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International Narcotics Control Strategy Report, 1999 Released by the Bureau for International Narcotics and Law Enforcement Affairs, U.S. Department of State Washington, DC, March 2000

MONEY LAUNDERING AND FINANCIAL CRIMES

Introduction

In 1999, money laundering exploded onto the front pages of the world's newspapers. In August, news headlines claimed that $15 billion in funds from Russia might have been laundered through banks in New York. Newspapers have continued to follow this story. In September 1999, U.S. Treasury Secretary Summers testified before the House Banking Committee on this issue, placing international money laundering directly into the spotlight. The investigation continues and indictments of a former bank official, two other individuals and the three companies have been filed. As the 2000 INCSR goes to press, guilty pleas from two of the individuals and the three companies have been entered. The large movements of money out of Russia and through American banks continue to focus the attention of the world on the problem of money laundering. Around the globe, there were both positive and negative developments in this field.

September marked the release of the Administration's National Money Laundering Strategy for 1999. This Strategy, prepared pursuant to the Money Laundering and Financial Crimes Strategy Act of 1998, highlighted the federal government's effort to address the problem of money laundering on a coordinated and comprehensive level. One of the four major goals of the Strategy is to strengthen international cooperation to disrupt the global flow of illicit money, and there are a number of action items in the Strategy that specifically address international money laundering.

Another major money laundering development in 1999 was the issuance of financial advisories concerning Antigua and Barbuda by the United States and the United Kingdom in April. The issuance of these advisories demonstrated that the United States and other nations will take tough, concrete action against governments that do not seriously address the problem of money laundering and do not adequately supervise financial institutions within their jurisdictions. The U.S. advisory, which advised financial institutions to give "enhanced scrutiny to all financial transactions routed into or out of Antigua and Barbuda," was issued because of negative changes in Antigua and Barbuda's anti-money laundering laws. These changes threatened to "create a 'haven' whose existence will undermine international efforts of the United States and other nations to counter money laundering and other criminal activity."

Issuance of these advisories is part of a coordinated campaign to identify and engage, and if necessary isolate, those jurisdictions that are not adequately addressing the problem of money laundering and to induce them into fulfilling their responsibilities as members of the international community. For example, the National Money Laundering Strategy has as one of its objectives that the United States should "apply increasing pressure to jurisdictions where lax controls invite money laundering." Action items included under this objective include a mandate to consider unilateral action where appropriate, including the issuance of bank advisories.

There is also multilateral support for stronger measures against non-compliant jurisdictions. The Financial Action Task Force has embarked upon an initiative to consider steps to be taken regarding countries and territories (including among FATF members) that fail to provide effective international administrative and judicial cooperation in money laundering cases. The first step in this process was to develop criteria for defining the non-cooperative countries and territories. The second step is to identify the jurisdictions that meet these criteria. The third step will be to agree upon the necessary international action to encourage compliance by the identified non-cooperative jurisdictions. The FATF is well underway on this initiative. Further, the FATF has already issued a press release expressing its concern about Austria, a FATF member, with respect to its failure to eliminate the anonymous passbook savings accounts that are available in Austria. Austria must begin to eliminate these accounts or face suspension of its FATF membership in June 2000. The FATF's willingness to take action against one of its members indicates that it will not shrink from fully pursuing this initiative.

In 1999, FATF agreed to expand its membership and invited three new countries to join as observers. These strategically important countries are Argentina, Brazil and Mexico. Full membership will be extended to each country once they satisfy FATF membership requirements.

Also during 1999, the Financial Stability Forum was created by the G-7 Finance Ministers to enhance international cooperation and coordination in the area of financial market supervision and surveillance. The Forum met for the first time in April and agreed to focus initially on three issues: the implications of highly leveraged institutions, the offshore financial services sector and short-term capital flows. This focus benefits efforts being undertaken in other various international initiatives to combat global money laundering and financial crime.

Any investigation of money laundering in the United States that involves the proceeds of a crime committed in a foreign country requires evidence that would establish the commission of the crime in the foreign country. Consequently, a successful money laundering prosecution in the United States requires the assistance and cooperation of the jurisdiction where the proceeds were generated. Such cooperation, in turn, requires that the countries involved have good working relationships between law enforcement agencies and have laws that allow and facilitate the exchange of information and evidence. Without such cooperation, it is difficult to investigate and prosecute international movements of money. Several bills to promote anti-money laundering cooperation have been introduced recently in the United States Congress.

Finally, it should be noted that two international crime conventions are also seeking to strengthen the international efforts against money laundering. In December 1999, the United Nations General Assembly adopted the International Convention for the Suppression of Terrorist Financing. This Convention requires States Parties to criminalize the providing or collecting of funds with the intent or knowledge that they are to be used to conduct certain terrorist activity. The Convention also contains important advances in the area of mutual legal assistance, including a provision that States Parties may not refuse a request for mutual legal assistance on the ground of bank secrecy. In addition, a new UN Convention against Transnational Organized Crime is being negotiated for General Assembly adoption in 2000. This Convention is expected to contain provisions to criminalize the laundering of proceeds beyond drug proceeds and to enhance anti-money laundering regulations, enforcement and cooperation worldwide.

Over the past year, it is encouraging that while anti-money laundering jurisdictions and organizations have been marshaling their forces, new colleagues have joined their ranks. Positive developments on this front include major initiatives in Eastern and Southern Africa, South America and the Asia-Pacific region. Each of these initiatives strengthens the global anti-money laundering community.

Why We Must Combat Money Laundering

People who commit crimes need to disguise the origin of their criminal money so that they can use it more easily. This fact is the basis for all money laundering, whether that of the drug trafficker, organized criminal, terrorist, arms trafficker, blackmailer, or credit card swindler. Money laundering generally involves a series of multiple transactions used to disguise the source of financial assets so that those assets may be used without compromising the criminals who are seeking to use the funds. Through money laundering, the criminal tries to transform the monetary proceeds derived from illicit activities into funds with an apparently legal source.

Money laundering has devastating social consequences and is a threat to national security because it provides the fuel for drug dealers, terrorists, illegal arms dealers, corrupt public officials and other criminals to operate and expand their criminal enterprises. In doing so, criminals manipulate financial systems in the United States and abroad. Unchecked, money laundering can erode the integrity of a nation's financial institutions. Due to the high integration of capital markets, money laundering can also negatively affect national and global interest rates as launderers reinvest funds where their schemes are less likely to be detected, rather than where rates of return are higher because of sound economic principles. Organized financial crime is assuming an increasingly significant role in money laundering that threatens the safety and security of peoples, states and democratic institutions. Moreover, our ability to conduct foreign policy and to promote our economic security and prosperity is hindered by these threats to our democratic and free-market partners.

In recent years, crime has become increasingly international in scope, and the financial aspects of crime have become more complex, due to rapid advances in technology and the globalization of the financial services industry. Modern financial systems permit criminals to order the transfer of millions of dollars instantly though personal computers and satellite dishes. Money is laundered through currency exchange houses, stock brokerage houses, gold dealers, casinos, automobile dealerships, insurance companies, and trading companies. Private banking facilities, offshore banking, shell corporations, free trade zones, wire systems, and trade financing all have the ability to mask illegal activities. The criminal's choice of money laundering vehicles is limited only by his or her creativity. Ultimately, this laundered money flows into global financial systems where it can undermine national economies and currencies. Money laundering is thus not only a law enforcement problem but a serious national and international security threat as well.

There is now worldwide recognition that we must deal firmly and effectively with increasingly elusive, well-financed and technologically adept criminals who are determined to use every means available to subvert the financial systems that are the cornerstone of legitimate international commerce. Global events over the past year involving offshore financial centers and new cyber money laundering trends point to the necessity of promptly addressing this growing threat.

Money launderers also negatively impact jurisdictions by reducing tax revenues through underground economies, competing unfairly with legitimate businesses, damaging financial systems, and disrupting economic development. Money laundering is now being viewed as a central dilemma in dealing with all forms of international organized crime because financial gain means power. Fighting money launderers not only reduces financial crime; it also deprives criminals and terrorists of the means to commit other serious crimes.

The United States and other nations are victims of tax evasion schemes that use various financial centers around the world and their bank secrecy laws to hide money from tax authorities, thus undermining legitimate tax collection. Financial centers that have strong bank secrecy laws and weak corporate formation regulations, and that do not cooperate in tax inquiries from foreign governments, are found worldwide. These financial centers, known as "tax havens," thrive in providing sanctuary for the deposit of monies from individuals and businesses that evade the payment of taxes in their home jurisdictions and to keep the money they have deposited from the knowledge of tax authorities. Billions of funds on which tax is properly due (marks, lira, pounds, et cetera) are held on deposit in these tax havens.

It makes no difference whether the funds on which tax is due emanate from illegal activity or revenue earned legally. Tax evasion and money laundering are activities that are aided by financial centers that have strong bank secrecy laws and a policy of non-cooperation with foreign tax or law enforcement authorities.

Offshore Financial Centers (OFCs)

Recent events of the past few years have led to a marked increase in 1999 in the efforts of the international financial community to identify and eliminate deficiencies in regulatory systems that may have the potential to threaten global financial stability. Simultaneously, the international financial community has been examining jurisdictions engaged in cross-border transactions to determine the extent to which individual jurisdictions adhere to standards and norms designed to thwart money laundering, tax evasion and other transnational financial crimes.

No sector in the global financial system is undergoing more intense scrutiny than the offshore financial services sector. Nearly sixty jurisdictions, scattered around the globe, comprise this constantly expanding sector (see offshore chart in this chapter.) A recent study found that by the end of 1997, the share of cross-border assets held in the offshore sector ($4.8 trillion) accounted for more than half all cross-border assets held globally.¹

It is not only the sheer volume of cross-border assets held by the offshore financial centers that has riveted the attention of the world's regulators, supervisors, law enforcement organizations and international financial institutions. While the OFCs serve many legitimate functions in international commerce and financial planning,2 some of the products and services provided by the OFCs when combined with certain aspects of the regulatory and legal regimes within the sector can be used for criminal purposes. In particular, the lack of transparency that characterizes the offshore sector has acted as a powerful magnet to governments, groups and individuals desirous of hiding their financial activity from public scrutiny.

Although there is little consensus regarding the exact definition of an offshore financial center, certain characteristics distinguish traditional onshore financial centers from those termed "offshore." Unlike the onshore jurisdictions, the vast majority of OFC jurisdictions restrict access to their OFC financial services and products to non-residents. Further, many OFCs conduct financial transactions only in currencies other than the local currency.

OFC jurisdictions also differ from onshore jurisdictions in their regulatory regimes and legal frameworks. In general, OFC jurisdictions lack the stringent banking regulatory and supervisory regimes found in developed onshore jurisdictions. In many OFC jurisdictions, banks are not required to adhere to a wide range of regulations normally imposed on onshore banks. Formation of a bank is more easily accomplished in OFC jurisdictions; in some, a bank can be formed and registered and its ownership placed in the hands of nominee directors via the Internet. However formed, there are few, if any, disclosure requirements. Bank transactions frequently are free of exchange and interest rate restrictions, minimal or no capital reserve requirements are required, and transactions are mostly tax-free. Some 4,000 banks are thought to have been licensed and registered in the offshore sector by December 1998.3 How many are merely "brass plate banks" is not known. Other non-bank financial industries, such as the insurance and securities industries are subject to even less, if any, regulation than is the banking industry in the offshore sector.

While there are well-regulated OFC jurisdictions, a principal attraction of the sector itself is the existence of legislative frameworks that, to varying degrees, are designed to provide anonymity, to promote regulatory and supervisory arbitrage, and to provide mitigation or evasion of home-jurisdiction tax regimes.5 Even OFC jurisdictions with well-regulated banking systems normally provide loosely regulated non-bank financial services, such as the insurance and securities industries. Common to the sector are the confidential formation and management of a variety of international business companies (IBCs) 5 and exempt companies, trusts, investment funds and insurance companies, replete with nominee directors, nominee officeholders and nominee shareholders. While all these services or products are legitimate in and of themselves, it is the skillful use of these products, combined with the loose regulation and enhanced secrecy of the OFC jurisdictions that attract those intent on criminal behavior. Additionally, many of the OFC jurisdictions also provide bearer shares for corporations and banks, in addition to specific forms of trusts designed to protect individual assets as well as to provide anonymity to the beneficial owners of corporate entities.

