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International Narcotics Control Strategy Report, 1998 Released by the Bureau for International Narcotics and Law Enforcement Affairs, U.S. Department of State Washington, DC, February 1999

Introduction

As the 1990s draw to a close, we have an opportunity to assess the changes in money laundering over the last decade. These changes have been phenomenal. Ten years ago only a handful of jurisdictions had criminalized money laundering. Today, most major jurisdictions have enacted laws criminalizing the laundering not only of drug proceeds, but of the proceeds of most serious crimes. Jurisdictions around the globe are enacting laws and regulations to implement know-your-customer regulations and establish suspicious activity reporting systems. From a time ten years ago when the Financial Action Task Force (FATF) was but an idea in the mind of the G-7 community, the FATF has developed into the major driving force promoting concerted action against money laundering. The FATF's 40 Recommendations have become the standard against which anti-money laundering regimes are measured, and the FATF itself is now conducting its second round of mutual evaluations to assess the performance of its 26 member jurisdictions in implementing the 40 Recommendations. Other multilateral regional groups, such as the Organization of American States, the Caribbean Financial Action Task Force, the Asia/Pacific Group and the Council of Europe, also have addressed the problem of money laundering in their regions. In the span of ten years, the world's awareness of the phenomenon of money laundering and the will to address this problem have developed exponentially.

That is not to say that the problem has been solved or is even under control. As jurisdictions have taken countermeasures, the criminals who generate criminal proceeds and the money launderers who disguise those proceeds have developed new and more sophisticated methods for moving money around the globe. As money launderers are driven out of traditional banking systems, they exploit alternative banking systems, such as offshore financial centers (OFCs), the hawala system, or the Colombian black market peso exchange system, or turn to the non-bank financial sector to move their criminal proceeds. With lightening speed, money launderers can probe the financial system for vulnerabilities and adapt their methods to exploit these soft spots.

Moreover, while substantial progress has been made around the globe, there are many frontiers, which have yet to embrace anti-money laundering regimes. The failure of countries such as Russia, Thailand and Israel to enact such regimes has been particularly disappointing. Moreover, even countries such as Mexico which have enacted anti-money laundering regimes face considerable challenges in implementing those regimes. Other countries, which appeared to be progressing, such as Antigua, have taken steps backward in this area. Finally, while the veil of bank secrecy has been lifted from much of the globe, many jurisdictions still continue to hide behind this veil in the hopes of generating income by providing protection to the profits of drug traffickers, organized crime figures, arms traffickers, terrorists and tax evaders. These frontiers provide the challenge for the next decade.

As the door closes on this century, the jurisdictions that have taken substantial steps to confront criminals by attacking the movement of criminal funds are to be commended. As we begin this annual report, it is hoped that jurisdictions that have yet to join this crusade will do so early in the coming decade.

Why It Is Important To Fight Money Laundering

People who commit crimes need to disguise their money so that they can then use it. This truism 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 money laundering provides the fuel for drug dealers, terrorists, arms dealers, 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 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. Money laundering can have devastating effects on financial institutions and can undermine the stability of democratic nations. Modern financial systems permit criminals to transfer instantly millions of dollars 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. The use of private banking facilities, offshore banking, free trade zones, wire systems, shell corporations, 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 in Russia and Asia point to the necessity of promptly addressing this growing threat.

Money launderers 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 the tax collector. 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 who wish to evade the payment of taxes in their home countries and to keep the money they have deposited from the knowledge of tax authorities. Billions of untaxed dollars (and marks, lira, pounds, et cetera) are held on deposit in these financial centers or tax havens.

It makes no difference whether the untaxed funds on deposit 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.

Money Laundering Trends and Typologies

Current Global Trends in Money Laundering

Several general observations can be made regarding the current characteristics of money laundering. First, the global nature of the money-laundering phenomenon renders geographic borders increasingly irrelevant. Launderers tend to move their activity to jurisdictions where there are few or weak money laundering countermeasures. Second, no significant new methods of money laundering have been identified during the past year. However a number of traditional money laundering techniques, such as structuring transactions so as to avoid reporting requirements, cash smuggling, currency exchange and the use of offshore financial centers (OFCs) continue to be prominent methods for hiding the proceeds of crime. Various uses of the Internet--such as casino gaming and its associated banking activity-as well as electronic/Internet banking increasingly provides a mechanism that could be used for rapid movement away from the traditional use of paper currency in industrialized nations. Third, there is a growing trend among money launderers to move away from the banking sector to the non-bank financial institution sector. In the non-bank financial sector, the use of bureaux de change (currency exchange houses) and money remittance businesses (such as wire transfer companies) to dispose of criminal proceeds remain among the most often cited threats.

