Intelligence and Drugs (CFID) to receive, analyze and disseminate information on these unusual disclosures. The CFID is comprised mostly of police and customs officers but operates independently of the Police and Customs Authorities. It hopes to join the Egmont Group in the near future.
Gibraltar continues to flourish as a jurisdiction with favorable tax policies and international offshore financial center providing for the formation and use of corporations, banks, trusts and insurance companies. The offshore financial sector makes up the third major component of the economy after tourism and commercial port services. In 1973, when Britain joined the EU, Gibraltar was accepted as an associate member. Gibraltar is determined to capitalize on its participation in the EU to expand its offshore financial sector into EU member nations.
The private limited company with share capital is the most favored offshore corporation in Gibraltar; it has been available since passage of the 1930 Companies Ordinance. A hybrid that issues shares and is limited by guarantee is gaining in acceptance since it allows for anonymity for the beneficiaries of trusts. All companies established in Gibraltar must have a registered office there. Annual general meetings must be held, and an annual return filed with the public registry containing updated information on the directors, shareholders, capital structure, and audited accounts. The beneficial ownership of some non-resident companies (exempt companies and qualifying companies) must be disclosed in confidence to the authorities upon establishment. Details of the directors and shareholders appear on the Public Registry, but the use of nominees in these positions can preserve anonymity.
Under the 1992 Banking Ordinance, the Commissioner of Banking issues both regular and offshore banking licenses. There are four classes of bank licenses offered: Full Class A (entitles the licensee to accept deposits from any person); Limited Class A (authorized to accept deposits from any person, but not meeting the qualifications for a full license); Full Class B (permitted to accept deposits from any person who is not resident in Gibraltar, any holder of a Class A license, or any other person specified by the Governor); and Limited Class B (allowed to accept deposits from non-residents and holders of Class A licenses but more limited in scope to its activities than a full Class B licensee). Of the 29 banks operating, 11 offer only offshore services. Every Gibraltar bank must be managed by at least two Gibraltar residents and keep audited accounts, which are available to the public.
As a result of 1980 amendments made to income tax laws, non residents of Gibraltar are exempted from Gibraltar taxes earned on deposit accounts held in Gibraltar banks, building societies, or in other licensed deposit-taking institutions. Because of this, a properly established and managed Gibraltar company can greatly reduce its tax liability. In October 1979, the United Kingdom removed exchange and remittance controls, making it possible for Gibraltar's financial community to engage in a wide range of activities and offer products such as foreign currency accounts for nonresidents.
As a result of its associate membership in the EU, Gibraltar can now market certain financial services without restriction in other EU member states. Since 1997, insurance companies based in Gibraltar have been able to operate in EU member states without having to register there. Pending legislation would make this possible for banks.
While it has comprehensive legislation in place, Gibraltar needs to remain vigilant of its offshore sector, particularly as it expands into the EU.
Greece (Concern). Both Greek and U.S. officials consider narcotics to be the major source of proceeds that need to be laundered. These proceeds are invested in real property, Greek government bearer bonds on the resale market, stocks, and companies. The illicit cross-border movement of currency and monetary instruments is still a problem, according to Greek authorities. Casinos are attractive to money launderers, primarily for gambling transactions and to a lesser degree for investment transactions. While there are oversight mechanisms in place, Greek law - designed to be attractive to foreign investors - does not have particularly onerous disclosure requirements on sourcing of foreign capital, unless government investment incentives are involved. There are currently five private and two state-owned casinos in Greece. U.S. firms with casino interests comply with applicable U.S. federal and state gaming and licensing laws and regulations.
According to Greek media reports of late 1999, casino gambling and the Greek stock exchange are the current favored venues for laundering funds. Though they are required to be in compliance with tax laws regarding the transfer of foreign exchange, stock market investors are not subject to rigorous background checks on all sources of income when they purchase stocks or bonds. Since there are small transaction fees but no capital gains on stock or bond transactions, it is relatively easy for money launderers to claim that large amounts of funds are the result of shrewd stock trading. A report by the Ministry of Public Order indicated close links between Russian organized crime and money laundering in Greece. The report states that "more than 40 companies operated by Russian interests are engaged in suspicious dealings. . .two of these have been proved to have close links with a Russian criminal organization." Uncorroborated press reports claim that up to $50 billion is laundered each year in Greece, the illicit proceeds of drug trafficking, prostitution, gun rackets, blackmail, and gambling activities by both Russian and Albanian crime syndicates. A Greek Customs official ranked Greece third in Europe (behind Italy and Spain) as a money laundering center.
Greece enacted a comprehensive anti-money laundering law in 1995 ("Prevention and Combating the Legalization of Income Derived from Criminal Activities") that criminalized money laundering from all sources. The law is in full compliance with EU directives on money laundering; the Bank of Greece has the authority to cooperate fully with central banks of the other EU nations in matters relating to money laundering. The law requires that banks and financial institutions file suspicious transaction reports (STRs) with a central authority called the Competent Committee. A supplementary law is under consideration that would extend the STR requirements to casinos.
According to the Greek anti-money laundering law, banks and brokerage firms request identification (internal ID or passport) to open an account and for any transaction over 15,000 euros. The regulations of transfer of foreign exchange require Greek citizens to provide a tax registration number for 1,000 euros exchanges and proof of compliance with tax laws for 10,000 euros exchanges.
Application of the 1995 anti-money laundering law began in earnest with the establishment in 1997 of the eight-member Committee of Article 7 of Law 2331/1995. The Committee functions as Greece's financial intelligence unit (FIU); it is chaired by a senior judge and includes representatives of various government ministries, the central bank, and the Athens Stock Exchange. The unit meets at least once a week to review reports of suspicious transactions filed by financial institutions throughout the country. If the Committee decides an STR merits investigation, it refers the STR to the Financial Crimes Enforcement Unit (SDOE), a multi-agency group that functions as the investigative arm of the Committee. Should SDOE find evidence of possible criminal violation, it sends the STR back to the Committee, which then prepares the case for the public prosecutor's office. The Committee maintains links with Interpol for assistance in investigations outside Greece. According to post reporting, Greek authorities are investigating several cases of money laundering, but very few have reached the public prosecutor.
The Central Directorate of SDOE is preparing a comprehensive report on money laundering in Greece which will evaluate how the anti-money laundering law is functioning; how well the banking sector complies with STR requirements; practices, techniques and methodologies of money laundering in Greece; and how the Greek experience conforms to international standards.
Greece is a member of the FATF and the Council of Europe. The Committee participates in the Egmont Group of FIUs. Greece is a party to the 1988 UN Convention and is in full compliance with its goals.
To strengthen its anti-money laundering regime, Greece should extend and implement the requirement for STR filing to gaming and stock market transactions, and adopt rigorous standards on casino ownership/investments. Without creating disincentives for legitimate foreign or domestic investors, it should also consider strengthened safeguards to ensure that sources of income for large investments conform to domestic and international legal obligations.
Grenada (Concern). Money laundering and other financial crimes are very real concerns in Grenada due to the government of Grenada's (GOG's) rapid and relatively unsupervised venture into offshore services.
Like other Caribbean jurisdictions, Grenada has sought revenue by competing for offshore dollars, earning almost $3 million from the sector in 1998. In 1996, it passed the Offshore Banking Act 1996, the Offshore Insurance Act 1996, and the Company Management Act 1996. The International Companies Act (Amended 1996) allows bearer shares, and the International Trust Act 1996 allows establishment of asset protection trusts that greatly restrict seizure by foreign authorities. The Minister of Finance reviews applications and issues licenses for offshore banks. The International Betting Act, enacted in 1998, provides for licensing of international gaming and gaming companies. Grenada has issued 30 offshore banking licenses (up from 10 in 1998) and indicated it has incorporated 900 IBCs and six Internet gaming licenses. The Registrar of Offshore Services supervises the sector, but it has too few staff to provide proper supervision.
The Grenada Citizenship Amendment Act of 1997 allows foreign nationals to purchase citizenship for a family of five for approximately $40,000, with no obligation to live on the island. New citizens may also change their names, thereby increasing suspicions that international criminals may take advantage of the program. The GOG claims that proper background checks are made, and the Registrar of Offshore Services and the Director General of Finance must approve applications. To date, Grenada has issued approximately 200 economic citizenships.
