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International Narcotics Control Strategy Report, 1998
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CONTINUATION OF MONEY LAUNDERING INTRODUCTION
Other Money Laundering Trends and Typologies
The Market for Gold and Other Precious Metals
Gold plays a significant role in international money laundering.
Gold, just like certain currencies (e.g., the U.S. dollar, Swiss
franc, and British pound) is a nearly universal commodity for
international commerce. The attractiveness and value of a particular
currency depend on a complex and often unstable variety of political
and economic conditions. Gold has been a key medium of exchange
since antiquity, and will, in fact, most likely always enjoy this
position, as it appears nearly immune to the consequences of changing
global fortunes.
Gold serves as both a commodity and, to a lesser extent, a medium
of exchange in money laundering conducted in Latin America, the
United States, Europe, and Asia. In this cycle, for example, gold
bullion makes its way to Italy via Swiss brokers. There it is
made into jewelry, much of which is then shipped to Latin America.
In Latin America, this jewelry (or the raw gold from which it
was made) then becomes one of, if not the most important, commodities
(others include various consumer goods and electronic equipment)
in the Colombian black market peso exchange (BMPE).
In money laundering associated with the hawala/hundi alternative
remittance system (or practices based on or associated with it),
gold often plays a somewhat different role: that of the primary
medium of exchange in certain transactions. Even though many hawala
transactions take place without a gram of gold, many of these
transactions moving money to South Asia involve gold for two reasons:
first, the combined historical, religious and cultural importance
gold enjoys in the region; and second, the increasing distrust
in the value of local currencies (many South Asian nations prohibit
speculation on their currencies, and exchange rates are fixed
by the central banks). Worldwide, gold is often used as a hedge
against inflation; in South Asia, gold is often the primary means
of preserving and protecting wealth.
In one case, a gold dealer operating in a major U.S. metropolitan
area is also operating as the "banker" for various jewelry
shops in the region. These jewelry shops give him the checks and
cash they receive for purchases, and he processes these through
his own bank accounts. In return, he gives them gold scrap and
gold jewelry for use in their businesses. He retains a few percentage
points of the money he receives from them for his "services"
(as well as the legal risk he is incurring). The owners of the
jewelry shops do not have to deal with the bureaucracy of banking
and, since there is almost no paper trail of their sales, they
enjoy a greatly reduced tax liability.
In another case, a U.S.-based hawaladar is facilitating the smuggling
of aliens from South Asia to the United States. He receives payments
from people who want to have aliens smuggled. He then makes contact
with a hawaladar in South Asia, and instructs him to make the
necessary payment to an alien smuggler. In order to settle his
accounts with the South Asian hawaladars, the U.S. hawaladar sends
U.S. postal money orders to a precious metals house in the Persian
Gulf. This allows the South Asian hawaladars to receive payment
in gold, held either by the precious metals house in their name,
or delivered to them in South Asia.
In both these cases, currency is being converted into gold. Even
though the first case does not involve hawala transfers, many
of the techniques associated with hawala (e.g., coded documents,
the use of gold) are present, and, since most of the participants
in this case are South Asian, it underscores the cultural significance
that is attached to gold there. In the second case, there is no
doubt that gold is the preferred medium of exchange, and the thriving
gold markets in the Persian Gulf make the necessary conversions
and payments possible.
Black Market Peso Exchange
A primary money-laundering scheme used by Colombian drug cartels
involves use of the Colombian black market peso exchange. The
brokers who operate the black market peso exchange are international
financiers who are capable of facilitating multi-million dollar
transactions outside Colombia's legitimate financial system. In
this money laundering scheme, the Colombian cartels sell drug-related
U.S. currency to black market peso brokers in Colombia who, with
their U.S.-based agents, place the U.S. currency into U.S. bank
accounts while trying to circumvent the U.S. Bank Secrecy Act
(BSA) reporting requirements. The exchangers then sell monetary
instruments drawn on their bank accounts in the United States
to Colombian importers who use these instruments to purchase foreign
goods. This method is the single most efficient and extensive
money laundering scheme in the Western Hemisphere and works as
follows:
The U.S. Government continues to be concerned about wholesale
narcotics proceeds being laundered through the BMPE. The U.S.