Fourth, there is also a continuing increase in the amount of criminal cash being smuggled out of countries for placement into financial systems abroad. In many European and other jurisdictions there are no cross-border records tracking the movement of cash, and it is relatively simple for launderers to take large sums of cash across land borders to neighboring jurisdictions. As with drugs, law enforcement officials believe that while passengers are carrying large amounts of cash on their persons, an even greater amount of cash is probably being hidden in cargo shipments. This trend of cash smuggling appears to be attributable mostly to the success of anti-money laundering measures in banks and other financial institutions in jurisdictions that require disclosure of large placements of cash.

Finally, the most noticeable trend is the increase in the use by money launderers of non-financial businesses or professions related to banking institutions. Money launderers are increasingly receiving the assistance of professional facilitators such as accountants, notaries, lawyers, real estate agents, and agents for the purchase and sale of luxury items, precious metals and even consumer durables, textiles and other products involved in the import-export trade. All these facilities utilize a variety of vehicles to mask the origin and ownership of tainted funds. The use of shell companies, usually incorporated in OFC jurisdictions, is one common vehicle.

Offshore Financial Centers

The Department of State recognizes the growing use of offshore financial centers for criminal purposes, from terrorism through tax evasion, as a disturbing trend. While OFCs have an appropriate role to play in international trade and commerce, they are being increasingly exploited for criminal purposes, including financial crimes, fraud, concealment of illicit gains, and money laundering enterprises.

For this reason, in this edition of the International Narcotics Control Strategy Report (INCSR), the Department of State provides a broad overview of OFCs, recognizing that much more attention will need to be devoted to this growing phenomenon in the future.

What Is an Offshore Financial Center?

An OFC is a jurisdiction where an intentional effort has been made to attract foreign business by deliberate government policies such as the enactment of tax and other fiscal incentives, "business friendly" regulatory/supervisory regimes and secrecy enforced by law. It is the OFC's legal framework that makes it unique. Common to most developing and mature OFCs is a legal framework that to varying degrees facilitates the maintenance of secrecy, the minimization or mitigation of tax and supervisory burdens, and freedom from common regulatory constraints, such as exchange controls and disclosure requirements.

When viewed as a financial services concept, an OFC is any jurisdiction that enables banks, trust companies, company incorporators, other financial intermediaries and financial advisors resident in that jurisdiction to provide products and services to non-residents in their home countries. In many cases the same services are not available to their own residents. These jurisdictions are often sovereign states but not necessarily so. They may be a free zone within a city, such as Dublin, Ireland. They may also be political subdivisions within a sovereign state, such as Madeira or Hong Kong.

The relationship between offshore and onshore jurisdictions is complex, but for the most part offshore financial centers tailor their products and services to residents of other jurisdictions. Through a practice known as nicheing, OFCs regularly modify their legislation, developing new financial vehicles and services to attract business from their target markets.

What Are the Common Characteristics of an OFC?

Many OFCs claim that their carefully crafted laws provide beneficial business and financial planning options for onshore clients. These options include, but are 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 (e.g., for owners of airplanes and ships); sophisticated insurance management options; investment opportunities for individuals that transcend home country marketing regulations; preservation of assets; investment of overnight funds; and freedom from certain home country regulatory requirements.

In short, the legislative frameworks of OFCs allow their onshore clients the opportunity to use these laws to their advantage so that they are able:

• To conduct their business activities behind a wall of secrecy;
• To circumvent their home country's tax regime; and
• To avoid sophisticated home country regulatory and supervisory programs.
  

The reality, however, is that the increased opportunities these offshore financial options provide can be, and have been, exploited for nefarious use by drug cartels, terrorists, money launderers, tax evaders and other criminals who rely on the financial secrecy provisions of OFCs to further their criminal enterprises.

Where Are OFCs Located?

In the 1960s, to be offshore, as in offshore from the United States, the United Kingdom, and Germany for example, it was sufficient to be just physically "out of sight and out of mind" as far as most onshore governments were concerned. It is not surprising, therefore, that the heaviest concentrations of the more established OFCs are in geographic proximity to the G-7 nations.

