Money Laundering

Money laundering is the process of moving money				multilateral institutions as the World Bank and the IMF
from the illegitimate to the legitimate economy. The				has been called into question. This tolerance of
crime of money laundering consists of knowingly				corruption has been a highly significant factor in the
disguising the source, origin or ownership of illegal				reduced legitimacy of these institutions that have not
funds.				been necessarily vigilant in monitoring the diversion of
Any criminal transactions are carried out in cash and				the loans they have made overseas.
the function of the money launderer is often to				Their new emphasis on corruption is an attempt to
translate these small sums into a larger, more liquid				reverse this trend. The rise of the Internet and the
sum which will be difficult to trace and more easy to				speed of financial transactions facilitated by
invest. Money laundering has emerged on a massive				computers have expanded money laundering
international scale with the globalization of the world				opportunities and activities in the latter half of the
economy and the internationalization of organized				1990s. There are increasing number of Webs sites
crime.				that solicit money for transfer offshore, the rise of
Money earned in one region can, with increasing				internet gambling and of virtual banking have made it
facility, be transferred to another part of the world,				possible to launder money without any infrastructure
preventing its eventual recovery by law enforcement.				to run or regulate international banking operations.
With the globalization of organized crime activity,				Instead, the rise of information technology and the
money is earned in all regions of the world and must				growth of untraceable encryption have provided the
be collected, consolidated and moved.				possibility of laundering money with greater facility
This growth has been facilitated by new technologies,				and with almost perfect anonymity. All that is needed
the increasing movement of goods and people				is a computer. The rise of the new information
globally and the declining significance of borders. A				technology has facilitated an incredible
large number of professionals, including lawyers,				communications revolution, but it has led to the
accountants and bankers, have emerged to provide				proliferation of money laundering in some of the
services to this criminal and corrupt clientele with				most remote destinations in the world. Such locations
large amounts of money at their disposal. Not				include Vanuatu, Nauru, and the Marshall Islands
involved in the original act, these professionals help				through whose "banks" billions have been laundered in
perpetuate criminal and corrupt activities through their				the last couple of years.
services. Organized crime groups have particularly				Facilitating the rise of virtual banking in offshore
benefited from the expansion of global financial				locations has been the willingness of major banks to
markets. They have exploited the differential				receive funds that have been routed through these
regulatory regimes and the possibility of moving				locales. While well-written software could screen
money across jurisdictions rapidly in order to hinder				these transactions and prevent the absorption of
detection by taking advantage of the discrepancies				these funds into mainstream banking centers, this has
between country based regulatory systems.				not occurred. The legal institutions to combat money
They seek out locales that are less regulated with				laundering are much slower than those constructed
respect to international anti-money laundering laws.				on an order before the information age. Therefore, a
These havens, frequently offshore banking centers,				wire transfer which is moved among four jurisdictions
provide both banking and corporate secrecy. They				in an hour, a typical move for a money launderer, will
also provide secrecy for the trusts, which are used				take law enforcement in the United States a year to
to hide large-scale assets that are often illegally				unravel because of the need to present documents
diverted from the companies controlled by organized				to four different jurisdictions to obtain information on
crime groups. In 1996 economists of the International				the transaction. Law enforcers in countries without
Monetary Fund (IMF) suggested that 2 percent of				such resources as the United States may never be
global GDP (gross domestic product) was related to				able to trace these transactions. In some cases, it is
drug crime and the laundered sums associated with				either legally impossible or physically impossible to
corruption and tax evasion would be an even larger				obtain needed information on the money movement
percentage. The share of the world's economy would				because of the bank secrecy or the presence and
be even higher today for several reasons as many				protection of trusts. In the United States, a predicate
forms of organized crime have grown in this period				offense is needed to prove money laundering.
and the countermeasures have failed to dent the				However, this requires cooperation of law
profits of this activity except at the margins.				enforcement in the source country. In cases where
Much laundered money has been invested in dollarized				the money is associated to a high level official or his
accounts and other strong currencies where it has				her associates, or where domestic law enforcement
escaped significant losses through currency				has been neutralized by corruption from crime
devaluations in origin countries. In offshore regimes				groups, that crucial cooperation will never be
where financial capital is untaxed, its growth is faster				forthcoming. In many countries, many categories of
than that of money that is part of taxed and				crime are not predicate offenses for money
regulated regimes. The range of businesses and				laundering or there is an absence of money laundering
financial institutions used to launder money has				law, leaving many financial transactions outside the
proliferated with the profits and the growing sums				reach of American law enforcement. A novel situation
which need to be laundered. Among the institutions				now exists.