Treasury Department has devised and is implementing a three-pronged
strategy designed to attack this money laundering system as a
whole. Since this is a trade based system, the strategy will necessitate
engaging the cooperation of the business and financial community
as well as the appropriate governmental law enforcement and regulatory
agencies.
The enforcement agencies will not only give BMPE investigations
top priority, they will initiate proactive programs to target
high level BMPE offenders. In addition they will coordinate their
investigations and share information with the other agencies conducting
similar investigations. Marshaling and analyzing the available
data regarding BMPE will be a key part of the strategic plan at
all levels.
The second part of the strategy entails the involvement of regulatory
agencies, which are authorized to seize assets, and sanction businesses,
which knowingly continue to be involved in this process. Once
again, the marshaling and sharing of available BMPE data will
be vital to this process.
The third leg of the strategy involves educating the business
and financial communities on how to spot BMPE transactions and,
most importantly, how to avoid them. Thus, it is hoped that this
three-pronged strategy will result in an effective approach to
combating a money laundering system which is responsible for annually
laundering and repatriating billions of narcotics dollars to the
major Colombian traffickers.
The Hawala System
The hawala (or hundi) alternative (or parallel) remittance system
is the key factor in money laundering and other financial crimes
committed in and associated with South Asia. It is closely related
to the "underground" 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 documented economies.
Hawala operates on trust and connections ("trust" is
one of several meanings associated with the word "hawala").
Customers trust hawala "bankers" (known as hawaladars)
who use their connections to facilitate money movement worldwide.
Hawala transfers take place with little, if any, paper trail,
and, when records are kept, they are usually kept in code. Contrary
to various media reports, hawala is an ancient system; it was
the primary money transfer mechanism used in South Asia prior
to the introduction of Western banking. Today, hawala continues
to be used for many legitimate transfers for cultural reasons,
and it also often operates in conjunction with Western banking
operations.
In 1997, a significant investigation began on the use of hawala
to move proceeds of crime from the United States to India. "Operation
Seek and Keep" is an ongoing investigation being conducted
by the Immigration and Naturalization Service with support from
the Internal Revenue Service, Customs, FinCEN, the Federal Bureau
of Investigation and the Postal Inspection Service. The target
of this investigation is an international ring allegedly responsible
for transporting approximately 200 aliens per month for three
years from South Asia (primarily India) to the United States.
Hawala seems to have been the primary mechanism used to facilitate
the various money transfers needed to support the smuggling. The
alien smuggling fees (approximately $20,000 per person) were paid
to a U.S.-based hawaladar who then contacted hawaladars in India,
who made the necessary arrangements with alien smugglers there.
The primary smuggling route was from India to Russia, from Russia
to Cuba, from Cuba to various points in Latin America and the
Caribbean, and then to the United States. Money was paid to the
Indian hawaladars through a variety of channels, including precious
metals companies operating in the United States and the Persian
Gulf.
Several factors contributed to the successes in this case. One
factor was the suspicious activity reports (SARs) filed by a financial
institution as part of its routine analysis of certain transactions
(as opposed to being filed at the time the transactions were conducted).
Subsequent analysis of these SARs provided valuable information
to help identify one of the channels used to move money from the
United States back to India.
Another factor was cooperation between U.S. and Indian authorities,
particularly in the area of information exchange. This facilitated
the development of a clear understanding of the overall way in
which money was being moved as well as the identification of several
targets of the investigation. Given the international nature of
hawala money laundering, this type of cooperation is essential.
There are several other investigations concerning narcotics trafficking
and smuggling where cooperation between U.S. and Indian law enforcement
officials is facilitating successful investigations in both countries.
