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1998 International Narcotics Control Strategy Report

Bureau for International Narcotics and Law Enforcement Affairs
United States Department of State
February 26, 1999


MONEY LAUNDERING AND FINANCIAL CRIMES

Introduction

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

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

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

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

Why It Is Important To Fight Money Laundering

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

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

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

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

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

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

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

Money Laundering Trends and Typologies

Current Global Trends in Money Laundering

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

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

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

Offshore Financial Centers

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

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

What Is an Offshore Financial Center?

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

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

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

What Are the Common Characteristics of an OFC?

Many OFCs claim that their carefully crafted laws provide beneficial business and financial planning options for onshore clients. These options include, but are not limited to: sophisticated trade financing; estate planning for high net worth individuals; tax mitigation for individuals and corporations; avoidance of exchange controls; liability containment (e.g., for owners of airplanes and ships); sophisticated insurance management options; investment opportunities for individuals that transcend home country marketing regulations; preservation of assets; investment of overnight funds; and freedom from certain home country regulatory requirements.

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

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

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

Where Are OFCs Located?

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

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

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

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

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

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

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

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

How Will OFCs Fare In the New Millennium?

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

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

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

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

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

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

Regulation in the Newer OFCs of the Western and South Pacific

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

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

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

Recent Case Examples of Misuse of Established OFCs

Offshore Internet Money Laundering

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

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

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

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

Operation Risky Business

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

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

Guernsey International Financial Fraud

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

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

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

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

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

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

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

Explanatory Notes Regarding the Offshore Financial Centers Chart

Recognizing that increased use of OFCs by drug cartels, terrorists and organized crime has appeared to increase in 1998, and concerned that the increased use of OFCs has the potential to de-stabilize the economic and political institutions of nascent democracies as well as threatening international security, the Department of State has undertaken an initial survey of OFCs. The results of the survey comprise the following chart. No claim is made that the survey is complete. Given the intrinsically secretive nature of OFCs, public information is often difficult to obtain. There are additional categories of data relating to OFCs that, were they included on the chart, would provide a more complete survey. Within most categories presented on the chart, the designations "Y" and "N" are used to denote the existence ("Y") or the non-existence ("N") of the entity or service in a specific jurisdiction. Where there is no (or only fragmentary) information regarding specific categories, the corresponding cells on the table are left blank.

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

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

Definitions: the Offshore Financial Centers Chart

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

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

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

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

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

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

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

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

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

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

Membership in International Organizations: These multinational organizations have been formed to combat money laundering or to establish sound supervisory regimes; the Asia/Pacific Group, the Financial Action Task Force, the Caribbean Financial Action Task Force, the Council of Europe Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures, the Offshore Group of Bank Supervisors and the Organization of American States Inter-American Drug Control Commission. A blank cell in this column indicates that the jurisdiction does not hold membership in any of these organizations.

Mutual Legal Assistance Treaties (MLATs): In money laundering cases, MLATs can be extremely useful as a means of obtaining banking and other financial records from our treaty partners. A "Y" in this column on the chart indicates that the United States has an MLAT with a specific jurisdiction or with the jurisdiction which is responsible for the international relations of the jurisdiction and which has extended application of the treaty to that jurisdiction. An "R" designates a country or jurisdiction with which the United States has signed an MLAT which has been ratified by the United States, but which is not yet in force.

Other Money Laundering Trends and Typologies

The Market for Gold and Other Precious Metals

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

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

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

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

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

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

Black Market Peso Exchange

A primary money-laundering scheme used by Colombian drug cartels involves use of the Colombian black market peso exchange. The brokers who operate the black market peso exchange are international financiers who are capable of facilitating multi-million dollar transactions outside Colombia's legitimate financial system. In this money laundering scheme, the Colombian cartels sell drug-related U.S. currency to black market peso brokers in Colombia who, with their U.S.-based agents, place the U.S. currency into U.S. bank accounts while trying to circumvent the U.S. Bank Secrecy Act (BSA) reporting requirements. The exchangers then sell monetary instruments drawn on their bank accounts in the United States to Colombian importers who use these instruments to purchase foreign goods. This method is the single most efficient and extensive money laundering scheme in the Western Hemisphere and works as follows:

  • A Colombian drug cartel arranges the shipment of drugs to the United States;
  • The drugs are sold in the United States in exchange for U.S. currency;
  • The cartel sells its U.S. currency to the 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 BSA reporting requirements when later placing the U.S. 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;
  • 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;
  • The Colombian black market peso broker now has a pool of laundered funds in U.S. dollars to sell to Colombian importers who use the dollars to purchase goods, either from the United States or from other markets; and
  • Finally, those goods are transported to Colombia, often via smuggling in order to avoid applicable Colombian law.

The U.S. Government continues to be concerned about wholesale narcotics proceeds being laundered through the BMPE. The U.S. Treasury Department has devised and is implementing a three-pronged strategy designed to attack this money laundering system as a whole. Since this is a trade based system, the strategy will necessitate engaging the cooperation of the business and financial community as well as the appropriate governmental law enforcement and regulatory agencies.

The enforcement agencies will not only give BMPE investigations top priority, they will initiate proactive programs to target high level BMPE offenders. In addition they will coordinate their investigations and share information with the other agencies conducting similar investigations. Marshaling and analyzing the available data regarding BMPE will be a key part of the strategic plan at all levels.

The second part of the strategy entails the involvement of regulatory agencies, which are authorized to seize assets, and sanction businesses, which knowingly continue to be involved in this process. Once again, the marshaling and sharing of available BMPE data will be vital to this process.

The third leg of the strategy involves educating the business and financial communities on how to spot BMPE transactions and, most importantly, how to avoid them. Thus, it is hoped that this three-pronged strategy will result in an effective approach to combating a money laundering system which is responsible for annually laundering and repatriating billions of narcotics dollars to the major Colombian traffickers.

The Hawala System

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

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

In 1997, a significant investigation began on the use of hawala to move proceeds of crime from the United States to India. "Operation Seek and Keep" is an ongoing investigation being conducted by the Immigration and Naturalization Service with support from the Internal Revenue Service, Customs, FinCEN, the Federal Bureau of Investigation and the Postal Inspection Service. The target of this investigation is an international ring allegedly responsible for transporting approximately 200 aliens per month for three years from South Asia (primarily India) to the United States.

Hawala seems to have been the primary mechanism used to facilitate the various money transfers needed to support the smuggling. The alien smuggling fees (approximately $20,000 per person) were paid to a U.S.-based hawaladar who then contacted hawaladars in India, who made the necessary arrangements with alien smugglers there. The primary smuggling route was from India to Russia, from Russia to Cuba, from Cuba to various points in Latin America and the Caribbean, and then to the United States. Money was paid to the Indian hawaladars through a variety of channels, including precious metals companies operating in the United States and the Persian Gulf.

Several factors contributed to the successes in this case. One factor was the suspicious activity reports (SARs) filed by a financial institution as part of its routine analysis of certain transactions (as opposed to being filed at the time the transactions were conducted). Subsequent analysis of these SARs provided valuable information to help identify one of the channels used to move money from the United States back to India.

Another factor was cooperation between U.S. and Indian authorities, particularly in the area of information exchange. This facilitated the development of a clear understanding of the overall way in which money was being moved as well as the identification of several targets of the investigation. Given the international nature of hawala money laundering, this type of cooperation is essential. There are several other investigations concerning narcotics trafficking and smuggling where cooperation between U.S. and Indian law enforcement officials is facilitating successful investigations in both countries.

Developments in Pakistan presented the other side of hawala, specifically the movement of money out of South Asia. An example of this can be found in the continuing investigation of the financial dealings of former Prime Minister Benazir Bhutto and her husband, Asif Zardari. More generally, various economic conditions in Pakistan, such as the temporary closing of banks after the nuclear tests, continuing devaluation of the Pakistani rupee and the conversion of foreign currency accounts to rupees were responsible for an increase in hawala transfers of money out of Pakistan. It appears that many Pakistanis feared that their holdings in Pakistan would continue to decrease in value, so they withdrew their money from banks and enlisted the services of Pakistani hawaladars to move their assets out of the jurisdiction. For example, Karachi residents withdrew money from their accounts at the Habib Bank Tower branch and went to the adjacent Boulton Market to conduct business with the hawaladars who have stalls there. In addition to serving as a means of preserving some measure of fiscal soundness, hawala also provided at least a partial means of bypassing the financial controls that had been imposed on Pakistan in the aftermath of its nuclear tests.

The money-laundering situation in Pakistan was the subject of a study conducted by FinCEN with assistance from the Department of State and the Drug Enforcement Administration in early 1998. In brief, this effort concluded that activities based in Pakistan (such as corruption or narcotics trafficking) are responsible for money laundering. Pakistan's financial services sector, however, is not a center for money laundering. As is likely to be seen in the Bhutto/Zardari case, a great deal of the money laundering takes place outside of Pakistan in international financial centers such as Switzerland and Dubai. Moreover, it is hawala, rather than the traditional banking and financial services sector, that is used to facilitate most money laundering.

In Indian and Pakistani hawala cases, there is a recurring involvement of the United Arab Emirates, specifically Dubai. India and Pakistan have taken initial steps to implement anti-money laundering legislation and put countermeasures in place. Apart from the occasional press report, there are no indications that such legislation is even being considered in the United Arab Emirates. Some Emirate banks have policies mandating various anti- money laundering measures, such as customer identification, but it is not clear how widely these are enforced.

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

Implications of the Euro Currency Unit

During October 1998, the United States House of Representatives Committee on Banking and Financial Services, Subcommittee on Domestic and International Monetary Policy held a public hearing to discuss the implications of the European Monetary Union on U.S. currency policy, specifically higher denomination notes. Theodore E. Allison, Assistant to the, Board of Governors of the Federal Reserve System, and Gary Gensler, Assistant Secretary for Financial Markets, U.S. Department of the Treasury, testified at the hearing. The following is extracted from their testimony:

The European Union has decided to issue 500 Euro notes, which, at today's exchange rates, would be worth close to $600. Currently, the $100 note is the highest denomination note the U.S. issues. Under legislation passed in 1918, however, the U.S. is authorized to issue currency in denominations of $500, $1,000, $5,000 and $10,000. These larger denomination notes were issued primarily for interbank transactions. The United States stopped printing these denominations in 1946, and ceased issuing them in 1969. At the time, Treasury and the Federal Reserve said, "Use of these larger denominations has declined sharply over the last two decades and the need for them appears insufficient to warrant the added cost of production and custody of new supplies."

The U.S. believes that as much as two-thirds of all U.S. currency (Federal Reserve Notes) in circulation--about $250 to $300 billion--are held outside of the United States. The United States does not issue currency for the purpose of generating revenue (but rather to meet the convenience and needs of the public), and it neither promotes the use of dollars internationally nor competes with other issuers in this regard. Nonetheless, the demand for dollars from abroad does provide significant benefits to the United States. Primarily, it is a convenience to Americans traveling abroad and doing business abroad. Second, the Federal Reserve earns interest on the assets it holds to support U.S. currency, which is held outside the United States.

We believe that the availability of Euro notes may reduce the use of dollars outside the United States to some extent. Most of the U.S. currency that is held abroad is in $100 bills, and it is estimated that approximately 75 percent of all $100 bills are held abroad. Within the G-7, Germany, Italy and Canada all have notes now in circulation with values higher than $100. The United States doubts that the issuance of notes higher than $100 (i.e. $500 or $1000) would improve convenience or efficiency to any significant degree within the United States. There are a number of arguments against the issuance of $500 bills; specifically that it could facilitate money laundering.