employed are large banks, offshore banks and				The complexity of the cases of money laundering
financial institutions, currency exchange and wire				means that the number and expertise of the
transfer businesses, stock brokerage houses, gold				enforcement required to address these crimes is so
dealers, casinos, insurance and trading companies.				vital that even well staffed American law
The ability to safeguard the proceeds of transnational				enforcement can address only a few major law
criminal activity, tax evasion and corruption have				enforcement cases annually. Furthermore, between
served as significant incentives for the growth of this				the corruption of domestic law enforcement in many
activity. There is limited risk and few deterrents for				countries and bank secrecy in others, most money
the money launderers and the professionals who aid				laundering investigations are condemned to failure
their activities. The limited seizures that do take place				from the start. As the amounts of money laundered
are merely "one more cost of doing business." The				grow, the capacity to address the problem remains
international efforts sponsored by the Organized for				perpetually behind.
Economic Cooperation and Development (OECD) to				Why the current campaign against money laundering?
limit offshore havens and to sanction countries that				A growing consensus is developing in many
facilitate money laundering have yet failed to sharply				developed countries that the problem of money
curtail money laundering.				laundering must be addressed both within their
Sources of Laundered Millions				economies and in offshore locations. Much of this is
Laundered money derives from the full range of illicit				proceeding on a diplomatic level and is aimed at
activities linked to organized crime such as narcotics				financial institutions because the previous legal
and arms trafficking, trafficking in human beings,				strategy has inherent limitations. Focus is now on
extortion, gambling, counterfeiting of money and				prevention rather than on legal remedies. The present
goods, trafficking in endangered species and stolen				movement against money laundering is the result of
art and automobiles. Often, corrupt government				a convergence of mutual interests rather than as a
officials move the bribes they have received or the				consequence of a unified view of the harms of
money they have embezzled to offshore locations				money laundering. For the United States, the driving
for security. Much of this cannot be treated as				force has been the rise of the international drug
laundered money in many countries because these				trade, a trade that has enormous financial and social
corrupt activities are not predicate offenses to				implications for the United States. American policy
money laundering.				makers have become increasingly concerned that
The need to have a pre-existing criminal offense				money laundering permits the perpetuation of the
under many criminal codes, is a major deterrent to				drug trade and terrorism.
effective money laundering investigations. The				The possibility to park funds in offshore havens gives
laundering techniques of organized crime groups have				these illicit operators the working capital to
become increasingly sophisticated. Experts are				perpetrate and perpetuate their activity. But money
retained who have the capacity to disguise the				laundering is not confined to offshore locales.
source of funds and make them look legitimate. For				American authorities now estimate that US$9 billion in
this reason organized crime groups have increasingly				narco dollars is laundered in New York City and
penetrated into legitimate economies and financial				US$30 billion dollars of drug money is laundered in
markets.				Texas. For European countries, the opening of
Such operators have laundered the assets from				borders and the establishment of the Euro in 2002
these diversified investments as well as from the				have placed their territory and financial systems at
original illicit activities. The money laundering				greater risk. The threat of transnational crime is not
associated with high level governmental corruption				only higher rates of violence, unwanted immigrants
has received more attention in the post-Cold War				but also large scale financial crime and money
era. Corrupt leaders launder money derived from				laundering within the European financial system. The
multiple sources: siphoned out of the national				movement of capital to offshore locations has had
treasury; diverted from foreign assistance; pay offs				severe consequences for Europe's revenue collection.
