Money Laundering

Money laundering is the process of moving money from the illegitimate to the legitimate economy. The crime of money laundering consists of knowingly disguising the source, origin or ownership of illegal funds.

Any criminal transactions are carried out in cash and the function of the money launderer is often to translate these small sums into a larger, more liquid sum which will be difficult to trace and more easy to invest. Money laundering has emerged on a massive international scale with the globalization of the world economy and the internationalization of organized crime.

Money earned in one region can, with increasing facility, be transferred to another part of the world, preventing its eventual recovery by law enforcement. With the globalization of organized crime activity, money is earned in all regions of the world and must be collected, consolidated and moved.

 This growth has been facilitated by new technologies, the increasing movement of goods and people globally and the declining significance of borders. A large number of professionals, including lawyers, accountants and bankers, have emerged to provide services to this criminal and corrupt clientele with large amounts of money at their disposal. Not involved in the original act, these professionals help perpetuate criminal and corrupt activities through their services. Organized crime groups have particularly benefited from the expansion of global financial markets. They have exploited the differential regulatory regimes and the possibility of moving money across jurisdictions rapidly in order to hinder detection by taking advantage of the discrepancies between country based regulatory systems.

They seek out locales that are less regulated with respect to international anti-money laundering laws. These havens, frequently offshore banking centers, provide both banking and corporate secrecy. They also provide secrecy for the trusts, which are used to hide large-scale assets that are often illegally diverted from the companies controlled by organized crime groups. In 1996 economists of the International Monetary Fund (IMF) suggested that 2 percent of global GDP (gross domestic product) was related to drug crime and the laundered sums associated with corruption and tax evasion would be an even larger percentage. The share of the world’s economy would be even higher today for several reasons as many forms of organized crime have grown in this period and the countermeasures have failed to dent the profits of this activity except at the margins.

Much laundered money has been invested in dollarized accounts and other strong currencies where it has escaped significant losses through currency devaluations in origin countries. In offshore regimes where financial capital is untaxed, its growth is faster than that of money that is part of taxed and regulated regimes. The range of businesses and financial institutions used to launder money has proliferated with the profits and the growing sums which need to be laundered. Among the institutions employed are large banks, offshore banks and financial institutions, currency exchange and wire transfer businesses, stock brokerage houses, gold dealers, casinos, insurance and trading companies.

The ability to safeguard the proceeds of transnational criminal activity, tax evasion and corruption have served as significant incentives for the growth of this activity. There is limited risk and few deterrents for the money launderers and the professionals who aid their activities. The limited seizures that do take place are merely “one more cost of doing business.” The international efforts sponsored by the Organized for Economic Cooperation and Development (OECD) to limit offshore havens and to sanction countries that facilitate money laundering have yet failed to sharply curtail money laundering.

Sources of Laundered Millions

Laundered money derives from the full range of illicit activities linked to organized crime such as narcotics and arms trafficking, trafficking in human beings, extortion, gambling, counterfeiting of money and goods, trafficking in endangered species and stolen art and automobiles. Often, corrupt government officials move the bribes they have received or the money they have embezzled to offshore locations for security. Much of this cannot be treated as laundered money in many countries because these corrupt activities are not predicate offenses to money laundering.

 The need to have a pre-existing criminal offense under many criminal codes, is a major deterrent to effective money laundering investigations. The laundering techniques of organized crime groups have become increasingly sophisticated. Experts are retained who have the capacity to disguise the source of funds and make them look legitimate. For this reason organized crime groups have increasingly penetrated into legitimate economies and financial markets.

Such operators have laundered the assets from these diversified investments as well as from the original illicit activities. The money laundering associated with high level governmental corruption has received more attention in the post-Cold War era. Corrupt leaders launder money derived from multiple sources: siphoned out of the national treasury; diverted from foreign assistance; pay offs from foreign investors or contractors working on development loans from multilateral organizations and proceeds from privatization.