The Department of the Treasury has, for a number of years, used investigative and regulatory tools to fight the placement of the proceeds of crime into the financial system. When criminals are deterred from placing illicit proceeds directly into the U.S. financial system, they often seek to hide it and transport it for placement in the financial system outside the United States. One practical deterrent has been that large physical quantities of cash are difficult to transport and to place within the financial system. At today's prices, $1 million worth of cocaine weighs about 44 pounds, but the cash paid, usually in $5s, $10s and $20s, for that cocaine can weigh up to 250 pounds, and is quite bulky. In $100 bills, the weight of $1 million is about 22 pounds. If criminals had access to $500 bills, $1 million could weigh as little as 4.4 pounds less than the average bag of sugar or flour available at the grocery store. Higher denomination notes would make it easier for criminals to transport and hide cash, making the money laundering process cheaper and more likely to evade detection. As a result, the net cost of committing many crimes could decline, as would the government's ability to punish and deter such crime.

Finally, the United States has no plans to reissue the $500 note and would consult with the law enforcement community before making any decision on this issue.

Recent Trends in the United States

An Assessment of the Sources of Illegal Proceeds

The main sources of illegal proceeds laundered in the United States are illegal narcotics sales, organized criminal enterprises, and white-collar crime.

Other illegal activities that generate substantial proceeds that are laundered within the United States and overseas include illegal gambling, prostitution, health care fraud, insurance fraud, financial institution fraud, embezzlement, consumer fraud, telemarketing fraud, bankruptcy fraud, corporate kickback schemes, investment schemes, and public corruption.

As illustrated in figure 1, a review of suspicious activity reporting by U.S. financial institutions for the previous two fiscal years (October 1 to September 30) clearly shows consistent volume of activity being experienced by type of violation. Although the total number of violations reported increased by 19 percent from fiscal year 1997 to 1998, the relative percentage of total violations represented by each category remained fairly constant. This reporting supports the conclusion that the sources of illicit proceeds have not changed significantly over the last year.

In light of recent world events, the United States has substantially elevated the priority assigned to combating terrorist financing. In June 1998, federal authorities seized $1.4 million in cash and property that reportedly was part of a money-laundering scheme to fund Middle East terrorism. The funds were transferred by wire from Europe and the Middle East to financial institutions in the United States and, through various means, were used to facilitate recruitment and training and military operations of the Middle East terrorist group Hamas. These activities include a conspiracy to commit such terrorist acts as extortion, kidnapping and murder against the citizens and government of Israel.

The affidavit used to support the seizure describes complex financial transactions intended to generate income for this organization while concealing the source and purpose of the money. Approximately one-half of those assets were blocked (frozen) in February 1995 by Treasury's Office of Foreign Assets Control under the authority of Executive Order 12947, through which President Clinton had recently imposed economic sanctions against terrorists threatening the Middle East peace process. As a result of that blocking action, a combination of funds and real property were protected from conversion or other disposal from February 1995 through June 1998, when they were seized under the civil asset forfeiture laws. Thus, this case marks the first time that the blocking authority under E.O. 12947 was used against a significant amount of foreign terrorist assets in the United States. It also marks the first time that civil asset forfeiture laws were used to seize money in U.S. financial institutions to prevent that money from being used for terrorism abroad.

It is significant that an Internet website appears to be affiliated with this particular terrorist group. The Internet provides perhaps the most comprehensive global voice. All may be heard, including organizations, which use terror as a means to achieve political aspirations. At present, there are several Internet websites, which espouse the message of these organizations. It is unclear whether such sites are operated by, or officially sanctioned by, the subject organizations. Their rhetoric, however, indicates that the website operators clearly support the political aims of the groups, and in some cases they solicit financial support for the subject terrorist organization. As the Internet continues to expand and become accessible to a broader user-base, this medium for spreading the terrorist message and soliciting financial backing is likely to grow.

The United States is also aware of at least one case in Asia where an alternative remittance system was used to finance terrorism. A series of bomb blasts in a major Indian city in 1993 was financed through hawala transfers. The investigation revealed that the funds supporting these bombings were handled by hawala operators in the United Kingdom, Dubai and India.

Asset or Monetary Instrument Purchases with Cash Proceeds

Asset laundering continues in the United States. It is the conversion of consumer products purchased with dirty currency, which are then exported to Colombia, for example, where they are sold for pesos. Consumer electronics, especially computers, are popular products purchased for export. Other durable goods, such as telephones and jewelry, are also exported. Law enforcement information clearly indicates that some major retailers (including warehouse clubs and home improvement chain stores) in the Miami area and in other major U.S. cities make large (over $10,000) cash sales to individuals, who then forward the merchandise, usually through a shipping broker, to Colombia. Area distributors in these cities have told investigators that there is a very high demand for unreported cash sales.

Private Bankers

Private banking facilities continue to be vulnerable to money laundering. Bank employees who provide special services to high-value customers may be exposed to money laundering schemes. For example, private banking representatives have established bank accounts for foreign nationals without requesting adequate customer identification, and in one case a private banking officer reportedly has assisted "smurfs" (persons who structure cash deposits) by warning them of upcoming audits in order to avoid detection by bank auditors.

Non-Bank Financial Institutions

Non-bank financial institutions (NBFIs) continue to be used for money laundering in the United States despite a number of efforts at both federal and state levels. NBFIs subject to the BSA include brokers and dealers of securities, the U.S. Postal Service, money order vendors, casinos, money transmitters, check cashers, and bureaux de change. With over 200,000 NBFIs in the United States, monitoring of these businesses for money laundering is a complicated matter. Moreover, the role of these institutions in money laundering operations varies. Some, such as the U.S. Postal Service or certain casinos, may be used by others as unwitting facilitators in the process; while others, such as certain bureaux de change or money transmitters, may be knowingly involved in laundering illegal proceeds. Among NBFIs, U.S. law enforcement continues to cite bureaux de change and money transmitters as being most heavily involved in money laundering operations.

Non-Financial Businesses and Professions

The United States continues to see the use of non-financial businesses or professions as mechanisms of money laundering, such as the international gold market and the black market peso exchange system. Professionals, such as accountants, lawyers, and realtors have been used to facilitate money- laundering transactions.

New Payment Technologies

Electronic money (e-money) has the potential to make it easier for criminals to hide the source of their proceeds and to move those proceeds without detection. While the application of new technologies to electronic or cyber-payments systems is still in its infancy, it is prudent to recognize their potentially broader impact. The technology exists which could permit these systems to combine the speed of the present bank-based wire transfer systems with the anonymity of currency. E-money transactions could also be effected in multiple currencies without limits and conducted entirely without intermediaries.

Although no money laundering prosecutions have yet been undertaken to combat abuse of new payment technologies, many jurisdictions have reported the increased use of Internet banking and gambling. United States law enforcement authorities have several cases under active investigation involving criminals who have made use of these technologies to solicit clients or to move funds. According to reports, the now defunct Antigua- based European Union Bank (EUB)--the first offshore bank to use the Internet--defrauded account holders of millions in deposits and may have been involved in laundering illicit funds. The bank, which collapsed in August 1997 when its Russian owners absconded with depositors' funds, attracted clients via the Internet through advertisements of Antigua's offshore regulatory limitations and strict privacy laws.

Jurisdictions should pay close attention to the emerging threats posed by these and other new payment technologies for being used in money laundering schemes, and they should consider developing preventative countermeasures. Moreover, even legitimate banking and gambling through the Internet raise many legal and practical issues for law enforcement. These include questions of jurisdiction, customer identification and broken audit trails.

What We Need to Do

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

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

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

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

Continuous action is needed on each of the following categories in 1999 and for the foreseeable future:

Adoption and Implementation of International Anti-Money Laundering Standards. The development of international standards to reduce jurisdictions' vulnerability to money laundering and to enhance financial, regulatory and law enforcement of anti-money laundering regimes has been at the forefront of the fight against this crime. Accordingly, it is critical that these standards, which continue to be refined and strengthened, be adopted on a global basis. Today, these standards include, among others: the FATF 40 Recommendations, the Aruba 19 Recommendations (CFATF), the OAS Model Regulations on Money Laundering, the Summit of the Americas December 1995 Buenos Aires Communiqué Plan of Action, the European Directive on Money Laundering, and the Basle Principles.

Constant Monitoring of Money Laundering Patterns, Trends and Typologies. More sophisticated techniques, involving both bank and non-bank financial institutions, in a wide array of traditional and non-traditional financial centers, have complicated identification, tracing and investigation. Information exchanges have been improving, but critical gaps in know-how must be closed in tandem with improved cooperation. There is a high priority need to share data, even critical intelligence. The pervasive corruption in some systems remains a barrier to information sharing.

Analysis of Money Management Practices. We need improved information from more jurisdictions on what factors influence drug traffickers and their money managers to use particular systems in those jurisdictions, to keep reserves in cash and other monetary instruments, to invest rather than park funds.

Tightening Restrictions Against Non-Drug Related Money Laundering and Other Financial Crimes. We need to identify the parallels between drug money laundering on the one hand, and between non-drug related money laundering and other financial crimes on the other, and we seek to achieve an effective international capability to investigate and prosecute all these crimes. While a number of governments are willing to impose new restrictions on drug-related financial crimes, many hesitate to apply such strictures to other non-drug money laundering and other forms of financial crime.

Equating Economic Power with Political Clout. The increasing concentrations of wealth among criminal groups in a number of jurisdictions is a concern, not only because of possible impacts on investments, real estate values, legitimate commerce and government integrity, but also because these organizations have the wealth to make large financial contributions to government officials who may compromise decisions in order to assist the criminals. We need to assess the national security, foreign policy, and political implications of these accumulations and transfers of wealth in all financial centers where such wealth is being concentrated. Corrupt officials and non-transparent financial systems represent a continuing threat to democracy and free markets in literally every region of the world.

Eliminating Systemic Weaknesses. Banks need to maintain similar records about their financial institution clients as they do for other customers and to report suspicious transactions involving such clients. Some available but underutilized tracking mechanisms include revocation of licenses, changes in ownership and management, levying of fines, and prosecutions. Perhaps the most intrinsic weakness is the lack of qualified personnel, not only in government regulatory agencies, but also within many banking systems, who are trained not only in implementing and managing such oversight systems, but also in handling today's complex monetary transactions. The enhanced training reported in recent international meetings is encouraging, but more is necessary.

Assessing the Criminal as Entrepreneur. We need to explore the extent to which criminal organizations are penetrating legitimate financial and other businesses, using their vast resources to gain control and to influence economic, financial and business decisions. More data and systematic analysis are needed, for example, on the role played by the drug trafficker and money launderer in foreign exchange markets, including their use of and creation of gray markets. There is good reason to question the overt as well as covert ownership of banks and financial institutions in many parts of the world.

Analyzing the Impact of Money Laundering on National Governments and Economies. We need more analysis of the impact of a jurisdiction's political and structural factors on its receptivity to money laundering and more analysis of the impact of money laundering on the political life and economic life of the jurisdiction. Among the questions requiring analysis is the extent to which structural macro-economic factors, such as commodity deflation, sustained high levels of unemployment, and recession make a jurisdiction susceptible to becoming a money-laundering haven. At the sectoral level, we need to determine the influence of black markets on legitimate enterprises. At the institutional level, we need to identify the major factors that may influence bankers and other financial managers in some jurisdictions to accept money they have reason to believe is tainted. As we better identify where money laundering is most likely to have a macro-economic or political impact, we need to evaluate the potential effectiveness of economic countermeasures. These could include limiting or excluding access to the global financial system by entities or states identified as major problems.