from foreign investors or contractors working on				The increasing amounts of capital sheltered in
development loans from multilateral organizations and				offshore locations is preventing the collection of
proceeds from privatization.				needed taxes, making the maintenance of offshore
The wave of privatizations in the 1990s in many				accounts an even greater problem for European
parts of the world has contributed to the increased				countries that need substantial revenues to maintain
deposit of funds in unregulated offshore accounts. In				expensive social welfare systems and take care of
the transitional period from governmental ownership				aging populations. Therefore, revenue concerns are
to private ownership when there is limited				more of an impetus for European than American
transparency, many of the insiders have managed to				action against offshore havens.
appropriate significant resources of privatizing firms				What is the current campaign against money
and have through elaborate trust agreements,				laundering?
consistent with the laws of the locale, parked very				In 1989 the Financial Action Task Force (FATF) was
valuable national resources in financial tax havens. The				established to coordinate a response to the problem
money laundering associated with the privatization				of money laundering. The following year FATF issued
process has also resulted in large and visible cases of				40 recommendations against money laundering which
international money laundering investigated such as				were subsequently revised in 1996. FATF, now
the Raul Salinas case from Mexico and the Pavel				consists of 29 countries, and two international
Lazarenko case from Ukraine. Investigations into each				organizations and represents the larger developed
of these cases, by Swiss and American authorities,				countries as well as some of the more affluent
as well as other governments, has totaled in the				developing countries. The first recommendation
hundreds of millions of dollars. In the Salinas case, pay				requires that countries become signatories to the
offs from drug traffickers were commingled with pay				Vienna Convention against money laundering. The
offs for beneficial privatizations of key state-owned				Vienna convention only concerns the proceeds of
industries.				money laundering related to the drug trade.
A major question is whether mechanisms will be				However, it does not include the other serious
made available in the future to deter such deposits				categories of crime with which money laundering may
and whether procedures will be established to make				be associated. Consequently, the recommendations
such sums more easily recoverable by the source				also suggest that prohibitions against money
country. As the corruption issue is no longer a taboo				laundering be extended to other serious offenses.
issue for employees of multilateral financial institutions,				This discretion has led to many countries differing
the significant money laundering associated with				legislative measures. Some have not made human
project and structural adjustment loans have become				trafficking, one of the fastest growing forms of
permissible topics of discussion.				organized crime, a predicate offense for money
For example, researchers at the IMF now				laundering. Likewise, corruption remains in most
acknowledge that they could observe the financial				countries, including the United States, outside the list
flows out of Haiti immediately after international loan				of many serious crimes, which are predicates to
funds flowed into the country. An investigator				money laundering.
examining the diversion of a World Bank loan to				The recommendations also deal with measures to
Pakistan traced $30 million to a Swiss bank.				identify, trace and confiscate laundered assets.
Increasingly, the investigators of corruption in these				Various measures must be taken by financial
international financial institutions must be trained to				institutions to ensure that they maintain proper
find money laundering because both bribe money and				record keeping, know their customers and keep
actual project loans wind up in the banking centers of				records for at least five years time to permit
Western countries.				reconstruction of financial transactions. Bank officials
Banks and Other Financial Institutions Engaged in				are required to monitor large and questionable
Money Laundering				transactions and to report suspicious transactions to
The types of financial institutions exploited for				competent authorities without advising the customers
money laundering have proliferated as the reporting				in question. These principles are applied not only to
requirements on major banks have increased.				the domestic banks but also to their subsidiaries that
Offshore banks have sprung up in many locales to				are located outside of the country. Signatory
service the demands of affluent clients who seek				countries are to intensify controls at the borders with
secrecy and an absence of reporting requirements.				the purpose of limiting the movement of large
By the end of 1997, offshore locales housed more				amounts of cash. Furthermore, countries are
than half of all cross-border assets held globally. Very				expected to develop modern methods of money
few countries have been active in taking measures				management such as checks and direct deposits that
to seize laundered assets.				reduce reliance on a cash economy. Effective
The exceptions are the United States and				regulatory bodies are to be established to ensure
Switzerland. However, the amount they have				that there are adequate measures and sufficiently
managed to freeze and confiscate has been very				trained personnel to realize the implementation of
limited compared to the overall total of illegal monies				these regulations.
in their financial markets. Many other major banking				Regulators must take efforts to ensure that criminals
centers, such as those located in England and				do not acquire or achieve significant control over
Germany, have thousands of suspicious transaction				financial institutions. International cooperation must be
reports yet have comparatively few successful				extended as regards to suspicious transactions,
criminal prosecutions or confiscations of assets.				confiscation, mutual assistance and extradition.