Perhaps the principal factor that has enabled the development of more remote OFCs is the growth of the Internet, which provides a mechanism to connect distant OFCs easily and rapidly to onshore clients who are not in geographic proximity. The Internet also provides OFCs with increased connectivity to international financial markets. In short, the Internet has made geographic proximity to their client base and international financial centers increasingly irrelevant for OFCs.

At the same time, "retail" investors have become more sophisticated as increased job mobility and the demise of corporate pension plans have forced individuals to take greater responsibility for their own financial planning.

Thus, it is now possible for an enterprising jurisdiction anywhere in the world to establish itself as an emerging OFC. The newest OFCs, e.g., Niue and the Marshall Islands, are now sprouting in remote areas of the world, such as the Pacific. Even more "remote" are mere figments of fertile imaginations such as the Dominion of Malchizedek or The Kingdom of Enenkio Atol, both entirely fraudulent in intent and practice.

OFCs are springing-up at an ever-increasing pace today, and it is difficult to say with any degree of accuracy how many are established and operating at any given point in time. Supervisory and law enforcement sources have, however, estimated that there were at least 63 identifiable OFCs operating around the world at the end of 1998. See the OFC chart below.

The bulk of the established and developing OFCs are still located in Europe and the Caribbean basin area, with the newer or emerging OFCs concentrated in Asia. The present migration to Asia, particularly the Pacific, is largely the function of several trends:

The targeted onshore states and multinational organizations are aggressively urging established offshore centers to develop internationally acceptable standards for supervising and regulating their offshore financial services sectors. These efforts are driving much of the high-risk/low-reward business out of some European and Caribbean OFCs, in a process known as "mainstreaming." This is not to say that all of the marginal business is moving out of the offshore market. Unfortunately, some undesirable business is simply relocating to OFCs in regions that view the efforts of other OFCs to mainstream as an opportunity to increase their own client base at the expense of those OFCs that are mainstreaming--without regard to quality or controls.

• Representatives of high-risk business, seeking to find more accommodating safe havens, have taken to the road. They are attempting to convince governments and professionals in remote states, where profitable new business is available, to develop an offshore market with a more "relaxed" regime.
• Governments with few options for economic diversification and limited resources, on the other hand, have seen the apparent financial success of other states that have become OFCs and are encouraged to follow their example. In order to compete with more established OFCs, these governments are willing to create OFCs despite high risks and limited resources to manage those risks.

How Will OFCs Fare In the New Millennium?

The proliferation of alternative markets, provided in locations such as the Marshall Islands and Niue, is an example of nicheing in an aggressive market. The very existence of Niue and the Marshall Islands as OFCs is the direct result of competition in a "hot market." Practitioners, seeking to find competitive alternatives, simply created two new OFCs. Industry observers see this trend continuing. Supervisors in the United States, Europe and Asia have noted this expansionary trend, which is taking place in the margins of their regional offshore markets, with increasing concern. It is the view of many observers of the offshore phenomenon that OFCs will find the new millennium a much more challenging era than the one they are leaving. It will almost certainly be a polarizing experience that will define the very essence of the offshore financial services industry, giving new meaning to the expression--"the good, the bad and the ugly."

For many of the established OFCs it will mean challenging OFC governments to mainstream their financial services sectors by:

• Revisiting secrecy laws in light of the legitimate needs of law enforcement authorities;
• Reviewing all relevant financial legislation to assure that it supports the government's objective to mainstream the industry;
• Declaring all business from money launderers and criminals to be undesirable and creating an environment supportive of anti-money laundering initiatives;
• Assuring that the OFC's financial service sector is in full compliance with all international standards, including those promulgated by the United Nations (UN), Basle Committee on Banking Supervision, Financial Action Task Force (FATF), Caribbean Financial Action Task Force (CFATF), Offshore Group of Banking Supervisors (OGBS) and the Organization for Economic Cooperation and Development (OECD).
• Developing an internationally acceptable level of supervision and regulation for the OFC's financial services sector;
• Establishing standards to upgrade the quality and number of professionals operating in OFC financial services sectors and the relevant government regulatory agencies, and the quality of service delivered.
  

The challenge for those OFCs that have a modest offshore nucleus and are continuing to develop their offshore financial services sectors will be to determine if they are going to take the high road or the low road. A determination to take the high road and mainstream will require:

• Assessing the resources of the state to determine if they are sufficient to establish an internationally accepted supervisory regime;
• Avoiding the enactment of highly restrictive secrecy laws that will provide unintended ability to shelter or launder criminal proceeds; and
• Declaring all business from money launderers and criminals, including tax evaders, to be undesirable and creating an environment supportive of anti-money laundering initiatives.
• Cooperating in tax enforcement matters.