In 1999, the GOG took several steps to develop and implement anti-money laundering laws and practices to avoid escalation of financial crimes. It passed legislation to turn the understaffed Offshore Services Registry into a semi-autonomous Financial Services Authority with more personnel, but no implementation has yet taken place. The FSA is still woefully understaffed. It also passed the Money Laundering Prevention Act of 1999, which is not yet in force. The Act criminalizes the laundering of proceeds relating to drugs, or from any other crime that, had it occurred inside Grenada, would have been punishable by at least five years imprisonment under Grenadian law. If convicted, violators face fines of $1 million and/or imprisonment for 27 years. "Tipping off" and aiding and abetting are punishable by a fine of $500,000 and/or 5 years in prison.
The law applies to a wide range of financial institutions, including onshore and offshore banks, money transmitters and exchanges, issuers of credit cards and traveler's checks, insurance businesses and trust businesses. These institutions are required to report suspicious transactions, keep transaction records for at least seven years, comply with any other regulations issued, and permit on-site inspections. The law also creates the Supervisory Authority to receive these financial disclosures; if it finds reasonable grounds that money laundering may have occurred or may occur, it will forward this information to the Director of Public Prosecutions. The Supervisory Authority must establish training requirements, may issue guidelines to financial institutions, and may disseminate information outside Grenada. The Ministry of Finance may also issue a code of practice to help institutions comply with the Act.
Individuals who leave Grenada carrying more than $37,000 must make a declaration to the Supervisory Authority. The law also contains asset seizure and forfeiture provisions, exempts good faith compliance from criminal liability, and overrides bank secrecy for money laundering investigations.
In May 1996, the GOG signed mutual legal assistance and extradition treaties with the United States. These treaties entered into force on September 14, 1999.
Grenada is a member of the CFATF, and underwent a CFATF mutual evaluation in November 1999.
With its expanding venture into financial services, the GOG needs to bring the Money Laundering Prevention Act into full force, establish and fully staff and fund the Supervisory Authority, and adequately train its personnel to detect and prosecute money laundering and other financial crimes. The GOG also needs to implement measures to provide more comprehensive regulation of the offshore sector, including the economic citizenship program, to prevent the jurisdiction's becoming a haven for international criminals.
Guatemala (Concern). As a transit point for much of the Colombian drug trade, Guatemala remains a site for money laundering activities. The lack of an anti-money laundering law and weak regulation and supervision of the financial sector continue to allow kidnappers, corrupt public officials and smugglers to use Guatemala as a safe haven for their illicit profits. During the past two years there has been an increase in the number of seizures of large amounts of currency in Guatemala.
The Government of Guatemala (GOG) continues to struggle to enact an effective anti- money laundering law. While the 1992 Narcotics Law includes a provision for investigating and prosecuting illicit transactions and investments, it is limited to investigating business transactions with funds or assets tied to narcotics investigations. There has never been a prosecution under this Law. In December 1997, the Secretariat for the Commission Against Addictions and Illicit Drug Trafficking (SECCATID) drafted a bill to criminalize the laundering of proceeds derived from several serious crimes and to introduce record keeping and currency reporting requirements. Another bill was drafted with in 1998, with U.S. Government participation, but neither one was ever introduced in Congress. In September 1999, the Guatemalan Banking Association presented to SECCATID its version of the bill, which eliminated many of the key anti-money laundering provisions. The banking sector continues to oppose the enactment of a comprehensive anti-money laundering law that would include the mandatory reporting of suspicious financial transactions and the creation of an investigation unit. The banking sector remains reluctant to make financial information available to law enforcement entities, on the grounds that banks are capable of self-policing, and it believes that the enactment of stronger legislation is therefore unnecessary.
The GOG has been very responsive to U.S. requests for extradition of Guatemalan nationals for prosecution on narcotics violations.
The GOG cannot continue to underestimate the negative effects of unchecked and unregulated access to its financial institutions by criminal elements. It needs to work with all appropriate Guatemalan institutions to promptly develop and implement effective anti-money laundering legislation that includes the mandatory reporting of suspicious or unusual financial transactions. Such a program would attract and retain the type of quality institutions that would ensure a sound and safe financial sector. The GOG should also renew its participation in the CFATF.
Guernsey (Primary). The Bailiwick of Guernsey covers a number of the Channel Islands, and encompasses three separate legislative assemblies (Guernsey, Alderney and Sark). Guernsey is a British Crown Dependency,.
Guernsey's highly sophisticated offshore sector is vulnerable to money laundering in the layering and integration stages. Historically, the international banking sector, and company and trust service providers, are areas of risk for money laundering. Use of company directors from Sark, which has no company law, has been a particular vulnerability. Guernsey does plan to license and supervise company and trust service providers and to extend this regulatory regime to Sark and Alderney.
Until the enactment of the Proceeds of Crime Law and Regulations 1999 ("the 1999 Law") there were significant gaps in Guernsey's anti-money laundering system. The Drug Trafficking Offences Law 1988 criminalized drug-related money laundering, while the Prevention of Terrorism law 1990 added terrorist-related activities as a predicate offense. The 1999 Law, which went into effect on January 1, 2000, extends the offense of money laundering to all indictable offenses. Overseas offenses are covered where, had the equivalent conduct occurred in Guernsey, it would have been a predicate offense. There is no exemption for fiscal offenses.
Until the 1999 Law came into force, suspicious transaction reports could be made voluntarily. The 1999 Law does not mandate suspicious transaction reporting; however the law provides an absolute defense for money laundering in cases where suspicious transaction reports were promptly filed. Reports of suspicious activity are made to the Joint Police &Customs Financial Investigation Unit - Guernsey, which serves as the Bailiwick's financial intelligence unit (FIU), and is a member of the Egmont Group. Guernsey is planning new drug trafficking legislation that will make suspicious transaction reporting mandatory for drug money laundering.
Guernsey's offshore sector is controlled by the Financial Services Commission. The majority of Guernsey's offshore activities consist of the formation of exempt companies, which may not conduct business in Jersey but serve primarily as holding companies for concerns operating elsewhere. Exempt companies pay no Guernsey taxes.
The Criminal Justice (Proceeds of Crime) Regulations 1999 apply to a wide range of financial businesses including company and trust service providers and professionals (to the extent they conduct financial business). Guernsey has special arrangements for financial business introduced by certain intermediaries. Under this system, for certain categories of individuals or institutions covered by the Regulations, a financial institution need not know the beneficial owner of funds. This represents a potential gap in Guernsey's system.
Guernsey is not a party to the 1988 UN Drug Convention. Guernsey plans to introduce the necessary legislation to enable it to accede to the Convention.
Guernsey is a member of the OGBS.
Guernsey is developing a comprehensive anti-money laundering regime and has demonstrated the political will to ensure that its financial institutions and services industry is not used to launder money. Guernsey's key to success in preventing its financial sector from being used to launder money will be the force with which it enacts and implements new legislation and regulations.
Guyana (Other). Guyana is not an important financial center or tax haven. Offshore banking is not permitted. Nevertheless, a largely unregulated banking sector, several independent currency exchanges and growing illicit trade in licit goods (particularly gold and diamonds) foster concerns that both narcotics- and non-narcotics-related money laundering take place.
Current Guyanese law makes the Bank of Guyana the sole financial regulator and applies regulations and penalties to all deposit-taking institutions. However, neither banks nor other financial institutions are required to know, record or report the identities of customers engaging in large currency transactions, or to maintain transaction records. Guyanese law requires reporting of funds over $10,000 imported into or exported out of Guyana, but no mechanisms facilitate such reporting.
Despite having finalized draft money laundering legislation in 1998, 1999 saw no discernible progress in passing this legislation. The National Assembly is expected to enact this bill in 2000. The bill criminalizes money laundering related to drug trafficking and other serious crimes, and allows for the expansion of predicate offenses. The bill also establishes suspicious transaction reporting requirements, requires confidentiality in the reporting process, provides a "safe harbor" for good faith reporting, and contains provisions for asset forfeiture, international cooperation and extradition for money laundering. The bill also creates a supervisory authority to receive financial disclosures and supervise financial institutions' activities to detect and prevent money laundering. Nevertheless, the proposed legislation falls short of the FATF recommendations and the amended OAS model regulations on money laundering. Guyana has not signed the CFATF Memorandum of Understanding; it would benefit by doing so and by actively participating in CFATF activities, including undergoing a mutual evaluation.