The wave of privatizations in the 1990s in many parts of the world has contributed to the increased deposit of funds in unregulated offshore accounts. In the transitional period from governmental ownership to private ownership when there is limited transparency, many of the insiders have managed to appropriate significant resources of privatizing firms and have through elaborate trust agreements, consistent with the laws of the locale, parked very valuable national resources in financial tax havens. The money laundering associated with the privatization process has also resulted in large and visible cases of international money laundering investigated such as the Raul Salinas case from Mexico and the Pavel Lazarenko case from Ukraine. Investigations into each of these cases, by Swiss and American authorities, as well as other governments, has totaled in the hundreds of millions of dollars. In the Salinas case, pay offs from drug traffickers were commingled with pay offs for beneficial privatizations of key state-owned industries.

A major question is whether mechanisms will be made available in the future to deter such deposits and whether procedures will be established to make such sums more easily recoverable by the source country. As the corruption issue is no longer a taboo issue for employees of multilateral financial institutions, the significant money laundering associated with project and structural adjustment loans have become permissible topics of discussion.

For example, researchers at the IMF now acknowledge that they could observe the financial flows out of Haiti immediately after international loan funds flowed into the country. An investigator examining the diversion of a World Bank loan to Pakistan traced $30 million to a Swiss bank. Increasingly, the investigators of corruption in these international financial institutions must be trained to find money laundering because both bribe money and actual project loans wind up in the banking centers of Western countries.

Banks and Other Financial Institutions Engaged in Money Laundering

The types of financial institutions exploited for money laundering have proliferated as the reporting requirements on major banks have increased. Offshore banks have sprung up in many locales to service the demands of affluent clients who seek secrecy and an absence of reporting requirements. By the end of 1997, offshore locales housed more than half of all cross-border assets held globally. Very few countries have been active in taking measures to seize laundered assets.

The exceptions are
the United States and Switzerland. However, the amount they have managed to freeze and confiscate has been very limited compared to the overall total of illegal monies in their financial markets. Many other major banking centers, such as those located in England and Germany, have thousands of suspicious transaction reports yet have comparatively few successful criminal prosecutions or confiscations of assets. Therefore, while there are significant risks of getting caught for smuggling drugs, there is much less chance of getting caught and losing the proceeds of drugs or other criminal proceeds. Most money laundering occurs in offshore banking centers, many of whose operations are less highly regulated than those in major banking centers.

Not all-offshore banks are laundering money. The most flagrant abusers are those offshore locales without any financial infrastructure or any regulatory mechanisms to monitor the banks or to track the transactions, which pass through their locale. In these situations individuals and businesses are exploiting the possibility of bank and corporate secrecy that these locales provide. Many parts of the Caribbean have established large legitimate banking services that are providing services to a large international clientele of legitimate businesses. This offers evidence to indicate that size and location are not absolute determinants of whether a financial institution is used as a laundering facility for the cleansing of questionable proceeds.

At present, there are different niches for different categories of money laundering. Drug dealers have the widest range of assets to dispose of and continuous financial flows, therefore they use all available financial instruments. There is significant differentiation in the market. For example, wire transfer businesses are used primarily by street level drug dealers, whereas the private banking services of major banks are available only to large-scale clients.

Offshore banks are used by individuals and groups engaged in a wide range of illicit and licit activities. There are increasing controls on large financial institutions, but recent cases have revealed that it is still possible to launder vast sums through major banks and through these banks offshore branches. Major American banks such as Citibank, the Bank of New York, and Union Bank of Switzerland (UBS), as well as their offshore branches, have figured prominently in recent investigations of money laundering. As one of the minority congresswomen on the United States House of Representatives Banking and Finance Committee commented, during the Bank of New York hearings, it was the failure to sanction Citibank in the Salinas case of drug money laundering which has perpetuated the problem. While such actions as a Geographic Targeting Order in the New York area has limited wire transfers out of small businesses, it remains continually possible to move large, questionable and illegal sums through the private banking operations of major banks.