Regulating Exchange Houses and Remittance Systems. There is ample evidence that the various underground hundi, hawala, and "chop" remittance systems, so essential to economic life in the Middle East, South and East Asia, are being used by drug traffickers, just like the "cambios" of Latin America, and non-bank institutions of all kinds, are being used in the Western financial community. These serve vital functions for key sectors of many economies. Systems for regulating the laundering of the proceeds of crime are essential, but they will fail unless they take into account the very informality that makes underground banking effective and desirable.

Continuing to Focus Attention on International Financial Centers (OFCs). The Financial Action Task Force (FATF), the Offshore Group of Banking Supervisors (OGBS) and other relevant organizations have been quite effective in working together. Also, some of the OFCs are members of FATF, the Caribbean Financial Action Task Force (CFATF), the Asia/Pacific Group (APG), or have participated in FATF/CFATF seminars which provided guidance on adopting and implementing FATF and UN guidance. The agreement in Paris in February 1997 to undertake compatible mutual evaluations of these constituencies should be given a high priority for early implementation. More analysis is needed of the methods used to move money through OFCs, and OGBS should be supported in its efforts to include as many OFCs as possible within its membership and a parallel effort to evaluate progress by its members.

Expanding the global use of the mutual evaluation process. The CFATF has an on-going mutual evaluation process to assist its members' anti-money laundering regimes, and the Council of Europe has also implemented such a process for jurisdictions in the New Independent States of the former Soviet Union (NIS) and in Central Europe. These important regional initiatives should continue apace and can serve as prime examples in spreading money-laundering countermeasures to other regions, such as Asia, the Pacific, Africa and the Middle East.

Consolidated Supervision of the International Banking System: The Basle Principles. The Basle Committee on Banking Supervision released its Core Principles for Effective Banking Supervision in September 1997. This document establishes 25 Core Principles to serve as a basis for supervision in all jurisdictions. They are comprehensive in their coverage, addressing the preconditions for effective banking supervision, licensing and structure, prudential regulations and requirements, methods of ongoing banking supervision, information requirements, formal powers of supervisors and cross-border banking. Principle 15 requires that banking supervisors determine that the banks they supervise have adequate policies, practices and procedures in place, including strict "know your customer" rules, that they promote high ethical and professional standards in the financial sector, and that they prevent the banks from being used by criminal elements. Supervisory authorities throughout the world were encouraged to endorse the Principles by October 1998. The Principles have been designed to be verifiable by supervisors, regional supervisory groups, and the market at large. The Basle Committee will play a role, together with other interested organizations, in monitoring progress made by individual jurisdictions in implementing the Principles.

Adopting Information Standards. The adoption by governments of information standards such as those recommended by FATF and the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network is a welcome, if not yet universal, step. Many more governments need to cooperate in adopting regulations to help curb the misuse of electronic transfer and payment mechanisms to launder illicit funds

Detecting Counterfeit Instruments. Governments and banking systems must be more vigilant in efforts to detect counterfeit currency and other monetary instruments. Schemes involving counterfeit bonds and other securities, usually as collateral, suggest the need for an international clearinghouse to assist banking and financial systems outside the major centers in determining the authenticity of documents.

Identifying and Preventing Financial Crimes. Governments and banking systems must exert greater efforts to identify and prevent a wide range of financial crimes, beyond drug and non-drug money laundering, including financial frauds such as credit card fraud and prime bank guarantee fraud. The history of such frauds suggests a need for a clearinghouse, which can assist the financial services industry in identifying customers and authenticating documents.

Ratifying and Implementing the l988 UN Drug Convention. The United Nations Office for Drug Control and Crime Prevention (UNODCCP) should intensify its efforts to ensure that all significant financial center jurisdictions are implementing fully the anti-money laundering and asset forfeiture provisions of the 1988 UN Drug Convention. As an immediate priority, ODCCP should focus on securing ratification or accession of the significant financial center governments, which have not yet become parties to the Convention.

Pursuing A Continuously Evolving Strategy. Nearly every opportunity that global businesses and finance companies have to offer legitimate commerce is today used by money launderers and financial fraudsters. Financial regulation, supervision and enforcement needs to expand to cover transactions that transcend national boundaries and to cover the widening array of financial service businesses. Similarly, there is a growing need to reduce the increasing use of non-financial service providers in the commission of these crimes.

Beyond standard technical elements, the following are some possible innovations to current international practice that would provide for greater reach for law enforcement authorities and less impunity for financial criminals. These concepts were developed by Deputy Assistant Secretary of State for International Narcotics and Law Enforcement Affairs, Jonathan M. Winer in conjunction with a speech given September 14, 1998 to the Sixteenth International Symposium on Economic Crime held in Cambridge, England. Some of his concepts are presented here as examples of further steps that could be taken by the international community to combat money laundering and financial crime. They do not represent official policies of the U.S. Government.

Asserting Jurisdiction Over and Access To Records

Mutual legal assistance treaties are a major new mechanism by which jurisdictions may cooperate with one another in retrieving essential evidence of financial crimes. The UN Convention on Transnational Organized Crime currently under negotiation in Vienna may create a universal system for mutual legal assistance in cases involving conspiracy and money laundering by organized crime. But jurisdictions can exercise self-help as well, making the right to do business in their territory contingent on agreement to make records available to law enforcement authorities. Such a provision, if universally adopted, would do much to protect shareholders, depositors, and creditors from having no remedy in the event of something going wrong. Simultaneously, the Group of Eight and the Council of Europe need to complete their work on problems of "high tech crime." These two groups are considering ways to ensure that "traffic" records of electronic mail and other electronic communications can be assessed by law enforcement authorities--either in real time or in recorded form--so that those authorities can identify the perpetrators of crimes committed through these new communication mechanisms. They must make progress as well on the difficult jurisdictional issues raised by electronic communication and on rules for search, seizure and use of electronic records which may be located thousands of miles distant from where the crime itself took place. Progress on these issues will be necessary to reduce the threat posed if some jurisdictions do not require records to be maintained or do not permit records maintained in their jurisdiction to be accessed in cases involving financial crime.

Refusing To Accept Bank Secrecy In Cases Involving Financial Crime

Jurisdictions cannot protect their citizens or residents from financial crime if financial criminals are able to shield their criminal conduct through the use of bank secrecy. Jurisdictions that do not permit law enforcement authorities to gain access to financial records in cases involving allegations of criminal conduct from terrorism to tax crime turn themselves into safe havens for financial criminals. Just as the European Union has sued one of its members, Austria, to stop its issuance of anonymous banking accounts, the Financial Action Task Force and other international bodies need to consider taking appropriate measures to sanction jurisdictions that have become safe havens for financial criminals. Such sanctions need not be anything that would impair the ability of financial markets to function normally. For example, when the Seychelles developed a package of economic citizenship that purported to include protecting criminal proceeds from international law enforcement, the FATF asked all its members to treat transactions with the Seychelles as "suspicious transactions," requiring immediate referral to law enforcement authorities. Such an approach could develop into a two-tier system for international banking transactions: the top tier, including jurisdictions that meet the FATF recommendations, would have their transactions treated normally. Jurisdictions not permitting overseas regulators or law enforcement officials to have access to financial records would have their transactions subjected to additional regulatory or enforcement review, such as through an automatic presumption that the transaction is suspicious, to be stored and analyzed by the jurisdiction's financial intelligence unit. This type of two-tier system, whose precedents include the Seychelles action by FATF, would reflect the actual risks to the global financial system inherent in having portions of that system be inaccessible to law enforcement investigations.

Eliminating Differential Treatment of International Financial Center (OFC) Transactions

The OFC concept is based on, in part, the notion that what is necessary to regulate transactions involving the citizens of one's own jurisdiction is not necessary in handling transactions involving the citizens of other jurisdictions. Its impact, however, has been to encourage some financial institutions to deliberately structure themselves so that they are not regulated by anyone. Recently, one such institution, Caymanx Bank, structured itself so that its operations in the Isle of Man were offshore to the Isle of Man because it was a subsidiary of an institution in the Cayman Islands. It was also offshore to the Cayman Islands because it was only doing business in the Isle of Man. As a result, its activities were effectively free of regulation, and its clients' records were advertised on the Internet as being free of oversight by the authorities of any jurisdiction. Whatever the economic justification for such differential treatment in the past, when national laws impose tariffs on many forms of economic activity, treating as offshore anyone's transactions one licenses makes no sense. Such differential treatment is especially inappropriate when everyone is using the same technological infrastructure and when it is increasingly difficult to determine the national origin or citizenship of any individual or corporate user of this global system. We should be moving towards an international system where "offshore" means the same as "onshore," requiring the same regulations, the same access to records, the same law enforcement. Over time, jurisdictions that continue to offer underregulated "offshore" services will develop reputational problems that drive off legitimate businesses. In the meantime, to protect ourselves from the consequences of the abuses inherent in offshore financial services, firms based in OFC jurisdictions, which are inadequately regulated, could be subjected to additional due diligence by major clearinghouse banks.

Eliminating The "It's Only Tax Evasion" Loophole

One of the great difficulties in developing information on a timely basis in financial crime cases is the problem of proving that monies hidden in shell companies, international business corporations, or trusts, are the proceeds of criminal activity other than tax evasion. In the United States, some of the most important federal prosecutions of serious organized crime figures responsible for contract killings, drug trafficking, and other extraordinarily serious crime, have succeeded only through the making of tax cases. In such domestic organized crime prosecutions, the inability of criminals to explain where their money came from, and the clear frauds involved in their handling of the funds, made criminal prosecutions successful. By contrast, the generally accepted principle that there is nothing wrong with handling mere "tax evasion" money offshore has created a swamp in which financial criminals breed. Jurisdictions could eliminate the "tax evasion" loophole through two techniques: including tax evasion among the grounds for the elimination of bank secrecy in the provision of documents to law enforcement and amending mutual legal assistance agreements to include tax offenses. If such an approach became generally accepted, jurisdictions that continued to make themselves available for tax evasion aimed at other jurisdictions might well find that the potential damage to their reputation from remaining outside this new system outweighed the potential income from continuing to offer these services. The G-7 initiative to coordinate, where appropriate, fiscal fraud and anti-money laundering enforcement efforts is a welcome step in this direction.

Cooperating In Repatriation of Assets and Broadening Civil Remedies for Victims of Financial Crime

Too often, victims of financial crime find themselves unable to reach the assets of those who have victimized them. Governments need to look at mechanisms to permit early immobilization of assets of financial criminals and mutual assistance in ensuring that the immobilization is international, not merely domestic. They may also wish to consider providing for an adequate array of civil causes of action for victims of financial crime against institutions that have facilitated the crime as well as against the actual perpetrators. Governments may wish to determine where and when financial institutions doing business in their territories should be held at risk for losses due to financial criminals occasioned through the use of their institutions. Failure to adopt and implement mechanisms to ensure the "know your customer" principle in a case where the "customer" proved to be engaging in a pattern or practice of fraudulent activity could lead to civil liability to victims. Such a finding of civil liability could in turn lead to enhanced compliance practices throughout the entire industry.