Developments in Pakistan presented the other side of hawala, specifically
the movement of money out of South Asia. An example of this can
be found in the continuing investigation of the financial dealings
of former Prime Minister Benazir Bhutto and her husband, Asif
Zardari. More generally, various economic conditions in Pakistan,
such as the temporary closing of banks after the nuclear tests,
continuing devaluation of the Pakistani rupee and the conversion
of foreign currency accounts to rupees were responsible for an
increase in hawala transfers of money out of Pakistan. It appears
that many Pakistanis feared that their holdings in Pakistan would
continue to decrease in value, so they withdrew their money from
banks and enlisted the services of Pakistani hawaladars to move
their assets out of the jurisdiction. For example, Karachi residents
withdrew money from their accounts at the Habib Bank Tower branch
and went to the adjacent Boulton Market to conduct business with
the hawaladars who have stalls there. In addition to serving as
a means of preserving some measure of fiscal soundness, hawala
also provided at least a partial means of bypassing the financial
controls that had been imposed on Pakistan in the aftermath of
its nuclear tests.
The money-laundering situation in Pakistan was the subject of
a study conducted by FinCEN with assistance from the Department
of State and the Drug Enforcement Administration in early 1998.
In brief, this effort concluded that activities based in Pakistan
(such as corruption or narcotics trafficking) are responsible
for money laundering. Pakistan's financial services sector, however,
is not a center for money laundering. As is likely to be seen
in the Bhutto/Zardari case, a great deal of the money laundering
takes place outside of Pakistan in international financial centers
such as Switzerland and Dubai. Moreover, it is hawala, rather
than the traditional banking and financial services sector, that
is used to facilitate most money laundering.
In Indian and Pakistani hawala cases, there is a recurring involvement
of the United Arab Emirates, specifically Dubai. India and Pakistan
have taken initial steps to implement anti-money laundering legislation
and put countermeasures in place. Apart from the occasional press
report, there are no indications that such legislation is even
being considered in the United Arab Emirates. Some Emirate banks
have policies mandating various anti-money laundering measures,
such as customer identification, but it is not clear how widely
these are enforced.
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 often compounded by the lack of any anti-money
laundering countermeasures in Dubai and the other Emirates.
Implications of the Euro Currency Unit
During October 1998, the United States House of Representatives
Committee on Banking and Financial Services, Subcommittee on Domestic
and International Monetary Policy held a public hearing to discuss
the implications of the European Monetary Union on U.S. currency
policy, specifically higher denomination notes. Theodore E. Allison,
Assistant to the, Board of Governors of the Federal Reserve System,
and Gary Gensler, Assistant Secretary for Financial Markets, U.S.
Department of the Treasury, testified at the hearing. The following
is extracted from their testimony:
The European Union has decided to issue 500 Euro notes, which, at today's exchange rates, would be worth close to $600. Currently, the $100 note is the highest denomination note the U.S. issues. Under legislation passed in 1918, however, the U.S. is authorized to issue currency in denominations of $500, $1,000, $5,000 and $10,000. These larger denomination notes were issued primarily for interbank transactions. The United States stopped printing these denominations in 1946, and ceased issuing them in 1969. At the time, Treasury and the Federal Reserve said, "Use of these larger denominations has declined sharply over the last two decades and the need for them appears insufficient to warrant the added cost of production and custody of new supplies."
The U.S. believes that as much as two-thirds of all U.S. currency (Federal Reserve Notes) in circulation--about $250 to $300 billion--are held outside of the United States. The United States does not issue currency for the purpose of generating revenue (but rather to meet the convenience and needs of the public), and it neither promotes the use of dollars internationally nor competes with other issuers in this regard. Nonetheless, the demand for dollars from abroad does provide significant benefits to the United States. Primarily, it is a convenience to Americans traveling abroad and doing business abroad. Second, the Federal Reserve earns interest on the assets it holds to support U.S. currency, which is held outside the United States.
We believe that the availability of Euro notes may reduce the use of dollars outside the United States to some extent. Most of the U.S. currency that is held abroad is in $100 bills, and it is estimated that approximately 75 percent of all $100 bills are held abroad. Within the G-7, Germany, Italy and Canada all have notes now in circulation with values higher than $100. The United States doubts that the issuance of notes higher than $100 (i.e. $500 or $1000) would improve convenience or efficiency to any significant degree within the United States. There are a number of arguments against the issuance of $500 bills; specifically that it could facilitate money laundering.