Guyana is a party to the 1988 UN Drug Convention, but needs to pass and implement a wide range of additional legislation before it will be in compliance with the Convention's goals and objectives.
Haiti (Concern). The Government of Haiti (GOH) has yet to take any concrete steps to fight money laundering. Haiti's institutional infrastructure continues to decline, and drug traffickers are taking advantage of this, further corroding already weak institutions. The young and inexperienced law enforcement system has been unable to effectively combat the rapid increase in drug trafficking, mainly cocaine, through Haiti on its way to the United States. Drug money corrupts police officers, judges, prosecutors, politicians, and financial institutions. Criminals are able to take advantage of the absence of financial regulations and abuse the fragile financial system. Bulk proceeds of cash are smuggled through Haiti, and criminals launder illicit funds through exchange houses, and via wire transfers through banks and money remitters.
Political problems contributed to the lack of progress in 1999. After two years of impasse, President Preval effectively dissolved parliament in January 1999. Disagreements between the government and the private sector have exacerbated the declining economic infrastructure. In 1997 the GOH drafted money laundering legislation which would have criminalized drug money laundering, established procedures for asset seizure and forfeiture, imposed customer identification requirements, and mandated suspicious activity reporting. But in the absence of a parliament and a working government, these measures were never introduced and cannot be considered until a new parliament is convened after elections scheduled for March 2000.
The absence of up-to-date anti-money laundering legislation continues to undermine the efforts of Haitian law enforcement agencies. The GOH needs to update its draft anti-money laundering legislation to criminalize the laundering of proceeds from all serious crimes, especially corruption, and to require cross-border currency declarations. It then needs to act expeditiously to enact the legislation. Once legal measures are in place, the GOH needs to create, train, and equip a centralized financial intelligence unit to coordinate anti-money laundering efforts and work with foreign governments to help protect the Haitian economy from criminal abuse. The GOH should also consider joining the CFATF, which would help provide additional support and coordination in the fight against money laundering.
Honduras (Concern). Although money laundering is believed to be on the increase, Honduras has not developed into a major money laundering center, and it is not an offshore financial center. What laundering takes place is primarily related to narcotics trafficking, followed by auto theft, kidnapping, bank fraud, illegal alien smuggling and corruption. Money laundering takes place in the banking sector, and in currency exchange houses, casinos, and front companies as well.
Honduras' current anti-money laundering program is based on Law No. 27-98 enacted on December 29, 1997. The law criminalized the laundering of narcotics-related proceeds, and introduced customer identification (no anonymous bank accounts permitted), recordkeeping (five years) and transaction reporting requirements for financial institutions, including banks, currency exchange houses, money transmitters and check sellers/cashiers. Casinos, however, are unregulated. Regulated financial institutions are required to report currency transactions over $10,000 and all unusual and/or suspicious financial transactions to the National Banking and Insurance Commission. After analysis of these reports, the Commission forwards those it believes may be linked to narcotics-trafficking activities to the Public Ministry or to the General Prosecutor's Office. Financial institutions in general have complied with the $10,000 currency transaction reporting requirement but have not reported any unusual or suspicious financial transactions, despite the fact that the law includes safe harbor provisions to protect financial institutions and their employees from civil and/or criminal liability when complying with such requirements. There have not been any prosecutions under this 1997 legislation, and mechanisms for the seizure, forfeiture and sharing of assets remain totally inadequate.
To combat corruption, in December 1999 the Government of Honduras approved a new Code of Criminal Procedure, which is in the process of implementation. New legislation was drafted in 1999 that would broaden the definition of money laundering to include the proceeds from any criminal activity. The new law, expected to be presented to the Congress in late February 2000, will also clarify procedures and responsibilities for prosecution of cases.
Honduras is a party to the 1988 UN Drug Convention.
The GOH anti-money laundering program remains weak, and efforts need to be expedited to enact the new anti-money laundering law.
Hong Kong (Primary). Hong Kong's status as a major financial center with an open and democratic society makes it attractive to money laundering activities. The combination of low taxes, modern financial services, flexible corporate laws and the absence of foreign exchange controls attract funds from across the globe, including those involving criminal proceeds. Narcotic trafficking is the major source of criminal proceeds laundered in Hong Kong. Organized crime groups based in Hong Kong dominate large portions of the Southeast Asian narcotics trade. Other sources of criminal proceeds include loan sharking, gambling, and financial crimes. Foreign sources of criminal proceeds are likewise sent to Hong Kong for laundering and Hong Kong serves as a major transit point in international money laundering schemes. Organized crime groups from Hong Kong are known to launder money through joint ventures and real estate purchases in China. Financial institutions and alternative remittance systems are the primary vehicles for money laundering. Laundering schemes include the use of bank accounts, shell companies, remittance businesses, and offshore corporations registered in Hong Kong through incorporation services.
A money laundering method widely used in Hong Kong and by ethnic Chinese communities throughout the world is the Chinese alternative remittance system (ARS). After the communist takeover of China, Hong Kong became the primary conduit for remitting funds through the ARS to China. The laundering of criminal proceeds through this system is extremely difficult to detect or prevent. The Chinese ARS can transfer large sums of money efficiently and quickly without leaving financial records tied to the transactions. The paper trail is eliminated by avoiding official reporting requirements to Customs authorities that bulk cash or monetary instruments would attract at the border, and commercial bank reporting requirements that cash or suspicious transactions require. The system is still used for its traditional purpose of conducting legitimate transactions; however, it is also used for tax evasion and as a means to move and launder criminal proceeds.
The Chinese ARS relies on a network of businesses such as jewelry stores, gold shops, travel agencies, money exchangers, finance companies, and import/export companies. At certain stages of the money transfer, the system depends on legitimate banks to balance the accounts of the parties conducting the transaction. No physical transfer of funds takes place; the transaction is merely a credit entry in the sending company's account and a debit entry in the receiving company's account. Even though physical funds are not moved during the transfer of funds using the Chinese ARS, the books must be balanced to reflect the actual exchange of value that the entries in the correspondent accounts represent. To accomplish this, the entities conducting underground transactions would use larger banks to transfer money usually through foreign intermediary banks to settle their accounts.
The advantages of using the ARS include anonymity, speed, price, and convenience. The system is much faster than bank procedures since large currency transactions can be conducted in a matter of hours. Fees are kept low, since the Chinese underground bankers also profit by taking advantage of unofficial currency exchange rates that are more favorable than official exchange rates. ARS uses businesses located within the community where banks may not be present or located at some distance. ARS hours tend to be more flexible than commercial bankers' hours.
Hong Kong criminalized narcotics related money laundering with the adoption of the Drug Trafficking (Recovery of Proceeds) Ordinance (DTROP) 1989. The law was suspended for several years pending the outcome of a court appeal. Both the Hong Kong Police and the Customs and Excise Department enforced the provisions of the DTROP of 1989. They established the Joint Financial Intelligence Unit (JFIU) to coordinate counter-money laundering activities and designated it to receive suspicious transactions related to narcotics. Although the DTROP allowed for reporting of suspicious transactions, the law did not require financial institutions to make such reports.
The criminalization of money laundering was extended to include any indictable offense with the adoption in 1994 of the Organized and Serious Crime Ordinance (OSCO). It was not until 1995 that amendments were made to the DTROP and OSCO to make suspicious transaction reporting mandatory for all financial institutions and non-bank financial institutions. On January 19, 2000, Hong Kong's Legislative Council enacted the Organized and Serious Crimes (Amendment) Bill of 1999, which requires money changers and remittance agents to implement customer identification procedures and to keep records for at least six years for transactions exceeding $2,500. The effective date for the law will be decided later this year.