This lack of transparency, coupled with a concomitant reluctance or refusal of many OFC jurisdictions to cooperate with regulators and law enforcement officials from other jurisdictions, attracts those with illegitimate purposes. Drug traffickers, terrorists, money launderers, tax evaders and other criminals have found the OFCs a particularly inviting venue in which to conduct and conceal their nefarious activities.

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¹ Luca Errico and Alberto Musalem, Working Paper of the International Monetary Fund, "Offshore Banking: An Analysis of Micro-and Macro-Prudential Issues," 1999, p.10.

² OFCs maintain that their carefully crafted laws and regulations provide beneficial business and financial planning options for their clients, including but not limited to: sophisticated trade financing, estate planning for high net worth individuals, tax mitigation for individuals and corporations, avoidance of exchange controls, liability containment for ships and airplanes, sophisticated insurance management options, investment opportunities that transcend home jurisdiction marketing regulations, preservation of assets, investment of overnight funds, and freedom from certain home jurisdiction regulatory requirements.

³ UNODCCP, Working Paper of the United Nations Office for Drug Control and Crime Prevention " The UN Offshore Forum," January 2000, p.6. Forty-four percent of all offshore banks are thought to be located in the Caribbean and Latin America, 29% in Europe, 19% in Asia and the Pacific and 10% in Africa and the Middle East.

⁴ The United Kingdom, Japan and the United States provide for the registration and operation of non-resident banks and corporations. However, they are normally excluded from analyses of offshore jurisdictions for reasons relating to the transparency of their stringently regulated regimes and their open access to law enforcement authorities which differentiate them from OFCs discussed in this analysis. In macro-economic terms, they are described as "primary OFCs," having advanced settlement and payment systems and operating in liquid regional markets where both the source and use of funds are available. These characteristics also distinguish them from the OFCs discussed herein. (Economic description derived from Errico and Musalem, p.12.)

Improper Use of OFCs

The opacity of the offshore sector appeals to sovereign states as well. A 1999 working paper of the International Monetary Fund (IMF) concluded that OFCs played a contributory role in the recent financial crises in Asia and Latin America by providing a hiding place for losses of loans from the international financial institutions. In 1997, Malaysia hid some $10 billion in losses in its OFC. Thailand, between 1993-1996, disguised poor lending decisions by "rolling over" its losses into its offshore sector. In the 1995 banking crisis in Argentina, $3-$4 billion of depositor and creditor losses were incurred due to the failure of Argentina's offshore banks operating in the OFCs in the Caribbean and in Uruguay. Similarly, in Venezuela's 1994 banking crisis, the offshore financial sector was used to hide billions of dollars by shifting assets and liabilities through unmonitored offshore establishments.2

Another example of disguising financial irregularities involved the Russian Central Bank (CBR) and the Isle of Jersey OFC. FIMACO, established as an IBC in Jersey at the end of the Soviet-era with a capitalization of only $1,000, became a wholly owned subsidiary of Eurobank, a subsidiary of the CBR, in 1992. Between 1993 and 1997, the CBR and Eurobank transferred just under $2.5 billion through FIMACO in order to inflate CBR reserve levels in order to mislead the IMF. Investigation into these transactions have found no evidence to date that any funds had been misappropriated or stolen.3

IBCs

As noted above, FIMACO was an IBC formed in the Jersey OFC with an initial capitalization of only $1,000. Although FIMACO's beneficial owner was eventually revealed, a primary attraction of IBCs is their ability to hide the identity of the beneficial owner by the use of nominee directors and officeholders. When combined with the use of bearer shares, IBCs present impenetrable barriers to law enforcement. Formed nearly instantaneously via the Internet in many OFCs, IBCs offering prepackaged anonymity (shelf companies) are convenient and accessible vehicles for those engaged in money laundering, tax evasion and other financial crimes. The well-advertised OFC in the British Virgin Islands (BVI) is reported to register nearly four hundred new IBCs each month. With more than 300,000 IBCs on its registers, the BVI may be the repository of more than 12% of all IBCs registered globally.¹

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¹ IBC is the term used to describe a variety of offshore corporate entities which, by design, can only transact business outside the jurisdiction in which they are formed. IBCs are characterized by rapid formation at low cost, broad powers, low to no taxation, minimal reporting requirements and secrecy. Many OFCs also permit IBCs to issue bearer shares.

² Errico and Musalem, pp.37-38.

³ PricewaterhouseCoopers, "Report to V.V. Gerashenko, Central Bank of Russia, re: FIMACO," August 1999.

Asset Protection Trusts

Although IBCs play an important legitimate role in international commerce, they also play an important role in money laundering, as do a variety of trusts. One form of trust, the Asset Protection Trust (APT), protects the assets of individuals from civil judgments in their home jurisdictions. A common provision of APTs is that challenges or claims against the assets of the trust must be brought before the courts of the jurisdiction of the APT domicile within a relatively short period of time (usually two years). Many APTS contain "flee clauses," requiring the immediate transference to another OFC if the APT is threatened by inquiry. Used in combination with one another, IBCs, mini-trusts, bearer shares and APTs, these instruments make it nearly impossible for competent authorities to generate paper trails or to identify the beneficial owner of companies, while they simultaneously protect those engaging in serious financial crime from civil or criminal prosecution.

Economic Citizenship

Other practices found in some offshore and onshore jurisdictions can be problematic for law enforcement. The selling of varying degrees of citizenship ("economic citizenship") for a contribution to the State, can be found in both onshore and offshore jurisdictions. However, when combined with "special benefits" such as an instant change of name and the ability to travel to many countries without a visa on a new passport, economic citizenship can be misused by criminals. Currently, six OFCs sell economic citizenship: Belize, Dominica, Grenada, St. Kitts and Nevis and St. Vincent and the Grenadines in the Caribbean and Nauru, in the Pacific.

Virtual Casinos

The Internet has spawned "virtual" casinos and sports betting shops, claiming to have their physical locations in the Caribbean Basin (see the OFC chart). While the details of gambling in cyberspace are discussed elsewhere in this Report, it is instructive to note that with the exception of St. Vincent and the Grenadines, all Caribbean Basin OFCs that sell economic citizenship also sell virtual casino licenses. In the Pacific, only the offshore jurisdictions of Niue and the Cook Islands are known to sell these licenses. Wherever actually located, virtual casinos are extremely profitable for the governments that sell the licenses ($75,000 for a sports betting shop, $100,000 for a virtual casino licenses-a typical fee) and, quite possibly, that share in the operator's profits. As was reported in the 1999 INCSR, the Pacific jurisdictions were thought to have generated nearly $1.2 million dollars a month in these license fees, principally in the Cook Islands. Reports suggest that in 1999, monthly income rose by 25% to $1.5 million. Internet gambling executed via the use of credit cards and offshore banks represents yet another powerful vehicle for criminals to launder funds from illicit sources and to evade taxes.

Sharing Control with the Private Sector

The reality is that, even in the better-regulated OFCs, opportunities for sovereign states to disguise losses and for criminals to engage in the placement and layering of illicitly gained funds are on the increase. New technologies and the creative abilities of unethical attorneys, accountants and other professional "gatekeepers" provide opportunities to manipulate the system. Two Pacific jurisdictions, the Marshall Islands and Niue, appear to have entered into various awkward sharing arrangements, whereby an external agent controls entry to the market, thereby assuming fundamental regulatory functions, nominally in the hands of the government. Entry to the Marshall Islands OFC and regulatory control of the OFC appear to be in the hands of the Reston, Virginia branch of a multi-national company, while entry into the Niue OFC is controlled by a Panamanian law firm.

Similar arrangements can be found in some Caribbean Basin OFCs as well. In the Belize OFC control of the registration of IBCs and ships was ceded to the private sector at its outset. In the case of Antigua and Barbuda, ceding control to an external agent played a major role in that government's decision to change legislation to create a haven for those engaged in money laundering. After intensive but fruitless negotiations with the Government of Antigua and Barbuda, the United States, followed by the United Kingdom issued financial advisories in April 1999 warning their own financial institutions to view with suspicion all transactions to, through and from Antigua and Barbuda, or involving any of its Nationals. One result of these advisories was the closing of all but 18 of Antigua and Barbuda's 57 offshore banks. Another beneficial result of the advisories has been the passage of new legislation, which reportedly has corrected many defects of the former laws pertaining to banking. Under the 1998 defective IBC Act the regulatory function of IBCs effectively was in the hands of private sector agents responsible for marketing the sector. It is expected that the act will be revised to reflect the complete separation of government regulatory functions from marketing, the latter of which is a private sector function. More recently, St. Lucia, despite the specific advice of the United States to the contrary, enacted legislation that places all but nominal regulatory control of its proposed OFC into the hands of the private sector. If the reports of the contents of the recently brought into force legislation are accurate, St. Lucia will have transferred control of its OFC to the private sector.

Entering into such arrangements is not a necessary pre-condition, however, to attracting dubious activity. Nauru, a Pacific Island with a population of only 10,000 individuals, has nearly 400 offshore banks registered to a single post office box. Reports by the Central Bank of Russia in 1999 allege that during 1998-1999, nearly $70 billion was either "booked" to Russian-owned banks registered in Nauru or transferred through Nauru's correspondent banks to OFCs in the Caribbean and Europe. Much smaller amounts of the $70 billion are alleged by the Central Bank to have been booked to, or transferred through, the Vanuatu OFC and through Palau. As is frequently the case, the markets reacted to these allegations quickly. Deutsche Bank issued a message to the nearly 300 correspondent banks within its system to stop processing dollar denominated transactions from the three Pacific jurisdictions. Republic National Bank, Bankers Trust and the Bank of New York followed suit.¹

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¹ UNODCCP, p.6. Of the nearly 2.5 million IBCs registered globally, 37% were registered in the Caribbean and Latin America, 25% in "Europe, 30% in Asia and the Pacific and 8% in Africa and the Middle East

Current International Initiatives

The damage to the reputation of an individual OFC resulting from governments or markets reacting to reports of irregular or illicit activities is significant as is the unavoidable collateral damage to the reputation of the offshore sector as a whole. For that reason, better-regulated OFCs understandably resent being tarred by the same brush as those which are not well regulated.

During the past year or so, the threats presented by a lack of transparency and oversight to an increasingly interdependent global financial system have been examined in variety of fora. While all these initiatives are important, the following will have a direct and immediate impact on the offshore sector and on the reputation of individual offshore jursidictions.

United Kingdom White Paper on the Offshore Industry in the Overseas Territories

Anthony Edwards' extensive review of the British Crown Dependencies of Guernsey, Jersey and the Isle of Man was presented to Parliament in November 1998. Edwards concluded that while "prudential regulation of banks, investment business and insurance is generally of a high standard," there were specific areas in which all the Channel Islands could improve.1 For example, the use of instruments such as asset protection trusts and bearer shares provided obstacles to international law enforcement.

Following the Edwards report, a White Paper on the offshore industry in the British Overseas Territories (Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Montserrat and Turks and Caicos) was issued in March 1999. That paper describes potential changes designed to ensure that those jurisdictions' regulatory regimes are effective, transparent and offer adequate accessibility for the legitimate investigation of criminal activity, including money laundering, other financial crimes as well as tax fraud and tax evasion The potential changes would also apply to the Channel Island jurisdictions.

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¹ Anthony Edwards, "Review of Financial Regulation in the Crown Dependencies," presented to Parliament by the Secretary of State for the Home Department, November 1998, p. vi.