The Department of the Treasury has, for a number of years, used investigative and regulatory tools to fight the placement of the proceeds of crime into the financial system. When criminals are deterred from placing illicit proceeds directly into the U.S. financial system, they often seek to hide it and transport it for placement in the financial system outside the United States. One practical deterrent has been that large physical quantities of cash are difficult to transport and to place within the financial system. At today's prices, $1 million worth of cocaine weighs about 44 pounds, but the cash paid, usually in $5s, $10s and $20s, for that cocaine can weigh up to 250 pounds, and is quite bulky. In $100 bills, the weight of $1 million is about 22 pounds. If criminals had access to $500 bills, $1 million could weigh as little as 4.4 pounds less than the average bag of sugar or flour available at the grocery store. Higher denomination notes would make it easier for criminals to transport and hide cash, making the money laundering process cheaper and more likely to evade detection. As a result, the net cost of committing many crimes could decline, as would the government's ability to punish and deter such crime.
Finally, the United States has no plans to reissue the $500 note and would consult with the law enforcement community before making any decision on this issue.
Recent Trends in the United States
An Assessment of the Sources of Illegal Proceeds
The main sources of illegal proceeds laundered in the United States
are illegal narcotics sales, organized criminal enterprises, and
white-collar crime.
Other illegal activities that generate substantial proceeds that
are laundered within the United States and overseas include illegal
gambling, prostitution, health care fraud, insurance fraud, financial
institution fraud, embezzlement, consumer fraud, telemarketing
fraud, bankruptcy fraud, corporate kickback schemes, investment
schemes, and public corruption.
As illustrated in figure 1, a review of suspicious activity reporting
by U.S. financial institutions for the previous two fiscal years
(October 1 to September 30) clearly shows consistent volume of
activity being experienced by type of violation. Although the
total number of violations reported increased by 19 percent from
fiscal year 1997 to 1998, the relative percentage of total violations
represented by each category remained fairly constant. This reporting
supports the conclusion that the sources of illicit proceeds have
not changed significantly over the last year.
In light of recent world events, the United States has substantially
elevated the priority assigned to combating terrorist financing.
In June 1998, federal authorities seized $1.4 million in cash
and property that reportedly was part of a money-laundering scheme
to fund Middle East terrorism. The funds were transferred by wire
from Europe and the Middle East to financial institutions in the
United States and, through various means, were used to facilitate
recruitment and training and military operations of the Middle
East terrorist group Hamas. These activities include a conspiracy
to commit such terrorist acts as extortion, kidnapping and murder
against the citizens and government of Israel.
The affidavit used to support the seizure describes complex financial
transactions intended to generate income for this organization
while concealing the source and purpose of the money. Approximately
one-half of those assets were blocked (frozen) in February 1995
by Treasury's Office of Foreign Assets Control under the authority
of Executive Order 12947, through which President Clinton had
recently imposed economic sanctions against terrorists threatening
the Middle East peace process. As a result of that blocking action,
a combination of funds and real property were protected from conversion
or other disposal from February 1995 through June 1998, when they
were seized under the civil asset forfeiture laws. Thus, this
case marks the first time that the blocking authority under E.O.
12947 was used against a significant amount of foreign terrorist
assets in the United States. It also marks the first time that
civil asset forfeiture laws were used to seize money in U.S. financial
institutions to prevent that money from being used for terrorism
abroad.
It is significant that an Internet website appears to be affiliated
with this particular terrorist group. The Internet provides perhaps
the most comprehensive global voice. All may be heard, including
organizations, which use terror as a means to achieve political
aspirations. At present, there are several Internet websites,
which espouse the message of these organizations. It is unclear
whether such sites are operated by, or officially sanctioned by,
the subject organizations. Their rhetoric, however, indicates
that the website operators clearly support the political aims
of the groups, and in some cases they solicit financial support
for the subject terrorist organization. As the Internet continues
to expand and become accessible to a broader user-base, this medium
for spreading the terrorist message and soliciting financial backing
is likely to grow.