Linking Future Global Financial Assistance by Multilateral Lenders to Strengthened Governmental Involvement in Supervision and Enforcement

Future global economic assistance to any jurisdiction or region needs to be more closely tied to taking specific rule of law actions that strengthen the ability of the governments involved to carry out essential regulatory and enforcement functions. This need not involve conditionality, but instead concurrent initiatives such as agreement to strengthen the role of central banks in auditing and inspecting the banks they regulate and to further protect them from political influence. Such audits could help ensure that central banks enforce safety and soundness provisions consistent with international standards and audited by international auditors, with goals, outputs, and benchmarks for reform defined. Among the actions to be undertaken would be to establish public, transparent standards for uniform business operation regulations, standards for such professionals as accountants, auditors, engineers, property appraisers, insurance and financial service providers, and requirements for the issuance and regular renewal of business licenses and permits. The International Monetary Fund and the World Bank would be two helpful initiators of this kind of approach, were they to have the support of the member states who fund them in undertaking this essential add-on to their past financial assistance programs.

Legislating Transparency in Government and Public Disclosure for Public Officials

Transparent government procurement and decision-making inhibits bribery and corruption, both important factors in criminal exploitation of financial systems and institutions. The adoption of mechanisms to increase the integrity of governments and public officials in these areas are closely related to mechanisms that increase the integrity of the financial systems used by the public sector and private sectors alike. Efforts underway at the OECD and in Central Europe and Latin America to combat corruption through the mechanisms of the Council of Europe and the Organization of American States could be supplemented by commitments by jurisdictions to the principles of transparency in government. Such transparency might well make it easier for states to take the other steps needed to combat financial crime, by attenuating the ability of would-be financial criminals to purchase the kind of legislative, executive or judicial environment needed to facilitate their activities.

U.S. Money Laundering Countermeasures

The United States has taken numerous steps to address the current preference toward use of money transmitters/remittance corporations and the black market peso exchange (BMPE). Most recently, the Treasury Under Secretary (Enforcement) convened an interagency group of experts to develop and begin work on a comprehensive plan to combat this problem. Additional counter-measures need to be developed to address the underground banking systems. FinCEN is working with the federal law enforcement Interagency Co- ordination Group (ICG) to study this problem.

With regard to money transmitters and remittance corporations, the Department of the Treasury continues to use Geographic Targeting Orders with varying degrees of success. Further, the U.S. Treasury has developed a close partnership with major national money transmitters that are believed to handle nearly 90 percent of the market for these financial services. U.S. prosecutors are beginning to enforce a relatively new law (18 U.S.C. 1960) requiring registration of money transmitters and money service businesses. Pending implementation of a federal registration system, prosecutors are relying on state law registration requirements; federal violations are charged for failure to register with the relevant state authority.

With regard to the BMPE, the ICG, through FinCEN, has been providing those U.S. banks that have been identified as holders of BMPE accounts with detailed information on the nature of the BMPE activity in their institutions, and the U.S. Government has issued an advisory warning banks of this type of activity. As a result of these efforts, SARs specifically identifying BMPE-type accounts have increased and this information is being shared with the appropriate federal law enforcement agencies. Further, as indicated above, the Department of the Treasury is developing a long-range strategy to address BMPE through both law enforcement and economic policy measures.

Further, the United States has nearly 5,000 personnel--from at least 75 agencies--that are directly involved at the federal and state levels in the prevention and detection of money laundering and the enforcement of anti- money laundering laws. United States anti-money laundering policy is based on the belief that it is more effective when agencies that are engaged in money laundering countermeasures work together than when each works alone. This means that in the anti-money laundering area, the United States relies heavily on joint investigations or task force operations to bring together what might otherwise be a diffused effort of individual agencies. It also means that the U.S. effort depends heavily on developing cooperative relationships among law enforcement, financial regulators, and the financial private sector to ensure that as many vulnerabilities to the financial system as possible are reduced.

Partnership with Financial Institutions

The United States continues to look for creative ways to facilitate a productive dialogue among law enforcement, regulators, and banking officials. Most recently, U.S. agencies have turned their attention to examining SARs, which since April 1996 have been required to be submitted by depository institutions, including banks, thrifts and credit unions. These reports are entered into a database and made available to federal and state financial regulators and to federal and state law enforcement agencies.

Analyses of SARs--especially in the context of interagency investigator and prosecutor review teams--help identify broadly the types of suspicious activities reported by banks which may be money laundering schemes and permit proactive, rather than reactive, targeting. A comparison of SARs against issues of concern in specific investigations should facilitate communications among law enforcement, bank regulators and the banking community about how best to focus suspicious activity reporting efforts. The objectives are for the government to provide guidance to the financial community on suspect activity identified by law enforcement and to seek insight from the financial community on how both the public and private sector can work together to prevent and detect abuses of the financial system.

Enforcement Cases

ADM Executive Pleads Guilty to $9 Million Theft

Mark E. Whitacre pleaded guilty to 37 counts of money laundering, filing false tax returns, conspiracy, wire fraud and interstate transportation of stolen property in October of 1997 in Urbana, IL. Whitacre was the president of the BioProducts Division of the Archer Daniels Midland Company (ADM) and over a four-year period, stole over $9 million from the corporation through a false billing/invoice scheme. During this same time, Whitacre was secretly working for the FBI, attempting to uncover evidence of worldwide price fixing of lysine, a livestock feed additive. Whitacre, and others established fictitious businesses, both foreign and domestic, which falsely billed ADM for services and materials. Whitacre caused the invoices to be paid by ADM, knowing no services were ever performed. Whitacre established bank accounts for at least ten fictitious entities in Switzerland, Germany, Hong Kong and the Cayman Islands. Whitacre would, on occasion, establish a fictitious bank account titled in a name closely resembling the name of a corporation with which ADM had legitimate business. In doing so, Whitacre was able to lend an air of legitimacy to some of his fraudulent transactions. The proceeds of the false invoice schemes, once deposited overseas, were then transferred to domestic accounts controlled by Whitacre or were used directly to pay creditors of Whitacre's. Whitacre, at 40, was once a rising star within ADM with CEO potential. In March of 1998 he was sentenced to 9 years in prison and ordered to pay over $11 million in restitution to ADM.

Casa De Cambio "Sting"

On July 1, 1998 , the CEO, president, and vice-president of Supermail International, Inc. were arrested on money laundering charges stemming from a two year investigation conducted by the Los Angeles office of the FBI and the Los Angeles Police Department (LAPD). The three executives, along with six other employees and associates, were arrested after a federal grand jury returned a 67-count indictment against 11 defendants, including the Supermail corporation, charging multiple conspiracies, money laundering, evading currency reporting requirements, aiding and abetting, and criminal forfeiture. According to corporate filings, Supermail International, Inc. is one of the largest check cashing enterprises operating in the Western United States, and purports to be one of the leading U.S. money transfer agents providing services to Mexico and Latin America, with its stock traded on the NASDAQ OTC Bulletin Board. Supermail is considered a giant among the increasing number of independent non-bank financial institutions operating in many inner-city neighborhoods where banks have reduced their presence.

The arrests represent the culmination of a two year Organized Crime Drug Enforcement Task Force investigation, during which the FBI and LAPD conducted a money laundering "sting" operation. The operation targeted the "Supermail International" check cashing business, also known as a "casa de cambio," in the San Fernando Valley area of Los Angeles. Task force members believed this company was laundering narcotics proceeds of Mexican drug trafficking groups.

During the course of the investigation, the defendants allegedly laundered over $3.2 million dollars of "drug" money. The investigation is believed to be one of the largest money laundering "sting" operations targeting a check cashing business in United States history.

Man Defrauds Foreign Government

Semyon Shpiglov, of Harrisburg, PA and CPA Gregory Dollis, of Camp Hill, PA pleaded guilty to charges of money laundering and conspiracy to defraud the IRS and the Customs service for their scheme to defraud the government of the Republic of Uzbekistan during 1991 through 1994. At the time, Shpiglov and Dollis were involved in a joint venture with the Republic of Uzbekistan to recycle scrap copper and sell it on the world market. The case originated from information from numerous CTRs filed on business associates of Shpiglov and his business partner.

United Metals International (UNI) was a joint venture between Shpiglov's company, Central Metals and Recycling, and Uzbek Cable, a manufacturer of copper cable located in Uzbekistan. Shpiglov concealed his ownership of Central Metals from the Uzbek government because he believed that if the Uzbek's realized the business concern was owned by former nationals of the USSR, the business arrangement might terminate. Central Metals was to provide recycling equipment and Uzbek Cable was to provide the recycling facility and waste wire cable. The profits from the sale of the recycled material would be split evenly between the two partners. Shpiglov, an unnamed co-conspirator and a former director of Uzbek Cable devised a plan to skim 5 percent of the profits from the joint venture. Shpiglov created Euro Exchange, a U.S. business which he falsely represented could provide the best brokerage service in securing the most profitable copper sales. Euro Exchange charged a fee of 5 percent of sales. Euro Exchange was in fact only a shell corporation that maintained a bank account into which copper sales proceeds were deposited. Shpiglov created false documentation from a fictitious officer of Euro Exchange to make the company appear legitimate. Shpiglov and Dollis created false bank records and tax returns to convince auditors with the Republic of Uzbekistan that profits of the joint venture were being properly accounted for. Proceeds from the copper sales were deposited into the Euro Exchange account or to the personal accounts of Shpiglov and the unnamed co-conspirator located at the Union Bank of Switzerland. In total, approximately $10 million was diverted to the personal use of Shpiglov and the unnamed co-conspirator. As part of his plea agreement, Shpiglov has agreed to forfeit $4.1 million, which will go towards unpaid taxes and restitution to the Uzbek government.

Money Launderers for Cali Cartel Convicted

Interior Designers Alexander Blarek and Frank Pellecchia laundered over $10 million of Cali Cartel leader Jose Santacruz Londono's drug proceeds by purchasing extravagant merchandise in the United States with drug proceeds and then shipping the merchandise to Colombia. In doing this, Blarek and Pellecchia collected a commission of 30 to 40 percent for their services. This activity continued for 10 years until 1996 when Santacruz was killed in a shoot out with the Colombian army.

Drug money was funneled to Blarek and Pellecchia in various ways. Over $3 million was electronically wired to accounts held in the name of Blarek Designs and/or A. Alexander & Associates, business names used by Blarek and Pellecchia. These wires varied in amounts ranging from $30,000 to $500,000 and originated from Germany, Panama and the Cayman Islands. The offshore accounts were not held in Santacruz's name, but rather in the names of other members of Santacruz's organization.

Blarek and Pellecchia disguised the true nature of the cash by using some of the cash for large purchases, such as improvements on their personal residence totaling over $200,000. Much of the cash was stored in several safe deposit boxes scattered across the country. At the time of Blarek and Pellecchia's arrest, the government seized more than $750,000 in cash from these safe deposit boxes. Blarek and Pellecchia also found a third way of dealing with the large sums of drug cash. After making cash pickups in New York, they would travel to Miami to meet with their Certified Public Accountant, Robert Rachlin. Although they would fly from San Francisco to New York to make the cash pickup, Blarek and Pellecchia would travel from New York to Miami via train or rental car, so they did not have to transport the cash on an airplane. Blarek and Pellecchia had an agreement with Rachlin in that they would give Rachlin cash in exchange for checks from Rachlin's trustee account. Rachlin would usually receive around $100,000 in cash, which he would replace with four $25,000 checks. This $100,000 then took on the appearance of having a legitimate source. They paid Rachlin a 1-2 percent commission for this service. CPA Rachlin pleaded guilty to money laundering for his part in these transactions. Blarek and Pellecchia were convicted at trial and later were sentenced to 68 months and 48 months incarceration. They were ordered to forfeit $4.5 million in narcotics proceeds.