Taking the low road, by choice or default, will place developing states, as well as those contemplating entry into the offshore market, at serious reputational, economic, law enforcement and political risk.

Regulation in the Newer OFCs of the Western and South Pacific

The Western and South Pacific regions have seen the recent development of OFCs in the Cook Islands, the Marshall Islands, Nauru, Niue, Samoa, Tonga and Vanuatu. These islands tend to have a laissez-faire approach to their banking rules and regulations. This regulatory philosophy was created specifically to prevent effective oversight of the offshore sector. As a result, governments in most of these nations have little or no control over their OFCs.

Isolated as they are, these island OFCs demonstrate the globalization of international finance. Via the Internet and wire transfer, many U.S.-based Asians are now using the banking facilities of Nauru's OFC. There is significant use by Russian organized crime of the OFCs of Vanuatu, Samoa and Nauru. One increasingly common scheme is to employ non-Russian middlemen to open accounts or charter shell banks or shell companies (all with the same post office box address in Nauru) to give the impression of legitimate business with non-Russian entities.

The Internet has also brought gambling to the South Pacific and has recently generated more than $1.5 million a month--concentrated primarily in the Cook Islands.

Recent Case Examples of Misuse of Established OFCs

Offshore Internet Money Laundering

The majority of "virtual casinos" advertised on the Internet are said to have their physical locations in the Caribbean Basin, as can be seen in the OFC chart. While this is true in many instances, in other cases, these "Caribbean locations" are located there in name only.

The New York Office of the FBI has targeted offshore websites engaged in wire fraud and money laundering. The investigation focused on offshore gambling operations and their managers. The sites affected were located on Curacao, the Netherlands Antilles, Antigua, and the Dominican Republic. As a result of a five-month FBI sting operation, numerous indictments and arrests of the web-site managers occurred in March 1998.

The sting focused on virtual casinos, which are interactive websites that re-create the inside of a Las Vegas-style casino, offering everything from blackjack to slot machines. These virtual casinos exist only on the Internet, and the individuals operating them can be housed in a small office or villa on islands such as Antigua.

The offshore governments mentioned above have at least 30 Internet gambling operations each of which pays an annual license fee of $75,000 for sports betting and $100,000 for virtual casinos. These booming offshore website businesses also offer opportunities for criminals to evade U.S. taxes and a vehicle to launder funds from illicit sources through these casinos.

Operation Risky Business

In March of 1997, the FBI opened an investigation involving an advanced fee scheme as a result of information received by its Atlanta Division and developed through a racketeering enterprise investigation. The investigation was conducted jointly with the U.S. Customs Service. Numerous business people throughout the world were victims of this scheme, including people located in Singapore, Israel, Turkey, Australia, Greece, Germany, France, the British Virgin Islands, Canada, Ireland, the United Kingdom, and the United States. The subjects of the investigation advertised in periodicals and newspapers such as the Wall Street Journal and the New York Times, touting themselves as being able to provide large amounts of venture capital to businesses. The applications for this venture capital required that the victim-client provide a "working capital agreement" fee ranging from $50,000 to $2,000,000 based upon the amount of venture capital requested. This fee was initially sent to a bank in either Switzerland, Canada, England, or Germany, and was eventually forwarded to the American International Bank in Antigua. From there, the money was then transferred to the credit of Caribbean American Bank (CAB), also located in Antigua. CAB was wholly owned and chartered by the subjects of the investigation. After the funds were forwarded, the subjects required the victim-client to provide collateralized letters of credit up to the amount that they were requesting in venture capital. When the victim-client could not provide such a letter (virtually impossible to obtain), the subjects would invoke a portion of the contract signed by the victim-client which placed the contract in default. The "working capital agreement" fee and any other fees paid by the victim-client were then forfeited. During later portions of the scheme, the subjects required that the victim-client incorporate an entity in Antigua and open an account at CAB. This trick was used to give the false impression that no U.S. entity was involved and that only Antiguan corporations were seeking this venture capital. It is estimated that the scheme defrauded in excess of 400 people or groups worldwide, and that the aggregate loss to the victim-clients exceeded $100 million.

