Money Laundering and Financial Crimes

Introduction

Overall anti-money laundering efforts in the year 2000 made progress across two broad fronts. The international community demonstrated its resolve to confront money laundering by showing a strong commitment to work collectively to address the problem while seeking to isolate those countries and jurisdictions that lack this commitment. In this regard, the year 2000 marked a milestone in international cooperation on fighting money laundering as the Financial Action Task Force (FATF)(1) publicly released a list of 15 countries and territories that were found to be non-cooperative in the international fight against money laundering. At the conclusion of its June 2000 plenary meeting, the FATF published a report that stated that these 15 countries and territories had "serious systemic problems with money laundering controls and that they must improve their rules and practices as expeditiously as possible or face possible sanctions." Following publication of this report, the United States, its G-7 partners and other FATF members issued advisories, notices or other various communications alerting the financial institutions in their countries about the money laundering risks they face in the "non-cooperating" jurisdictions.

The publication of the FATF report represents the first step in an ongoing process to bring international financial centers into compliance with international anti-money laundering standards. The development of a consensus among the FATF membership was the result of a five-month process in which FATF evaluated the anti-money laundering systems of numerous countries in order to identify those anti-money laundering efforts that fail to meet international norms. The willingness of the FATF members to agree on this list demonstrates the seriousness of the money laundering problem in those jurisdictions and the commitment of the members to address it in a meaningful way.

This exercise has already shown positive results. Since the list was published, seven of the 15 jurisdictions have enacted all or almost all of the legislation needed to address deficiencies identified by the FATF, and now must demonstrate effective implementation of the legislation. Several other jurisdictions have enacted some relevant legislation to address the deficiencies identified by FATF. These jurisdictions are commended for beginning their legislative processes, and are encouraged to continue to work toward developing comprehensive anti-money laundering regimes that meet international standards. The FATF will be assessing the progress made by all listed jurisdictions to determine whether any should be removed from the list and will also continue its review process to determine whether any new countries should be added.

Further international commitment was reflected in additional advances by FATF and FATF-like regional bodies. Three countries—Argentina, Brazil and Mexico—joined FATF, increasing its membership to 29 nations. In addition, two new regional FATF-like bodies were created to extend the fight against money laundering. The Financial Action Task Force against Money Laundering in South America and the Eastern and Southern African Anti-Money Laundering Group were formed in 2000, increasing the number of regional bodies to five.

The December 2000 signing of the United Nations Convention against Transnational Organized Crime in Palermo, Italy represents another significant development in the effort to promote international cooperation against money laundering and other forms of organized crime. The Convention was signed by over 125 countries, including the United States, and will enter into force after forty have become parties. This Convention includes many significant provisions with respect to money laundering and international cooperation in financial investigations. Once again, the drafting and signing of this Convention demonstrate the recognition by the international community that it must stand together to effectively fight international organized crime and money laundering.

(1)The Financial Action Task Force on Money Laundering is an inter-governmental body whose purpose is the development and promotion of policies to combat money laundering.

The relationship between money laundering and foreign corruption was highlighted in the U.S. National Money Laundering Strategy for 2000, which called for numerous actions to be taken in this area. Most significantly, the Department’s of Treasury and State, and the federal bank regulators issued guidance to help U.S. financial institutions avoid transactions that may involve the proceeds of foreign official corruption. The importance of such guidance was reinforced by the publication last year of a report by the Swiss Federal Banking Commission. The report detailed how 19 banks that operate in Switzerland handled almost $1 billion in funds relating to corruption by the former ruler of Nigeria, General Sani Abacha. The report criticized several of the banks for weaknesses in their account-opening procedures or monitoring and reporting mechanisms. The report noted that "[t]he Abacha case is a clear example of the international dimensions of the issue of the deposit of corruption proceeds in the financial system."

In 2000, the political and diplomatic anti-money laundering efforts were complemented by an initiative from the private sector. In October 2000, eleven world money center banks agreed to a set of anti-money laundering guidelines—the "Wolfsberg Anti-Money Laundering Principles"—for private banking activities. The guidelines state at the outset that "bank policy will be to prevent the use of its world-wide operations for criminal purposes." The participating banking organizations are hopeful that other banking organizations and financial institutions will adopt the anti-money laundering principles that have been developed.

The FATF initiatives, the United Nations Convention against Transnational Organized Crime and the Wolfsberg Principles were some of the highlights from 2000 that have made contributions to stemming the flow of illegal proceeds around the globe. These international efforts should yield even greater results in the year to come.

Why We Must Combat Money Laundering

Money laundering is necessitated by the requirement for criminals, be they drug traffickers, organized criminals, terrorists, arms traffickers, blackmailers, or credit card swindlers, to disguise the origin of their criminal money so that they can use it more easily. 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. These transactions typically fall into three stages: (1) Placement, the process of placing, through deposits, wire transfers, or other means, unlawful proceeds into financial institutions; (2) Layering, the process of separating the proceeds of criminal activity from their origin through the use of layers of complex financial transactions; and (3) Integration, the process of using an apparently legitimate transaction to disguise the illicit proceeds. Through this process 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. It provides the fuel for drug dealers, terrorists, illegal arms dealers, corrupt public officials and other criminals to operate and expand their criminal enterprises. 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, in addition to facilitating legitimate commerce, permit criminals to order the transfer of millions of dollars instantly, using personal computers and satellite dishes. The criminal's choice of money laundering vehicles is limited only by his or her creativity. 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. 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 could also adversely affect currencies and interest rates as launderers reinvest funds where their schemes are less likely to be detected, rather than where rates of return are higher.