The Organization for Economic Co-operation and Development (OECD) Program to Counteract Harmful Tax Practices

While the British Crown Dependencies and Overseas Territories will face new regulations, including to withhold taxes, that may not be the case with smaller sovereign offshore jurisdictions located around the world. In pursuit of their effort to combat harmful tax practices, OECD governments are in the process of identifying jurisdictions that function as tax havens, and the OECD is taking steps to eliminate the adverse consequences that those jurisdiction have on the world economy. The identified jurisdictions will be encouraged to eliminate the harmful features of their regimes as part of an ongoing co-operative dialogue with the OECD Forum on Harmful Tax Practices. In situations in which those discussions are unsuccessful, coordinated countermeasures by OECD member countries are foreseen.

Mandated by the 1998 Report on Harmful Tax Competition to produce a list of tax havens, the Forum, over the last year has engaged in extensive factual review and dialogue with the jurisdictions initially identified for review (with the exception of a small number that chose not to participate). On the basis of these consultations, the Forum met in November 1999 in Paris to undertake an initial technical evaluation of whether each jurisdiction meets the criteria for being a tax haven, as set out in the 1998 Report. Those preliminary findings were presented to the Committee on Fiscal Affairs, the OECD's senior tax policy body in January 2000.

As defined in the 1998 Report, a tax haven is a jurisdiction that (i) imposes no or only nominal taxes (generally or in special circumstances), (ii) offers, or is perceived to offer, itself as a place to be used by non-residents to escape taxation in their jurisdiction of residence, and (iii) possesses "confirming criteria." Those confirming criteria are: 1) lack of effective exchange of information, 2) lack of transparency, and (3) attracting businesses that conduct no substantial activities. These criteria are consistent with the nature of the tax poaching schemes that are the object of the OECD's work: schemes that impede the ability of home jurisdictions to enforce their own tax laws.

Currently, private dialogues are underway with those jurisdictions under review, and any list of tax havens would be submitted to the OECD Council in June 2000. Publication of the Forum's findings is not expected until after the June 2000 Ministerial. The report is expected to distinguish between uncooperative tax havens and jurisdictions that choose to commit themselves to work towards eliminating the harmful aspects of their regimes. No distinction will be made between jurisdictions that are independent states and those that are dependencies.

Financial Action Task Force (FATF) Ad Hoc Group on Non-Cooperative Countries and Territories (NCCT)

The Financial Action Task Force, is engaged in a process designed to identify non-cooperative jurisdictions in the fight against money laundering and to encourage them to implement international standards in this area. The year-old initiative began with the development of twenty-five criteria1 to identify detrimental rules and practices that impede international cooperation in the fight against money laundering. The criteria address the following issues:

• Loopholes in financial regulations that allow no, or inadequate supervision of the financial sector, weak licensing or customer identification requirements, excessive financial secrecy provisions, or lack of suspicious transaction reporting systems.

• Weaknesses in commercial requirements including the identification of beneficial ownership and the registration procedures of business entities.

• Obstacles to international co-operation, regarding both administrative and judicial levels.

• Inadequate resources for preventing, detecting and repressing money laundering activities.

The criteria are consistent with the international anti-money laundering standards set out in the forty Recommendations of the FATF, the intergovernmental body set up in 1989 to combat money laundering.

The FATF has set up four regional review groups to begin reviews of a number of jurisdictions, both within and outside the FATF membership. Jurisdictions to be reviewed are being informed of the work to be carried out by the FATF. The reviews will involve the gathering of all relevant information, including laws and regulations as well as any mutual evaluation reports, self-assessment surveys or progress reports, if available. The factual information on each jurisdiction's regime will then be analyzed with respect to the twenty-five criteria and a draft report will be prepared and sent to the jurisdictions concerned for comment. Once the reports are completed, the FATF will address further steps to encourage constructive anti-money laundering action and is expected to publish a list of non-cooperative jurisdictions.

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¹ The twenty-five criteria are set forth in the Annex - to the Money Laundering and Financial Crimes section.

The Financial Stability Forum (FSF) Working Group on Offshore Financial Centers

The FSF established the OFC Working Group in April 1999. The Working Group is comprised of officials of industrial and emerging market economies, international institutions, and regulatory and supervisory groupings. The Working Group's purpose is to evaluate the impact on global financial stability of the uses made by market participants of financial offshore centers. The Working Group is reviewing the uses and activities of OFCs. Those OFCs with weaknesses in financial supervision, cross-border cooperation, and transparency allow financial market participants to engage in regulatory arbitrage of several forms, undermining efforts to strengthen the global financial system. The Group considers that the key to addressing most of the problems with these OFCs is through the adoption and implementation of international standards, particular in cross-border cooperation. The Group's work is focused on identifying the relevant international standards whose implementation would address these issues, and developing recommendations on mechanisms for assessing compliance in the implementation of the standards and ensuring appropriate incentives to enhance such compliance.

The OFCs in the New Millennium

Were all problematic OFCs to implement all the recommendations of the international organizations, the opportunities presented to those intent on using the OFCs for criminal purposes in the opening decades of the 21st century would still increase greatly with the introduction of new technologies. Governments will have to devote substantial resources to cope with issues that promise to be as complex than those currently associated with cyberspace.

But the Internet need not be a weapon wielded primarily by those with criminal intent. A cursory search on the Internet reveals dozens of websites promising instantaneous access to the OFCs. Not infrequently, regulators of the named OFC jurisdictions state that they have no contractual connection to the agents advertising their access and are, in fact, being victimized by being named in these websites.

A novel idea might resolve this problem. To protect against reputational damage, each OFC jurisdiction could construct a website in which it names its contracted agents and also names those who are fraudulently advertising their connection to the OFC. Alternatively, a multinational entity, such as the United Nations might consider providing this service. Additionally, a global website could track fraudulent OFCs such as The Kingdom of EnenKio Atoll, the Republic of Melchizedek and the Republic of Lomar, which exist only in cyberspace. These fraudulent entities are responsible for defrauding individuals of hundreds of millions of dollars through the selling of economic citizenship and other criminal schemes.

Beyond the challenges that new technologies pose for regulators and law enforcement authorities, another lingering issue not yet sufficiently addressed by those committed to achieving transparency in the offshore sector, is the critical role played by licensed professionals in aiding and abetting criminal behavior in the OFCs Achieving transparency would require convening groups representing governments and licensed professionals (such as lawyers, accountants, auditors, company formation agents and notaries) to consider developing clear standards, guidelines and rules to govern conduct in order to avoid putting professionals "in a place in which their obligations to client and to country clearly conflict."2 The United States Government considers this to be a very serious issue and is closely studying it and all its ramifications. While this problem is not unique to the OFCs, it is of particular import in the OFC sector.

Ultimately, the concerted joint effort of regulators, law enforcement officials, and regulated licensed professionals working closely with those providing financial services in all jurisdictions will be necessary to combat all financial crimes, including money laundering and tax evasion, while diminishing the perceived potential threat of the offshore financial sector to global financial stability.

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¹ Jonathan M. Winer, "The Coming Wave of Transparency Reform: A Tidal Shift", keynote address at the Seventeenth Cambridge Symposium on Economic Crime" September 1999, p.8.

Explanatory Notes To the Offshore Financial Centers Chart

Given the intrinsically secretive nature of OFCs, public information is frequently difficult to obtain. Industry publications, discussions with officials responsible for managing the OFCs, finance ministry officials, embassy reports, analyses from U.S. agencies, studies of international organizations and other governments and secondary sources provided the data for the chart.

Jurisdictions which are considering establishing OFCs, Nepal and Palau for example, are not included on the chart. Excluded also are jurisdictions which provide low or no taxes to individuals but offer no other services normally associated with the offshore financial service sector.

Within most categories presented on the chart, the designations Y and N are used to denote the existence (Y) or the non-existence (N) of the entity or service in a specific jurisdiction. Where there is no (or only fragmentary) information regarding specific categories, the corresponding cells on the chart are left blank. In some categories, symbols other than, or in addition to Y or N are employed. Explanations for additional symbols are provided below.

Explanations of the categories themselves are either provided in the preceding text, are considered to be self-evident, or are provided below.

Category Designations on the Offshore Financial Centers Chart

Offshore Banks: The number is provided if known. A Y in this category indicates that although the OFC registers offshore banks, the number of such banks is not known. A P indicates that the jurisdiction refuses to reveal the number of registered offshore banks. An N indicates that there are no offshore banks in the jurisdiction. A blank cell indicates that the United States does not know if offshore banks are offered within the OFC.

Trust and Management Companies: These are companies which provide fiduciary services, serve as marketing agents, representatives, lawyers, accountants, trustees, nominee shareholders, directors and officers of international business corporations. Y=Yes; N=No; Blank cell=Unknown.

International Business Corporations (IBCs) &Exempt Companies: Numbers provided when known and public; in many cases, the numbers are significantly underreported. A Y indicates that IBCs and/or Exempt Companies are offered but the number is not known. A P means the jurisdiction refuses to reveal the information; a blank cell indicates that it is not known whether IBCs are offered.

Bearer Shares: Y = Yes; N = No; Blank Cell = Unknown.

Asset Protection Trusts (APTs): Y = Yes; N = No; Blank Cell = Unknown

Insurance and Re-insurance Company Formation: Y = Yes; N = No ; Blank Cell = Unknown

Provides "Economic Citizenship": Passports are sold by jurisdictions that enable their holders to evade taxation and legal remedies by law enforcement agencies of their "home countries". Y = Yes; N = No.

Services Advertised on the Internet: The Internet has been an extraordinary boon to OFCs. For minimal cost, remote and little known jurisdictions and agents can advertise globally, describing the services provided by the OFCs and providing almost instantaneous registration There is no distinction on the chart between government sponsored websites and those sponsored solely by the private sector. Y = Yes, N = No; Blank cell = Unknown

Internet Gaming: Licenses granted by jurisdictions enable grantees to establish "virtual casinos" on the Internet." Pay via credit card. Y= Yes; N= No; Blank Cell = Unknown

Criminalized Drug Money Laundering. A D in this column indicates that the jurisdiction has passed a law criminalizing narcotics-related money laundering only. BD indicates that the money laundering encompasses other crimes in addition to narcotics related money laundering. N = no legislation criminalizing money laundering.

Suspicious Activities Reports: An M indicates that reporting suspicious transactions to law enforcement by banks, and in some jurisdictions, other financial institutions is mandatory. A P indicates that reporting is voluntary. N=no requirement to report.

Cooperates with International Law Enforcement: Y= Yes; N=No; Blank Cell = Unknown

Membership in International Organizations: These multinational organizations have been formed to combat money laundering or to establish sound supervisory regimes; the Asia/Pacific Group, the Financial Action Task Force, the Caribbean Financial Action Task Force, the Council of Europe Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures, the Offshore Group of Banking Supervisors and the Organization of American States Inter-American Drug Control Commission. N = not a member in any of these organizations.

Mutual Legal Assistance Treaties (MLATs): In money laundering cases, MLATs can be extremely useful as a means of obtaining banking and other financial records from our treaty partners. A Y in this column on the chart indicates that the United States has an MLAT with a specific jurisdiction or with the jurisdiction which is responsible for the international relations of the jurisdiction and which has extended application of the treaty to that jurisdiction. An R designates a country or jurisdiction with which the United States has signed an MLAT which has been ratified by the United States but is not yet in force. A D in this column indicates that the OFC jurisdiction is an overseas territory of the United Kingdom and is covered under the MLAT with the United Kingdom. Madeira, as was, Macau, is an autonomous region of Portugal, which does not have an MLAT with the United States. Similarly, Aruba and the Netherlands Antilles are part of the Netherlands, which does not have an MLAT with the United States. Hong Kong's MLAT.

Offshore Financial Centers Chart -- [Excel file]

Money Laundering Trends

In last year's Report, we noted that there was relatively little change in the predicate offenses that generate illicit proceeds. A review of U.S. suspicious activity reports (SAR),1 investigative activity, prosecutions and convictions during 1999 continues to suggest that sources of illicit proceeds are consistent with those reported in prior years. Specifically, drug trafficking, bank fraud, medical and commercial fraud appear most often as predicate offenses.

Money laundering and evasion of currency reporting requirements continue to be major problems in the United States. All income from illegal activity, such as narcotics trafficking, illegal gambling, Internet, bankruptcy and health care fraud, embezzlement, public corruption and other crimes for profit involve some degree of money laundering.