Operation Abilene

Dr. Yuan A. Yu, Jr, a physician in Juarez, Mexico and John Drayton Kingston of Abilene, Texas pleaded guilty to money laundering and the illegal distribution of anabolic steroids, Valium and Rohypnol. Kingston would arrange with Yu in Mexico for the illegal importation of controlled substances. Yu, who owned two pharmacies in Mexico, hired taxi drivers to deliver the pharmaceuticals to courier service deposit locations in El Paso for further transshipment to recipients in six other states. Kingston brokered the purchases and was the go between for accepting and distributing the payments. Kingston and Yu would agree to a certain price for each controlled substance ordered. Kingston would realize a profit from each order by marking up Yu's price. Kingston's customers were instructed to send payments for the illegal controlled substances to Yu and other conspirators in El Paso, Texas via Western Union, Federal Express and other courier services. They were also instructed as to the method of payment, which included cash, money orders and wire transfers. During the course of the conspiracy, the proceeds of the organization's sales and distribution of controlled substances exceeded $4,850, 000.

Operation Casablanca

On May 18, 1998, the Secretary of the Treasury and the Attorney General of the United States announced the culmination of Operation Casablanca, the largest, most comprehensive and significant drug money laundering case in the history of U.S. law enforcement.

This three-year, undercover money laundering investigation resulted in the arrest of 167 individuals, the seizure of over $103 million in U.S. currency, over four tons of marijuana and two tons of cocaine. The indictment, which was issued in the 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 alleges 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.

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. The total was approximately $110 million dollars. 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.

At the conclusion of the investigation, the Federal Reserve Board issued temporary cease and desist orders against six of the foreign banks that they supervise and that were implicated in Casablanca. These banks are Bancomer, Banca Serfin, Banamex, Banco International, Banco Santander and Banco Industrial De Venezuela.

Prosecution of the people and institutions implicated in Operation Casablanca is pending.

Swiss Banker Pleads Guilty to Money Laundering

Karl Burkhardt and Marco Meroni were sentenced on money laundering charges for their role in a conspiracy to launder $2.9 million in alleged narcotics proceeds for an undercover agent posing as a drug dealer. Burkhardt, a Swiss businessman , assisted by Meroni, accepted the currency in Florida and Virginia and laundered the cash through nominee accounts in the U.S. and Liechtenstein.

On three occasions the undercover agent gave Burkhardt $200,000 in purported drug proceeds. Burkhardt and Meroni converted the currency in two ways. On several occasions they purchased multiple cashiers checks in amounts under $10,000 at various banks. They also opened numerous bank accounts and deposited the currency; again in amounts under $10,000, solely for the purpose of laundering the currency. In one instance, this raised the suspicions of a Washington, DC bank and the suspicious activity was reported to the IRS. The funds were converted to larger dollar cashiers checks and then were centralized to Florida business accounts controlled by Burkhardt. As part of the laundering scheme, Burkhardt established a foreign corporation and bank account in Liechtenstein for the undercover agent because, according to Burkhardt, Liechtenstein had strict bank secrecy laws and would not turn over documents to law enforcement authorities. Burkhardt wired the proceeds, less his commission of 20 percent, from his bank accounts to the undercover agent's corporate bank account in Liechtenstein. He then had the funds wired from that account to the undercover agent's personal bank account in Virginia. After accepting $2 million in purported drug proceeds from the undercover agent in an Arlington, Virginia hotel, Burkhardt and Meroni proceeded to Dulles International Airport. There they were arrested aboard a jet Burkhardt had hired to take himself and Meroni to Switzerland to launder the $2 million. Burkhardt maintained a lavish estate in West Palm Beach, Florida as well as a residence in Zurich, Switzerland. As part of his plea agreement, Burkhardt agreed to forfeit the Florida property and its contents valued at over $1.5 million. The Florida residence contained numerous valuable antique paintings, tapestries and other items. Burkhardt also forfeited several vehicles and bank accounts in his name and in the names of several aliases. The investigation was conducted by agents of the Internal Revenue Service, Customs, DEA and the Arlington County Police Department.

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 to which the United States is fully committed to preventing the continued use of financial instruments and systems in the perpetuation of international crime.

The specific objectives of the Strategy to fight financial crime are the following:

  • Combat money laundering by denying criminals access to financial institutions and by strengthening enforcement efforts to reduce inbound and outbound movement of criminal proceeds;
  • Seize the assets of international criminals through aggressive use of forfeiture laws;
  • Enhance bilateral and multilateral cooperation against all financial crime by working with foreign governments to establish or update enforcement tools and to implement multilateral anti-money laundering standards; and
  • Target offshore centers for international fraud, counterfeiting, electronic access device schemes and other financial crimes.

As discussed in 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

In his statement before the 52nd session of the UN General Assembly on September 22, 1997, President Clinton remarked that: "In the 21st century, our security will be challenged increasingly by interconnected groups that traffic in terror, organized crime and drug smuggling. Already these international crime and drug syndicates drain up to $750 billion a year from legitimate economies. That sum exceeds the combined GNP of more than half the nations in this room." In the three years since October 1995 when the President declared international crime to be a threat to the national security interest of the United States in Presidential Decision Directive (PDD) 42, the United States has made international cooperation and collaboration in confronting new security threats that defy borders and unilateral solutions a key priority of United States domestic and foreign policy.

In particular, in his October 1995 address to the UN General Assembly, the President called for international cooperation to address the threats posed by money laundering, narcotics trafficking and terrorism, noting that the forces of international crime "jeopardize the global trend toward peace and freedom, undermine fragile democracies, sap the strength from developing jurisdictions, [and] threaten our efforts to build a safer, more prosperous world." Immediately, 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. Specifically, the President noted the corrosive effect on markets and governments of the laundering of massive illicit profits and ordered U.S. government agencies to increase efforts in going after those criminal proceeds. The United States strategy has been to integrate domestic and international efforts and to expand cooperation and consultation among its agencies to reduce international crime

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). IEEPA sanctions attack the finances, companies and individuals owned or controlled by the Cali cartel as well as other Colombian drug cartels, freezing their assets in the United States, identifying their front companies and barring Americans from doing business with them. Currently the Treasury Department identifies five Colombian trafficker kingpins, 154 businesses and 292 individuals determined to be directly involved with illegal traffickers and their so-called legitimate business fronts. As part of the PDD-42 process, an interagency group reviews whether measures can be taken against other international criminals. Also under PDD-42, agencies work together to deny visas to a broad range of organized and other international criminals and their families to prevent them from entering the United States

Combating the rise of international crime requires far-reaching cooperation among U.S. agencies as well as with other jurisdictions. Under PDD-42, U.S. agencies have worked together to collaborate with foreign law enforcement and other government authorities to support U.S. law enforcement abroad, seize accounts, and prosecute, convict, and imprison criminals. United States authorities have increased, and more effectively targeted, assistance and training and have sought better ways of collecting, analyzing and sharing intelligence globally regarding money laundering and other financial crimes. Bilateral and multilateral initiatives to stop criminals from moving funds throughout the international financial system have been launched in tandem with other nations.

During 1998, U.S. officials continued efforts to implement 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.

Bilateral Activities

Training and Technical Assistance

During 1998, 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 1998 $44.1 million dollar program for providing law enforcement, rule of law, central bank training and technical assistance to emerging democracies. A prime focus of the training program was a multi-agency approach to addressing international financial crime, law enforcement development, organized crime fighting, and counternarcotics training. Supported by, and in cooperation with INL, the Department of Justice (DOJ), Treasury Department component agencies (including the Financial Crimes Enforcement Network (FinCEN) and 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 and criminal justice programs worldwide.

During 1998, INL funded numerous programs to combat international financial crimes, including money laundering. 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 assessments and develop specialized training in specific jurisdictions worldwide.

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 Central and South America to Russia, the New Independent States (NIS) of the former Soviet Union, and Central Europe. INL 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 Academy (ILEA)--Budapest.

Customs Service (USCS)

The USCS Office of Investigations (Financial Investigations Branch) continues to be extensively involved in the INL-sponsored multi-agency international money laundering training program. Drawing on its expertise in undercover drug money laundering, as well as traditional money laundering investigations related to all types of criminal activity, the USCS strives to impart its considerable experience to law enforcement, regulatory, and banking officials of all the jurisdictions identified by the INL.

As co-hosts with numerous other federal agencies, the USCS conducted anti- money laundering training domestically and abroad for officials of 19 different jurisdictions. Approximately 1,048 students and officials received USCS anti-money laundering training in fiscal year 1998.

In addition, the USCS participated in two separate DOJ training initiatives designed to train officials from Mexico and Colombia. The Mexican training program, which was sponsored by the Drug Enforcement Administration, was held in Virginia. The Colombian Prosecutors training program was sponsored by DOJ and took place in Potomac, Maryland.

Department of Justice: Criminal Division

In an unprecedented collaboration of in-country and headquarters training, on June 1-5, 1998, in the Washington, DC area, the first of two interagency anti-money laundering and asset forfeiture courses was offered to Colombian prosecutors and investigators who had completed a one-week course of instruction in Bogota, Colombia, by OPDAT and ICITAP.

This first group was comprised of prosecutors from the Fiscalia; investigators from the Technical Investigative Corps assigned to the Money Laundering Unit; investigators from the Department of Administrative Security; from the National Police; from INCOMEX (Import/Export Control); and one representative from the Banking Superintendency. Each of the participants is assigned to, or will serve in a liaison capacity with, the newly-created Asset Forfeiture/Money Laundering Special Unit in the Office of the Fiscal General in Colombia.

During the week of June 15-19, 1998, identical training was offered to another group from the Money Laundering Unit. In addition to the basic regimen of anti-money laundering and asset forfeiture training, this course of instruction focused on the Colombian black market peso exchange (BMPE) process and the importance of Colombia aggressively enforcing its recently- passed anti-smuggling law.

The Criminal Division's Asset Forfeiture and Money Laundering Section conducted a seminar on asset forfeiture in San Jose, Costa Rica, entitled "Forfeiting the Proceeds of Crime." Countries attending the seminar included Costa Rica, Panama, Guatemala, Honduras, Nicaragua, El Salvador, and the Dominican Republic. At the conclusion of the seminar, the United States and Costa Rica signed an agreement providing for the sharing of 50 percent of the net proceeds received from a criminal forfeiture case in the Southern District of California, where real property and personal property were seized and sold in Costa Rica with the assistance of Costa Rican authorities.

Internal Revenue Service (IRS)

The Internal Revenue Service, Criminal Investigation Division (IRS-CID) placed additional emphasis on combating international money laundering and financial crime this past year. With the addition of two new foreign posts, Hong Kong and Ottawa, Canada, IRS-CID increased its presence in the international law enforcement community. These increased resources supplemented IRS international training efforts. This training included courses on financial investigative techniques, money laundering methods, and technical assistance.