The United States is also aware of at least one case in Asia where
an alternative remittance system was used to finance terrorism.
A series of bomb blasts in a major Indian city in 1993 was financed
through hawala transfers. The investigation revealed that the
funds supporting these bombings were handled by hawala operators
in the United Kingdom, Dubai and India.
Asset or Monetary Instrument Purchases with Cash Proceeds
Asset laundering continues in the United States. It is the conversion
of consumer products purchased with dirty currency, which are
then exported to Colombia, for example, where they are sold for
pesos. Consumer electronics, especially computers, are popular
products purchased for export. Other durable goods, such as telephones
and jewelry, are also exported. Law enforcement information clearly
indicates that some major retailers (including warehouse clubs
and home improvement chain stores) in the Miami area and in other
major U.S. cities make large (over $10,000) cash sales to individuals,
who then forward the merchandise, usually through a shipping broker,
to Colombia. Area distributors in these cities have told investigators
that there is a very high demand for unreported cash sales.
Private Bankers
Private banking facilities continue to be vulnerable to money
laundering. Bank employees who provide special services to high-value
customers may be exposed to money laundering schemes. For example,
private banking representatives have established bank accounts
for foreign nationals without requesting adequate customer identification,
and in one case a private banking officer reportedly has assisted
"smurfs" (persons who structure cash deposits) by warning
them of upcoming audits in order to avoid detection by bank auditors.
Non-Bank Financial Institutions
Non-bank financial institutions (NBFIs) continue to be used for
money laundering in the United States despite a number of efforts
at both federal and state levels. NBFIs subject to the BSA include
brokers and dealers of securities, the U.S. Postal Service, money
order vendors, casinos, money transmitters, check cashers, and
bureaux de change. With over 200,000 NBFIs in the United States,
monitoring of these businesses for money laundering is a complicated
matter. Moreover, the role of these institutions in money laundering
operations varies. Some, such as the U.S. Postal Service or certain
casinos, may be used by others as unwitting facilitators in the
process; while others, such as certain bureaux de change or money
transmitters, may be knowingly involved in laundering illegal
proceeds. Among NBFIs, U.S. law enforcement continues to cite
bureaux de change and money transmitters as being most heavily
involved in money laundering operations.
Non-Financial Businesses and Professions
The United States continues to see the use of non-financial businesses
or professions as mechanisms of money laundering, such as the
international gold market and the black market peso exchange system.
Professionals, such as accountants, lawyers, and realtors have
been used to facilitate money-laundering transactions.
New Payment Technologies
Electronic money (e-money) has the potential to make it easier
for criminals to hide the source of their proceeds and to move
those proceeds without detection. While the application of new
technologies to electronic or cyber-payments systems is still
in its infancy, it is prudent to recognize their potentially broader
impact. The technology exists which could permit these systems
to combine the speed of the present bank-based wire transfer systems
with the anonymity of currency. E-money transactions could also
be effected in multiple currencies without limits and conducted
entirely without intermediaries.
Although no money laundering prosecutions have yet been undertaken
to combat abuse of new payment technologies, many jurisdictions
have reported the increased use of Internet banking and gambling.
United States law enforcement authorities have several cases under
active investigation involving criminals who have made use of
these technologies to solicit clients or to move funds. According
to reports, the now defunct Antigua-based European Union Bank
(EUB)--the first offshore bank to use the Internet--defrauded
account holders of millions in deposits and may have been involved
in laundering illicit funds. The bank, which collapsed in August
1997 when its Russian owners absconded with depositors' funds,
attracted clients via the Internet through advertisements of Antigua's
offshore regulatory limitations and strict privacy laws.
Jurisdictions should pay close attention to the emerging threats
posed by these and other new payment technologies for being used
in money laundering schemes, and they should consider developing
preventative countermeasures. Moreover, even legitimate banking
and gambling through the Internet raise many legal and practical
issues for law enforcement. These include questions of jurisdiction,
customer identification and broken audit trails.