From 1986 when money laundering was made a separate crime in the United States, through September 1998, there were more than 5,900 convictions or guilty pleas for federal money laundering offences. In fiscal year 1997 through 1999, U.S. Attorneys charged approximately 2,000 defendants each year.

__________________ ¹In the United States, financial institutions are required to report suspicious transactions to the competent authorities.

Money Laundering and Tax Evasion

During fiscal year 1999 (October 1, 1998 to September 30, 1999), the Internal Revenue Service (IRS) initiated 2,076 money laundering investigations; many worked jointly with other U.S. law enforcement agencies. Of those, 1,710 were recommended for prosecution. The approximate total dollar amount of proceeds laundered on the 1,710 cases was over $7 billion.

In recent years, the IRS has seen a proliferation in tax evasion schemes using trusts, bank accounts, and corporations in offshore financial centers (OFCs). Currently, there are sophisticated promotions of trust schemes that involve a series of trusts formed domestically and in OFCs that are also utilizing foreign bank accounts and international business corporations (IBCs). These promotions are directed to individuals with incomes usually greater than $100,000. Promoters are selling these fraudulent trust packages for $10,000 to $75,000 that purportedly detail how individuals can take their businesses offshore and avoid federal income tax. These promotions are in reality elaborate tax evasion and money laundering schemes, whose multiple layers make it difficult, if not impossible, to determine beneficial owners and to track transactions.

For example, in one sophisticated scheme, promoters instruct individuals to transfer their businesses, including income earned during the year, to a trust, tax-exempt or asset Management Company (AMC). Next, promoters instruct clients to form a trust with nominee directors in an OFC. All income earned by the business that was transferred to the AMC is then distributed to the foreign trust. The trustee of the foreign trust is the AMC. The promoters then instruct individuals to form a second foreign trust also located in an OFC. All the income, less some fraudulent expenses, is distributed from the first foreign trust to the second foreign trust. The first foreign trust is the trustee of the second foreign trust and Certificates of Beneficial Interest (CBIs) are issued to the first foreign trust or other foreigner controlled by the taxpayer. At this point, according to the promoters, the income transferred to the second foreign trust is now outside U.S. tax jurisdiction. Promoters claim that since the source of the income and the beneficiary are foreign, there is no U.S. tax return filing requirements.

Since the business income is now offshore, individuals need to repatriate their earnings back into the United States. The most popular method used to do this is to open a foreign business account with an anonymous IBC in an OFC and deposit business earnings into that account. In other cases, individuals are purchasing offshore banking licenses and forming their own financial institutions (as has been documented in Belize and Nauru). The earnings are returned to the individual by the use of a debit or credit card or through wire transfers. In the case of debit or credit cards, the individual uses the cards for cash access through ATMs in the United States or to pay everyday living expenses. Since these cards are issued by banks in OFCs, it is very difficult for U.S. law enforcement to document the transactions. In some instances, the business earnings are wire transferred back to the United States. This scheme occurs in OFCs around the world.

Money Laundering: New Technologies and Terrorist Financing

The use of automated teller machines (ATMs) is a recently identified method of money laundering that came to light during a comprehensive review of SARs. Other forms of electronic transactions, including via the Internet and with smart cards, are also of concern to U.S. officials responsible for fighting money laundering. Terrorist financing also has been included in this section due to the high priority placed on this problem by U.S. law enforcement authorities.

Automated Teller Machines

A review of SARs filed from July 1997 through June 1998 identified a significant number of reports noting a Bank Secrecy Act (BSA) violations and citing instances of ATM activity. Reports were filed by more than 60 different banks in 32 states, the District of Columbia and Guam. The reporting indicates that ATMs are being used domestically and abroad to deposit and withdraw large sums of cash on a recurrent basis with the apparent purpose of evading detection by law enforcement authorities.

Domestically, the SARs indicate structuring of cash transactions to avoid the Currency Transaction Report (CTR) filing requirement. Customers do this by making multiple ATM cash deposits and withdrawals in combination with same day bank counter activity aggregating more than $10,000.

Internationally, the SARs reveal that, in many instances, cash or wired funds in accounts based in the United States were subsequently withdrawn from ATMs located in jurisdictions with a high risk for money laundering or drug trafficking. The size and number of the withdrawals within short time frames are indicative of potential money laundering.

Online Banking¹

The sources of illicit proceeds and schemes used to launder those proceeds remain generally unchanged from prior years. However, there has been a significant increase in the use of online banking services to carry out specific steps in the money laundering cycle. In particular, an increase in the exploitation of online banking for both the layering and integration phases of money laundering has been observed.

Institutions offering online banking use the Internet as the delivery channel to facilitate consumer and business financial transactions, such as funds transfers, bill payment, and account balance review. An online banking customer accesses his or her accounts from an Internet browser--software that runs the banking programs resident on the institution's Internet server.

Although many online banks offer virtually the same services as do traditional brick-and-mortar banks, Internet banking is viewed by many analysts as an important means of maintaining an increasingly sophisticated customer base, of developing a new customer base, and of capturing a greater share of depositor assets. Because Internet banks generally have lower operational and transactional costs than do traditional banks, they are often able to attract new customers with offers of low-cost checking accounts and favorable interest returns on deposits and investments.

Despite lingering customer fears about security, reliability, and privacy, many industry analysts believe that online banking in the United States is positioned for dynamic growth. More than 1,200 U.S. banks and credit unions purchased Internet banking technology in 1998, and it is believed that about 7,200 banks and credit unions did the same by the end of 1999.

The growth of electronic banking has introduced various new challenges for regulatory and law enforcement authorities. Governments must continually evaluate industry developments in order to formulate strategies to ensure continued growth of online banking, while minimizing the risk for financial fraud and money laundering.

Today's online bank may consist of no more than a computer server and a telecommunications connection. Depending on its location, an online bank may be subject to a wide range of oversight and supervision--from very robust and effective policies and programs, to very lax or nonexistent regulatory regimes. In addition, an online bank whose practices come under suspicion by regulatory and law enforcement authorities may be difficult to investigate because of the remote and global projection capabilities of the Internet and other telecommunications technologies. The victims of a bank fraud and the perpetrators of a money laundering scheme each may be half-a-world away from the physical location of the bank's computer servers. Online payment technologies may also pose other unique problems vis-à-vis concealed transactor identities and insufficient or non-existent audit trails.

As the phenomenon of online banking continues to spread globally, so too will the threat for criminal abuse by individuals and organizations engaged in money laundering, fraud and other financial crimes. Electronic banks, particularly those that operate in traditional bank secrecy jurisdictions, offer many unique services that may be misused for the purpose of laundering illicit funds.

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¹ "Online banking" is often used as an umbrella term to describe Internet banking, PC banking and telephone banking. This discussion focuses exclusively on the issues associated with Internet banking.

Internet Banking and Gambling

Electronic commerce, or E-commerce, is a growing application within the Internet being used for both legitimate and illegitimate businesses. E-commerce comes in many legitimate forms such as electronic funds transfer and electronic banking. This particular area of Internet banking has undergone regulatory scrutiny in the United States primarily to identify banking customers through verification of driver license, residential address, telephone, social security and passport information. However, in the international electronic banking markets, few regulatory or due diligence oversights address the verification of Internet customers.

For example, offshore Internet banks are often associated with offshore Internet gaming businesses, which further facilitate the laundering of illicit cash. The countries associated with offshore Internet banking do little to conduct on-site review and regulation of these "cyberbusinesses." This poses unique challenges to U.S. law enforcement agencies.

Jurisdictions that have provided a haven for offshore Internet gaming argue that the offshore locations and licenses put the Internet operation outside the jurisdiction of U.S. law. Those cases, however, that have been adjudicated by United States courts, indicate that the act of entering the bet and transmitting the information from the United States via the Internet constitutes gambling activity within the United States and is sufficient to confer jurisdiction to U.S. courts. However, a number of non-cooperative jurisdictions in the Caribbean continue to utilize Internet gaming as a means to target U.S. gamblers and provide a sanctuary for offshore Internet money launders.

Encryption and Electronic Money

United States law enforcement agencies are concerned about cryptography (the art of ciphering and deciphering messages in code). Cryptography has allowed the development of electronic money (e-money). The basic technology that has furthered the use of e-money allows banks and their customers to protect their financial transactions through the use of encryption "keys." By utilizing encryption keys, the banks and individuals can encrypt e-money to be an identified or an anonymous transaction. Identified e-money contains information revealing the identity of the person who originally withdrew the money. Anonymous e-money is similar to paper cash. Once anonymous e-money is withdrawn from an account, it can be spent, given away or laundered without leaving a transaction trail. These types of transactions serve as a conduit for money launderers to facilitate their illicit cash businesses.

Electronic Communication

The Internet is also known as a new forum for public and private speech. This speech is carried-out via electronic mail (e-mail), chat rooms and bulletin boards. These forums are often used by potential money launderers to provide misleading and inaccurate stock and commodity market information. The idea of the money launderer is to provide penny stock or initial public offering stock information that misleads investors to interpret the electronic communication as potential (unofficial) investment advice. This information causes many investors to purchase or sell stocks by anticipating an increase or decrease in market prices. The criminals then use these market adjustments to realize millions of dollars in profits. These profits are then placed into stock transactions via the Internet with commingled lawful cash transactions.

Web Page Crimes

Legitimate vendors have established elaborate web pages in support of their product display, service catalogs, and have utilized a variety of secure payment options to facilitate purchases. These web pages allow for business-to-business or business-to-consumer transactions. Vendors can choose to host their web stores locally or host their web stores remotely through an Internet Service Provider (ISP). These web stores have been used by white collar criminal networks as a mechanism to conduct a wide variety of criminal schemes, including money laundering. Many criminal associates and enterprises also have established their own web pages. One of the schemes involves the use of identity theft and credit cards. In this scheme, criminal enterprises utilize merchandise purchases to launder illicit cash with merchandise sales. Many of these thefts come from criminals who can duplicate legitimate web pages to intercept legitimate consumer purchases (called "web spoofing"). These thefts occur specifically to obtain credit card and identity information from the consumer. Once the information is captured, the thief forwards the intercepted information to the legitimate web page vendor. The legitimate vendor sends the purchase confirmation to the consumer. Many consumers will not know of the theft until the unauthorized merchandise purchases are noted on the consumer's credit card bill.

Smart Cards

Another concern to U.S. law enforcement officials is the developing use of smart cards to facilitate the laundering of illicit cash. Smart cards allow users to bypass paper money by adding cash value to a computer chip embedded on the front of the card. The microchip keeps track of how much money is on the card after each deposit and purchase. Because the cash value is stored on the card, there is no need for the merchant to dial up a bank or credit card company's computer to get approval for a transaction.

Smart cards can be used for direct purchases, computer-to-computer purchases and automatic teller machine withdrawals. This advanced technology has enabled individuals with a pre-loaded value card to withdraw currencies in 53 countries throughout the world.

Although smart cards have been widely accepted in Europe and Asia, consumers in the United States have been slow in welcoming the technology. However, money launderers have determined that smart cards are a far easier way to move large sums of money than bulk cash shipments.

Internet Fraud Center

These new technologies and criminal applications of the Internet have caused U.S. law enforcement officials to encounter difficulty in handling complaints by consumers and even problems in receiving complaints from victims. In many cases, the victim does not know where or even what agency to report an Internet crime. When a law enforcement agency receives a complaint, it is difficult to determine exactly where the crime took place. In response, the Federal Bureau of Investigation (FBI) has opened the Internet Fraud Center (IFC). The IFC will be a conduit for Internet criminal complaints received domestically and internationally. The IFC was designed by the FBI to address Internet crimes regardless of the violation or where the crime originated or was committed. This information will then be disseminated to the appropriate law enforcement agency for further investigation.

The IFC will allow U.S. law enforcement to apply better investigative resources to address criminal enterprises utilizing the Internet to commit their criminal activity in the year 2000 and beyond.