Ultimately, this laundered money flows into global financial systems where it could undermine national economies and currencies. Money laundering is thus not only a law enforcement problem but poses 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. The continued abuse of some offshore financial centers, the proliferation of on-line Internet banking and Internet gambling have further enhanced the need to scrutinize new technologies to combat money laundering schemes.

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 allow them to keep the money they have deposited from the knowledge of tax authorities. Billions of funds on which tax is properly due, denominated in various currencies, are held on deposit in these tax havens.

Both 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 law enforcement authorities, as is the case with some jurisdictions with offshore financial centers.

Offshore Financial Centers

Nearly sixty jurisdictions, scattered around the globe, comprise the constantly expanding offshore financial services sector. 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 of all cross-border assets held globally.(1)

(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.

The attention of many multilateral entities concerned with global financial stability in an increasingly interdependent financial system has been focused on more than just the sheer volume of cross-border assets held by the offshore financial centers (OFCs). While this discussion is not intended to suggest that OFCs, as a class, are all unregulated or all centers of illegal financial activity, the nature of the regulatory and legal regimes in a number of OFCs can be viewed as problematic, as are some of the services and products provided in many OFCs. In particular, the lack of transparency that characterizes many of the OFCs(1) has acted as a powerful magnet attracting governments, groups and individuals desiring to hide 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." First, offshore financial centers are in almost all cases, segregated from the normal banking structure of the jurisdiction. The vast majority of jurisdictions offering offshore financial services restrict access to these services and products to non-residents, thereby creating a parallel system within their own borders. Many jurisdictions with OFCs conduct financial transactions only in currencies other than the local currency. OFCs also differ from onshore jurisdictions in their regulatory regimes and in their legal frameworks. Many OFCs lack the stringent regulatory and supervisory regimes found in developed onshore jurisdictions. In the majority of OFCs, 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 most OFCs; it is even reported that in some jurisdictions a bank can be formed, 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 are free of exchange and interest rate restrictions; minimal or no capital reserve requirements are required; and transactions are mostly tax-free.

Some 4000 banks are thought to have been licensed and registered globally in the offshore sector by December 1998.(2) How many are merely "plaque banks," (banks without an actual physical presence in the jurisdiction in which they are registered) is not currently known, although the United Nations Global Program Against Money Laundering is currently collecting that data. In many OFCs, non-bank financial industries, such as the insurance and securities industries, are subject to even less, if any, regulation than is the banking industry.

While there are many well-regulated OFCs, a principal attraction is often the existence of legal frameworks designed to obscure the identity of the beneficial owner, to promote regulatory and supervisory arbitrage, and to provide mitigation or evasion of home-country tax regimes. Some of these OFCs offer the ability to form and manage confidentiality of a variety of international business companies (IBCs) and exempt companies, trusts, investment funds and insurance companies, many with nominee directors, nominee officeholders and nominee shareholders. When combined with the use of bearer shares and "mini-trusts" (the latter are instruments used to further insulate the beneficial owner while bridging the ownership and management of the corporate entity), IBCs can present impenetrable barriers to law enforcement.(3)

Although IBCs have served as the predominant instruments for committing financial crimes, a variety of types of trusts play important roles as well. One form of trust, the Asset Protection Trust (APT), protects the assets of individuals from civil judgments in their home countries. 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" providing for funds to be immediately transferred to another OFC if the APT is threatened by inquiry. Used in combination, IBCs, mini-trusts, bearer shares and APTs make it nearly impossible for competent authorities to generate paper trails or to identify beneficial owners of companies, while they simultaneously protect those engaging in serious financial crime from civil or criminal prosecution.

Other practices found in some OFCs cause problems for law enforcement. One such practice, well advertised on the Internet, is the selling of "economic citizenship"—a practice that enables individuals suspected of committing crimes to purchase citizenship in an OFC jurisdiction that does not have an extradition agreement with the purchaser’s original home country. Currently five Caribbean Basin OFCs are actively selling economic citizenships: Belize, Dominica, Grenada, St. Kitts/Nevis and St. Vincent and the Grenadines. In the Pacific region, economic citizenships are for sale in Nauru.