In addition to the DTROP and OSCO, anti-money laundering measures are contained in the Prevention of Money Laundering Guideline issued by the Hong Kong Monetary Authority, the Guidance Note on the Prevention of Money Laundering issued by the Office of the Commissioner of Insurance, the Anti-Money Laundering Guidance Notes issued by the Securities and Futures Commission, and the Anti-Money Laundering Guidance Notes issued by the Law Society of Hong Kong. These regulations require the legal entities supervised by the above mentioned agencies to follow the measures and procedures for record keeping, customer identification, and suspicious transactions reporting.
The Joint Financial Intelligence Unit (JFIU), Hong Kong's financial intelligence unit, began to receive all suspicious transaction reports in 1995. The JFIU records and analyzes the suspicious transactions and forwards those indicating criminal activity to the Financial Investigative Groups of the Hong Kong Police and Customs and Excise Department for investigation. The JFIU is able to share information with foreign counterparts for investigative purposes. After investigations are completed, the enforcement agencies provide feedback to the JFIU for annotation in the JFIU database. The JFIU is a member of the Egmont Group.
Money laundering investigations by Hong Kong enforcement authorities have involved offshore corporations registered in Hong Kong. Hong Kong-registered Private Limited Companies provide a level of anonymity that makes them attractive for money laundering. The Companies Ordinance of 1932 with amendments through 1999 is the legislative basis for establishing Private Limited Companies in Hong Kong. The Ordinance does not require the disclosure of beneficial ownership because it permits the use of nominee shareholders, and it is possible to use corporate directors provided by incorporation services run by attorneys and accountants. Hong Kong allows for the marketing of shelf companies. Corporate documents must be written in English but may include Chinese characters. Corporate entities may be listed as officers and shareholders since Hong Kong registered companies have all the legal powers of a natural person. Resident corporate directors are not necessary; however a registered office in Hong Kong is required along with a resident company secretary. The ordinance prohibits bearer shares and allows public access to registers of corporate directors, managers, and members. All Hong Kong registered companies must appoint a certified auditor with membership in the Hong Kong Society of Accountants and are required to keep accounting records at a location selected at the discretion of the directors. Company accounts must be filed with tax authorities but not with the Registrar.
The agreement between Hong Kong and the United States on mutual assistance in criminal matters entered into force in January 2000. Hong Kong is a member of the FATF and the Asia/Pacific Group on Money Laundering. Hong Kong has a strong legislative basis to combat money laundering and is expected to enact and implement additional measures to increase suspicious reporting by non-bank financial institutions and to increase the number of prosecutions and convictions. Hong Kong underwent its second mutual evaluation by the FATF in 1998.
Hungary (Primary). Hungary is vulnerable to money laundering for a variety of reasons, including rising crime rates, a strong presence of both domestic and foreign organized crime groups, and Hungary's role as a transit country for narcotics trafficking along the Balkan Route. Hungary also has strict personal data protection laws that significantly hinder the ability of Hungarian authorities to share information on money laundering and other criminal activities with their foreign counterparts. Major sources of criminal proceeds come from narcotics trafficking, smuggling, arms trafficking, auto theft, tax evasion, financial fraud, alien smuggling and racketeering. Hungary is also used as a location for the laundering of foreign criminal proceeds, especially those from countries of the former Soviet Union. The availability of anonymous bearer passbooks may pose a risk for money laundering, although Hungarian officials doubt that they are used as vehicles for money laundering.
Although Hungarian financial institutions are subject to Hungary's anti-money laundering legislation, most cash intensive businesses such as real estate firms are not subject to money laundering controls, and Hungary is still a predominantly cash-based economy. The types of financial institutions used to launder proceeds include banks and non-bank financial institutions such as currency exchanges, casinos, investment companies, and real estate agencies. The types of monetary instruments used to launder proceeds include cash, wire transfers, bank drafts, letters of credit, and stocks and bonds. Front companies and false documents are used to establish elaborate systems to transfer funds and launder money. Hungarian authorities have investigated incidents of front companies located in offshore zones sending fictitious invoices to Hungary for the purpose of justifying the wiring of funds abroad.
Hungary's anti-money laundering legislation, Act XXIV of 1994 on the Prevention and Impeding of Money Laundering, became effective on May 8, 1994. Money laundering was simultaneously criminalized with the amendment of Section 303 "Money Laundering" of the 1978 Hungarian Criminal Code. The criminalization provisions apply to proceeds derived from any crime, including the instrumentalities of money laundering.
Hungary's anti-money laundering law specifies the types of transactions, financial institutions, and employees covered by the law. It also provides for customer identification and the recording of identification data, and sets out requirements for recording and disclosure of suspicious transactions, including exceptions to bank secrecy. The law mandates the establishment of internal rules for existing financial institutions to implement the provisions of the law and makes submission of these internal rules an integral part of the licensing requirements of future financial services institutions. The law also establishes a disclosures unit to receive suspicious transactions reports.
The Anti-Money Laundering Section (AMLS), a sub-department of the Hungarian National Police Headquarters (ORKF), is the central authority for receiving or collecting suspicious transaction reports. The ORFK designated the AMLS to perform this role under the authority granted it by Hungary's anti-money laundering law. Government Decree N?74/1994 (V.10.) outlines the procedures for financial institutions to report suspicious transactions to the AMLS. The obligation to report to the AMLS in no way prohibits financial institutions from reporting obvious criminal incidents directly to the police.
The AMLS is the financial intelligence unit having jurisdictional responsibilities for money laundering violations. It is subordinate to the Economic Crimes Department of the Central Criminal Directorate (KBI), which in turn is subordinate to the National Police Headquarters (ORFK). The ORFK is an organizational component of the Ministry of the Interior, but is neither subordinate nor reports to the Minister of Interior. Provisions for the AMLS were made in Hungary's anti-money laundering legislation and implementing regulations.
According to Section 3, Paragraph 1 of the Hungarian anti-money laundering law, financial institutions must report suspicious transactions immediately to the AMLS. As the central point for receiving suspicious transaction reports, the AMLS registers them and has 30 days to conduct a preliminary investigation. The time period may be extended for just cause. If circumstances warrant an immediate preliminary investigation of a suspicious transaction, an order for action may be issued within a specific time frame-24 hours, 48 hours, or 15 days. While conducting a preliminary investigation, the AMLS may ask for additional information from the financial institution making the initial suspicious transaction report or from other government agencies. It may also request information from foreign counterparts, including customs services and other financial investigative agencies, either directly or through the Hungarian National Central Bureau of Interpol. The anti-money laundering law allows the AMLS to request this information without requiring the prior approval of the Prosecutor's Office. Once the preliminary investigation is completed, the AMLS prepares a summary report about its findings. A criminal investigation is opened by the Investigations Department of the KBI if the findings indicate a strong suspicion of a money laundering offense-if not, then all documents related to the preliminary investigation are archived.
An MLAT between the United States and Hungary entered into force in March 1997. Hungary is a member of the Council of Europe's PC-R-EV. The ORTK is a member of the Egmont Group. In January 2000, the United States and Hungary signed a non-binding information sharing agreement between agencies responsible for law enforcement and transnational issues. This agreement is anticipated to aid in criminal investigations in both countries.
Despite what appears to be a comprehensive anti-money laundering regime in place since 1994, Hungary has initiated only three major investigations for money laundering, none of which has resulted in any convictions. Hungary should examine methods to bolster the effectiveness of its anti-money laundering regime.
Iceland (Other). Iceland is not a financial center, and money laundering is not considered a significant problem. The first apparent instance of money laundering arose in 1999 in connection with a large drug bust, in which for the first time the government is pursuing money laundering charges and moving to seize the assets of those involved.
Iceland first adopted a law against money laundering in 1993 based on the Forty recommendations of the FATF on money laundering. The Trade Ministry issued implementing regulations in 1994, which spelled out in detail the obligation of financial institutions to fully identify customers and to report large deposits and suspicious transactions. Money laundering is considered a crime no matter what the underlying offense, although the punishment can be greater when it is related to drug trafficking. FATF representatives visited Iceland in 1998 to review how the law and regulations were working. Based on their recommendations, the government has submitted a bill to Parliament to strengthen the 1993 law.
Iceland is a party to the 1988 UN Drug Convention, as well as the 1990 EU Convention on Money Laundering. Iceland's financial intelligence unit (FIU), the Rikisssaksoknari, participates in the Egmont Group of FIUs.