Terrorist Financing

In 1998, terrorists mounted approximately 273 attacks killing 741 people worldwide. Most notable were the August 1998 bombings of the U.S. Embassies in Dar Es Salaam, Tanzania and Nairobi, Kenya--allegedly orchestrated and financed by Usama Bin Ladin and his al-Qa'ida terrorist organization. The simultaneous attacks claimed 301 lives and injured more than 5,000 people.

Terrorist groups differ from other criminal networks in the motives behind their crimes. Unlike drug traffickers and organized crime groups that primarily seek monetary gain, terrorist groups usually have non-financial goals, such as publicity, dissemination of ideology, political legitimacy, and political influence. As a result, uncovering and interdicting the finances of a terrorist organization with existing anti-money laundering laws and FATF guidelines requires that policy makers and law enforcement officials recognize that terrorists' revenues, expenditures and methods of moving funds may differ from profit-oriented organized crime networks.

While not seeking financial gain as an end in itself, international terrorist groups need money to attract and retain adherents and to support a presence locally and overseas. Hizballah, HAMAS, Bin Ladin's al-Qa'ida, and others also need funds for media campaigns, to buy political influence, and even to undertake social projects--largely with the aim of maintaining membership and attracting sympathetic supporters. Indeed, for many terrorist groups, the planning and execution of violent attacks probably comprise a small part of their total budget. It is much more difficult to investigate the financial dealings of a terrorist organization if most of its funds are earmarked for legitimate political, social, and humanitarian activities.

Although many countries have passed laws that prohibit money laundering for all crimes--including terrorism--the laws usually have been applied to terrorists only in cases where they have taken part coincidentally in fraud, drug trafficking, or some other crime that generated illicit proceeds. More needs to be done on a comprehensive basis to prevent money laundering from facilitating terrorist activities.

Global Money Laundering Typologies

Asia and the Pacific

Structuring of transactions to avoid the prevention and detection of money laundering by threshold-based reporting requirements continues to be a significant problem in the United States as evidenced by a review of the SARs. This problem is further exacerbated by use of cashier's checks and money orders to facilitate physical transportation of funds. For example, one case involved a scheme to structure currency deposits into U.S. financial accounts in amounts just under $10,000 and then to wire transfer these funds to individuals in Hong Kong, Singapore, Bangkok and Vietnam. Additionally, the scheme involved sending cashier's checks and negotiable instruments via the U.S. Postal Service. The structured financial transactions involved the purchase of over $1 million of American Express money orders. The investigation revealed that an illegal money transmitting business was utilized to transfer over $20 million to individuals outside the United States. One of the defendants pled guilty to filing false tax returns and received a sentence of six months plus three years probation. The other defendant was convicted of conspiracy, operating an illegal wire transmitting business, structuring, and tax evasion.

Central and Eastern Europe

A review of SARs filed from January 1997 through February 1999 was undertaken to determine if SAR data could be used to construct a meaningful typology of suspicious financial activity that could be linked to Russia and jurisdictions in Eastern Europe and Eurasia (EEAE). This research identified approximately 500 SARs filed during this period reporting transactions or transactors associated, directly or indirectly, with Russia or one of jurisdictions in EEAE - (Estonia, Latvia, Lithuania, Belarus, Ukraine, Moldova, Armenia, Azerbaijan, Georgia, Turkmenistan, Kazakhstan, Uzbekistan, Kyrgyzstan and Tajikistan). The SAR narrative field proved to be invaluable in identifying the relevant transactions and transactors and provided the vast majority of the information of value used in building the typology.

The national SAR database was searched to extract and then analyze SARs that include a reference in the narrative to Russia or the EEAE jurisdictions. An analysis of SAR data showed extensive, large dollar wire transfer activity, typically involving apparent connections between multiple accounts, companies, banks, and countries often involving a Russia-based bank or company, or a Russian citizen.

There are many variations of the overall paths of the wire transfer activity. However, a basic pattern that emerges from SAR data is that bank accounts based in the United States are identified as either primary reception or origination points for large wired sums, coming in from, or destined for, Russia and neighboring countries. It further appears that some of these U.S.-based accounts may also serve as conduit accounts from which large sums are then wired offshore, often to money laundering havens. Similarly, wires may also be received from offshore havens or other foreign locations.

With few exceptions, there appears to be no significant net flow in favor of any frequently cited country, including the United States. In many instances, the activity seems to have no purpose other than to move a transaction through a series of financial institutions, domestically and internationally. Such activity may reflect what law enforcement officials call "layering," or the transfer of funds to and from various locations and accounts for the express purpose of concealing the nature, origin or beneficiaries of the transactions.

Large wire transfer activity associated with Russia and the EEAE is most often identified by the banks as being unusual or suspicious for two reasons. First, the suspect has been unwilling or unable to provide sufficient information about the beneficiary or sender of the wire, or second because inadequate identifying information has traveled with the transaction through a chain of activity.

A second type of unusual or suspicious activity often reported involving Russia and EEAE is that which is not normally expected or commensurate with the stated business of the account holder. Similarly, relatively dormant accounts appear suddenly to experience a noteworthy and unexplained increase in wire transfers or other financial transactions. In some instances, the banks have reported suspected front companies, since it may be discovered by the bank that a given business entity is apparently non-existent (i.e., not operating at its stated address).

The account holders of the U.S.-based bank accounts with active wire transfer activity involving Russia and EEAE include primarily the following types of businesses: import, export and trade; investment and finance; management companies; car dealer, parts and sales; construction; electrical and computer; medical supplies; consulting and marketing; oil; and telecommunications and media companies. While any of these business types can be used as a front for illicit financial activity, international trade entities, investment and financial management companies and construction companies are believed by U.S. and foreign law enforcement authorities to have been used as cover for the movement of criminal proceeds into or out of Russia.

There is also evidence from the SARs pertaining to large dollar wire activity which involves correspondent accounts that a Russian bank maintains at an U.S.-based bank (i.e., through which correspondent account the Russian bank transacts U.S. dollar-denominated wire transfers on behalf of its customers). Banks that are monitoring and reporting such activity as suspicious appear to be doing so because of concerns about the identity of actual transactors, unusually large amounts involved, or atypical patterns of account activity.

Jurisdictions that appear may have some links to these transactions include the British Virgin Islands, Canada, the Cayman Islands, People's Republic of China, Cyprus, Germany, Ireland, Israel, Italy, and Switzerland. With the exception of the Cayman Islands, each of these jurisdictions experienced a significant increase from 1997 to 1998 in suspicious transactions linked to Russia or the other former Soviet Republics.

On average, approximately 75% of these reported violations are BSA-related-i.e., involving structuring or money laundering. In filings which report wire transfer activity, these jurisdictions are, by a slight margin, more often the destination of wires sent out from a suspicious account, rather than the origination point of wires sent to a suspicious account

Many of these SAR filings refer to more than one of the jurisdictions listed above, indicating that money is being transferred to or from a number of these jurisdictions from the account in question. The country most often mentioned in conjunction with other jurisdictions on this list was Switzerland.

Of the NIS themselves, the three countries that exhibited a marked percentage increase in activity, as reported in the SARs, from 1997 to 1998 are Armenia, Latvia and Ukraine. These are also the three republics with the most overall SAR filings after Russia itself.

The study also involved an updated review on SARs filed since March 1999 (the cut off date for the original data set). That review indicates that activity identified by financial institutions as suspicious and involving Russia and the NIS continues to be consistent with the current typology. The review also indicates that there has been an increase in reporting since that time by some banks, often in response to subpoenas or other requests for information from law enforcement agencies.

Latin America

Operation Casablanca

This case was first discussed in last year's Report and the following information is an update to this ongoing investigation.

In May 1998, the United States Customs Service concluded Operation Casablanca, the largest, most comprehensive and significant drug money laundering case in the history of U.S. law enforcement.

This undercover money laundering investigation resulted in the seizure of over $98 million in U.S. currency ($67 million from bank accounts and $31 million in cash from drug traffickers), over 4 tons of marijuana and two tons of cocaine. The indictment, which was issued in U.S. District Court in Los Angeles, charged 26 Mexican bank officials and three Mexican banks, CONFIA, SERFIN, and BANCOMER with laundering drug money. The indictment alleged that officials from 12 of Mexico's largest 19 banking institutions were involved in money laundering activities. Additionally, bankers from two Venezuelan banks, BANCO INDUSTRIAL DE VENEZUELA and BANCO DEL CARIBE were charged in the money laundering scheme.

Operation Casablanca was significant for a number of reasons: (1) because of the sheer volume of the amounts of money involved, and (2) because it represents the first time Mexican banks and bank officials have been directly linked to laundering the Cali and Juarez cartels' U.S. drug profits, and (3) because it uncovered a systematic scheme to launder money via a large number of Mexican institutions.

The money laundering scheme worked in the following manner:

• Undercover agents were introduced to financial managers from both the Cali Cartel and the Juarez Cartel and obtained contracts to "pick up" drug proceeds on the streets of major U.S. cities.

• The agents were also introduced to Mexican bankers who then opened bank accounts for them.

• The funds that were "picked up" were then transported back to Los Angeles, California where they were deposited in U.S. Customs Service-controlled undercover bank accounts.

• The funds were then wire transferred to accounts opened by the Mexican banking officials. After taking out their commission, these officials then issued Mexican bank drafts drawn on the U.S. accounts of the Mexican banks. These bank drafts were delivered back to the undercover agents in the U.S. either in person or via courier.

• The funds were then disbursed at the direction of the money launderers. A large percentage of the money seized during Operation Casablanca was as the result of the use of "substitute assets" laws. Substitute assets are assets owned by a business or individual and seized by the government in lieu of the actual property (in this case money) that was used to further a criminal enterprise.

Court orders were obtained allowing for the seizure of the total amount of drug money laundered through the accounts and the amount of commission money paid to the bankers. Because the Mexican bank drafts were drawn on the U.S. accounts of the Mexican banks, court orders were obtained allowing for the seizure of the aforementioned funds from those U.S. accounts.

As a result:

• BANCOMER and SERFIN each pled guilty to criminal money laundering violations and together forfeited a total of $16 million to the government. Each bank was also fined $500,000.
• CONFIA settled the indictment with a civil plea and forfeited $12 million.
• 28 individuals, including 12 Mexican bankers and their associates, have pled guilty to money laundering and/or drug smuggling charges.
• 3 Mexican bankers were convicted, and 3 Mexican bankers were acquitted of money laundering charges in trials in Los Angeles.
• Three Venezuelan bankers were convicted in December 1999 on money laundering charges.
• $64 million of the $98 million seized during this investigation has been forfeited to the government of the United States.

Africa and the Middle East

Alien smuggling as a money laundering predicate offense in the United States has grown from being a problem primarily involving neighboring countries to involve transportation of illegal immigrants from all regions of the world. Proceeds from this type of crime have unique characteristics and result in highly complex financial investigations for our immigration authorities and for other law enforcement agencies that have collateral jurisdiction, such as the U.S. Postal Inspection Service.

In a recent case, postal inspectors and special agents from the Immigration and Naturalization Service (INS) uncovered an alien smuggling/money laundering scheme. On September 30, 1999, an anti-smuggling task force of the INS and Internal Revenue Service (IRS) executed a federal seizure warrant at the Bank of America, New York, New York. The warrant covered the contents of an operating account maintained by a gold exchange company in Dubai, United Arab Emirates. Nearly $300,000 was seized from the operating account.

Over the past three years, the INS and agencies involved in the alien smuggling task force also have been conducting an international alien smuggling investigation based in Dallas, Texas. The investigation revealed that alien smuggling proceeds in the form of structured postal money orders and other monetary instruments have been funneled through the UAE-based gold exchange company's account in New York to members of alien smuggling organizations located abroad. A number of the organization's members have pled guilty in Dallas, Texas to alien smuggling and money laundering, and they are now cooperating defendants. The co-conspirators stated they used the gold exchange company's account to launder money and transfer alien smuggling proceeds.