Internet gaming executed via the use of credit cards and offshore banks represents yet another powerful vehicle for criminals to launder funds from illicit sources as well as to evade taxes. Advertised on the Internet as being located primarily in the Caribbean Basin, virtual casinos can be extremely profitable for governments that sell the licenses and likely share in the operator’s profits. By the end of December 2000, Antigua and Barbuda, for example, reportedly had licensed more than 80 Internet gaming websites at a cost of $75,000–$85,000 for a sports betting shop and $100,000 for a virtual casino. As the Offshore Financial Services chart indicates, with the exception of St. Vincent and the Grenadines, all Caribbean Basin OFCs that sell "economic citizenships" also sell virtual casino licenses. In the Pacific region, only the Palau and Vanuatu OFCs are reported to sell gaming licenses (reportedly for much lower fees than are charged in the Caribbean). Neither Palau nor Vanuatu sell economic citizenships.(2)

In recent years, various bodies have examined the threats presented by a lack of transparency and oversight posed to an increasingly interdependent global financial system. Two initiatives, The Financial Stability Forum’s Offshore Working Group and the Financial Action Task Force’s Non-Cooperative Countries and Territories Initiative, have had a direct impact on the offshore financial services industry in 2000. These initiatives have drawn distinctions between the better-regulated and cooperative jurisdictions and those that are not. Both initiatives have focused a great deal of attention on the OFCs although the FATF initiative addresses jurisdictions beyond OFCs.

The Financial Stability Forum (FSF) was convened in 1999 at the request of the G-7 Finance Ministers to promote international financial stability through information exchange and international cooperation in financial supervision and surveillance. At its first meeting in April 1999, the FSF established the Working Group on Offshore Financial Centers. The working group was comprised of officials of industrial and emerging market economies, international institutions and international regulatory and supervisory groupings.

The FSF Working Group’s mandate was to consider the significance of OFCs in relation to global financial stability. In April, the FSF Working Group issued a report concluding that a number of the OFCs were perceived as having weaknesses in financial supervision, cross-border cooperation and transparency. In order to prioritize the jurisdictions for eventual IMF assessment, OFCs were divided into three categories: Group I (cooperative OFCs with high quality supervision), Group II (potentially cooperative OFCs with low quality supervision) and Group III (non-cooperative OFCs with low quality supervision).

The OFCs in Group I, Hong Kong, Luxembourg, Singapore and Switzerland, were "generally perceived as having legal infrastructures and supervisory practices, and/or a level of resources devoted to supervision and co-operation relative to the size of their financial activities, and/or a level of cooperation that are largely of a good quality and better than in other OFCs." The OFCs of Guernsey, Ireland, the Isle of Man and Jersey were also generally viewed in the same light "though continuing efforts to improve the quality of supervision and co-operation should be encouraged in these jurisdictions.’’ (1)

In response to the G-7 Finance Ministers 1998 Birmingham Summit, the FATF formally created the Ad Hoc Group on Non-Cooperative Countries and Territories (NCCT.) In 1999, this group developed twenty-five criteria for the purpose of determining which jurisdictions weakened the global effort to combat money laundering. These criteria encompass four broad areas:

• Loopholes in financial regulations

• Obstacles raised by other regulatory requirements

• Obstacles to international cooperation

• Inadequate resources for preventing and detecting money laundering activities

FATF initiated a review of a first tranche of jurisdictions in February 2000. After a through review and dialogue with these jurisdictions, the FATF at its June 2000 Plenary identified fifteen jurisdictions as non-cooperative in the international fight against money laundering. Those fifteen were as follows: the Bahamas, the Cayman Islands, the Cook Islands, Dominica, Israel, Lebanon, Liechtenstein, the Marshall Islands, Nauru, Niue, Panama, the Philippines, Russia, St. Kitts and Nevis, and St. Vincent and the Grenadines. All but Israel, Lebanon and Russia are OFCs.

Fourteen other jurisdictions, all OFCs, were identified as having deficiencies, but were not placed on the non-cooperative list. Those jurisdictions are as follows: Antigua and Barbuda, Belize, Bermuda, British Virgin Islands, Cyprus, Gibraltar, Guernsey, the Isle of Man, Jersey, Malta, Mauritius, Monaco, Samoa and St. Lucia. The reviews of two other OFC jurisdictions, Vanuatu and the Seychelles, were not completed at the June Plenary, but at the October Plenary neither jurisdiction was determined to be non-cooperative.

At the July G-7 Finance Ministers Summit held in Japan, the United States along with its partners, issued formal advisories or notices notifying all financial institutions in G-7 countries of the FATF’s issuance of Recommendation 21.(2) The U.S. Department of Treasury issued individual advisories regarding each of the fifteen named NCCTs to all U.S. financial institutions. The advisories advised financial institutions to "give enhanced scrutiny" to transactions involving the named jurisdictions.

Offshore Financial Services Chart

Money Laundering Trends and Typologies

As in previous years, money launderers have demonstrated a great deal of creativity in combining traditional money laundering techniques into complex money laundering schemes designed to thwart the ability of authorities to prevent, detect and prosecute money laundering. Increasingly, however, money launderers are modifying traditional techniques to take advantage of developments and technologies designed to streamline the process as well as employing the services of professionals such as lawyers and accountants to help launder illicit proceeds. Below are some examples of various money laundering typologies and a review of statistical information on U.S. money laundering trends for 2000.