The profits for the institutions and particularly for the officials of these divisions have made bankers often turn a blind eye. A recently released U.S. General Accounting Office (GAO) report, conducted by the investigative branch of the agency, examined the possibility of laundering money in the United States. The investigators traced US$800 million of such funds that had been moved into U.S. banks by one Russian. He did this by registering companies in the “offshore location” of the State of Delaware, which protects the anonymity of corporations. The money was subsequently moved into accounts in the private banking sector of Citibank. No legal action had been taken against the banks, any of the account holders or against the individual who had managed to move these funds of unknown origin through the American banking system. This investigation reveals how sophisticated money launderers can exploit significant loopholes in United States to move large amounts of questionable money through a leading American institution.

Money Laundering in the Mercosur

Money laundering is becoming an increasingly serious problem in several of the countries of the Mercosur. Part of this is related to the need of Colombian and Mexican drug lords to launder their money, and the greater facility with which they can do this in Spanish speaking countries. It also is due to the proliferation of offshore banks in Latin America and the Caribbean, which now represent 43% of the international total. The most visible manifestation of this phenomenon has been the construction of the resorts of Cancun that was done with drug money. Yet the use of hotels through which to launder money is not confined to Mexico, as the proliferation of luxury hotels in Argentina with limited clientele is further visible evidence of this problem. More difficult to detect and investigate is the money laundering through the Mercosur banking sector, shell companies, commodities brokerages and currency exchanges.

A joint investigation conducted by the Brazilian Federal Police, Central Bank and other entities reported that between 1998-99, US$18 billion was laundered through Brazil. Brazilian money launderers, according to the U.S. Department of State, dispose of drug money and the profits of white-collar crime. Much of the arms and drugs trade occurs through the border town of Foz de Iguacu. The proximity to Paraguay, which is a major money-laundering center for Latin America, exacerbates the problem. Approximately, 20% of Paraguayan money laundering is related to drugs, while the vast majority emanates from smuggling and contraband.

No major scandal has disrupted the Uruguayan banking system but the dependence of the Uruguayan economy on its banking sector has failed to make it very vigilant in reviewing the source of client funds. A major money laundering scandal erupted in early 2001 with the Argentine Central Bank President Pedro Pou accused of covering up illicit cash being moved through local and foreign banks. He tried to hide from the Argentine congress information on these illegal transactions. This public scandal emerged after a report by an U.S. Senate Subcommittee on money laundering traced drug money from Citibank back to an Argentine bank. As much as US$10 billion may have been laundered through Buenos Aires. In response to these problems, the South American Financial Action Task Force (Grupo de Accion Finaciero de Sudamerica contra el Lavado de Avisos-GAFISUD) was established on December 8, 2000. Its member states’ include Argentina, Bolivia, Brazil, Colombia, Chile, Ecudor, Paraguay, Peru and Uruguay. The vital function of this organization is to improve coordination in monitoring and combating money laundering in the region.

Why has it been so hard to move against money laundering?

Until recently it has been difficult to undertake measures against money laundering due to the absence of a necessary political will and the cumbersome international legal mechanisms which presently exist. Furthermore, the profits of this activity, particularly within private banking, have been very lucrative for financial institutions and the registration and associated services. The offshore locales have provided an incentive for many locales without alternatives. Money laundering on a large scale has existed since the 1960s. Dictators have moved money to safe havens and with the rise of the international drug trade since the late 1960s, there has been an increasing need to move large amounts of money into the legitimate financial system. Covert arms sales have been facilitated for decades by money laundering. Even though many knew this was going on, the fight against money laundering has been treated as a secondary concern to the preservation of influence within a particular geographic region. With the end of the Cold War, the desire to protect certain dictators who were key figures in this strategy collapsed.