Investigators concentrated on identifying the movement of the illegal proceeds and the financial institutions in which the proceeds were deposited. An Indian national living in the eastern United States structured large postal money order purchases at several post offices in his city. The Indian national, who was arrested on alien smuggling and money laundering charges in November 1998, transferred these money orders plus checks received at a post office box (usually via Express Mail), through a network of co-conspirators to the UAE-based currency exchange. During questioning, he stated that the Hawala or Hundi alternative remittance system provided a mechanism for him to send currency between the United States and India. Further, he indicated the primary reason to utilize the Hawala system was to transfer money to smugglers in India or to reimburse smuggling fees to relatives in India who had provided money to smugglers in India.

With the assistance of FinCEN, a complete analysis is being conducted on a number of deposits into the operating account. As of December 31, 1999, the analysis disclosed a large percentage of the deposits consisted of structured postal and non-postal money orders, cashier's checks and traveler's checks. The investigation is continuing.

Other Money Laundering Trends and Typologies

Black Market Peso Exchange System

The Black Market Peso Exchange system is the primary money laundering conduit used by Colombian narcotics traffickers in repatriating revenues to Colombia and is the single most efficient and extensive money laundering scheme in the Western Hemisphere. Specifically the process begins when a Colombian drug cartel arranges the shipment of drugs to the United States. The drugs are sold in the U.S. in exchange for U.S. currency that is then sold to a Colombian black market peso broker's agent in the United States. The U.S. currency is sold at a discount because the broker and his agent must assume the risk of evading the Bank Secrecy Act (BSA) reporting requirements when later placing the dollars into the U.S. financial system.

Once the dollars are delivered to the U.S.-based agent of the peso broker, the peso broker in Colombia deposits the agreed upon equivalent in Colombian pesos into the cartel's account in Colombia. At this point, the cartel has laundered its money because it has successfully converted its drug dollars into pesos, and the Colombian broker and his agent now assume the risk for introducing the laundered drug dollars into the U.S. banking system, usually through a variety of surreptitious transactions. Having introduced the dollars into the U.S. banking system, the Colombian black market peso broker now has a pool of laundered dollars to sell to Colombian importers. These importers then use the dollars to purchase goods, either from the U.S. or from other markets, which are transported to Colombia, often via smuggling in order to avoid applicable Colombian law.

The exact size and structure of the BMPE system cannot be determined with any degree of precision. However, based on anecdotal law enforcement evidence, informants' statements, and Colombian law enforcement and intelligence officials, it is believed that between $3 billion and $6 billion is laundered annually. Other sources of demand for BMPE dollars include capital outflows by Colombian residents, who seek either to conceal the funds from the Colombian authorities or simply to take advantage of the favorable BMPE exchange rate.

The BMPE system and the contraband imports it finance would likely have faded in significance following the liberalization of exchange controls in the early 1990s. However, narcotics traffickers increased their reliance on the system to launder their illicit drug proceeds. Continued Colombian trade restrictions and high tariffs, coupled with the fact that the growing supply of "narco-dollars" lowers the BMPE exchange rate to a level below the official rate, act to perpetuate this money laundering scheme.

To combat the BMPE, the U.S. Government has proposed the formation of an international task force of experts from Colombia, Aruba, Panama, and Venezuela to examine the BMPE as a money laundering system. As proposed, the BMPE task force would report its findings and recommended policy options to senior government officials from the respective jurisdictions. Pending agreement by all involved governments, the first meeting of the task force could occur as soon as June 2000.

Money Services Businesses (MSBs)

The United States has categorized businesses that offer alternative financial services as MSBs. The use of currency exchange houses and money remittance businesses to dispose of criminal proceeds remains among the most often cited threats in our domestic fight against financial crimes. The prolific use of the wire remitter industry by narcotics organizations is evidenced by historical data obtained from the prior Geographical Targeting Order (GTO) covering metropolitan New York City, northern New Jersey, and Puerto Rico, and from the various wire remitter investigations that are ongoing across the country.

Criminal organizations are drawn to the use of wire transmitter businesses because they provide a swift and relatively anonymous means of laundering their money. Their preference for this mode is enhanced by the lack of money laundering regulations and controls imposed on the wire transmitter industry by the government. Although wire transmitter businesses are subject to the currency transaction reporting provisions of BSA, they are not currently required to file suspicious activity reports when they become aware of possible criminal activity occurring through their institutions. Non-bank wire remitters, are being illegally used in the following ways:

Structuring	The traffickers or associates will go from transmitting agent to transmitting agent, with cash, conducting wire transfers in amounts under the reporting requirements ($10,000) in order to evade the Currency Transaction Report (CTR) filing requirements. This method, known as "smurfing," began with banks in the 1980s.
Collusion:	The rogue transmitting agent may agree, for a fee, to take sums greater than $10,000 and upon depositing the money with the bank, have the CTR filed in his name, thus effectively insulating the trafficker. The transmitting agent may attempt to structure the deposit with his own financial institution in order to evade the filing requirement.
Direct Ownership:	The trafficker may purchase a transmitting outlet and install his associate as the agent. This can be done at very little cost and would allow wholesale transmission of funds abroad.

The Hawala System

The hawala (or hundi) alternative (or parallel) remittance system is the key factor in money laundering and other financial crimes committed in and associated with South Asia. It is closely related to the "black" or "off the books" economies in the region. The size of the underground economies in South Asia are estimated to be 50 to 100 percent the size of the "white" or "documented" economies.

Hawala operates on trust and connections ("trust" is one of several meanings associated with the word "hawala"). Customers trust hawala "bankers" or "operators" (known as hawaladars) who use their connections to facilitate money movement worldwide. Hawala transfers take place with little, if any, paper trail, and, when records are kept, they are usually kept in code. Contrary to various media reports, hawala is an ancient system; it was the primary money transfer mechanism used in South Asia prior to the introduction of Western banking. Today, hawala continues to be used for many legitimate transfers for cultural reasons, and it also often operates in conjunction with Western banking operations.

In 1999, there were significant developments in "Operation Seek and Keep." This Operation concerned the investigation of an international alien smuggling and money laundering ring. Aliens were smuggled from South Asia to the United States. Many of the aliens' had their fees paid by U.S. businessmen, who were in effect purchasing indentured servants to help them operate a variety of businesses. The Operation Seek and Keep Task Force, which consisted of representatives from the U.S. Immigration and Naturalization Service, FinCEN, Internal Revenue Service, Customs Service, Postal Inspection Service and Federal Bureau of Investigation identified both the routes by which aliens were smuggled and the means by which the proceeds from this operation were laundered. In late 1998, all but a handful of the major subjects in this case were apprehended. In 1999, most of these subjects began prison sentences, and work is continuing to locate the remaining fugitives.

Hawala was the primary means by which money was moved by the alien smugglers, and the hawala operators assisted them with laundering the criminal proceeds and the arrangements for payment of alien smuggling fees. Throughout 1999, members of the Task Force analyzed telephone and other transcripts and conducted detailed interviews with several of the subjects to develop a fuller understanding of the financial aspects of the case. This work resulted in the identification of an account belonging to a Dubai-based firm that appears to have been a party to the money laundering operations. This account is now the object of an asset forfeiture proceeding.

In another U.S. case, a nationwide network of criminals appears to be channeling money to a Dubai-based trading company. Once the money reaches Dubai, hawala is used to move it to various destinations in Asia and elsewhere.

In Pakistan, the newly established Musharraf government is attempting to recover national assets allegedly stolen by former (and deposed) Prime Minister Nawaz Sharif. There are also similar allegations about former Prime Minister Benazir Bhutto and her husband, Asif Zardari. Bhutto and Zardari are accused of having used a combination of hawala, offshore centers in Europe and Dubai-based businesses to launder money.

Dubai, India and Pakistan form a "hawala triangle" responsible for significant international money laundering activities that go far beyond South Asia. While interdiction of non-bank money laundering systems such as hawala is difficult enough in itself, this difficulty is sometimes compounded by the lack of insufficient effective money laundering countermeasures in Dubai and the other Emirates.

The Market for Gold and Other Precious Metals

Gold is known to play a significant role in international money laundering. Gold, just like certain currencies (e.g., the U.S. dollar, Swiss franc, and British pound) is a nearly universal commodity for international commerce. The attractiveness and value of a particular currency depend on a complex and often unstable variety of political and economic conditions. Gold has been a key medium of exchange since antiquity and will, in fact, most likely always enjoy this position, as it appears nearly immune to the consequences of changing global fortunes.

Gold serves as both a commodity and, to a lesser extent, a medium of exchange in money laundering conducted in Latin America, the United States, Europe and Asia. In this cycle, for example, gold bullion makes its way to Italy via Swiss brokers. There it is made into jewelry, much of which is then shipped to Latin America. In Latin America, this jewelry (or the raw gold from which it was made) then becomes one, if not the most important, of the commodities in the black market peso exchange. Other commodities include various consumer goods and electronic equipment.

Gold is often shipped from South America to the United States where it is refined and sold to domestic customers. Payments owed for the imported gold are documented as being used to pay for goods shipped to South America. This scheme also serves, often fraudulently, as a source of U.S. dollars for the black market peso exchange. Often, the sales to the domestic customers are made through jewelry supply distributors to individuals who are "engaged in jewelry manufacture." Some of the gold thus obtained is cast and disguised as shapes that resemble common objects such as nuts, bolts or tools. These items are then smuggled out of the United States back to the South America. The cycle can then repeat over and over. This gold scheme has the capacity to launder hundreds of millions of dollars in illegal proceeds and defraud the foreign countries of millions of dollars of tax revenue.

In money laundering associated with the hawala (hundi) alternative remittance system (or practices based on or associated with it), gold often plays a somewhat different role: that of the primary medium of exchange in certain transactions. Even though many hawala transactions take place without a gram of gold, many of these transactions moving money to South Asia involve gold for two reasons: first, the combined historical, religious and cultural importance gold enjoys in the region; and second, the increasing distrust in the value of local currencies. (Many South Asian nations prohibit speculation on their currencies, and exchange rates are fixed by the central banks). Worldwide, gold is often used as a hedge against inflation. In South Asia, gold is often the primary means of preserving and protecting wealth.

In one case, a gold dealer operating in a major U.S. metropolitan area was also operating as the "banker" for various jewelry shops in the region. These jewelry shops give him the checks and cash they receive for purchases, and he processes these through his own bank accounts. In return, he gives them gold scrap and gold jewelry for use in their businesses. He retains a few percentage points of the money he receives from them for his "services" (as well as the legal risk he is incurring). The owners of the jewelry shops do not have to deal with the bureaucracy of banking and, because there is almost no paper trail of their sales, they enjoy a greatly reduced tax liability.

In another case, an U.S.-based hawaladar (hawala operator) is facilitating the smuggling of aliens from South Asia to the United States. He receives payments from people who want to have aliens smuggled. He then makes contact with a hawaladar in South Asia, and instructs him to make the necessary payment to an alien smuggler. In order to settle his accounts with the South Asian hawaladars, the U.S. hawaladar sends U.S. postal money orders to a precious metals house in the Persian Gulf. This allows the South Asian hawaladars to receive payment in gold, held either by the precious metals house in their name or delivered to them in South Asia.

In both these cases, currency is being converted into gold. Even though the first case does not involve hawala transfers, many of the techniques associated with hawala (e.g., coded documents, the use of gold) are present, and, because most of the participants in this case are South Asian, it underscores the cultural significance that is attached to gold there. In the second case, there is no doubt that gold is the preferred medium of exchange, and the thriving gold markets in the Persian Gulf make the necessary conversions and payments possible.

What Can be Done to Combat Money Laundering

In an electronic world in which the banking system operates through linked computers 24 hours a day, there must be increased global emphasis upon thorough vetting of personal, company and financial institution accounts at the bank of origin. There is no substitute for a thorough know-your-customer policy, especially as applied to those placing currency into the system and converting it to an account susceptible to immediate transfer outside the jurisdiction.

Considerable attention also must be focused by anti-money laundering authorities on establishing international standards, obtaining agreements to exchange information, establishing linkages for cooperative investigations, and overcoming political resistance in various key jurisdictions to ensure such cooperation.