What We Need to Do
In an electronic world in which the banking system operates through
linked computers 24 hours a day, there must be increased global
emphasis upon thorough vetting of personal, company and financial
institution accounts at the bank of origin. There is no substitute
for a thorough know-your-customer policy, especially as applied
to those placing currency into the system and converting it to
an account susceptible to immediate transfer outside the jurisdiction.
Considerable attention also must be focused by anti-money laundering
authorities on establishing international standards, obtaining
agreements to exchange information, establishing linkages for
cooperative investigations, and overcoming political resistance
in various key jurisdictions to ensure such cooperation.
Governments need laws and regulations that: establish corporate
criminal liability for bank and non-bank financial institutions
for money laundering violations; apply to all financial transactions,
not just to cash transactions at the teller's window; apply anti-money
laundering measures to serious crimes, not just drug trafficking;
criminalize investments in legitimate industry if the investment
proceeds were derived from illegal acts; and enable the sharing
of financial and corporate ownership information with law enforcement
agencies and judicial authorities.
Governments also need strategies that focus on changes in both
the operations of financial systems and the methods criminals
develop to exploit them--strategies that look at specific governments
and specific financial systems.
Continuous action is needed on each of the following categories
in 1999 and for the foreseeable future:
Adoption and Implementation of International Anti-Money Laundering
Standards. The development of international standards to reduce
jurisdictions' vulnerability to money laundering and to enhance
financial, regulatory and law enforcement of anti-money laundering
regimes has been at the forefront of the fight against this crime.
Accordingly, it is critical that these standards, which continue
to be refined and strengthened, be adopted on a global basis.
Today, these standards include, among others: the FATF 40 Recommendations,
the Aruba 19 Recommendations (CFATF), the OAS Model Regulations
on Money Laundering, the Summit of the Americas December 1995
Buenos Aires Communiqué Plan of Action, the European Directive
on Money Laundering, and the Basle Principles.
Constant Monitoring of Money Laundering Patterns, Trends and
Typologies. More sophisticated techniques, involving both
bank and non-bank financial institutions, in a wide array of traditional
and non-traditional financial centers, have complicated identification,
tracing and investigation. Information exchanges have been improving,
but critical gaps in know-how must be closed in tandem with improved
cooperation. There is a high priority need to share data, even
critical intelligence. The pervasive corruption in some systems
remains a barrier to information sharing.
Analysis of Money Management Practices. We need improved
information from more jurisdictions on what factors influence
drug traffickers and their money managers to use particular systems
in those jurisdictions, to keep reserves in cash and other monetary
instruments, to invest rather than park funds.
Tightening Restrictions Against Non-Drug Related Money Laundering
and Other Financial Crimes. We need to identify the parallels
between drug money laundering on the one hand, and between non-drug
related money laundering and other financial crimes on the other,
and we seek to achieve an effective international capability to
investigate and prosecute all these crimes. While a number of
governments are willing to impose new restrictions on drug-related
financial crimes, many hesitate to apply such strictures to other
non-drug money laundering and other forms of financial crime.
Equating Economic Power with Political Clout. The increasing
concentrations of wealth among criminal groups in a number of
jurisdictions is a concern, not only because of possible impacts
on investments, real estate values, legitimate commerce and government
integrity, but also because these organizations have the wealth
to make large financial contributions to government officials
who may compromise decisions in order to assist the criminals.
We need to assess the national security, foreign policy, and political
implications of these accumulations and transfers of wealth in
all financial centers where such wealth is being concentrated.
Corrupt officials and non-transparent financial systems represent
a continuing threat to democracy and free markets in literally
every region of the world.
Eliminating Systemic Weaknesses. Banks need to maintain
similar records about their financial institution clients as they
do for other customers and to report suspicious transactions involving
such clients. Some available but underutilized tracking mechanisms
include revocation of licenses, changes in ownership and management,
levying of fines, and prosecutions. Perhaps the most intrinsic
weakness is the lack of qualified personnel, not only in government
regulatory agencies, but also within many banking systems, who
are trained not only in implementing and managing such oversight
systems, but also in handling today's complex monetary transactions.