IRS-CID conducted a financial investigative techniques course for law enforcement representatives from the Ukrainian Tax Police and Romanian Financial Guard. A financial investigative techniques course was also given in St. Petersburg, Russia for members of the Russian Tax Police.

Further, IRS-CID participated in five multi-agency training courses at the International Law Enforcement Academy (ILEA) in Budapest, Hungary and two in Panama City, Panama. In addition, IRS-CID contributes to the curriculum at the newly established ILEA in Bangkok, Thailand. IRS-CID also conducted money laundering courses and/or assessments in Mexico, Costa Rica, the Dominican Republic, and Armenia.

IRS-CID Special Agents in foreign posts also participated in seminars in other jurisdictions and in the United States, including a money laundering roundtable for the Duma in Moscow to support the passage of anti-money laundering legislation in Russia. In addition, IRS-CID participated in training for the Colombian anti-money laundering unit in Washington, DC.

As part of an INL-sponsored Caribbean regional money laundering seminar, IRS-CID developed and led training for law enforcement officers, bank regulators and prosecutors from 16 Caribbean jurisdictions. The goal was to foster international cooperation in the region in combating money laundering and other financial crimes.

In one innovative and successful endeavor, IRS-CID provided advanced training and technical assistance to members of the Counter Drug Crime Task Force in Trinidad and Tobago. The Task Force is composed of representatives from each component of Trinidad law enforcement and its primary mission is to address drug trafficking and related money laundering offenses. Along with additional law enforcement support from the United Kingdom, and assessment assistance from FinCEN, the current operations of the task force were evaluated. IRS special agents placed their training emphasis on managing case inventories, target selection and narco-traffickers' support networks. Over a six-month period, the special agents also provided assistance on evidence perfection and presentation, and on financial analysis. As a result of these efforts, money-laundering indictments were obtained against six persons. These were the first money laundering indictments in the region. In conjunction with these investigations, the Task Force also showed positive results in narcotics arrests, seizures and forfeitures, and extraditions to the United States.

Federal Law Enforcement Training Center (FLETC)

During 1998 FLETC conducted several anti-money laundering training programs. During January 1998 FLETC conducted an International Banking and Money Laundering Training Program in Nizhniy Novgorod, Russia. A similar program was also undertaken in Kaliningrad, Russia in May 1998 and Moscow in September 1998.

Federal Bureau of Investigation (FBI)

The Federal Bureau of Investigation's international training program continues to provide money laundering training to a global audience. Training programs cover 133 federal statutory violations, RICO predicate offenses, and foreign and international violations. Foreign law enforcement officials have received training with respect to these violations at the FBI's National Academy at Quantico, Virginia, at the ILEA--Budapest; and at various other locations abroad. These courses emphasize detection, disruption, and dismantling of major groups involved in money laundering in order to combat the international and domestic drug trade, as well as organized crime, public corruption, and terrorism.

During fiscal year 1998, the FBI 's overseas Legal Attaches and FBI headquarters have received numerous requests for training in countermeasures and case management. The FBI conducted numerous money laundering training courses during fiscal year 1998 in Nicosia, Cyprus; Tirana, Albania; Buenos Aires, Argentina; Riga, Latvia; Chisinau, Moldova; Manila, Philippines; and Bogota, Colombia. These courses were taught by Special Agents from the drug, organized crime, public corruption, and terrorism units of the FBI with practical experience in money laundering cases.

Drug Enforcement Administration (DEA)

DEA offers a number of courses targeted to the international enforcement community which focus on combating narcotics-related money laundering. Courses are held primarily in-country and tailored to a particular region or jurisdiction.

A one-week asset forfeiture/financial investigations seminar, given in the foreign jurisdiction or in a particular region, is designed to encourage participating nations to enact and/or implement legislation dealing with the seizure and forfeiture of narcotics-related proceeds. The course provides investigators with current information and methods to identify seized and forfeited trafficking assets, conduct money laundering investigations, and utilize financial documentation. The seminars also emphasize international and regional cooperation, implementation of bilateral agreements, and the sharing of intelligence and assets.

Judicial seminars are designed to acquaint foreign prosecuting attorneys and judicial officers with the principles of trying narcotics violations, with an emphasis on conspiracies.

The advanced/regional drug enforcement school, which provides two weeks of training in traditional and specialized investigative techniques, is offered in jurisdictions of regional interest or significance. The course is targeted to mid- and upper-level narcotics officers, and focuses on managing a full range of drug-related investigations.

A one-week course in methods of instruction (MOI) for existing or newly- assigned law enforcement trainers is designed to precede the drug enforcement school. MOI graduates will conduct the drug enforcement school, using DEA lesson plans and under the supervision of DEA instructors.

Specialized training courses of one or two weeks are specially designed to meet the needs of a particular jurisdiction or region. Topics covered may include undercover operations, conspiracy investigations, intelligence collections and analytical methods, and supervisory techniques.

Secret Service

The Secret Service continues to be extensively involved in training foreign officials in the areas of counterfeit U.S. currency and financial fraud schemes. With approximately 450 billion U.S. dollars in circulation worldwide, two thirds of it outside of the United States, the U.S. dollar continues to be the most popular currency to counterfeit. This past year, the Secret Service briefed foreign officials on counterfeit U.S. currency and it's impact on their jurisdictions as well as on ours. Specific financial fraud schemes involving credit cards, debit cards, electronic fund transfers, false financial institutions, "419" fraud, cellular telephone fraud, money laundering and other types of fraud schemes were also explained.

Training programs have varied depending on the targeted foreign participants. Foreign government officials and financial institutions were briefed on applicable fraud schemes and assisted in the identification of systemic weaknesses in their financial systems that lead to fraudulent financial activity. In training foreign law enforcement officials, the Secret Service conducted comprehensive training programs that included additional subjects such as standard and new investigative techniques to confront these crimes.

The goal of the Secret Service foreign training program not only is to train and assist the foreign participants with their financial systems, but also to establish a permanent conduit for information exchange and liaison. The objective of this training is to foster cooperation between jurisdictions in a joint effort to combat counterfeit U.S. currency and financial crimes that impact on their jurisdictions as well as ours.

During 1998, the Secret Service, using INL-provided funds, conducted training for foreign law enforcement and financial institutions in Argentina, Bulgaria, Hungary, Latvia, Nigeria, Poland and Romania. The Secret Service also independently conducted training for law enforcement and financial institutions in Canada, Colombia, France, Malaysia, Nigeria, Peru, Philippines and Thailand.

This past year, Secret Service's Counterfeit division, in conjunction with other U.S. Treasury agencies, conducted briefings on the International Currency Awareness Program in Colombia, the Dominican Republic, Panama, and Mexico.

Financial Crimes Enforcement Network (FinCEN)

FinCEN, the U.S. financial intelligence unit (FIU), has an international training program with three main components: (1) instruction provided to a vast array of foreign government officials, financial regulators, bankers, and others on the subjects of money laundering and FinCEN's mission and operations; (2) training in financial analysis and in the creation and operation of FIUs, modeled after FinCEN and other FIUs throughout the world; and (3) jurisdiction specific advanced financial investigative and analysis techniques courses involving case management exercises. FinCEN continues to work closely with other agencies in supporting U.S. interests overseas by (1) advising foreign government officials on how to establish advanced systems for detecting, preventing and prosecuting financial crimes; (2) recommending ways in which to develop a partnership between government and financial institutions to prevent money laundering; (3) providing specialized training and technical assistance in computer systems architecture and operations; and (4) conducting assessments of money laundering regulations and procedures. FinCEN also works closely with jurisdiction representatives of the Egmont Group of FIUs in providing training and technical assistance to various jurisdictions in establishing and operating their own FIUs.

This past year, FinCEN provided legal and technical assistance to a number of jurisdictions in drafting and revising their anti-money laundering legislation. These jurisdictions included Antigua and Barbuda, Bermuda, Canada, Costa Rica, El Salvador, India, Mauritius, Moldova, Mozambique, Pakistan, Panama, Peru, Romania, Russia, and Thailand. In addition, FinCEN continued to provide assistance to officials of Nepal in preparing a proposal for the establishment of its offshore financial center.

FinCEN hosted delegations from various FIUs including those of Belgium, the Czech Republic, France, Ireland, the Netherlands, Slovenia, Slovakia, Spain, Switzerland, Taiwan, and the United Kingdom. Additionally, representatives from FinCEN visited the FIUs in Aruba, Australia, Cyprus, Greece, the Netherlands, New Zealand, Taiwan, and Turkey to learn about their FIUs and facilitate information sharing and case development.

FinCEN participated in two anti-money laundering and anti-corruption training programs held in San Jose, Costa Rica, for officials from Costa Rica, Guatemala, Panama, Honduras, Belize, Nicaragua, El Salvador and the Dominican Republic.

FinCEN participated in three formal, inter-agency money-laundering assessments in Nigeria, Armenia and the Dominican Republic. In September 1998, FinCEN sent a working level needs assessment team to Latvia, Lithuania and Estonia to meet with law enforcement, banking, and regulatory officials to evaluate the status of their anti-money laundering legislation, to advise the officials on how to establish and operate their financial intelligence units, and to determine possible training needs.

FinCEN worked closely with Mexico throughout this past year by providing support and technical assistance to its FIU. FinCEN's computer specialists worked closely with Mexico's Secretaria de Hacienda y Credito Publico (Hacienda) in furthering the development and expansion of its analytical database capabilities. In October 1998, FinCEN in coordination with the Office of the Comptroller of the Currency conducted a specialized compliance training program for middle level banking and regulatory officials in Mexico. Other presenters included representatives from Hacienda, the FDIC, IRS, and Bank of America.

In December 1998, FinCEN participated in a Brazilian Central Bank sponsored anti-money laundering conference in Brasilia, which focused on the international aspects of money laundering prevention. FinCEN served on a panel consisting of representatives from Uruguay, Italy, Portugal, France and the Financial Action Task Force secretariat. Over 500 persons attended the conference.

International Law Enforcement Academies (ILEA): Budapest, Western Hemisphere, and Bangkok

Five 12-hour training segments were presented at the ILEA in Budapest, Hungary. These segments provided instruction in financial investigative techniques and money laundering. They were attended by participants from the region, including representatives from Hungary, Croatia, and the Former Yugoslav Republic of Macedonia, Estonia, Slovenia, Kaazakstan, Uzbekistan, Kyrgyzstan, Moldova, Ukraine, Russia, Poland, Bulgaria, and Georgia. These courses were a portion of a consolidated interagency curriculum presented by various U.S. law enforcement agencies during an 8-week period.

A similar program is planned for the proposed new ILEA for the Western Hemisphere. The participants would be promising mid-level managers from law enforcement agencies and the judiciaries of South America, Central America, and the Caribbean. This Academy is now in its planning phase and its location is still undetermined.

The ILEA for Southeast Asia was formally established in September 1998 and conducted its first training course in February 1999. The Academy is located in Bangkok, Thailand and will attract candidates from Thailand, Malaysia, Laos, the Philippines, Indonesia, and other jurisdictions in the region.