Governments need laws and regulations that: establish corporate criminal liability for bank and non-bank financial institutions for money laundering violations; apply to all financial transactions, not just to cash transactions at the teller's window; apply anti-money laundering measures to serious crimes, not just drug trafficking; criminalize investments in legitimate industry if the investment proceeds were derived from illegal acts; and enable the sharing of financial and corporate ownership information with law enforcement agencies and judicial authorities.

Governments also need strategies that focus on changes in both the operations of financial systems and the methods criminals develop to exploit them--strategies that look at specific governments and specific financial systems.

U.S. Money Laundering Countermeasures

The National Money Laundering Strategy For 1999

In light of the ongoing threats posed by money laundering, Congress recently passed, and the President signed, the Money Laundering and Financial Crimes Strategy Act of 1998, which calls for the development of a five year anti-money laundering Strategy. The National Money Laundering Strategy for 1999 is the first of five annual reports to be submitted to Congress.

The Strategy is organized around four broad goals: strengthening domestic enforcement; enhancing the measures taken by banks and other financial institutions; building stronger partnerships with state and local governments; and bolstering international cooperation. It sets forth an ambitious agenda of actions designed to advance these goals. It establishes a Steering Committee led by the Deputy Secretary of the Treasury and the Deputy Attorney General, to oversee implementation. Treasury will work with Departments of Justice and State and other existing anti-money laundering experts within U.S. Government, and will provide the U.S. Congress with a second of five National Money Laundering Strategy annual reports in February 2000. An additional 180-day review of the Strategy will begin in March 2000.

Specifically, the Strategy calls for (1) designating high-risk money laundering zones at which to direct coordinated law enforcement efforts; (2) rules requiring the scrutiny of suspicious activities in a range of financial institutions, from money transmitters to broker-dealers and casinos; (3) submission of the Administration's Money Laundering Act of 1999, to bolster the domestic and international crimes-from arms trafficking to public corruption and fraud-subject to U.S. money laundering prosecutions; (4) a 90-day review of measures that would restrict the use of correspondent accounts in the United States by certain offshore or other institutions that pose money laundering risks; and (5) intensified pressure on nations that lack adequate counter-money laundering controls to adopt them. The following are priority Strategy action items which will be implemented immediately:

• Promote adoption of supervisory and regulatory actions (to include items such as increased regulatory reporting, increased external and internal audits, differentiated risk weights or provisioning) in response to specified jurisdictions that fail to make progress in implementing effective international standards, including those related to money laundering.

In an effort to apply pressure to jurisdictions where lax controls invite money laundering, Treasury will conduct a 90-day review of issues involving non-compliant offshore jurisdictions. Federal bank regulators and law enforcement officials will examine what guidance would be appropriate to enhance the scrutiny of correspondent bank accounts in the United States maintained by certain offshore and other financial institutions that pose money laundering risks.

• As part of Treasury's effort to understand the implications of counter-money laundering programs for personal privacy, it will conduct a 180-day review in which it will expand on and outline privacy protection efforts in the context of anti-money laundering programs.

• The Strategy encourages regulatory and cooperative public-private efforts to prevent money laundering. It enhances the defenses of U.S. financial institutions against use by international criminal organizations. Thus, Treasury and Justice will convene a high-level working group of federal bank regulators and law enforcement officials to examine what guidance would be appropriate to enhance bank scrutiny of certain transactions or patterns of transactions in potentially high-risk accounts. The federal bank supervisory agencies, in cooperation with Treasury, will conduct a review of existing bank examination procedures relating to the prevention and detection of money laundering at financial organizations.

• The Strategy assures that all types of financial institutions are subject to effective Bank Secrecy Act requirements. As such, Treasury will issue a final rule for the reporting of suspicious activity by money service businesses and casinos, and it will work with the Securities and Exchange Commission to propose rules for the reporting of suspicious activity by brokers and dealers.

• The Strategy calls for the improvement of coordination and effectiveness of international enforcement efforts. The G-7 nations will be urged to consider an initiative to harmonize rules relating to international funds transfers so that the originators of the transfers will be identified. In addition, Treasury, State and Justice will consider establishing a program to deny or revoke visas in all cases where couriers are being used to repatriate drug currency.

• Treasury and Justice, in an effort to identify and target major money laundering systems, will issue joint memoranda to investigators and prosecutors recommending that investigative and prosecutorial guidelines include considerations for below-threshold cases that offer the potential of having a systemic or financial sector-wide effects on money laundering.

• Treasury, in consultation with Justice, will begin designation of High-Risk Money Laundering and Related Financial Crimes Areas (HIFCAs) and inaugurate the Financial Crime-Free Communities Support (C-FIC) program. This program will help strengthen partnerships between federal, state and local governments to fight money laundering throughout the United States.

• The Strategy shepherds the coordinated efforts of the Congress, states and localities, the private sector and the international community, and it lays out a road map for combating money laundering and other financial crimes.

International Crime Control Strategy

On May 12, 1998, President Clinton released the first International Crime Control Strategy in U.S. history. The Strategy provides a framework for integrating all facets of the federal government's response to international crime. It is an outgrowth of Presidential Decision Directive 42 (discussed below). One of the eight goals of the Strategy is to counter financial crime. This reflects the high priority that the United States attaches to preventing the continued use of financial instruments and systems in the perpetuation of international crime.

The objectives of the Strategy to fight financial crime include combating money laundering by denying criminals access to financial institutions and by strengthening enforcement efforts to reduce inbound and outbound movement of criminal proceeds.

Other objectives include seizing assets of international criminals through aggressive use of forfeiture laws and enhancing bilateral and multilateral cooperation against all financial crime by working with foreign governments to establish or update enforcement tools and standards.

Finally, one of the more important objectives is the targeting of offshore centers for international fraud, counterfeiting, electronic access device schemes and other financial crimes. During 1999, this sector became an important global focus for numerous countries and multilateral organizations as noted in the offshore financial centers chapter in this report.

As can be seen throughout this report, the administration is fully engaged in implementing all aspects of the Strategy's components to counter financial crime.

Presidential Decision Directive (PDD)-42

During 1995 the President signed PDD-42, ordering the Departments of Justice, State, and Treasury, the Coast Guard, the National Security Council, the intelligence community, and other federal agencies to increase and integrate their efforts against international crime syndicates and money laundering.

During 1999, U.S. officials continued efforts to address PDD-42, specifically targeting the nation's fight against international crime by going after the profits of crime. In consultation with the Secretary of State and the Attorney General, the Secretary of the Treasury has been identifying the most egregious overseas sanctuaries for illegally obtained wealth and negotiating with those governments to end the safe havens sought by international criminals. Negotiations have resulted in strengthened anti-money laundering regimes and weakened safe haven status. United States authorities have improved coordination among themselves and expanded cooperative programs with foreign law enforcement agencies. Training and technical assistance have been targeted to assist foreign police forces, prosecutors, judges, and bank supervisors to become more effective crime fighting agencies, while strengthening and generating contacts for information-sharing with U.S. counterparts.

A key component of the International Crime Control Strategy and PDD-42 has been the imposition of sanctions under the International Emergency Economic Powers Act (IEEPA). The U.S. now has at its disposal two powerful economic sanctions options against narcotics traffickers, the entities they own or control, and those persons acting for them or supporting their narcotics trafficking activities.

In addition to IEEPA, the U.S. Government also will use the new Foreign Narcotics Kingpin Designation Act ("the Kingpin Act"). In December of 1999, the President signed into law the Kingpin Act, which provides him with a statutory framework for imposing sanctions against foreign drug kingpins when such sanctions are appropriate. The Kingpin Act is modeled after the highly effective Specially Designated Narcotics Traffickers ("SDNT") program that Treasury's Office of Foreign Assets Control ("OFAC") administers against the Colombian cartels pursuant to Executive order 12978, which was issued in October, 1995 under the authority of IEEPA. Nearly 500 individuals and entities have been identified as SDNT's in the five years since the Colombia program's inception.

Both the Kingpin Act and the IEEPA-SDNT program prohibit U.S. persons from engaging in transactions, trade and services involving foreign narcotics kingpins and derivative designees. The objective of both laws is to deny drug kingpins, their businesses and agents access to the U.S. financial system and to the benefits of trade and transactions involving U.S. businesses and individuals. The long-term effectiveness of designations under the Kingpin Act, as well as designations under an IEEPA program, will depend heavily upon Treasury's authority to make derivative designations of entities and individuals as is being done in the IEEPA-SDNT program against Colombian cartels.

The Kingpin Act, moves beyond the IEEPA-SDNT Colombia model to target the activities of significant foreign narcotics traffickers ("drug kingpins") and their organizations on a worldwide basis. In keeping with PDD-42's emphasis on interagency cooperation, the Kingpin Act requires that the Departments of Treasury, Justice, State and Defense and the CIA coordinate to develop a list of recommended kingpins for presidential designation by June 1 of each year. The statute permits kingpin designations at other times as well.

In keeping with PDD-42's emphasis on international cooperation and collaborations, to the extent feasible, the United States will continue to coordinate carefully with the host government concerning the drug kingpins, and it will continue to work cooperatively with appropriate host governments authorities to pursue additional measures and leads against those significant foreign narcotics traffickers. For instance, the cooperation of the Government of Colombia has been important to the success of the IEEPA-SDNT program against narcotics cartels in that country.

Enforcement Cases

Cayman Island Bank Assist Russian Money Launderers

The FBI conducted an undercover operation to determine the existence and extent of a Russian-based business using the United States to launder money. As a result of this investigation, the FBI found a Cayman Island bank being used to support money launderers in the United States and Russia.

The bank supplied the Russians and the FBI undercover agents with instructions on how to covertly bypass U.S. currency transaction reports and provide bogus merchandise invoices to enable the businesses to substantiate expending payments that in fact were deposits to the secreted offshore bank account.

An indictment was returned against the Chief Executive Officer of the Cayman Island bank for facilitating money laundering in the United States.

Diploma Mill College

A New Orleans-based FBI investigation into mail order colleges discovered an offshore money laundering operation facilitating the frauds. The investigation involved mail order correspondence schools that offered external degree studies. These entities solicited students through printed advertisements in magazines and major newspapers. These entities had a national and international student registration of over 15,000 students. However, none of these entities were recognized by any collegiate accrediting body.

The students being targeted by these entities were generating over $2 million per semester in student fees. The victim-students would pay their fees by check, credit card or bank draft. Approximately $36 million was obtained and laundered by the use of this deception to obtain students.

The mail order entities used many shell companies to conceal the source of the income they generated. Over 12 different bank accounts were located by the FBI. Some of the accounts owned or controlled by these entities were located in the Cayman Islands and were maintained under various company names. The accounts were used by the owners to buy drugs, produce pornographic movies, and establish a quasi-militia organization with anti-government objectives.

The investigation allowed the FBI to issue seizure warrants for bank accounts totaling over $10 million. Later, the home of a company official, valued at approximately $2 million, was forfeited to the FBI. All of the "university" officials were convicted of various charges of mail fraud, wire fraud, and money laundering.

Forfeiture Of $50,000,000

On May 27, 1999, a Federal Judge in the Southern District of Florida issued a final order forfeiting $50,000,000 to the United States. The funds represent the narcotics proceeds traceable to Paul Edward Hindelang. Hindelang, a convicted narcotics smuggler, plead guilty in the 1980's to importation of narcotics. The plea agreement signed by Hindelang called for him to forfeit all illegal proceeds generated through his narcotics trafficking. Based on information developed by the U.S. Customs Service and the Monroe County Sheriffs Office, an investigation was initiated into allegations that Hindelang failed to identify all his illegal assets. The investigation revealed that Hindelang concealed his narcotics proceeds through the use of nominee accounts in the names of individuals, associates and corporations in Switzerland, Turks and Caicos Islands, the Cayman Islands, Costa Rica and Panama.

This forfeiture represents the largest single forfeiture in the history of the Treasury Department and the largest single asset sharing disbursement, $25 million, to any law enforcement agency.