India (Primary). The money laundering situation in India is complex. There are many sources of illicit funds, including corruption, smuggling, financial fraud, narcotics trafficking, and prostitution. Tax evasion and the financing of terrorist and insurgent groups, issues that are related to money laundering, are also of concern in India. Given India's population and emergence as a regional financial center, Indian money laundering is a growing concern.
The hawala (or hundi) system plays a major role in money laundering in India. Hawala transactions are efficient, cost-effective and private. Licit as well as illicit transactions are conducted through hawala. Hawala is part of the "black" or underground economy in India. Estimates of the size of this economy range from one half to equal in size to the "white" (or "on the books") economy, affording some idea of the magnitude of hawala transactions. Hawala money laundering has been a component of a variety of money laundering schemes for many predicate offenses including corruption, alien smuggling, narcotics trafficking and financial fraud.
At present, India has a wide range of legislation addressing money laundering and other financial crimes. The Code of Criminal Procedure, 1973, Chapter XXXIV (sections 451-459) establishes the basic framework for confiscating the proceeds of crime. The Criminal Law Amendment Ordinance of 1944, allows for the attachment of money or property obtained through bribery, corruption, criminal breach of trust or theft, as well as of assets disproportionate to known sources of income by the order of a district judge; section 13 of this Ordinance provides for forfeiture of these assets to the state on conviction.
The Narcotic Drugs and Psychotropic Substances Act of 1985, Amended in 1988, calls for the tracing and forfeiture of property or assets acquired through narcotics trafficking and has provisions that address attempts to transfer or conceal property or assets. In effect, this act criminalizes drug-related money laundering, as called for by the 1988 UN Drug Convention.
Section 16 of the Prevention of Corruption Act of 1988 provides for forfeiture of the assets disproportionate to known income (presumably from bribes) held by a corrupt public servant convicted under section 13 (i) (e) of this Act. Sections 111 to 127 of the Customs Act of 1962 contain provisions for the confiscation of any money or property that was obtained through violation of any provisions of this Act.
The Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act of 1976 calls for the forfeiture of property acquired through smuggling and illegal foreign exchange transactions. In effect, this Act criminalizes money laundering where smuggling and certain hawala-like transactions are involved.
The Foreign Exchange Regulation Act (FERA) is one of India's primary tools for fighting money laundering. Among its objectives are the establishment of controls over foreign exchange, the prevention of capital flight and the maintenance of external solvency. A closely related piece of legislation is the Conservation of Foreign Exchange and Prevention of Smuggling Act, which provides for preventive detention in smuggling and other matters relating to foreign exchange violations. The FERA (and its successor, the Foreign Exchange Management Act (FEMA)) is enforced by the Enforcement Directorate (ED), which is part of India's Ministry of Finance; the ED is the organization most often involved in the investigation of hawala cases, as they often involve foreign exchange transactions.
India's anti-money laundering legislation has passed the lower house of Indian Parliament . It was referred to a special committee in the upper house for possible further amendments. This legislation would criminalize money laundering for a wide range of offenses, including white collar crimes, bank fraud, corruption, tax evasion, and narcotics trafficking.
The replacement for the FERA, the FEMA, was enacted in late 1999. This Act contains provisions facilitating continued financial liberalization in India in the area of foreign exchange. As under the FERA, the Reserve Bank of India, India's central bank, would still play an active role in the regulation and supervision of foreign exchange transactions, and hawala transactions would continue to be illegal.
India does not have a financial intelligence unit, and the draft legislation does not call for the formation of one. India does have an organization, the Central Economic Intelligence Bureau (CEIB), which is India's apex organization for fighting all financial crimes. Other organizations, such as the Directorate of Revenue Intelligence, Indian Customs and Excise, the Reserve Bank of India and numerous others all make essential contributions to India's anti-money laundering efforts.
In 1999, the Immigration and Naturalization Service (INS) and Postal Inspection Service (USPIS), with assistance from FinCEN, initiated efforts to seize funds from U.S. accounts associated with an international alien smuggling ring. In 1998, the Operation Seek and Keep task force (INS, IRS, FinCEN, USPIS, FBI, Customs) halted the operation of this alien smuggling ring, which used hawala to finance its activities. In early 1999, further analysis identified the details of the money transfer routes and, in mid-1999, the seizures were initiated. In addition to cooperation between the U.S. members of the task force, various agencies in India, specifically the CEIB, DRI and CBI, provided essential assistance on many aspects of this case. U.S. and Indian officials are also currently conducting investigations into Indian components of the money laundering associated with the alien smuggling operations.
India does not offer offshore services.
India needs to pass and then implement its draft legislation, in order to protect its financial institutions from money laundering and other financial crimes.
Indonesia (Primary). Indonesia's money laundering problem continues to grow. Strict bank secrecy laws, inadequate legislation, and a strategic geographical location combine to make Indonesia vulnerable to money laundering. Money laundering in Indonesia is believed to be connected with domestic narcotics trafficking, fraud and corruption. Money laundering most likely takes place in Indonesia's traditional financial sector as well as through alternative remittance systems. Indonesian banks have also been the victims of numerous large-scale frauds and corruption. Lax banking practices are often components of these frauds. A 1999 report commissioned by the Indonesian government found that nearly $80 million secretly transferred out of PT Bank Bali went into the accounts of former Indonesian President Habibie's senior aides, as well as his own political party, and entailed a large money laundering operation aimed at hiding numerous beneficiaries.
Indonesia has not enacted anti-money laundering legislation. Despite calls for several years by senior officials of the Bank Indonesia (Indonesia's central bank) to do so, there are no signs that any action has been taken. There are also indications that Indonesia's banks are not subject to adequate supervision or regulation. Several Indonesian banks have been victimized in scandals that might have been prevented if adequate safeguards had been in place. Once again, senior officials have, on occasion, called for action in this area, but none has been taken.
Indonesia does not have a financial intelligence unit.
Indonesia does not offer offshore services.
The Government of Indonesia (GOI) should prepare and implement both anti-money laundering legislation and prudential bank supervisory practices that are in accord with accepted international practices and standards.
Iran (Other). Iran is not a financial center, and is not considered to be of significance with regard to money laundering. The United States considers Iran to be a sponsor of international terrorism, which involves the laundering of operating funds. In addition, Iran's border with Afghanistan makes it an ideal transit country for drugs entering the European market. Iranian law enforcement officials reportedly carry out financial investigations in the context of drug crimes.
The Iranian real estate market is widely used as an alternative remittance system similar to hawala: real estate transactions take place in Iran, but no funds change hands there; rather, payment is made overseas. This is often done because of the difficulty in getting funds out of Iran and the relative weakness of the Iranian rial. However, in at least one case the real estate market was used to launder narcotics-related funds under the cover of legitimate businesses.
Iran has no laws against money laundering.
Iran is a party to the 1988 UN Drug Convention.
Ireland (Concern). The primary sources of illicit proceeds in Ireland are narcotics trafficking, smuggling of contraband tobacco and VAT fraud. Money laundering takes place in financial institutions as well as unofficial banking networks using bureaux de change, which are not regulated in Ireland.
Ireland has two pieces of legislation that address money laundering, the Criminal Justice Act 1994 (CJA94) and Criminal Justice Act (miscellaneous provisions) 1997 (CJ(MP)A97). The CJA94 criminalized the laundering of the proceeds of narcotics trafficking and other criminal activity. It also required financial institutions to report suspicious transactions, implement customer identification procedures and retain records of financial transactions. The CJ(MP)A97 adds requirements for the implementation of counter-money laundering programs and for training in the identification of suspicious transactions.
Reports of suspicious transactions are filed with the Bureau of Fraud Investigation, which is Ireland's financial intelligence unit (FIU). The Bureau is a member of the Egmont Group.
Offshore banking in Ireland is concentrated in Dublin's International Financial Services Centre (IFSC). Attracted by a preferential ten percent corporate tax rate, around 400 international financial institutions and companies operate in the IFSC, employing over 7,000 people, mostly in the areas of fiscal management, re-insurance, fund administration and foreign exchange dealing. Since Irish personal tax rates are high and duties in Ireland on items such as automobiles are considerably higher than in other western European countries, this type of company is very attractive. IFSC companies are regulated by the Central Bank of Ireland. To date, there have been no proven cases of money laundering or other illegal financial activities associated with IFSC companies.