Suspicious Activity Reporting: Suspicious Activity Reports (SARs) continue to play a critical role in U.S. anti-money laundering efforts. Similar types of reporting systems are in operation throughout the world and are a key component in global anti-money laundering efforts as well. In addition to their importance to law enforcement efforts to combat money laundering, SAR reporting can also provide important information on current money laundering trends and typologies. This information can then be used by authorities to develop more effective countermeasures. The following statistical overview is derived from aggregate totals for Suspicious Activity Reports filed by depository institutions (i.e., banks, thrifts and credit unions) from the U.S. SAR system. A small part of the total volume relates to reports filed by affiliates of depository institutions or, in some cases, filed voluntarily by brokers and dealers in securities, money service businesses, or gaming businesses.

Underlying suspicious activity identified in SARs data is provided in rank order in Chart 2. It should be noted that for the largest number of filings (Structuring/Money Laundering—45.3 percent of all filings), structuring activity comprises about 50 percent of the SARs identified under this category. Chart 3 breaks out the overall data by violation/year.

The size of the U.S. national SAR database presents special opportunities for developing analytic approaches to the data set. Analysis of the data set has enabled FinCEN to provide banks with important feedback regarding examples and patterns of suspicious activity.

SARs filed during the first half of 2000 reflect several complex activities involving suspicious wire transfer patterns. As reported in the SAR narratives, many of these suspicious wire transfer patterns involve shell companies—i.e., corporations that engage in no apparent business activity and that only serve as a conduit for funds or securities. Often the activities also involve foreign transactors located in jurisdictions considered non-cooperative in the fight against global money laundering.

Several complex suspicious wire transfer transactions have been observed, each involving geographically complicated wire transfer routing (originator, beneficiary, or transit/intermediary banks) and/or geographically complex originator and beneficiary activity. More than $500 million in suspicious wire transfers have been reported in connection with this type of activity.

These activities display common patterns of underlying suspicious activity:

• A lack of evidence of legitimate business activity, or any business operations undertaken by many of the companies;

• Unusually large numbers of wire transfers (several thousand wires totaling more than U.S. $500 million);

• Transactions conducted in bursts of activities within a short period of time;

• Beneficiaries maintaining accounts at foreign banks that have been the subject of previous SAR reporting due to suspicious wire transfer activity;

• Reappearing beneficiary banks based in offshore locations, the account of at least one of which has been closed by the reporting financial institution due to overall suspect activity.

Law enforcement information and SARs filed by U.S. financial institutions confirm a shift in suspected money laundering activity involving Mexico. Rather than transiting through Mexico en route to Colombia or other Central and South American destinations, often drug proceeds are now cycled through Mexico directly back into the United States. SARs have revealed patterns of large wire transactions ($1.5 million or more per transaction) moving funds to U.S. payees from Mexican money exchange houses and other financial institutions, which may at least, in part, be attributable to changes in the laundering cycle. Such changes in patterns are believed to stem from the heightened profile of Mexico-based criminal groups in drug trafficking in the U.S., which creates a corresponding increased threat of money laundering activity linked to Mexico.

The 2000 National Money Laundering Financial Sector Strategy Conference, co-sponsored by the U.S. Departments of Treasury and Justice, provided a forum for discussing recently observed trends pertaining to the use of money remitters for illicit funds transfer and money laundering.

There was a general consensus among the conference participants that there are three major categories of remitters currently operating: a) money remitters that are corrupt and are working directly with the money launderers and drug dealers; b) money remitters that might not be directly involved with the illicit proceeds, but are "willfully blind" to these activities and transactions; and c) money remitters that are not necessarily aware of nor "willfully blind" to the illicit activities.

Various schemes appear primarily designed to evade federal and industry practice that is mandated by record keeping, reporting, and customer identification requirements. These varied activities include basic structuring of money transfer transactions below the reporting and identification dollar amount thresholds mandated by government; the use of multiple money transfer agent businesses and/or parent remitter companies to avoid overall monitoring and detection by the industry(1); and frequent use of falsified names, addresses, and receipts as a "cover" justification for the substantial illicit funds transfers.

Analysis of SAR reporting on ATM transactions confirms a continuing trend in suspicious transactions in which funds are wired to/through a U.S. financial institution from a foreign source and then withdrawn in cash in a third country using ATMs. SARs indicate such ATM withdrawals in at least 57 nations, with the highest incidence in Colombia (408 occurrences), followed by Venezuela (145), Mexico (119), and Argentina (31). The wire transfers that start the cycle originate primarily in Switzerland, Italy, Germany, and England. Amounts up to several hundred thousand dollars have been withdrawn over several months using this method.

The Black Market Peso Exchange System (BMPE) is a trade-based system that depends on commercial traffic between the U.S. and Colombia to launder profits from the sale of illegal drugs in the United States. The BMPE is a significant money laundering conduit used by Colombian narcotics traffickers in repatriating revenues to Colombia. The process begins when a Colombian drug organization 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 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 organization’s account in Colombia. At this point, the organization 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.