There was no longer a need to “protect our dictator,” whose corruption became an embarrassment to the states and consequentl
y multilateral lending institutions. The massive money laundering out of the states of the former Soviet Union, in the 1990s, has revealed that the budgets and economies of entire countries can be devastated by the ability to launder money to major financial centers and offshore locations. The credibility of such multilateral institutions as the World Bank and the IMF has been called into question. This tolerance of corruption has been a highly significant factor in the reduced legitimacy of these institutions that have not been necessarily vigilant in monitoring the diversion of the loans they have made overseas.

Their new emphasis on corruption is an attempt to reverse this trend. The rise of the Internet and the speed of financial transactions facilitated by computers have expanded money laundering opportunities and activities in the latter half of the 1990s. There are increasing number of Webs sites that solicit money for transfer offshore, the rise of internet gambling and of virtual banking have made it possible to launder money without any infrastructure to run or regulate international banking operations. Instead, the rise of information technology and the growth of untraceable encryption have provided the possibility of laundering money with greater facility and with almost perfect anonymity. All that is needed is a computer. The rise of the new information technology has facilitated an incredible communications revolution, but it has led to the proliferation of money laundering in some of the most remote destinations in the world. Such locations include Vanuatu, Nauru, and the Marshall Islands through whose “banks” billions have been laundered in the last couple of years.

Facilitating the rise of virtual banking in offshore locations has been the willingness of major banks to receive funds that have been routed through these locales. While well-written software could screen these transactions and prevent the absorption of these funds into mainstream banking centers, this has not occurred. The legal institutions to combat money laundering are much slower than those constructed on an order before the information age. Therefore, a wire transfer which is moved among four jurisdictions in an hour, a typical move for a money launderer, will take law enforcement in the United States a year to unravel because of the need to present documents to four different jurisdictions to obtain information on the transaction. Law enforcers in countries without such resources as the United States may never be able to trace these transactions. In some cases, it is either legally impossible or physically impossible to obtain needed information on the money movement because of the bank secrecy or the presence and protection of trusts. In the United States, a predicate offense is needed to prove money laundering. However, this requires cooperation of law enforcement in the source country. In cases where the money is associated to a high level official or his/her associates, or where domestic law enforcement has been neutralized by corruption from crime groups, that crucial cooperation will never be forthcoming. In many countries, many categories of crime are not predicate offenses for money laundering or there is an absence of money laundering law, leaving many financial transactions outside the reach of American law enforcement. A novel situation now exists.

The complexity of the cases of money laundering means that the number and expertise of the enforcement required to address these crimes is so vital that even well staffed American law enforcement can address only a few major law enforcement cases annually. Furthermore, between the corruption of domestic law enforcement in many countries and bank secrecy in others, most money laundering investigations are condemned to failure from the start. As the amounts of money laundered grow, the capacity to address the problem remains perpetually behind.

Why the current campaign against money laundering?

A growing consensus is developing in many developed countries that the problem of money laundering must be addressed both within their economies and in offshore locations. Much of this is proceeding on a diplomatic level and is aimed at financial institutions because the previous legal strategy has inherent limitations. Focus is now on prevention rather than on legal remedies. The present movement against money laundering is the result of a convergence of mutual interests rather than as a consequence of a unified view of the harms of money laundering. For the United States, the driving force has been the rise of the international drug trade, a trade that has enormous financial and social implications for the United States. American policy makers have become increasingly concerned that money laundering permits the perpetuation of the drug trade and terrorism.

The possibility to park funds in offshore havens gives these illicit operators the working capital to perpetrate and perpetuate their activity. But money laundering is not confined to offshore locales. American authorities now estimate that US$9 billion in narco dollars is laundered in New York City and US$30 billion dollars of drug money is laundered in Texas. For European countries, the opening of borders and the establishment of the Euro in 2002 have placed their territory and financial systems at greater risk. The threat of transnational crime is not only higher rates of violence, unwanted immigrants but also large scale financial crime and money laundering within the European financial system. The movement of capital to offshore locations has had severe consequences for Europe’s revenue collection. The increasing amounts of capital sheltered in offshore locations is preventing the collection of needed taxes, making the maintenance of offshore accounts an even greater problem for European countries that need substantial revenues to maintain expensive social welfare systems and take care of aging populations. Therefore, revenue concerns are more of an impetus for European than American action against offshore havens.