Until 1999, Irish law permitted the establishment in Ireland of Irish Registered Non-Resident Companies (IRNRs). Many IRNRs had no substantial operations in Ireland and were not liable to Irish taxation. Irish police suspected that a large number of the estimated 40,000 IRNRs were engaged in fraud, tax evasion, money laundering and other illegal operations. Abuse of IRNRs also threatened Ireland's reputation as an emerging financial center. In response, in 1999 the government introduced new tax and company law arrangements to clamp down on criminal use of IRNR-company status. The 1999 Finance Bill equates company registration in Ireland with tax residence, except in limited circumstances. New company law measures also require that every new application for company registration in Ireland be required to show how the proposed company will carry on activities in Ireland, and that every Irish registered company have an Irish resident director.
Ireland is a member of the Council of Europe and the FATF. Its FIU participates in the Egmont Group. Ireland is a party to the 1988 UN Drug Convention.
Isle of Man (Primary). The Isle of Man (IOM) is a British Crown Dependency. Its vulnerability to money laundering lies in its sophisticated offshore services sector, at the layering and integration stages. Historically, corporate service providers have been a relative weak link in the IOM's regulatory system. To address this problem, the IOM is taking aggressive steps to regulate, license and supervise company formation agents and corporate service providers. The legislation is scheduled to be implemented during 2000.
The IOM criminalized drug-related money laundering in 1987, and added terrorism as a predicated offenses for money laundering in1990. The Criminal Justice (Money Laundering Offenses) Act 1998 extended the money laundering offense to cover the proceeds of all serious crimes. There is no exemption for fiscal offenses. The IOM also enacted the Anti-Money Laundering Code 1998 (The 1998 Code) and amended that legislation effective December 1999. The Code (as amended) applies to a very wide range of financial businesses including lawyers, registered legal practitioners and accountants operating client accounts, company service providers and trust service providers. However a recent amendment to the Code provides an exemption from the identification of customers requirement for business relationships which were formed prior to December 1998.
The primary type of offshore company formed on the IOM is the Exempt Company. An exempt company may not do business on the IOM, and its beneficial owners are usually not residents of the IOM. The name of the beneficial owner need not be disclosed. Bearer shares may be issued, but not allotted directly to the bearer-they are allotted in registered form and then transferred. IOM law requires that the name and address of the holder of the bearer warrants be recorded.
The IOM allows "eligible introducers" to facilitate arrangements for financial transactions, such as opening bank accounts. Under this system, a financial institution need not know the beneficial owner of funds. The represents a potential gap in the IOM system.
Under laws covering drugs and terrorism, all citizens are required to report suspicious transactions. The penalty for failing to report is 5 years imprisonment and/or a fine. However, the Criminal Justice (Money Laundering Offenses) Act 1998 does not require mandatory reporting, but provides an absolute defense for money laundering in cases where suspicious transaction reports were made to the Police or Customs officials. All registered financial businesses, bureaux de changes, estate agents, casinos, betting shops, company and trust service providers, accountants, and lawyers are required to file reports of suspicious activity with the Fraud Squad Financial Investigation Unit, IOM Constabulary, which serves as the financial intelligence unit. The Fraud Squad is a member of the Egmont Group.
The IOM is a member of the OGBS and has played a leading role in the organization's anti-money laundering program.
The IOM has a good record of cooperation with overseas requests for assistance, on both regulatory and criminal matters, and new legislation will enhance its ability to share information. The IOM has developed a comprehensive anti-money laundering regime and has clearly demonstrated the political will to ensure that its financial institutions and services industry is not used to launder money. The IOM's key to success in preventing its financial sector from being used to launder money will be in the continued force with which it implements the new legislation and regulations.
Israel (Primary). Most law enforcement officials believe that a significant amount of money is laundered through Israel, primarily because money laundering is not a crime. Absent a money laundering law, Israeli officials have been unable to investigate and estimate the extent of money laundering in Israel or it its relation to narcotics trafficking. Many observers believe that Israel's banking sector is used to launder criminally derived funds but the volume is still unknown. The U.S.-Israeli MLAT went into effect in May 1999, but it has not facilitated cooperation in the asset forfeiture area because Israel has yet to enact the necessary legislation.
On April 14, 1999, the Israeli Government presented to the Knesset Law Proposal 5759-1999, "Prohibition of Money Laundering." The legislation has passed the first of the three readings necessary for the legislation to become law. Israeli cautiously expect the bill to pass all three readings in the Knesset by June 2000.
The proposed law would establish a comprehensive anti-money laundering regime in Israel. It also includes significant provisions on asset forfeiture. Specifically, the bill would criminalize money laundering predicated on a list of several serious offenses such as corruption, terrorism, gambling, counterfeiting, fraud, and narcotics trafficking; establish inbound and outbound currency reporting requirements; mandate certain recordkeeping and reporting requirements such as suspicious transaction and large currency transaction reporting for financial and non-bank financial institutions; and require the Minister of Justice to establish a central database that would receive the reports mandated by the law. With respect to asset forfeiture, the law would institute criminal and civil forfeiture regimes for money laundering offenses.
The proposed law requires implementing regulations by the Minister of Justice and other Ministers before it can be fully operational. Thus, a final evaluation of the new regime must await the drafting of the regulations. Nonetheless, the introduction of this law is very significant.
Currently, Israel only has criminal forfeiture as part of its Dangerous Drug Ordinance. Due to the pleading and evidentiary restrictions of the law, it is extremely difficult to apply. Israel has an asset forfeiture fund under which half of the proceeds are to be allocated to law enforcement purposes, with half going to other government programs. An official from the Anti-Drug Authority, the agency that has the controlling vote on how forfeited proceeds are allocated, has said that the forfeiture fund has not been effective in promoting forfeiture cooperation. Moreover, the official claimed it has not helped develop new cases because so much of the forfeited funds can be dedicated for non-law enforcement purposes.
The U.S. Department of Justice Forfeiture Program has shared forfeited assets with Israel on two occasions. The most recent was on August 10, 1998, when the United States transferred approximately $35,000 from the Department of Justice forfeiture fund to the Government of Israel in recognition of the assistance of the Israel National Police (INP). The successful prosecution and forfeiture case involved Ran Efraim, a heroin dealer prosecuted in Brooklyn, New York. The INP provided background intelligence on the targeted defendants who were Israeli citizens and sent eight police officers to New York to translate Hebrew on wiretapped calls. As a result, DEA was able to obtain search warrants and seize forfeitable property, which ultimately led to indictments against 11 individuals on charges of racketeering, heroin trafficking and conspiracy to commit murder.
Israel has been in the process of considering anti-money laundering legislation for the past several years. Although the collection database required by the proposed law is not expected to be completed for another three years, stricter law enforcement should be possible immediately after the promulgation of the law. It is critical that the proposed anti-money laundering legislation be enacted and implemented as soon as possible.
Italy (Primary). Although Italy is not a regional financial center, its large financial sector renders it vulnerable to money laundering. Italy is a drug consumption country and a drug transhippment point for western European nations, and a site for the laundering of narcotics-related proceeds. Italian organized criminal groups, particularly in the southern part of the country, continue to pose the major threat vis-?-vis money laundering. These groups engage in narcotics and alien smuggling, extortion, usury, and kidnapping, and the subsequent laundering of the proceeds of these crimes. Following the turmoil in the former Yugoslavia, the links between Italian criminal groups and their counterpart Russian and Albanian organizations have grown to include other organized crime groups active in the countries of the former Yugoslavia.
In 1997, the last year for which figures are available, money laundering activity in Italy was estimated to total over $50 billion annually. Much of this illicit money is funneled into commercial and financial entities in Italy and abroad, including both the bank and non-bank financial sector. Italian money launderers are reportedly purchasing large parcels of real estate in Italy and other European countries, particularly hotels in resort areas. The illegal gold market is also heavily used by money launderers.