To combat the BMPE, the U.S. Department of Treasury has instituted an interagency working group that has aggressively attacked this problem and whose efforts have resulted in better coordinated and integrated anti-BMPE investigations and increased successful prosecutions. Treasury's outreach programs to educate U.S. exporters of the operations of and their vulnerability to the BMPE have also achieved success. During the past year, high level U.S. Government officials met with senior officials of U.S. companies whose products are vulnerable to the BMPE to explain the system and to encourage them to develop programs to counter the BMPE.

In addition to these domestic outreach efforts, the United States, Colombia, Panama, Venezuela and Aruba have formed an international working group of experts to combat this money laundering system. This working group is to study the BMPE, report its findings, and recommend policy options and actions that can be taken by the governments against the BMPE.

On October 21, 2000, a task force composed of U.S. Treasury Department and Department of Justice officials and government officials from Aruba, Colombia, Panama, and Venezuela participated in the first meeting of this working group. At the meeting, the 30 experts discussed how the BMPE money laundering system affected each of their respective countries. Topics of discussion included the BMPE steps, documentation of international commercial transactions, the problems with existing paper trails and laws, and ways to improve international cooperation. The group’s work is planned to continue in meetings to be held in Colombia, Panama, and Venezuela during the course of 2001.

The hawala (or hundi) alternative (or parallel) remittance system continues to be a 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 and financial reasons; and it also often operates in conjunction with Western banking operations.

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 ineffective money laundering countermeasures in Dubai and the other Emirates.

Internet gambling is illegal in the United States. A joint FBI-IRS Internet gambling investigation recently targeted a Sports Tout Service (STC) which was providing its services via the Internet, as well as functioning as an Internet Service Provider (ISP). The STC service collected, collated and analyzed statistical and other information relative to sporting events, and then in turn sold this information to subscribers who factored it into their betting decisions. The STC/ISP also included two offshore gambling operations located in the Caribbean, both of which accepted wagers via the Internet or toll-free telephone numbers. Law enforcement personnel were successful in infiltrating the operation.

To launder the proceeds from their illegal Internet gambling activities, the subjects of this investigation employed the services of an attorney. The attorney devised an elaborate scheme in which the STC/ISP leased its services to the subjects of the investigation for a specified amount. Proceeds were also laundered through a series of bank accounts in the Caribbean and eventually funneled back to U.S. banking institutions. Investigators estimate that approximately $178 million was wagered through the STC/ISP annually. It is anticipated that subjects in this investigation will be charged with gambling, money laundering, tax evasion and RICO-related offenses.

United States law enforcement authorities have observed that as money laundering schemes become more complex, the perpetrators turn to the learned expertise of attorneys, accountants, consultants and agent representatives to aid them in the movement of illegal currency. These professionals, using shell corporations, nominees and fictitious records, devise elaborate paper trails to disguise the true source of illegal income. During Fiscal Years 1999 and 2000, 131 attorneys, accountants and consultants were sentenced as a result of money laundering convictions.

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, the Euro) 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.

In a recent case, United States law enforcement authorities identified a money laundering system that makes use of the legitimate gold trade to launder money through black market currency exchanges. In this system, gold jewelry is sold in the Panama Colon Free Trade Zone to Colombians (who are allegedly hoarding gold against the devaluation of the peso). The jewelry is smuggled into Colombia through the city of Bucaramanga. The jewelry is then melted and formed to resemble gold from mines, fabricated into pigment and then shipped to the U.S. for refining. (The pigment fabrication stage is important because the Colombian government will pay a 4.5 percent export tax credit on the exported goods.) The "gold pigment" arrives in the U.S. but is instead entered as "bullion", which does not qualify for the export credit. The gold is refined and sold in the U.S. and then smuggled back to South America. The resulting loss to the Colombian government is estimated to be over $20 million. A variant of this scheme has the refined gold being exported to Switzerland for sale to Italian jewelry manufacturers for delivery to Panama. In all cases, it is believed that the same gold is being recycled throughout each step of the scheme.

An anti-smuggling task force consisting of U.S. Postal Inspectors and special agents from the Immigration and Naturalization Service and Internal Revenue Service executed a federal warrant at the Bank of America in New York City to seize the contents of an account (totaling roughly $230,000) maintained by an international exchange firm located in the United Arab Emirates. The investigation indicated that the account contained alien smuggling proceeds, in the form of structured postal money orders and other monetary instruments. These proceeds were being moved through the exchange company’s account to members of alien smuggling organizations in India and, as reimbursement for smuggling fees, to relatives in India who helped with the operation.

A multi-agency task force consisting of U.S. Postal Inspectors from the North Jersey/Caribbean Division and special agents from the Internal Revenue Service, Federal Bureau of Investigation and U.S. Customs Service arrested nine members of a narcotics and money laundering ring known as the "Dussan Organization." The ring operated in Northern New Jersey, New York and Colombia and was charged with money laundering and structuring transactions to avoid currency transaction reporting requirements. Members of the group allegedly structured postal and commercial money orders at various post offices and convenience stores in New Jersey and New York, and used express mail services to send the money orders to various businesses in the United States and South America. It is estimated that the ring laundered at least $3 million in illegal proceeds.