The indictment in this matter was sealed until May 7, 1998. As of February 2, 1999, eleven subjects had been arrested, and four had entered plea agreements with the government. The other seven subjects are awaiting trial.

Guernsey International Financial Fraud

The FBI continues to investigate a company, registered with the Securities and Exchange Commission (SEC), which is suspected of being involved in money laundering throughout the international financial community, including offshore locations. This company was allegedly engaged in the development and sale of image processing technology. The company allegedly included false revenue, earnings and asset figures into its annual and quarterly reports and in other statements disseminated to the investing public and to stockbrokers. The president, a vice president, the controller, one director and 5 other individuals having business with the company were indicted on 17 counts of security-related violations in August 1996. The case has not yet gone to trial, however; the controller and 3 other individuals have plead guilty.

The company reported that it had received approximately $8 million in revenue from ten foreign customers, purportedly from the alleged sale of computer software and hardware. The customers were incorporated by a company formation business in the United Kingdom at the direction of the principals of the company. It is believed that the customers were nothing more than "brass plate" entities, which had addresses in the Isle of Man, Ireland and the United Kingdom and had nominee directors from the Isle of Sark. The Sark directors acted on instructions from the company formation business, which in turn acted on the instructions of the principals of the company.

In order to create the appearance that the "customers" had paid for the products and to avoid detection of the scheme, principals of the company allegedly arranged for funds to be delivered to the company and disguised them as payment for products sold. In fact, it is believed that the vast majority of these funds were not bona fide payments for goods sold. Rather, the source of the funds was either regular corporate earnings or the proceeds of the sales of the company's securities.

The subject company issued over $20 million in unregistered shares of stock. Pursuant to the Securities Act of 1933, companies are required to register all securities with the SEC. However, Regulation S of the Securities Act (Reg S) provides a "safe harbor" from the registration requirements and allows a company to offer and sell securities without filing a registration statement with the SEC if the securities are sold to bona fide foreign purchasers in offshore transactions. A foreign entity controlled by a United States person does not qualify as a bona fide foreign purchaser.

The subject company issued a Panamanian entity one million shares of Reg S stock, allegedly in exchange for consulting and investment services. The Panamanian entity was managed by a trust administration company located in Guernsey. The transfer of stock allegedly violated U.S. law because the Panamanian entity was controlled by U.S. citizens who were lawyers for the company. They sold the shares through a New York brokerage firm. The lawyers then transferred a large portion of the funds to another Guernsey entity which was controlled by the president of the subject company, who then transferred the funds to the company as payment for goods sold to "customers."

In addition to allegedly creating false receivables through the fictitious sale of products, the subject company also allegedly created false assets by purportedly investing in trust deeds of over $1.2 million. It is believed that these investments in second trust deeds were shams. In one transaction, the subject company "invested" $700,000 in second trust deeds with a real estate company. The real estate company then transferred the funds to a Swiss trust company located in Zurich. (The real estate company was the subject of a separate FBI investigation. Losses to investors in that case were approximately $40 million, and the principals were apprehended by the FBI in the Philippines.) Shortly thereafter, upon instruction of principals of the company, the Guernsey trust company wired the funds back to the company, which recorded the funds as payment for products sold to its "customers." Losses in this matter are approximately $30 million.

At the very least, the case examples described above demonstrate many of the characteristics and improper uses of OFCs.

Explanatory Notes Regarding the Offshore Financial Centers Chart

Recognizing that increased use of OFCs by drug cartels, terrorists and organized crime has appeared to increase in 1998, and concerned that the increased use of OFCs has the potential to de-stabilize the economic and political institutions of nascent democracies as well as threatening international security, the Department of State has undertaken an initial survey of OFCs. The results of the survey comprise the following chart. No claim is made that the survey is complete. Given the intrinsically secretive nature of OFCs, public information is often difficult to obtain. There are additional categories of data relating to OFCs that, were they included on the chart, would provide a more complete survey. 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 table are left blank.

Jurisdictions currently planning to introduce OFCs, or about which only fragmentary information exists regarding OFCs (Fiji, Iceland, Iran, Nepal, Palau, Sao Tome and Principe) have been excluded from the chart.

The Department of State recognizes the inherent weakness of a geographic survey that is unable to draw distinctions between well-regulated and poorly supervised OFCs, or to note those OFCs willing to deny services to those involved with international drug cartels, terrorism or major organized crime rings. More research is needed before definitive conclusions regarding each OFC can be made.