Italy's major piece of anti-money laundering legislation is Act No. 153/97, which does the following:
- Designates the Ufficio Italiano dei Cambi (UIC) as the recipient of suspicious transactions reports;
- Creates an inter-ministerial commission to coordinate anti-money laundering among the various Italian enforcement and regulatory agencies;
- Provides a safe harbor provision for those reporting suspicious transactions;
- Establishes organizational links among the agencies which are involved in the fight against organized crime; and
- Encourages the facilitation of international cooperation against money laundering.
Italy has criminalized money laundering for all serious crimes. The basic 1991 Italian anti-money laundering law requires customer identification, the recording of significant transactions (those above the equivalent of $10,000), and the reporting of suspicious transactions and crossborder cash movements above $10,000. Banks, stock brokerages, exchange houses and insurance companies are subject to the provisions of the law. Italy is considering extending the law to entities not now covered, such as casinos and notaries
The UIC functions as the Italian financial intelligence unit (FIU). It serves as the recipient of suspicious and large cash transaction reports, which had previously gone to local police precincts and thence to various regional authorities. The UIC receives millions of such reports per month; it scrutinizes these with the aid of sophisticated computer systems. After the UIC analyzes the reports and stores them in a unified database, it forwards them to the appropriate law enforcement agency-the Anti-Mafia Directorate (if the reports are connected with organized crime) or the Guardia di Finanza-for action if deemed necessary.
On the international scene, Italy served as president of the FATF in 1997-98. It underwent a successful second-round FATF mutual evaluation in 1997. The UIC is a member of the Egmont Group of FIUs. The Italian government has a number of bilateral agreements with foreign governments in the area of investigative cooperation on drug trafficking and organized crime. It also has in place an established system for tracing, freezing, seizing and confiscating assets. In accordance with Council of Europe procedure, Italy is committed to sharing these assets with the nations with which it cooperates.
Italy and the United States have in place a very successful MLAT and an extradition treaty. Italian-U.S. cooperation on money laundering cases is excellent, and the joint working of cases is common. However, Italian prosecution procedures can be lengthy. In addition, the divergent laws of the two nations can create problems. For example, under Italian law a person may be charged with money laundering only if he/she did not play a role in the underlying predicate offense. This means that the United States cannot obtain extradition of a person for trial on both money laundering and the predicate offense. Conversely, Italian prosecutors do not always specify a predicate offense when bringing a charge of money laundering. Since such information is necessary under U.S. law, this means that the United States cannot always respond to Italian extradition requests.
Italy's anti-money laundering statutes are comprehensive as regards reporting requirements, investigation and enforcement. But although thorough internal auditing and training programs are in place in the financial sector, implementation by non-bank institutions still lag behind as evidenced by the relatively low number of suspicious transactions reports being filed by these entities. More diligent training and supervision could help to close this gap, which may allow criminals to utilize these institutions as they seek new ways to launder their illicit proceeeds.
Jamaica (Concern). While Jamaica has not developed into a significant regional financial center, tax haven or offshore banking center, money laundering does occur, primarily through the purchase of assets such as cars and real estate. The laundering of proceeds through Jamaican banks and financial institutions does not appear to be prevalent.
Legislative efforts by the Government of Jamaica (GOJ) to fight narcotics trafficking and money laundering are based on the 1948 Dangerous Drugs Act, as amended; the 1994 Drug Offenses (Forfeiture of Proceeds) Act; the 1995 Mutual Legal Assistance on Criminal Matters Act;; the 1995 Mutual Legal Assistance on Criminal Matters Act; the 1996 Money Laundering Act ; the 1998 Maritime Drug Trafficking (Suppression) Act; and the 1999 Precursor Chemical Act. The 1996 Money Laundering Act criminalized narcotics-related money laundering and introduced recordkeeping (five years) and reporting requirements for banks and financial institutions (insurance companies, credit unions, currency exchange houses, money remitters, securities dealers) for currency transactions over $10,000.
The GOJ made progress during 1999 in bringing its anti-money laundering regime in line with international standards, particularly those of the CFATF. The Money Laundering Act was amended in March 1999 to raise the reporting threshold to $50,000 and to add a requirement for banks and financial institutions to report suspicious financial transactions in any amount to the Director of Public Prosecutions (DPP). Jamaica is also in the final stages of hiring personnel for the financial intelligence unit being created within the Office of the Director of Public Prosecutions. The Office of the Parliamentary Counsel has drafted amendments to the Money Laundering Act that will expand the list of predicate offenses to include fraud and firearms offenses. Further action is required, however, to address the critical issue of money laundering in relation to the proceeds of other serious crimes.
The Jamaican financial sector includes deposit-taking type institutions such as commercial banks (mostly retail banking), merchant banks, (commercial financing), building societies (financing for home ownership), credit unions and co-operatives, and non-depository institutions such as securities dealers/advisors, insurance companies and unit trusts. The Bank of Jamaica supervises the depository institutions (with the exception of credit unions and co-operatives) and licenses the exchange houses. The credit unions and co-operatives are quasi self-regulatory but are overseen by the Co-operatives Department. The various regulatory and supervisory entities for the financial industry, such as the Bank of Jamaica, the Securities Commission and the Superintendency of Insurance, have issued guidelines and procedures for their respective sectors regarding their obligations under the money laundering laws. They have also suggested approaches to meeting such obligations, and have conducted training sessions to assist in compliance.
Jamaica is a member of the CFATF, and underwent a mutual evaluation in March 1999. The GOJ has one year to carry out the recommendations contained in the report, following its adoption at the October 1999 CFATF meeting.
Current forfeiture laws require a criminal drug-trafficking conviction as a prerequisite to the forfeiture of assets. Jamaica does not have a civil forfeiture statute. Further GOJ action is needed in the area of asset forfeiture, since the current regime does not permit the GOJ to take full advantage of the forfeiture mechanism to augment the resources of its anti-drug agencies and deprive criminals of their illicit proceeds.
Japan (Primary). While there are no precise estimates concerning the scope of money laundering in Japan, Japan is suspected of being a major money laundering center. There is a growing drug market in Japan with increased trafficking activity within the illegal immigrant population. Law enforcement authorities believe that organized crime, e.g. the boryokudan, is responsible for much of the drug and other major crime, including money laundering.
In the past, Japan's anti-money laundering regime was viewed as virtually ineffective because of the limited scope of the money laundering predicates, the direct tracing requirements placed on law enforcement and the low level of suspicious transaction reporting by Japanese financial institutions. However, during 1999, an increased commitment by the Government of Japan (GOJ) to strengthen its anti-money laundering regime resulted in the enactment of new anti-organized crime legislation which substantially increased law enforcement's ability to fight money laundering. The GOJ also encouraged a renewed awareness by Japanese financial institutions as to the importance of suspicious transaction reporting, which resulted in an increase in suspicious transaction reports from 11 in 1998 to over 900 during 1999.
In previous years, Japanese law enforcement focused its attention on the investigation and prosecution of drug crimes with little emphasis on the investigation of money laundering. The Anti-Drug Special Law, enacted in 1991, criminalized only drug-related money laundering, mandated suspicious transaction reports for the illicit proceeds of drug offenses, and authorized controlled drug deliveries. The Japanese police and prosecutors undertook few investigations and prosecutions into suspected money laundering. The limited scope of the law and the burden required of law enforcement to prove a direct link between money and assets to specific drug activity rendered the law fairly ineffective.
However, within the last two years, the Japanese National Police have re-evaluated their investigative priorities and increasingly are focusing their efforts on the financial aspects of organized crime. The largest of these financial cases originated in September 1997, when police in Osaka arrested a boryokudan leader who had received $1.3 million in drug proceeds from junior gang members. In February 1998, the Osaka District Court, in the first use of the provisions of the money laundering law which prescribes the receipt of illicit drug proceeds, imposed a penalty of $1.3 million on the boryokudan leader.
In August 1999, Japanese efforts to combat money laundering were strengthened by the enactment of anti-organized crime legislation. This new legislation expanded the scope of the money laundering law beyond drug trafficking to include money laundering predicates such as murder, aggravated assault, extortion, theft, fraud, and kidnapping. The new law also extended the confiscation laws to include the additional money laundering predicates and to include value-based forfeitures; created a financial intelligence unit; and authorized electronic surveillance of organized crime members. Japanese law enforcement agencies have welcomed the passage of the new law and believe that the new legislation will strengthen their ability to fight money laundering.