Therefore, while there are significant risks of getting				Cooperative investigations should be encouraged and
caught for smuggling drugs, there is much less chance				launched when possible. To ensure cooperation
of getting caught and losing the proceeds of drugs or				among states, there must be decisions made as to
other criminal proceeds. Most money laundering				the best venues in which to prosecute offenders.
occurs in offshore banking centers, many of whose				Annual Reports are issued by the FATF within which
operations are less highly regulated than those in				the country teams have monitored the progress of
major banking centers.				member states and issues typologies. The Typologies
Not all-offshore banks are laundering money. The				Report follow an annual meeting in which law
most flagrant abusers are those offshore locales				enforcement, legal, financial and regulatory experts
without any financial infrastructure or any regulatory				discuss recent trends in laundering criminal proceeds,
mechanisms to monitor the banks or to track the				emerging trends that arouse concern and
transactions, which pass through their locale. In these				countermeasures which have proved effective. In
situations individuals and businesses are exploiting the				June 2000, the FATF listed a group of 15 jurisdictions
possibility of bank and corporate secrecy that these				with serious deficiencies in anti-money laundering
locales provide. Many parts of the Caribbean have				efforts. This "blacklist" was based on extent of
established large legitimate banking services that are				compliance with 25 published criteria.
providing services to a large international clientele of				Three of the fifteen jurisdictions are located in the
legitimate businesses. This offers evidence to indicate				Caribbean and include Dominca, St. Kitts-Nevis and St.
that size and location are not absolute determinants				Vincent. According to the Annual Report issued at
of whether a financial institution is used as a				the same time, the member countries of the FATF
laundering facility for the cleansing of questionable				group are largely in compliance with the regulations.
proceeds.				This evaluation is based largely on the mutual
At present, there are different niches for different				evaluations of the member states. A dichotomy
categories of money laundering. Drug dealers have				exists between the perception of the developed
the widest range of assets to dispose of and				countries and the offshore centers. The tax havens
continuous financial flows, therefore they use all				or international financial centers claim that the
available financial instruments. There is significant				legislation and infrastructure are in place and most
differentiation in the market. For example, wire				money laundering occurs through large financial
transfer businesses are used primarily by street level				centers. On the other side, the mainland countries
drug dealers, whereas the private banking services of				perceive that money laundering is occurring in
major banks are available only to large-scale clients.				offshore locales. The problem remains that money
Offshore banks are used by individuals and groups				laundering persists in both kinds of locales. The FATF
engaged in a wide range of illicit and licit activities.				is now turning its attention to such problems as
There are increasing controls on large financial				money laundering through on-line banking, trusts and
institutions, but recent cases have revealed that it is				other non-corporate vehicles, the professionals who
still possible to launder vast sums through major				facilitate money laundering, the role of cash vs.
banks and through these banks offshore branches.				non-cash activities and the money laundering of
Major American banks such as Citibank, the Bank of				terrorists. The FATF is only one of several visible
New York, and Union Bank of Switzerland (UBS), as				multilateral bodies working on money laundering. It
well as their offshore branches, have figured				has regional task forces that include the Caribbean
prominently in recent investigations of money				Financial Action Task Force and Asia/Pacific Group on
laundering. As one of the minority congresswomen				Money Laundering. The United Nations and its Office
on the United States House of Representatives				of Drug Control and Crime Prevention (ODCCP) has a
Banking and Finance Committee commented, during				program against money laundering.
the Bank of New York hearings, it was the failure to				The Organization of American States (OAS)
sanction Citibank in the Salinas case of drug money				Inter-American Commission on Drug Control, as well
laundering which has perpetuated the problem. While				as the Council of Europe, have launched special
such actions as a Geographic Targeting Order in the				initiatives on money laundering. Much has also been
New York area has limited wire transfers out of small				done at the national level. The Bureau of International
businesses, it remains continually possible to move				Narcotics and Law Enforcement of the U.S.