Definitions: the Offshore Financial Centers Chart

Offshore Banks: These are banks that are domiciled in one jurisdiction and which conduct their business primarily with non-residents of that jurisdiction. While there are many banks and bank branches engaged in legitimate business in the offshore sector, there are also many which are not. Whether legitimate or not, offshore banks are unencumbered by many regulations normally associated with "onshore" financial institutions. Exempt or subject to very low tax rates, with few or no capital reserve requirements, offshore banks typically enjoy relaxed or non-existent supervision while providing layers of secrecy for their account holders. In most instances, there is no requirement for an offshore bank even to have a physical presence in the jurisdiction in which it is registered. Constantly refining and developing new financial services in order to maintain competitiveness, many offshore banks are now offering portfolio management and mutual funds free from capital gains taxation. Some newer OFCs, located primarily in the South Pacific, have passed legislation making it a criminal offense to disclose any information concerning an offshore bank or its customers to law enforcement officials or financial regulators of other jurisdictions.

Supervisory and Regulatory Agencies: This column on the chart notes whether such supervisory and regulatory agencies have been formed to supervise the activities of the OFC. It makes no judgment as to the extent of supervision or the effectiveness of the agencies in exercising their authority.

Trust and Management Companies: These are companies which provide fiduciary services, serve as agents, representatives, lawyers, accountants, trustees, nominee shareholders, directors and officers of international business corporations as well as acting as marketing agents for OFCs.

International Business Corporations (IBCs) / Exempt Companies: IBCs are commonly defined as corporate structures operating exclusively outside the jurisdiction in which they are incorporated. Rapid formation, secrecy, broad powers, low cost, low or no taxation and minimal filing and reporting requirements characterize them. IBCs are incorporated as separate legal entities with limited liability, and they eliminate the connection to the principals, thereby providing an additional layer of secrecy. Also common to IBCs and exempt companies (shell companies) are the use of bearer shares, and nominee shareholders and directors.

Bearer Shares: These are certificates of corporations, the ownership of which passes with the certificate itself. In this column, no distinction is made between bearer shares of IBCs or offshore banks. Bearer shares, when issued by an IBC, and when further insulated by a simple conveyance known as the "mini-trust," through which control of the IBC has been passed to the beneficial owner, provide nearly impenetrable layers of anonymity for the ultimate beneficial owner of the assets.

Asset Protection Trusts (APTs): These trusts protect the assets of individuals from civil judgments in their home countries. A common provision of APT law is that when nominal requirements have been met, the courts of the trust domicile cannot entertain a challenge or a claim against the assets of the trust. Many APTs and other trusts include a "flee clause" which requires the trustee to transfer the assets of the APT and other trusts to another jurisdiction whenever the trust is threatened by inquiry.

Insurance and Re-insurance Company Formation: These companies are established in OFCs to take advantage of limited or non-existent tax requirements and lax or few regulatory and capitalization requirements.

Government-Sponsored "Economic Citizenship": These occur where passports are sold by jurisdictions which enable their holders to evade taxation and legal remedies by law enforcement agencies of the passport holders' "home countries".

Services Advertised via the Internet by Agents or Governments: The Internet has provided an extraordinary boon to OFCs. For minimal cost, remote and little known jurisdictions and their agents can advertise globally, describing the services provided by the OFCs. These services include, but are not limited to, the opening of numbered or anonymous bank accounts, the formation, licensing and registration of offshore banks, the creation of IBCs and APTs and other trusts, the formation of insurance and re-insurance companies, the sale of economic citizenship, and the licensing of "virtual casinos" on the Internet. Also advertised on the Internet but not noted on the chart are services that range from the registration of aircraft and ships, portfolio and mutual fund management to the placement of IBCs and other exempt companies into "free-trade" zones.

Internet Gaming: Licenses granted by jurisdictions enable grantees to establish "virtual casinos" on the Internet. As with the services of OFCs offered on the Internet, not all "virtual casinos" are licensed by the jurisdiction in which the casino is presumably located. In many instances, the operators of these websites are not located in the jurisdiction in which even licensed websites are advertised as being domiciled. U.S. Government law enforcement officials believe that organized crime groups in the United States operate some of these "virtual casinos."

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 Bank Supervisors and the Organization of American States Inter-American Drug Control Commission. A blank cell in this column indicates that the jurisdiction does not hold membership 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 which is not yet in force.

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