Japan plays an active role in international anti-money laundering fora. It is a member of the FATF, serving as the president in 1998-1999. Japan underwent a second-round FATF mutual evaluation in 1997. Japan is also a member of the Asia/Pacific Group on Money Laundering and is the current G-8 president.
With the passage of the Anti-Organized Crime Law, Japan now has the legal tools and agencies in place to successfully combat money laundering. Japanese law enforcement must now make full use of the tools they have been given to aggressively investigate and prosecute money laundering and financial crime.
Jersey (Primary). The Bailiwick of Jersey, one of the Channel Islands, is a British Crown Dependency. The risk of money laundering is Jersey lies in its sophisticated offshore services sector, at the layering and integration stages. Historically, company and trust service providers are weak links in the regulatory system. The majority of Jersey's offshore sector consists of Exempt Companies, which may not conduct business in Jersey, but serve as holding companies for concerns operating elsewhere. Exempt companies pay no Jersey taxes.
Until the enactment of the Proceeds of Crime Law 1999 ("the 1999 Law") there were significant gaps in Jersey's anti-money laundering system. The Drug Trafficking Offenses Law of 1988 criminalized drug-related money laundering, while the Prevention of Terrorism Law of 1996 did the same for the proceeds of terrorist activity. Under the 1999 Law, the predicate offenses for money laundering now extend to all offenses with a maximum sentence of one year or more. Overseas offenses are covered where, had the equivalent conduct occurred in Jersey, it would have been a predicate offense. There is no exemption for fiscal offenses.
Under the laws relating to narcotics trafficking and terrorism, all citizens are required to report suspicious transactions. The penalty for failing to report is 5 years imprisonment and/or a fine. The 1999 Law does not stipulate mandatory reporting, but provides an absolute defense for money laundering in cases where suspicious transaction reports were made to the Police or Customs officials. Banks, lawyers, accountants and trust companies are also required to implement customer identification procedures and to retain financial records.
Reports of suspicious transactions are made to the Financial Investigations Unit (FIU), which serves as Jersey's financial intelligence unit. The FIU was estblished by informal agreement between Jersey Police and Customs.
The Financial Supervision Commission (FSC) is responsible for regulating Jersey's banks, building societies, insurance companies and collective investment schemes. The Company Registry also falls within the scope of the FSC's responsibility. Beginning in the summer of 2000, Jersey plans to give the FSC responsibility for the licensing and supervision of company and trust service providers.
Jersey has special arrangements for financial business introduced by certain intermediaries. Under this system, certain categories of individuals or institutions covered by the Money Laundering Order 1999, a financial institution need not know the beneficial owner of funds. This represents a potential gap in Jersey's system.
The 1999 Law went a long way towards addressing deficiencies in Jersey's ability to cooperate effectively with regulatory and criminal requests for assistance at the investigation stage, since it allows Jersey to comply with requests for assistance on the full range of money laundering offenses. Authorities are able to exchange available regulatory information with overseas counterparts, and to launch investigations into regulated institutions or persons on their behalf. However, they do not yet have the power to disclose information on individual client accounts, without the consent of the client, in response to a request for regulatory assistance. Significantly, there are no legal constraints on cooperation between law enforcement and regulatory authorities within Jersey.
Jersey is a member of the OGBS and has played a leading role in the organization's anti-money laundering program. The Financial Investigations Unit is a member of the Egmont Group.
Jersey has developed a comprehensive anti-money laundering regime and has clearly demonstrated the political will to ensure that its financial institutions and services industry is not used to launder money. Jersey's key to success in preventing its offshore financial sector from being used to launder money will be in the continued force with which it implements the new legislation and regulations.
Jordan (Other). Jordanian officials have in the past expressed concern about money laundering, but it is not a problem at present, since the country is not a major financial center, and foreign exchange entities are regulated by the government. The most recent instance of alleged money laundering involving Jordan took place in 1992, when the Central Bank of Jordan was accused of laundering Iraqi funds in Switzerland through such entities as the Iraqi Finance Corporation and the Jordanian Gulf Bank. The central bank denied the charges, and the accusations were never proven.
The Government of Jordan (GOJ) has not criminalized money laundering, and Jordanian officials say there is no move to draft such legislation in the foreseeable future, although Jordanian enforcement officials are supportive of such a move. Nor are there any financial laws that would assist in the investigation or prosecution of existing narcotics laws. Nonetheless, Jordanian officials report that some financial institutions cooperate with prosecutors' requests for access to financial records associated with narcotics offenses. The central bank has instructed Jordanian banks to be on the lookout for customers making "dubious" transfers and to be particularly careful when handling transactions made in foreign currency, especially if the amounts involved are large or if the bank has no information about the source of the funds. However, Jordan does not require depositors to disclose the origin of large cash deposits or transactions.
Jordan is a party to the 1988 UN Drug Convention. It does not have an MLAT with the United States.
Jordan needs to criminalize money laundering and to put in place a system of financial regulations, including requiring the reporting of suspicious transactions, in order to protect its financial system from abuse.
Kazakhstan (Other). Kazakhstan's financial infrastructure is advanced for the region. This, together with a significant organized crime presence and role in drug transshipment to Russian and Western European markets, give Kazakhstan substantial potential for hosting money laundering operations. The government has taken steps to combat money laundering and corruption and welcomes international training and assistance.
Kazakhstan's more than 200 organized crime groups are believed to be a big part of Kazakhstan's growing problems with money laundering and financial crime. These groups, which maintain ties with organized crime groups in the United States and Europe, have targeted banks, casinos and businesses engaged in food processing, distilling and export trade. They are extremely sophisticated and elusive. Kazakhstan officials estimate that $10 billion in illegal raw material exports have occurred through illegal joint ventures, although this figure may be exaggerated.
Kazakhstan has criminalized money laundering and is in the process of drafting anti-money laundering legislation. Inadequate financial controls make detection difficult; bank examiners are not trained to look for evidence of money laundering; rather, banking examination procedures address safety concerns. Law enforcement agencies in Kazakhstan lack resources to conduct effective investigations. Kazakhstan needs statues to delineate responsibility among the various law enforcement agencies. Kazakhstan customs enforcement faces serious problems in the areas of corruption, falsification of shipping documents and collection of revenue. Nevertheless, in 1999 Kazakhistani officials opened over 400 cases under the 1998 money laundering provision of the criminal code. Government steps to regulate the banking sector have reduced the number of banks and imposed relatively strict oversight of bank officials. The government has also made efforts to combat corruption.
Kazakhstan became a party to the 1988 UN Drug Convention in 1997. Kazakhstan has received U.S.-funded anti-money laundering and combating economic crime training.
Kenya (Other). Kenya's strategic location, sea and air transport infrastructure and its strong commercial and family ties to India and Pakistan continue to make it a significant transit country for South Asian cannabis and heroin. Although Nairobi serves as the financial center for East African region, it is not an offshore financial center. There is no direct evidence that Kenya is a major money laundering country.
To date, there is no comprehensive anti-money laundering legislation that criminalizes money laundering beyond narcotic drugs. Kenyan banks are required to keep records on customers with large transactions; however, Kenya no longer exercises rigorous currency controls at its borders. In June 1998, the Kenyan government announced that it would focus efforts on combating money laundering. In 1999, the President of Kenya issued a statement denouncing money laundering and granted the Central Bank of Kenya the power to supervise all Kenyan banks. However, there has been little progress in this area, and corruption and lack of political will remain significant obstacles. Kenya has no narcotics-related asset forfeiture and seizure legislation.
There are approximately 50 banks in Kenya, including several international institutions. Although some bank managers have been involved with fraud and illegal lending activities, there have been no arrests or prosecution for money laundering offenses.
Kenya is a party to the 1988 UN Drug Convention.
Korea (Republic of Korea) (Concern). Korea is vulnerable to money laundering for a variety of reasons. Korea is used as a transit country for international narcotics trafficking, especially from China, and its domestic narcotics consumption is on the rise. Korean organized crime groups cooperate with Japanese and Southeast Asian groups in the nar