Forfeiture of Mustang Ranch

On July 9, 1999, the world famous Mustang Ranch Brothel in Story County, Nevada was forfeited to the U.S. Government based on a guilty verdict in a three-week jury trial. The trial was the result of a thirty-three-count indictment charging Joseph Conforte, A.G.E. Enterprises, A.G.E. Corporation and other individuals with money laundering, wire fraud and racketeering.

The indictment was based on a joint investigation between the U.S. Customs Service, Internal Revenue Service and the Federal Bureau of Investigation that alleged Conforte, the owner of the Mustang Ranch, skimmed over $6 million from the Mustang Ranch during bankruptcy proceedings. Conforte laundered this money by opening bank accounts in fictitious names in Switzerland. Conforte, who remains a fugitive, utilized the laundered money to set up various corporations to re-purchase the Mustang Ranch from the IRS after it had been seized by the IRS for failure to pay back taxes.

Along with the Mustang Ranch, a restaurant, six parcels of land, a trailer park, and 264 acres of land were forfeited. The value of these properties is estimated to be in excess of $6 million. In addition, the jury issued a monetary judgment against A.G.E. Corporation and A.G.E. Enterprises in the amount of $20,000,000 each. The total amount of the forfeiture ordered by the jury is in excess of $46,000,000.

Former Mexican Deputy Attorney General Arrested On Money Laundering Charges

On August 26, 1999, at the conclusion of a four-year investigation, former Mexican Deputy Attorney General Mario Ruiz Massieu was arrested by the U.S. Customs Service pursuant to an indictment returned in Houston, Texas charging him with laundering over $9 million in narcotics proceeds. The investigation was initiated based on a request by the Mexican government for assistance in locating Massieu for questioning in the assassination of his brother Jose Francisco Ruiz Massieu, the former Secretary-General of Mexico's ruling political party, Partido Revolucionario Institutional (PRI).

The U.S. Customs Service arrested Ruiz Massieu in 1995 as he attempted to depart the U.S. without reporting over $46,000 in currency. The ensuing investigation revealed that between 1993 and 1995, twenty-five cash deposits totaling over $9 million were made to an account in the name of Mario Ruiz Massieu. In 1997, following a civil trial in Houston, Texas, a federal jury ruled that the $9 million in Massieu's account were proceeds derived from drug trafficking and forfeited the money to the United States.

Offshore Comes Onshore

Owen K. Stephenson and Ronald G. Sparks were indicted in November, 1998 on 30 counts of mail fraud, money laundering and conspiracy. The two California men had conspired to run an Anadarko bank scheme that fraudulently pulled in more than $7,000,000 from investors and depositors.

Sparks and Stephenson initially met with Apache tribal officials in November, 1996 to discuss creating a tribal bank that would provide low-interest loans to Apache Tribal members. In order to establish the framework for the bank, in April, 1997, the Apache Business Committee enacted a banking code, by which First Americans Bank, LTD was created. However, by May, 1997, Sparks and Stephenson, while continuing negotiations with the Apache Tribe, were already advertising on the Internet for investors and depositors. They boasted of giving "offshore" banking secrecy using the sovereignty of the Apache Tribe in Oklahoma.

Once the money was received from unsuspecting investors and depositors, it was deposited in corporate accounts Sparks and Stephenson controlled at Citizens Bank in Lawton, Oklahoma.

Sparks and Stephenson were both tried and convicted of money laundering, mail fraud and conspiracy. Sparks was sentenced to 11 years and 3 months in prison and ordered to pay over $6,000,000 in restitution. Stephenson is currently a fugitive.

Offshore Money Laundering Operation

John M. Matthewson of San Antonio, Texas, former chairman and owner of Guardian Bank && Trust recently was sentenced in August 1999 to six months home confinement followed by five years of supervised release after pleading guilty to conspiracy to commit money laundering and wire fraud, and assisting clients in tax evasion. The light sentence was due to Mr. Matthewson's deteriorating health and his willingness to share information with authorities.

The scheme established by Matthewson involved the establishment of shell corporations and the opening of offshore bank accounts in fictitious names at Guardian Bank and Trust, a Cayman Island Bank. As part of the scheme, from 1990 to 1994 Guardian Bank received payments from U.S. depositors and, in return, provided false and inflated sales invoices to create the appearance that goods and services were purchased and the transactions were legitimate. Matthewson instructed his bank to issue bogus invoices, which allowed the depositors' businesses to take fraudulent tax deductions on federal tax returns.

Matthewson also arranged the issuance of Visa gold credit cards in the names of anonymous IBCs that permitted U.S. depositors access to their money in the offshore account without revealing the existence or ownership of the account. Matthewson further assisted in the creation of Dutch corporations that were used to issue sham mortgages that gave the appearance that depositors of his bank were borrowing money from a legitimate lender. These sham mortgages allowed depositors to use unreported funds from their offshore accounts at Guardian, to create sham tax deductions for mortgage interest, and to redeposit mortgage interest into secret offshore accounts.

Operation Calecia

Benito Ramos-Salcido and Sergio Campo-Salcido were the leaders of a Mexican drug organization until Benito Ramos-Salcido was murdered in 1996. Sergio Campo-Salcido allegedly continued to direct the smuggling of hundreds of kilograms of cocaine into the United States and used the proceeds to purchase pieces of real estate in California in the names of his wife, Raquel Trujillo-Yanez, Benito Ramos-Salcido's widow, Claudia Mendoza-Ibarra, and CLRA, Inc., a company owned by the two women. Trujillo and Mendoza used CLRA, Inc. and these properties as a means to launder the proceeds generated by the drug organization. John L. Matkin acted as a business manager and assisted the organization in the purchase and development of the properties. All four were indicted on money laundering conspiracy and narcotics conspiracy charges. Mendoza and Matkin pleaded guilty to the money laundering charges while Campos and his wife are fugitives believed to be living in Mexico. In the United States, the case involved the seizure of real estate valued at $4 million, jewelry worth $180,000, and $27,000 in cash. As a result of cooperation between IRS and Mexican authorities, records were supplied to the Mexican officials who seized approximately $9 million from Mexican bank accounts controlled by Campos, Trujillo and Mendoza. This money is in the process of being forfeited. The Mexican Office of the Attorney General (PGR) and the Secretariat of the Treasury (Hacienda) are also attempting to locate real property assets owned by the targets in Northern Mexico for possible forfeiture.

Operation Juno

Operation Juno was initiated after the seizure of approximately 386 kilograms of liquid cocaine, which had been concealed and shipped in frozen fish from Cartagena, Colombia, in July, 1995, and shipped under the name of the Colombian company "COLAPIA S.A.," whose U.S. distribution center was in the Atlanta area. The subsequent investigation of "COLAPIA S.A." indicated that the company owner was a partner of Arfranio ("Phanor") Arizabaleta Arzayur, a prominent Cali, Colombia, narcotics trafficker. The operation resulted in the indictments of Armando Mogollon, Hector Fabio Botero, Juan Montoya, Juan Carolos Arias, and Samuel Vallejo, all of Colombia. The indictments charged that from October, 1996 to August, 1999 the defendants conspired to launder drug money and traffic in narcotics.

In September 1996, the Drug Enforcement Administration (DEA) and the Internal Revenue Service (IRS) began an undercover money laundering "sting" investigation called "Operation Juno," based out of a rented office building in suburban Atlanta. DEA and IRS Special Agents gained permission from the Attorney General to open a legitimate stockbrokerage firm, which served to validate the undercover money laundering operation. No stock trades were ever executed through the undercover stockbrokerage firm.

Members of the Arzayur organization referred Operation Juno to other drug trafficking organizations in need of financial and money laundering services. At the request of one of the five indicted defendants in this case, Operation Juno picked up drug proceeds usually ranging between $100,000 and $500,000 in U.S. currency. Pickups were made in Dallas, Houston, New York, Newark, Providence, Miami, Chicago, Madrid, Spain, and Rome, Italy. Juno later wire-transferred the monies from the collection city to an undercover bank account in Atlanta.

Along with the five named defendants, 40 arrests have been made in the United States during the course of the investigation. In addition, 15 other defendants are in the process of being arrested in New York and Chicago. Civil seizure warrants are also being brought against bank accounts worldwide. Approximately $26 million in drug proceeds were targeted for seizure. $10 million was seized during the investigation, and the balance is being seized in 59 accounts at 34 U.S. banks, and 282 accounts at 52 foreign banks.

Bilateral Activities

Training and Technical Assistance

During 1999, a number of U.S. law enforcement and regulatory agencies provided training on money laundering countermeasures and financial investigations to their law enforcement, financial regulatory, and prosecutorial counterparts around the globe. These courses have been designed to give financial investigators, bank regulators, and prosecutors the necessary tools to recognize, to investigate, and to prosecute money laundering, financial crimes, and related criminal activity. Courses have been provided at U.S. locations as well as within the jurisdictions to which the programs were targeted.

Department of State

The Department of State's Bureau for International Narcotics and Law Enforcement Affairs (INL) developed a fiscal year 1999 $3.4 million dollar program for providing law enforcement, prosecutorial and central bank training to countries around the globe. A prime focus of the training program was a multi-agency approach to develop or enhance financial crime and anti-money laundering regimes in selected jurisdictions. Supported by and in coordination with INL, the Department of Justice (DOJ), Treasury Department component agencies, the Office of the Comptroller of the Currency (OCC)), the Board of Governors of the Federal Reserve (FRB), and non-government organizations offered law enforcement, regulatory and criminal justice programs worldwide.

During 1999, INL funded over 70 programs to combat international financial crimes and money laundering in 40 countries. Nearly every federal law enforcement agency assisted in this effort by providing basic and advanced training courses in all aspects of financial criminal activity. In addition, many federal agencies were provided funding to conduct multiagency financial crime assessments and develop specialized training in specific jurisdictions worldwide to address assessment findings.

In May, 1999, an INL-led multi-agency team delivered a weeklong money laundering seminar in Ankara, Turkey, which focused on investigative techniques, suspicious transactions reporting, information systems, mutual legal assistance and organized crime. The audience included members of the Turkish judiciary, police, customs, banking community, and FIU. A similar November, 1999 seminar in Nicosia, Cyprus, dealt with money laundering on the Internet, offshore financial centers, bank secrecy, Russian organized crime, and wire transfers.

Also in 1999, INL led a team from DOJ, the U.S. Customs Service, DEA, and the Federal Reserve Board of Governors that conducted a weeklong money laundering and training assessment in Lebanon. The team met with Lebanese law enforcement, banking and judicial personnel, as well as U.S. embassy officials.

As in previous years, INL training programs continue to focus on the interagency approach and bring together, where possible, law enforcement, judicial and central bank authorities in assessments and training programs. This approach allows for an exchange of information and a dialogue usually not undertaken by those attending the training seminars. This approach has proven successful in various parts of the globe, from Asia, Central and South America, Russia, the New Independent States (NIS) of the former Soviet Union, and Central Europe. INL also provides funding for many of the regional training and technical assistance programs offered by the various law enforcement agencies, including those at the International Law Enforcement Academies (ILEA).

The following summary provides a glimpse of training activities undertaken in 1999 by U.S. law enforcement agencies.

Drug Enforcement Administration (DEA)

International Asset Forfeiture and Money Laundering Seminars are a part of the U.S. Department of Justice Asset Forfeiture Program conducted by the Drug Enforcement Administration Office of Training, International Training Section. The intent of these seminars is to share, compare, and contrast U.S. legislation with that of other countries, building a relationship and fostering communications with foreign narcotics enforcement and prosecutorial personnel. On average, the yearly budget allotted is $420,000 to complete five seminars. Each seminar provides instruction to 35 to 50 high-level drug law enforcement and money laundering specialists.

DEA's primary focus for its training courses include specialized training for central bank regulators, police and customs officials, and prosecutors. Course materials include training in U.S. asset forfeiture laws, asset and financial gathering techniques, financial investigation techniques, case studies, document exploitation, and international banking.

Training is designed for one-week seminars involving lectures, presentations, case studies, and practical application exercises. Guest lecturer