A review of SARs filed by gaming establishments reveals patterns of suspicious activity in which casino accounts are used to transfer significant amounts of funds through non-bank financial transaction channels. The funds are cashed out by the client or moved to other accounts with minimal or no gaming activity. Variations on this theme involved an initial deposit by wire or bank cashiers check, but then the funds would be wired out to another account. The funds were then stored for a period of time in a casino safety deposit box or held in the form of safekeeping markers, and then cashed out. In several instances the client was observed transferring chips to other individuals to cash out, as well as cashing out a greater amount than held on deposit (with no gambling winnings to account for the excess amount).

One multi-agency task force investigation focused on a scheme where an investment consultant had formed a management group under the laws of Anguilla and offered investment services to citizens of the United States. A confidential informant (CI), cooperating with law enforcement, advised the offshore consultant of the CI's desire to launder drug proceeds. The consultant offered to set up an off shore trust for the CI and withhold the CI's identity from the trust records, thereby distorting the true illegal source of the funds.

Due to the U.S. Customs Service requirement of filing an International Transportation of Currency Report, the consultant required delivery of the funds by a courier to an international airport in Canada before the consultant actually took possession of the funds. In Toronto, Canada the consultant took delivery of $100,000 in unsigned traveler checks, promising to deposit the checks in Caribbean bank accounts and to wire transfer the money back to the CI, less commissions. The consultant then traveled to St. Maarten and Anguilla and established the promised accounts. These accounts were opened at Barclays Bank, Anguilla and Chase Manhattan, St. Maarten. The funds were then wire transmitted back to the U.S.

Upon his return to the United States, the subject was arrested. The subject was indicted on six counts of money laundering and Customs violations. Through plea negotiations, the subject received 18 months incarceration.

On October 15, 1998, Congress passed the Money Laundering and Financial Crimes Strategy Act of 1998. The Act called upon the President, acting through the Secretary of the Treasury and in consultation with the Attorney General, to develop a national strategy for combating money laundering and related financial crimes. The Act called for the first national strategy to be sent to Congress in 1999, and updated annually for the following four consecutive years. The first annual strategy was released on September 23, 1999. The National Money Laundering Strategy for 2000 was released on March 8, 2000, at a press conference co-chaired by the Deputy Attorney General and Deputy Treasury Secretary.

The 2000 Strategy is organized according to the four following overarching goals: (1) to strengthen domestic enforcement in order to disrupt the flow of illegal money; (2) to enhance regulatory and cooperative public-private efforts to prevent money laundering; (3) to strengthen partnerships with state and local governments to fight money laundering throughout the United States; and (4) to strengthen international cooperation in order to disrupt the global flow of illicit money.

These four goals are supported by identified objectives which, in turn, are to be accomplished through approximately 65 specific action items set out in the strategy.

The following are summaries of the most significant action items:

• Designation of High Intensity Financial Crime Areas (HIFCAs): The designation of HIFCAs was mandated by the 1998 legislation and was the first action item in the 1999 Strategy. HIFCAs are defined as special, high-risk areas or sectors where law enforcement will concentrate its resources and energy to combat money laundering. The Justice and Treasury Departments led a process to identify and designate the first HIFCAs. As part of this process, the two departments convened an interagency HIFCA Working Group to collect and analyze relevant information and make recommendations to the Deputy Attorney General and the Deputy Treasury Secretary for the HIFCA designations. The 2000 Strategy designated the first HIFCAs: (1) New York City/Northern New Jersey area; (2) the Los Angeles, California, metropolitan area; (3) San Juan, Puerto Rico; and (4) a "systems" HIFCA to focus and enhance current efforts addressing the problem of cross-border currency smuggling/movements between Mexico and Texas and Arizona. The HIFCA program is intended to concentrate law enforcement efforts at the federal, state, and local levels to combat money laundering in the designated high-intensity money laundering zones. Future HIFCAs will be selected from applications received from prospective areas or from candidates proposed by the Secretary of the Treasury or the Attorney General.

• Financial Crime-Free Communities Support Program: The 2000 Strategy announces the launching of the Financial Crime-Free Communities Support (C-FIC) program. The C-FIC program is also the result of a legislative mandate which calls for the establishment of a federal grant program to provide seed capital for emerging state and local anti-money laundering enforcement efforts. The Bureau of Justice Assistance (BJA) is assisting the Treasury Department in administering this grant program. Congress appropriated $2.9 million in fiscal year 2000 for the commencement of the program. The first nine recipients for C-FIC grants were announced in September 2000 and included a variety of programs proposed by state and local law enforcement agencies in New York, Illinois, Arizona, Florida, Texas and California.

• Money Service Business Suspicious Activity Report Reporting: In conjunction with the release of the strategy, the Treasury Department announced the issuance of final regulations, effective December 31, 2001, mandating that money transmitters, issuers, sellers, and redeemers of money orders and traveler’s checks must report suspicious transactions to the Treasury Department.