Treaties and Agreements

Mutual Legal Assistance Treaties (MLATs) allow generally for the exchange of evidence and information in criminal and ancillary matters, including money laundering and asset forfeiture cases. They can be extremely useful as a means of obtaining banking and other financial records from our treaty partners. MLATs, which are negotiated by the Department of State in cooperation with the Department of Justice, are in force with the following jurisdictions: Argentina, Austria, the Bahamas, Canada, Hungary, Italy, Jamaica, Mexico, Morocco, the Netherlands, Panama, the Philippines, South Korea, Spain, Switzerland, Thailand, Turkey, the United Kingdom, the United Kingdom with respect to its Caribbean dependent territories (the Cayman Islands, Anguilla, the British Virgin Islands, Montserrat, and the Turks and Caicos Islands), and Uruguay. MLATs have been ratified by the United States but not yet brought into force with the following jurisdictions: Antigua and Barbuda, Australia, Barbados, Belgium, Brazil, Colombia, the Czech Republic, Dominica, Estonia, Grenada, Hong Kong, Israel, Latvia, Lithuania, Luxembourg, Poland, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Trinidad and Tobago, and Venezuela. Additional MLATs have been signed but are not yet in force with Egypt, Nigeria, and Ukraine. The United States has also signed the OAS MLAT. The United States is actively engaged in negotiating additional MLATS with jurisdictions around the world.

In addition, the United States has entered into executive agreements on forfeiture cooperation, including (1) an agreement with the United Kingdom providing for forfeiture assistance and asset sharing in narcotics cases, and (2) a forfeiture cooperation and asset sharing agreement with the Kingdom of the Netherlands. The United States has asset sharing agreements with Canada, Colombia, Ecuador, Mexico, and the United Kingdom on behalf of Anguilla, the British Virgin Islands, the Cayman Islands, Montserrat, and the Turks and Caicos Islands.

Financial Information Exchange Agreements (FIEAs) facilitate the exchange of currency transaction information between the U.S. Treasury Department and other finance ministries. The U.S. has FIEAs with Colombia, Ecuador, Mexico, Panama, Paraguay, Peru, and Venezuela. Treasury's Financial Crimes Enforcement Network (FinCEN) has a Memoranda of Understanding or an exchange of letters in place with other financial intelligence units (FIUs) to facilitate the exchange of information with FIUs in Argentina, Australia, Belgium, France, the Netherlands, Slovenia, Spain, and the United Kingdom.

The United States has Customs Mutual Assistance Agreements (CMAAs) with the European Community and with the following jurisdictions: Argentina, Australia, Austria, Belarus, Belgium, Canada, Cyprus, the Czech Republic, Denmark, Finland, France, Germany, Greece, Honduras, Hong Kong, Hungary, Ireland, Italy, Japan, Kazakstan, South Korea, Latvia, Mexico, Mongolia, New Zealand, Norway, Poland, Portugal, Russia, Spain, Sweden, Ukraine, the United Kingdom and Yugoslavia. (The U.S. view is that the Socialist Federal Republic of Yugoslavia (SFRY) has dissolved and that the successors that formerly made up the SFRY--Bosnia and Herzegovina, Croatia, the Former Yugoslav Republic of Macedonia, Slovenia, and the Federal Republic of Yugoslavia (Serbia and Montenegro)--continue to be bound by the agreement with the SFRY at the time of dissolution.) All of the agreements are patterned after a Customs Organization Model CMAA. Since assistance can be provided in the enforcement of any laws related to customs, the U.S. Customs Service uses these agreements to assist in the gathering of information and evidence for criminal and civil cases involving trade fraud, smuggling, violations of export control laws, and most recently, in the growing effort to combat narcotics trafficking and money laundering.

Asset Sharing

Pursuant to the provisions of a 1988 U.S. law permitting the United States to share forfeited assets with foreign jurisdictions under certain conditions, 18 U.S.C. § 981(i), 21 U.S.C. § 881(e)(1(E), and 31 U.S.C. § 9703(h)(2), the Departments of Justice, State and Treasury have aggressively sought to encourage foreign governments to cooperate in joint investigations of drug trafficking and money laundering, offering the inducement of sharing in forfeited assets. A parallel goal has been to encourage spending of these assets to improve narcotics law enforcement. The long term goal has been to encourage governments to improve asset forfeiture laws and procedures, so that they will be able to conduct investigations and prosecutions of drug trafficking and money laundering which include asset forfeiture. The United States and its partners in the G-8 are currently pursuing an aggressive program to strengthen asset forfeiture and sharing regimes. To date, Canada, Switzerland, Jersey and the United Kingdom have shared forfeited assets with the United States.

From 1989 through December 1998, the international asset sharing program, administered by the Department of Justice, resulted in the forfeiture in the United States of $371,415,985.88 of which $156,006,456.49 was shared with foreign governments which cooperated and assisted in the investigations. In 1998, the Department of Justice transferred forfeited proceeds to: Canada ($175,752.23); the Cayman Islands ($78,238.74); Costa Rica ($613,019), Israel ($34,954.52), Ecuador ($49,946) and Switzerland ($89,016,022). Prior recipients of shared assets (1989-1996) include: Argentina, the Bahamas, British Virgin Islands, Canada, the Cayman Islands, Colombia, Costa Rica, Ecuador, Egypt, Guatemala, Guernsey, Hungary, Israel, Liechtenstein, Luxembourg, Paraguay, Romania, St. Maarten, Switzerland, the United Kingdom and Venezuela.

Multilateral Activities

Financial Action Task Force (FATF)

The Financial Action Task Force, which was established at the G-7 Economic Summit in Paris in 1989, is an inter-governmental body whose purpose is the development and promotion of policies to combat money laundering. These policies aim to prevent proceeds of crime from being used in future criminal activities and from affecting legitimate economic activities.

The FATF currently consists of 26 jurisdictions and two international organizations(1). Its membership includes the major financial center jurisdictions of Europe, North America and Asia. One of the guiding principles of the FATF is that money laundering is a complex economic crime which cannot be effectively controlled by conventional law enforcement methods alone, and that finance ministries, financial institutions, and regulators must work closely with law enforcement agencies in combating money laundering. Accordingly, the FATF is a multi-disciplinary body, bringing legal, financial and law enforcement experts together into the policy-making process.

In 1998, the FATF focused on several major initiatives. An important step during 1998 was the FATF's decision to extend its mandate for an additional five years (1999-2004) and expand its membership to a limited number of strategically important countries. In April 1998, finance ministers of the FATF member states met and confirmed their intention to build a strong global alliance to combat the laundering of money stemming from criminal activity. The Ministers urged the FATF to foster the establishment of a worldwide anti-money laundering network through the expansion of the FATF membership, the development of FATF-style regional bodies, and close cooperation with all of the relevant international organizations. In May 1998, the G-8 Heads of State welcomed the FATF's plans for its future. In September, the FATF discussed the formal process of contacting potential candidates and accepting new members.

The FATF's second round of mutual evaluations, which commenced in early 1996 and is well underway, is focused on the effectiveness of members' anti- money laundering measures in practice and also assesses follow-up action taken in response to the recommendations for improvement made in the first round. During 1998, the FATF completed 11 second round mutual evaluations(2) In addition, the Council of Europe's (COE) mutual evaluation program, which was endorsed by the FATF, commenced, and seven COE jurisdictions were evaluated in 1998(3). (See section on the COE for more detailed information.) The FATF and the COE will complete their current mutual evaluation programs by the end of 1999.

The FATF continues to encourage and participate in constructive dialogue with relevant international organizations and international financial institutions. In February 1998, Michel Camdessus, Managing Director of the International Monetary Fund (IMF), and Pino Arlacchi, UN Under Secretary General and Executive Director of the UN Office of Drug Control and Crime Prevention, addressed the FATF plenary. Each speaker recognized the mutually supportive relationship between the FATF and his organization, and both offered their assistance to the FATF in estimating the magnitude of the money laundering problem, a current FATF initiative. In September 1998, a coordination meeting of the international organizations concerned with combating money laundering was held in Vienna, Austria. It was agreed that there should be two meetings each year between the FATF, its Steering Group or members and the international organizations. The first meeting between the FATF Steering Group and the international organizations would discuss longer term policy issues, while the other meeting between FATF members and the international organizations would address technical assistance and training issues.

In February 1998, the FATF released its annual money laundering typologies report. The 1998 report discusses current money laundering trends and methods in both FATF and non-FATF member states and includes a special study on money laundering facilitated by non-financial businesses, such as legal service providers, real estate brokerages, and casinos. The report also discusses money laundering countermeasures, and it specifically references the use of geographical targeting orders (GTOs). The use of the gold market for money laundering is also reported. This report can be found on the FATF home page at http://www.oecd.org/fatf http://www.oecd.org/fatf.

Leading up to the May 1998 Birmingham Economic Summit, the G-7 finance ministers called for efforts to be pursued by the Organization for Economic Cooperation and Development (OECD) and the FATF to address harmful tax competition--specifically, to enhance anti-money laundering systems to deal effectively with tax-related crimes. The initiative noted the need to: (1) ensure that obligations to report suspicious transactions continue to apply even where such transactions are thought to involve tax offenses; and (2) allow money laundering authorities to pass information to tax authorities to support the investigation of tax-related crimes. The FATF has agreed to consider this issue and, in January 1999, the FATF Secretariat met informally with the OECD Committee on Fiscal Affairs (CFA) to identify areas of common interest and clarify what is expected of each body.

In June 1998, Mr. Jun Yokota of Japan's Ministry of Foreign Affairs assumed the Presidency for FATF-X (1998-1999). This is the first time an Asian FATF member has served as President of the FATF. The president-elect for FATF-XI is Mr. Gil Galvao of Portugal.

Also in June 1998, a financial services forum was conducted by FATF with representatives from the private financial services sector to discuss areas of common interest and ways to develop better measures to prevent and detect money laundering through the financial community. Topics discussed in the forum included providing feedback to financial institutions and developing anti-money laundering standards for the accounting industry. The FATF circulated its "best practices guidelines" on providing feedback to financial institutions in response to suspicious transaction reporting, requesting comments from the financial services sector.

The work of the Ad Hoc Group on Estimating the Magnitude of Money Laundering continued. This group, chaired by the United States, was established to develop a methodology to measure the money laundering problem from a global perspective. The ad hoc group hopes to create a viable and transferable framework for analysis to facilitate the use of this framework by the more standardized estimates of the dimensions of this threat, better comparisons between and among various jurisdictions and regions, and evaluation of the impact of counter-measures. To date, the committee (which now includes representatives from most of the FATF members) has agreed on a particular set of predicate crimes whose proceeds are deemed to be particularly vulnerable to money laundering. It is in the process of conducting a survey of data sources available in each jurisdiction for measuring the frequency of these crimes. From these data sources, the FATF hopes to estimate the criminal proceeds flowing from these particular crimes, beginning with the crimes of drug trafficking and fraud.

In the G-7 Finance Ministers Conclusions issued prior to the Birmingham Summit, concern was expressed regarding jurisdictions which offer excessive banking secrecy and allow the use of "screen companies" for illegal purposes. The G-7 finance ministers asked the FATF to review this issue and make recommendations on what can be done to rectify these abuses(4). In response, in September, the FATF created an Ad Hoc Group on Non-Cooperative Countries or Territories, which is chaired by Belgium. This group is in the process of developing criteria to define the characteristics of a non-cooperative jurisdiction or territory. The ad hoc group is also expected to identify jurisdictions that pose a serious threat to the international community and recommend steps that can be taken by the FATF or other multilateral entities to encourage such jurisdictions to comply with international anti-money laundering and regulatory standards.