The enhanced training reported in recent international meetings
is encouraging, but more is necessary.
Assessing the Criminal as Entrepreneur. We need to explore
the extent to which criminal organizations are penetrating legitimate
financial and other businesses, using their vast resources to
gain control and to influence economic, financial and business
decisions. More data and systematic analysis are needed, for example,
on the role played by the drug trafficker and money launderer
in foreign exchange markets, including their use of and creation
of gray markets. There is good reason to question the overt as
well as covert ownership of banks and financial institutions in
many parts of the world.
Analyzing the Impact of Money Laundering on National Governments
and Economies. We need more analysis of the impact of a jurisdiction's
political and structural factors on its receptivity to money laundering
and more analysis of the impact of money laundering on the political
life and economic life of the jurisdiction. Among the questions
requiring analysis is the extent to which structural macro-economic
factors, such as commodity deflation, sustained high levels of
unemployment, and recession make a jurisdiction susceptible to
becoming a money-laundering haven. At the sectoral level, we need
to determine the influence of black markets on legitimate enterprises.
At the institutional level, we need to identify the major factors
that may influence bankers and other financial managers in some
jurisdictions to accept money they have reason to believe is tainted.
As we better identify where money laundering is most likely to
have a macro-economic or political impact, we need to evaluate
the potential effectiveness of economic countermeasures. These
could include limiting or excluding access to the global financial
system by entities or states identified as major problems.
Regulating Exchange Houses and Remittance Systems. There
is ample evidence that the various underground hundi, hawala,
and "chop" remittance systems, so essential to economic
life in the Middle East, South and East Asia, are being used by
drug traffickers, just like the "cambios" of Latin America,
and non-bank institutions of all kinds, are being used in the
Western financial community. These serve vital functions for key
sectors of many economies. Systems for regulating the laundering
of the proceeds of crime are essential, but they will fail unless
they take into account the very informality that makes underground
banking effective and desirable.
Continuing to Focus Attention on International Financial Centers
(OFCs). The Financial Action Task Force (FATF), the Offshore
Group of Banking Supervisors (OGBS) and other relevant organizations
have been quite effective in working together. Also, some of the
OFCs are members of FATF, the Caribbean Financial Action Task
Force (CFATF), the Asia/Pacific Group (APG), or have participated
in FATF/CFATF seminars which provided guidance on adopting and
implementing FATF and UN guidance. The agreement in Paris in February
1997 to undertake compatible mutual evaluations of these constituencies
should be given a high priority for early implementation. More
analysis is needed of the methods used to move money through OFCs,
and OGBS should be supported in its efforts to include as many
OFCs as possible within its membership and a parallel effort to
evaluate progress by its members.
Expanding the global use of the mutual evaluation process.
The CFATF has an on-going mutual evaluation process to assist
its members' anti-money laundering regimes, and the Council of
Europe has also implemented such a process for jurisdictions in
the New Independent States of the former Soviet Union (NIS) and
in Central Europe. These important regional initiatives should
continue apace and can serve as prime examples in spreading money-laundering
countermeasures to other regions, such as Asia, the Pacific, Africa
and the Middle East.
Consolidated Supervision of the International Banking System:
The Basle Principles. The Basle Committee on Banking Supervision
released its Core Principles for Effective Banking Supervision
in September 1997. This document establishes 25 Core Principles
to serve as a basis for supervision in all jurisdictions. They
are comprehensive in their coverage, addressing the preconditions
for effective banking supervision, licensing and structure, prudential
regulations and requirements, methods of ongoing banking supervision,
information requirements, formal powers of supervisors and cross-border
banking. Principle 15 requires that banking supervisors determine
that the banks they supervise have adequate policies, practices
and procedures in place, including strict "know your customer"
rules, that they promote high ethical and professional standards
in the financial sector, and that they prevent the banks from
being used by criminal elements. Supervisory authorities throughout
the world were encouraged to endorse the Principles by October
1998. The Principles have been designed to be verifiable by supervisors,
regional supervisory groups, and the market at large. The Basle
Committee will play a role, together with other interested organizations,
in monitoring progress made by individual jurisdictions in implementing
the Principles.