• Financial Crime Havens: The 1999 Strategy called for the formation of an interagency working group to explore whether measures should be adopted to restrict financial institutions in the United States from opening or maintaining correspondent banking accounts for foreign banks that are organized in "lax" offshore jurisdictions. This initiative was pursued in conjunction with the FATF NCCT initiative which resulted in the naming of fifteen Non-cooperative Countries and Jurisdictions in June 2000. The issuance of this list was followed by the issuance of FinCEN Advisories to United States financial institutions concerning the fifteen designated jurisdictions.

• "Gatekeepers": Pursuant to the 1999 Strategy, an interagency working group was created to examine the responsibilities of professionals, such as lawyers and accountants, with regard to money laundering. The 2000 Strategy directed the working group to continue its review and "to make recommendations—ranging from enhanced professional education, standards or rules, to legislation—as might be needed." In April 2000, a meeting of representatives from the G-8 countries was convened in Washington, D.C. to discuss this issue. Because of the difficult legal and policy issues involved when considering the responsibilities of lawyers and accountants in this area, the working group is continuing to study this issue and prepare recommendations for the Steering Committee in 2001.

• Legislation: The Treasury Department announced that in conjunction with the 2000 Strategy, the administration was sending new anti-money laundering legislation to Congress. The International Counter-Money Laundering Act of 2000 offered needed new authority to take calibrated action against foreign financial crime havens. In addition to seeking enactment of the Treasury bill, the 2000 Strategy called for the administration to seek enactment of the Justice Department’s Money Laundering Act of 2000, which was submitted to Congress on November 10, 1999. This bill contained numerous provisions that would enhance the effectiveness of the money laundering statutes. However, neither of these bills was enacted in 2000.

In conjunction with the announcement of the 2000 Strategy, on March 7, 2000, the Attorney General and the Secretary of the Treasury issued a joint memorandum to all U.S. Attorneys (USAs) and the heads of all of the federal law enforcement agencies emphasizing the importance of anti-money laundering enforcement. In addition it requested the implementation of several action items recommended in the 1999 Strategy.

Specifically, the memorandum urged the USAs and the law enforcement agencies:

• to encourage below-threshold investigations and prosecutions that potentially have a systemic or financial sector-wide effect on money laundering;

• to establish SAR review teams;

• to ensure that all informants and cooperating witnesses are debriefed with respect to money laundering methods and their knowledge of money laundering techniques;

• to increase the use of electronic surveillance in appropriate money laundering cases;

• to enhance the support and analysis of multi-district money laundering investigations;

• to increase training for financial investigations; and

• to increase the strategic use of asset forfeiture in money laundering cases.

The 2000 Strategy set out a far-reaching and highly ambitious regimen of action items and milestones to be addressed and accomplished during 2000. The implementation of the Money Laundering Strategy is being guided by an interagency Steering Committee co-chaired by the Deputy Secretary of the Treasury and the Deputy Attorney General, with the participation of relevant departments and agencies. The Steering Committee has the responsibility of tracking and identifying progress toward fulfillment of the goals and objectives identified in the 2000 Strategy and this progress will be reported in the 2001 Strategy.

At the fiftieth anniversary of the United Nations in 1995, the President of the United States broadened the definition of what constitutes a national security threat to include international crime. Shortly thereafter, in October of that year, PDD-42 was signed, directing a cooperative federal effort against international criminal organizations and money laundering. The U.S. Departments of Justice, State and the Treasury as well as the U.S. Coast Guard, the National Security Council, intelligence agencies and other federal entities were instructed to work together to confront and counter this threat to U.S. national security and international stability.

PDD-42 directs the agencies to cooperate to accomplish the following objectives: (1) produce greater results in this area by increasing the priority and resources devoted to this effort; (2) achieve increased effectiveness and synergy by improving coordination among agencies and across the types of international criminal activity; (3) assist and work more closely with other governments to create a global response and to eliminate this threat and to eliminate sanctuaries; and (4) use creatively and aggressively all legal means available to the government to combat international organized crime.

The year 2000 saw progress on all of these fronts with notable success achieved in developing a global response identifying money laundering vulnerabilities and encouraging compliance with international anti-money laundering standards. A United States interagency group worked with the Financial Action Task Force (FATF) in its groundbreaking effort to name non-cooperative countries and territories in the fight against money laundering. As noted previously in this report, the FATF developed a set of twenty-five criteria to be used in determining whether a jurisdiction had an acceptable or deficient anti-money laundering regime and issued a report listing fifteen jurisdictions as having serious deficiencies.

Another 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 is using the Foreign Narcotics Kingpin Designation Act ("the Kingpin Designation Act"). In December of 1999, the President signed into law the Kingpin Designation Act, which provides him with a statutory framework for imposing sanctions against foreign drug kingpins when such sanctions are appropriate. Twelve foreign persons were identified as appropriate for sanctions on June 1, 2000 and others will be designated by June 1, 2001. Of those twelve foreign persons, six were from Mexico (Benjamin Alberto Arellano Felix, Ramon Eduardo Arellano Felix, Jose de Jesus Amezcua Contreras, Luis Ignacio Amezcua Contreras, Rafael Caro Quintero, Vicente Carrillo Fuentes), two were from the Caribbean (Noel Timothy Heath, Glenroy Vingrove Matthews), two were from Nigeria (Abeni O. Ogungbuyi, Oluwole A. Ogungbuyi) and two were from Asia (Chang Chi Fu, Wei Hsueh Kang).