large, questionable and illegal sums through the				Department of State releases annually its
private banking operations of major banks.				International Narcotics Control Strategy,
The profits for the institutions and particularly for the				approximately a quarter of it is devoted to actions
officials of these divisions have made bankers often				against money laundering and compliance with money
turn a blind eye. A recently released U.S. General				laundering regulations. The report assesses not only
Accounting Office (GAO) report, conducted by the				drug-related money laundering but that related to
investigative branch of the agency, examined the				other offenses. A significant group of countries are
possibility of laundering money in the United States.				identified as of primary concern based on their failure
The investigators traced US$800 million of such funds				to meet a wide range of criteria concerning asset
that had been moved into U.S. banks by one Russian.				and information sharing, as well as the deficiencies of
He did this by registering companies in the "offshore				their legal framework. Individual countries have
location" of the State of Delaware, which protects				established domestic Financial Intelligence Units to
the anonymity of corporations. The money was				address problems of financial crime in order to
subsequently moved into accounts in the private				formulate more effective countermeasures.
banking sector of Citibank. No legal action had been				These countries share some information within the
taken against the banks, any of the account holders				framework of the Egmont Group. This informal
or against the individual who had managed to move				alliance includes over 45 countries facilitating the
these funds of unknown origin through the American				exchange of records and evidentiary materials among
banking system. This investigation reveals how				member states. The United Nations Convention
sophisticated money launderers can exploit significant				Against Transnational Organized Crime, was signed in
loopholes in United States to move large amounts of				Palermo, Italy by 123 countries (December 12-14,
questionable money through a leading American				2000). It contains provisions to combat money
institution.				laundering as it is related to organized crime. These
Money Laundering in the Mercosur				include adequate system of internal regulation within
Money laundering is becoming an increasingly serious				the signatory countries, cooperation on the regional,
problem in several of the countries of the Mercosur.				international and multilateral levels, and the
Part of this is related to the need of Colombian and				mechanisms needed to detect the cross border
Mexican drug lords to launder their money, and the				movements of capital. Furthermore, it requires
greater facility with which they can do this in Spanish				customer identification, record keeping, reporting of
speaking countries. It also is due to the proliferation				suspicious transactions. Money laundering in this
of offshore banks in Latin America and the				convention is tied not only to traditional forms of
Caribbean, which now represent 43% of the				organized crime but also to the corrupt practices
international total. The most visible manifestation of				facilitating it.
this phenomenon has been the construction of the				The enormous growth of money laundering results
resorts of Cancun that was done with drug money.				from several factors simultaneously: the rise of
Yet the use of hotels through which to launder				transnational organized crime, the globalization of
money is not confined to Mexico, as the proliferation				corruption and the competition for capital in an
of luxury hotels in Argentina with limited clientele is				increasingly globalized international economy. The
further visible evidence of this problem. More difficult				major actors in this essentially criminal business
to detect and investigate is the money laundering				practice are major banking centers and offshore
through the Mercosur banking sector, shell companies,				locales, although many other institutions and
commodities brokerages and currency exchanges.				businesses participate. The possibility of laundering
A joint investigation conducted by the Brazilian				money in so many regions of the world has resulted
Federal Police, Central Bank and other entities				in the massive transfer of resources from developing
reported that between 1998-99, US$18 billion was				and transitional countries to safe havens in the more
laundered through Brazil. Brazilian money launderers,				developed countries and more protected offshore
according to the U.S. Department of State, dispose				locations.
of drug money and the profits of white-collar crime.				Placement of money overseas, allows criminals and
Much of the arms and drugs trade occurs through				corrupt individuals to evade the control of local
the border town of Foz de Iguacu. The proximity to				authorities, avoid the instability of domestic banking
Paraguay, which is a major money-laundering center				institutions while securing access to their funds
for Latin America, exacerbates the problem.				internationally. Combating money laundering requires a
Approximately, 20% of Paraguayan money laundering				multi-faceted approach. It is necessary not only to
is related to drugs, while the vast majority emanates				target the recipients of the laundered money but also
from smuggling and contraband.				to recognize the instability of the financial system in
No major scandal has disrupted the Uruguayan				the source country. The capacity of different states
banking system but the dependence of the				to combat organized crime and money laundering
Uruguayan economy on its banking sector has failed				must also be enhanced. This is a difficult problem in
to make it very vigilant in reviewing the source of				states that often do not have the sufficient
client funds. A major money laundering scandal				resources to provide for the basic educational,
erupted in early 2001 with the Argentine Central Bank				medical and social needs of their citizenry. The
President Pedro Pou accused of covering up illicit cash				international actions against money laundering are
being moved through local and foreign banks. He tried				now focused more on prevention and sanctions
to hide from the Argentine congress information on				rather than the multi-faceted strategies needed to
these illegal transactions. This public scandal emerged				address the actual causes of the problem.