What is the current campaign against money laundering?

In 1989 the Financial Action Task Force (FATF) was established to coordinate a response to the problem of money laundering. The following year FATF issued 40 recommendations against money laundering which were subsequently revised in 1996. FATF, now consists of 29 countries, and two international organizations and represents the larger developed countries as well as some of the more affluent developing countries. The first recommendation requires that countries become signatories to the Vienna Convention against money laundering. The Vienna convention only concerns the proceeds of money laundering related to the drug trade.

However, it does not include the other serious categories of crime with which money laundering may be associated. Consequently, the recommendations also suggest that prohibitions against money laundering be extended to other serious offenses. This discretion has led to many countries differing legislative measures. Some have not made human trafficking, one of the fastest growing forms of organized crime, a predicate offense for money laundering. Likewise, corruption remains in most countries, including the United States, outside the list of many serious crimes, which are predicates to money laundering.

The recommendations also deal with measures to identify, trace and confiscate laundered assets. Various measures must be taken by financial institutions to ensure that they maintain proper record keeping, know their customers and keep records for at least five years time to permit reconstruction of financial transactions. Bank officials are required to monitor large and questionable transactions and to report suspicious transactions to competent authorities without advising the customers in question. These principles are applied not only to the domestic banks but also to their subsidiaries that are located outside of the country. Signatory countries are to intensify control
s at the borders with the purpose of limiting the movement of large amounts of cash. Furthermore, countries are expected to develop modern methods of money management such as checks and direct deposits that reduce reliance on a cash economy. Effective regulatory bodies are to be established to ensure that there are adequate measures and sufficiently trained personnel to realize the implementation of these regulations.

Regulators must take efforts to ensure that criminals do not acquire or achieve significant control over financial institutions. International cooperation must be extended as regards to suspicious transactions, confiscation, mutual assistance and extradition. Cooperative investigations should be encouraged and launched when possible. To ensure cooperation among states, there must be decisions made as to the best venues in which to prosecute offenders. Annual Reports are issued by the FATF within which the country teams have monitored the progress of member states and issues typologies. The Typologies Report follow an annual meeting in which law enforcement, legal, financial and regulatory experts discuss recent trends in laundering criminal proceeds, emerging trends that arouse concern and countermeasures which have proved effective. In June 2000, the FATF listed a group of 15 jurisdictions with serious deficiencies in anti-money laundering efforts. This “blacklist” was based on extent of compliance with 25 published criteria.

Three of the fifteen jurisdictions are located in the Caribbean and include Dominca, St. Kitts-Nevis and St. Vincent. According to the Annual Report issued at the same time, the member countries of the FATF group are largely in compliance with the regulations. This evaluation is based largely on the mutual evaluations of the member states. A dichotomy exists between the perception of the developed countries and the offshore centers. The tax havens or international financial centers claim that the legislation and infrastructure are in place and most money laundering occurs through large financial centers. On the other side, the mainland countries perceive that money laundering is occurring in offshore locales. The problem remains that money laundering persists in both kinds of locales. The FATF is now turning its attention to such problems as money laundering through on-line banking, trusts and other non-corporate vehicles, the professionals who facilitate money laundering, the role of cash vs. non-cash activities and the money laundering of terrorists. The FATF is only one of several visible multilateral bodies working on money laundering. It has regional task forces that include the Caribbean Financial Action Task Force and Asia/Pacific Group on Money Laundering. The United Nations and its Office of Drug Control and Crime Prevention (ODCCP) has a program against money laundering.