The Kingpin Designation 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 600 individuals and entities have been identified as SDNTs since the Colombia program’s inception.

Both the Kingpin Designation 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 their 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 Designation Act, as well as designations under an IEEPA program, depends 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 Designation 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 Designation 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 accordance with PDD-42’s emphasis on international cooperation and collaborations, to the extent feasible, the United States will continue to coordinate carefully with host governments concerning drug kingpins. Furthermore, the United States will continue to work cooperatively with appropriate host government authorities to pursue additional measures and leads against those significant foreign narcotics traffickers. An example of the importance of this cooperation has been the success the Government of Colombia has had in applying the IEEPA-SDNT program against narcotics cartels in that country.

This case involved 19 individuals in the Home Health Care service, one being both an attorney and accountant. This indictment contained 123 counts involving conspiracy, false claims, wire fraud and money laundering. The false claims involved fictitious patient claims and claims for services which were not provided.

The two primary subjects employed an attorney to incorporate four interrelated shell corporations as the controlling entities. In addition, eight nominee corporations were created to generate fictitious health care service records reflecting in-home therapy and nursing care. Health care providers including therapists, registered nurses and physicians operated the nominee corporations. To keep the health care billing, tax return filings and bank account records synchronized, the two main subjects relied on the attorney/accountant defendant.

In excess of $4 million was laundered through bank accounts in New York, Florida and suspected offshore accounts in connection with this scheme. Numerous accounts were created at four or five separate banks for purposes of amassing and moving these funds. Cashier's checks often were purchased and even negotiated through the attorney/accountant's trust account to conceal property acquisition. This defendant was sentenced to two years in jail.

Both primary defendants were ordered to forfeit real and personal property, including the $4 million and purchased property. They received five- and two-year prison sentences respectively. Two related case defendants laundered an additional $2 million and were charged in a separate 33 count indictment. They were ordered to forfeit $95,000 in currency.

The Department of Justice announced in November 2000 that Jose Stroh, of Cali, Colombia, pled guilty to conspiring to launder in excess of $129 million of narcotics proceeds for various drug cartels in Colombia between 1986 and 1992.

Stroh, a fugitive Colombian national, was apprehended by the DEA in early February 2000 while attempting to pass through Panamanian customs. He was transported to Miami and eventually Connecticut to face charges.

Stroh was charged with operating a money laundering enterprise which was responsible for turning millions of dollars of proceeds generated from cocaine sales in New York, New Jersey, Connecticut, California and Mexico into Colombian pesos which he returned to the Cali narcotics traffickers.

Stroh, operating from Colombia, opened bank accounts in Panama into which the drug proceeds were delivered in the form of money orders, checks and wire transfers. Cash was transferred in suitcases, boxes, bags, and other containers. Money launderers then would convert the cash to checks or deposit it into accounts where it could be transferred anywhere in the world. Some of these funds were wired to bank accounts in Israel and Germany where the laundered funds were subsequently moved to one of two Panamanian shell corporations that Stroh controlled. Often times, the money orders were concealed inside of magazines and shipped out of the U.S. through various courier services in New Jersey to Stroh’s businesses in Panama.

At the same time Stroh was negotiating with Cali Cartel intermediaries for the purchase of dollars in the United States, he was also negotiating with others for the sale of these dollars in exchange for Colombian pesos. Stroh often sold dollars to "legitimate" businesses in Colombia that needed dollars for transactions in the United States.

Stroh is scheduled for sentencing in February 2001. He faces a maximum term of imprisonment of five years, and $5,000,000 in fines. As part of his agreement with the Government, Stroh agreed to relinquish $930,000 in several accounts that he held at Lehman Brothers brokerage house in Miami, Florida.

Dinero Express Inc. is a Dominican money remitter licensed in the states of New York, Massachusetts, New Jersey, Rhode Island, Florida, and Puerto Rico. In August 1996, three Dinero Express employees were arrested and pled guilty to money laundering violations. In addition to these arrests, two search warrants were executed on Dinero Express locations. Analysis of the search warrant documents, as well as documents provided by a cooperating defendant, revealed a money laundering operation, responsible for the laundering of approximately $10.1 million in criminally derived proceeds through an elaborate structuring scheme.

On April 18, 2000, at the conclusion of a 7 year investigation, a Federal Grand Jury empanelled within the Southern District of New York, issued an indictment charging Dinero Express Inc., and its President, Roberto Beras with 82 counts of money laundering and currency reporting violations. The indictment went on to charge Luis Francisco Soriano, a manager of Dinero Express, with 4 counts of money laundering and currency reporting violations, as well as Maria Mendoza, clerk of Dinero Express, who was charged with 35 counts of currency reporting violations.

On December 5, 2000, the Jury ordered forfeiture of $10 million against Dinero Express Inc. and Roberto Beras.

Operation Cashback is one of the largest investigations of the Black Market Peso Exchange