Adopting Information Standards. The adoption by governments
of information standards such as those recommended by FATF and
the Society for Worldwide Interbank Financial Telecommunication
(SWIFT) network is a welcome, if not yet universal, step. Many
more governments need to cooperate in adopting regulations to
help curb the misuse of electronic transfer and payment mechanisms
to launder illicit funds
Detecting Counterfeit Instruments. Governments and banking
systems must be more vigilant in efforts to detect counterfeit
currency and other monetary instruments. Schemes involving counterfeit
bonds and other securities, usually as collateral, suggest the
need for an international clearinghouse to assist banking and
financial systems outside the major centers in determining the
authenticity of documents.
Identifying and Preventing Financial Crimes. Governments
and banking systems must exert greater efforts to identify and
prevent a wide range of financial crimes, beyond drug and non-drug
money laundering, including financial frauds such as credit card
fraud and prime bank guarantee fraud. The history of such frauds
suggests a need for a clearinghouse, which can assist the financial
services industry in identifying customers and authenticating
documents.
Ratifying and Implementing the l988 UN Drug Convention.
The United Nations Office for Drug Control and Crime Prevention
(UNODCCP) should intensify its efforts to ensure that all significant
financial center jurisdictions are implementing fully the anti-money
laundering and asset forfeiture provisions of the 1988 UN Drug
Convention. As an immediate priority, ODCCP should focus on securing
ratification or accession of the significant financial center
governments, which have not yet become parties to the Convention.
Pursuing A Continuously Evolving Strategy. Nearly every
opportunity that global businesses and finance companies have
to offer legitimate commerce is today used by money launderers
and financial fraudsters. Financial regulation, supervision and
enforcement needs to expand to cover transactions that transcend
national boundaries and to cover the widening array of financial
service businesses. Similarly, there is a growing need to reduce
the increasing use of non-financial service providers in the commission
of these crimes.
Beyond standard technical elements, the following are some possible
innovations to current international practice that would provide
for greater reach for law enforcement authorities and less impunity
for financial criminals. These concepts were developed by Deputy
Assistant Secretary of State for International Narcotics and Law
Enforcement Affairs, Jonathan M. Winer in conjunction with a speech
given September 14, 1998 to the Sixteenth International Symposium
on Economic Crime held in Cambridge, England. Some of his concepts
are presented here as examples of further steps that could be
taken by the international community to combat money laundering
and financial crime. They do not represent official policies of
the U.S. Government.
Asserting Jurisdiction Over and Access To Records
Mutual legal assistance treaties are a major new mechanism by which jurisdictions may cooperate with one another in retrieving essential evidence of financial crimes. The UN Convention on Transnational Organized Crime currently under negotiation in Vienna may create a universal system for mutual legal assistance in cases involving conspiracy and money laundering by organized crime. But jurisdictions can exercise self-help as well, making the right to do business in their territory contingent on agreement to make records available to law enforcement authorities. Such a provision, if universally adopted, would do much to protect shareholders, depositors, and creditors from having no remedy in the event of something going wrong. Simultaneously, the Group of Eight and the Council of Europe need to complete their work on problems of "high tech crime." These two groups are considering ways to ensure that "traffic" records of electronic mail and other electronic communications can be assessed by law enforcement authorities--either in real time or in recorded form--so that those authorities can identify the perpetrators of crimes committed through these new communication mechanisms. They must make progress as well on the difficult jurisdictional issues raised by electronic communication and on rules for search, seizure and use of electronic records which may be located thousands of miles distant from where the crime itself took place. Progress on these issues will be necessary to reduce the threat posed if some jurisdictions do not require records to be maintained or do not permit records maintained in their jurisdiction to be accessed in cases involving financial crime.
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