after a report by an U.S. Senate Subcommittee on				Prevention works more effectively in the international
money laundering traced drug money from Citibank				financial community than in a single country where
back to an Argentine bank. As much as US$10 billion				corruption and coercion by crime groups or high level
may have been laundered through Buenos Aires. In				corrupt officials may prevent the implementation of
response to these problems, the South American				needed controls. Sanctioning may work in
Financial Action Task Force (Grupo de Accion				embarrassing major banking centers into greater
Finaciero de Sudamerica contra el Lavado de				compliance but the enormous profits of private
Avisos-GAFISUD) was established on December 8,				banking services make many institutions adhere to
2000. Its member states' include Argentina, Bolivia,				the letter but not the spirit of money laundering
Brazil, Colombia, Chile, Ecudor, Paraguay, Peru and				controls. Their internal audit rules screen out some of
Uruguay. The vital function of this organization is to				the most blatant violators but the proliferation of
improve coordination in monitoring and combating				trust agreements and front companies make it very
money laundering in the region.				difficult to screen clients effectively. Many larger
Why has it been so hard to move against money				financial systems, such as Switzerland, which have
laundering?				served as major repositories for drug kingpins,
Until recently it has been difficult to undertake				corrupt officials, and oligarchs are evaluated as in
measures against money laundering due to the				compliance of money laundering provisions.
absence of a necessary political will and the				Yet they do not provide enough law enforcement
cumbersome international legal mechanisms which				resources to investigate the vast amounts of money
presently exist. Furthermore, the profits of this				and the diversity of actors who are laundering
activity, particularly within private banking, have been				money through their financial system. Therefore, the
very lucrative for financial institutions and the				probability of successfully laundering large sums may
registration and associated services. The offshore				be greater and there are many jurisdictions that are
locales have provided an incentive for many locales				considered medium or high risk for money laundering
without alternatives. Money laundering on a large				by the FATF. In developing countries, which house
scale has existed since the 1960s. Dictators have				many offshore locations, there is desperate
moved money to safe havens and with the rise of				competition for capital. Some Caribbean nations
the international drug trade since the late 1960s,				suggest that the drive against offshore locations is
there has been an increasing need to move large				not motivated so much by the desire to combat
amounts of money into the legitimate financial				money laundering but to counter the competition for
system. Covert arms sales have been facilitated for				financial services. In the absence of development
decades by money laundering. Even though many				alternatives, there is often little incentive to get out
knew this was going on, the fight against money				of the money laundering business. The sanctioning
laundering has been treated as a secondary concern				regime that has been instituted is being executed
to the preservation of influence within a particular				without equity. Countries placed on the high-risk list,
geographic region. With the end of the Cold War, the				otherwise known as the "black-list," by the FATF are
desire to protect certain dictators who were key				not necessarily the worst offenders. Some countries
figures in this strategy collapsed.				with very significant problems of money laundering
There was no longer a need to "protect our				have escaped sanctioning because of their political
dictator," whose corruption became an				connections. Some small countries in the Caribbean or
embarrassment to the states and consequently				territories of larger countries do not have the public
multilateral lending institutions. The massive money				relations or the regulatory capacity to prevent their
laundering out of the states of the former Soviet				sanctioning have been exposed to the full force of
Union, in the 1990s, has revealed that the budgets				the FATF. Whereas a country like Liechtenstein has
and economies of entire countries can be devastated				the abundant resources to put towards the hire of
by the ability to launder money to major financial				lobbyists to clear its name and also address some
centers and offshore locations. The credibility of such				aspects of the problem.

Maggies Toronto

Money Laundering