The Organization of American States (OAS) Inter-American Commission on Drug Control, as well as the Council of Europe, have launched special initiatives on money laundering. Much has also been done at the national level. The Bureau of International Narcotics and Law Enforcement of the U.S. Department of State releases annually its International Narcotics Control Strategy, approximately a quarter of it is devoted to actions against money laundering and compliance with money laundering regulations. The report assesses not only drug-related money laundering but that related to other offenses. A significant group of countries are identified as of primary concern based on their failure to meet a wide range of criteria concerning asset and information sharing, as well as the deficiencies of their legal framework. Individual countries have established domestic Financial Intelligence Units to address problems of financial crime in order to formulate more effective countermeasures.

These countries share some information within the framework of the Egmont Group. This informal alliance includes over 45 countries facilitating the exchange of records and evidentiary materials among member states. The United Nations Convention Against Transnational Organized Crime, was signed in Palermo, Italy by 123 countries (December 12-14, 2000). It contains provisions to combat money laundering as it is related to organized crime. These include adequate system of internal regulation within the signatory countries, cooperation on the regional, international and multilateral levels, and the mechanisms needed to detect the cross border movements of capital. Furthermore, it requires customer identification, record keeping, reporting of suspicious transactions. Money laundering in this convention is tied not only to traditional forms of organized crime but also to the corrupt practices facilitating it.

The enormous growth of money laundering results from several factors simultaneously: the rise of transnational organized crime, the globalization of corruption and the competition for capital in an increasingly globalized international economy. The major actors in this essentially criminal business practice are major banking centers and offshore locales, although many other institutions and businesses participate. The possibility of laundering money in so many regions of the world has resulted in the massive transfer of resources from developing and transitional countries to safe havens in the more developed countries and more protected offshore locations.

Placement of money overseas, allows criminals and corrupt individuals to evade the control of local authorities, avoid the instability of domestic banking institutions while securing access to their funds internationally. Combating money laundering requires a multi-faceted approach. It is necessary not only to target the recipients of the laundered money but also to recognize the instability of the financial system in the source country. The capacity of different states to combat organized crime and money laundering must also be enhanced. This is a difficult problem in states that often do not have the sufficient resources to provide for the basic educational, medical and social needs of their citizenry. The international actions against money laundering are now focused more on prevention and sanctions rather than the multi-faceted strategies needed to address the actual causes of the problem.

Prevention works more effectively in the international financial community than in a single country where corruption and coercion by crime groups or high level corrupt officials may prevent the implementation of needed controls. Sanctioning may work in embarrassing major banking centers into greater compliance but the enormous profits of private banking services make many institutions adhere to the letter but not the spirit of money laundering controls. Their internal audit rules screen out some of the most blatant violators but the proliferation of trust agreements and front companies make it very difficult to screen clients effectively. Many larger financial systems, such as Switzerland, which have served as major repositories for drug kingpins, corrupt officials, and oligarchs are evaluated as in compliance of money laundering provisions.

Yet they do not provide enough law enforcement resources to investigate the vast amounts of money and the diversity of actors who are laundering money through their financial system. Therefore, the probability of successfully laundering large sums may be greater and there are many jurisdictions that are considered medium or high risk for money laundering by the FATF. In developing countries, which house many offshore locations, there is desperate competition for capital. Some Caribbean nations suggest that the drive against offshore locations is not motivated so much by the desire to combat money laundering but to counter the competition for financial services. In the absence of development alternatives, there is often little incentive to get out of the money laundering business. The sanctioning regime that has been instituted is being executed without equity. Countries placed on the high-risk list, otherwise known as the “black-
list,” by the FATF are not necessarily the worst offenders. Some countries with very significant problems of money laundering have escaped sanctioning because of their political connections. Some small countries in the Caribbean or territories of larger countries do not have the public relations or the regulatory capacity to prevent their sanctioning have been exposed to the full force of the FATF. Whereas a country like Liechtenstein has the abundant resources to put towards the hire of lobbyists to clear its name and also address some aspects of the problem.