As the FATF continues to pursue this issue, much international attention is currently being focused on abuses and threats posed by jurisdictions which facilitate money laundering through excessive secrecy provisions, inadequate financial services supervisory regimes, and lack of money laundering controls. In addition to the statements issued in the G-7 Finance Ministers Conclusions, the Birmingham Summit Communiqué placed special emphasis on issues raised by international financial centers. The United Nations issued an extensive report in June outlining its findings regarding financial secrecy havens and money laundering.

The work of the three regional Ad Hoc Groups--on the Asia/Pacific Region (Australian Chair), Caribbean and Latin American Region (French Chair), and Central and Eastern Europe (Netherlands Chair)--continues. The regional ad hoc groups serve as catalysts for external relations efforts in each particular region and have been instrumental in creating FATF-style regional bodies.

In October 1998, the FATF co-hosted its second anti-money laundering seminar with the Black Sea Economic Cooperation (BSEC) in Athens, Greece. The conference focused on the international nature of the money laundering problem and money laundering methods specific to the Black Sea Region.

In November 1998, the FATF concluded another successful meeting on money laundering typologies. The purpose of the annual typologies exercises is to provide a forum for law enforcement experts--those primarily tasked with combating money laundering--to discuss recent trends in the laundering of criminal proceeds, emerging threats, and effective countermeasures. Discussions focused primarily on the implications of the new European monetary unit ("the Euro") and large denomination bank notes, non- cooperative jurisdictions and territories, new payment technologies, and the gold market. In addition, the experts identified the continued use of lawyers, notaries and accountants as financial advisors and intermediaries for money launderers. On a similar note, there seems to be an increase in the use of other financial service professionals (e.g., stock brokers) as facilitators in money laundering schemes. In early 1999, the FATF will produce its annual public version of the typologies report presenting the findings from the November exercise.

Asia/Pacific Group on Money Laundering (APG)

The Asia/Pacific Group on Money Laundering (APG) (5) was formally established in February 1997 at the Fourth Asia/Pacific Money Laundering Symposium in Bangkok, Thailand. The establishment of this group is a positive step in recognizing that money laundering is a significant international issue, which affects the Asia/Pacific region, and that jurisdictions within the region need to cooperate in combating money laundering.

In March 1998, the APG held its first official meeting in Tokyo, Japan. The meeting was attended by 25 jurisdictions and seven international organizations and resulted in the adoption of several documents, reflecting progress toward the establishment of effective anti-money laundering policies in the Asia/Pacific region. The APG Terms of Reference were revised and adopted to include reference to three new members--Fiji, India and Korea. The Terms of Reference also reflect the APG's acceptance of the FATF 40 Recommendations as the guiding principles for action for the creation of an effective anti-money laundering framework. The APG Working Party will develop a statement of principles and measures for application of the FATF 40 Recommendations within the region. The APG also warmly welcomed an Asia/Europe Ministerial (ASEM) proposal that seeks to gain further political commitment to combat money laundering within the region and to develop a training and technical assistance program.

In October 1998, the APG held its first typologies meeting in Wellington, New Zealand to consider practical ways of dealing with money laundering. This meeting provided a forum for knowledgeable law enforcement and regulatory experts from the Asia/Pacific region to discuss recent trends in the laundering of criminal proceeds, emerging threats, and effective countermeasures. The meeting focused on the vulnerability and problems of international financial centers (OFCs) and included experts from some South Pacific offshore centers (e.g., Vanuatu, and the Cook Islands). The APG will be conducting its next typologies exercise in Tokyo, Japan in March 1999. This meeting will focus on alternate remittance systems (e.g., Hawala, and underground banking).

Caribbean Financial Action Task Force (CFATF)

The Caribbean Financial Action Task Force (CFATF) continues its important anti-money laundering initiatives in that region. The CFATF requires its member jurisdictions to implement the FATF 40 Recommendations as well as an additional 19 Recommendations specific to the region. For the preceding year ending November 1998, Barbados chaired the CFATF. The Cayman Islands was elected to chair the CFATF in November 1998; the Honorable George A. McCarthy, Financial Secretary of the Cayman Islands, will serve as Chairman until October 1999. The Secretariat of the CFATF is housed in Port of Spain, Trinidad and Tobago.

In October 1996, the CFATF adopted a Memorandum of Understanding (MOU) which delineates its mission, objectives, and membership requirements. Prior to 1998, 22 jurisdictions subscribed to the MOU. In 1998, Dominica, St. Kitts and Nevis, and Suriname signed the MOU, bringing membership in the CFATF to 25 jurisdictions(6). The five Cooperating and Supporting Nations (Canada, France, the Netherlands, the United Kingdom, and the United States) have continued to provide financial and other support to the CFATF since its inception. The staffing of the CFATF Secretariat will change in 1999. Following the end of the current Executive Director's term in February 1999, for the first time, a Caribbean individual will assume the lead position within the Secretariat. Mr. Calvin Wilson, a citizen of Trinidad and Tobago and currently the CFATF's Deputy Director, will assume the Executive Director position. The Deputy Director position will be filled by an official from France, seconded to the CFATF Secretariat by the French Government.

The CFATF mutual evaluation program continues to advance. Nine of the 25 CFATF members have undergone mutual evaluations(7), and the first round of mutual evaluations of all remaining CFATF members is scheduled to be completed by the end of the year 2000. In 1998, the CFATF completed four(8) of the six scheduled on-site examinations. The evaluations of St. Kitts and Nevis and Nicaragua were postponed until 1999 and 2000, respectively.

During 1998, the CFATF continued its energetic program of money laundering typologies exercises to identify current trends in money laundering in the Caribbean and to develop effective countermeasures. The CFATF completed two additional typologies exercises this year, for a total of four since the program was initiated. The first 1998 typologies exercise focused on international finance and discussed potential money laundering through the Caribbean's domestic and offshore financial institutions. The second typologies exercise focused on money laundering through emerging cyber- payment technologies such as digital money, smart cards, and Internet banking. This typologies exercise used a hypothetical scenario set in the year 2005 in order to more effectively frame the potential money laundering vulnerabilities of these emerging payment systems and to spur proactive policy discussions to address this issue. The result of this typologies exercise was a far-reaching series of policy recommendations. In 1999, the CFATF plans to conduct a typologies exercise focusing on the vulnerabilities to money laundering associated with free trade zones.

In October, after reviewing the results of the four CFATF typologies exercises, the CFATF Council of Ministers adopted the FATF's June 1996 Revised 40 Recommendations and called for their immediate implementation. In addition, the Council established a working group to study and revise, if necessary, the CFATF 19 Recommendations. Finally, the Council agreed that the second round of CFATF mutual evaluations will be based upon implementation of the Revised FATF 40 Recommendations, as well as any approved revisions to the CFATF 19 Recommendations.

The CFATF continues to play a key role in the United States/European Union Anti-Money Laundering Training and Technical Assistance Program for the Caribbean. This comprehensive program covering financial, legal, law enforcement, and regulatory measures will be the culmination of combined multilateral efforts to develop a regional training and technical assistance program. A program manager has been identified, and is expected to begin his assignment in March 1999.

Summit of the Americas Follow-Up

Money laundering continues to be a priority item for governments in the Western Hemisphere. This was evidenced in the Second Summit of the Americas held in Santiago, Chile in 1998. In particular, the Heads of State and Governments of the Hemisphere, recognizing the critical role of financial intelligence units (FIUs) in combating money laundering, approved an action plan which called on the hemisphere to: "Establish or strengthen existing, duly trained and equipped specialized central units responsible for requesting, analyzing and exchanging, among the competent State authorities, information relating to the laundering of the proceeds, assets and instrumentalities used in criminal activities (also known as money laundering)."

In another positive development, the Summit participants also recognized the vital role that the private sector, and in particular the financial industry, must play in controlling money laundering. They therefore called upon the financial institutions to "redouble their efforts to prevent money laundering." It is expected that further anti-money laundering initiatives will be considered by the Summit Implementation Review Group (SIRG) in preparation for the next Summit of the Americas.

OAS/CICAD

The Organization of American States Inter-American Commission on Drug Abuse Control (OAS/CICAD) convened its Experts Group on Money Laundering Control twice during 1998. In its first meeting in Washington, DC, the Experts Group focused on development of a training and technical assistance program for member states. The Group developed an implementation plan as well as a comprehensive training curriculum for financial intelligence units (FIUs), police agencies, judges, and prosecutors. The goal of this program is to assist member nations in implementing the Buenos Aires Communiqué Plan of Action, as well as the OAS/CICAD Model Regulations Concerning Money Laundering.

At its October 1998 meeting in Buenos Aires, the Experts Group concluded discussions proposing wide-ranging amendments to the OAS/CICAD Model Regulations Concerning Money Laundering. The proposed revisions bring the Model Regulations in line with the provisions of the FATF 40 Recommendations and the Buenos Aires Plan of Action, and, in some respects, move beyond them. The proposed revisions include:

  • Extending the predicate offenses of money laundering from drug trafficking to other serious crimes;
  • Extending money laundering controls beyond banks to encompass non-bank financial institutions, offshore financial services providers, and professionals such as accountants, lawyers, and brokers or dealers in securities and futures contracts;
  • Requiring the reporting of cross border currency movements above specified amounts to the appropriate authorities;
  • Encouraging the development of audit mechanisms specifically designed to detect and prevent money laundering; and
  • Encouraging jurisdictions to pay special attention to the risks inherent in new payment technologies, such as smart cards and Internet-based financial services.

In May 1999 at its regular session, the OAS/CICAD, will debate and is expect to forward the revised Model Regulations to the OAS General Assembly for final approval.

During 1998, the OAS/CICAD Experts Group also conducted several typologies exercises which explored money laundering threats and countermeasures in the hemisphere. Typologies presentations were provided by member governments, as well as by other international bodies such as the FATF, and by representatives of several private sector banking associations. Also in 1998, OAS/CICAD established a listing of points of contact on its web site as a means of facilitating international and hemispheric cooperation in anti-money laundering efforts.

On September 29, 1998, OAS Secretary General Cesar Gaviria and Inter- American Development Bank (IDB) President Enrique Iglesias signed an agreement to initiate a pilot anti-money laundering training and technical assistance program. This program is designed to strengthen the banking sector against money laundering. This is an important initiative which demonstrates the seriousness which both the OAS and the IDB attach to anti- money laundering efforts in the hemisphere. It is expected that the first of the training seminars for bank supervisors, regulators, and senior private sector banking executives will be conducted early in 1999. The pilot program will be conducted in five jurisdictions, which are yet to be named.

Council of Europe (COE)

The Council of Europe's Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures (PC-R-EV) has made remarkable progress within its first year of operation. One of the catalysts for the formation of the PC-R-EV was the European Union's decision to make anti-money laundering initiatives an EU membership prerequisite. Qualifying candidate jurisdictions will be required to have undergone a Financial Action Task Force (FATF) or Council of Europe/PC-R-EV mutual evaluation, become a party to the 1988 UN Drug Convention and the Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime (the Strasbourg Convention), and indicate that they are implementing the FATF 40 Recommendations.

Since the PC-R-EV first met in December 1997, it has undertaken seven mutual evaluations, held two additional plenary meetings, delivered a training seminar for mutual evaluators, and conducted its first typologies exercise. In its plenary meetings, PC-R-EV has discussed the mutual evaluation reports of Slovenia, Cyprus, the Czech Republic, Slovakia, and Malta. The June 1999 plenary is expected to discuss the mutual evaluation reports of Andorra, Lithuania, Hungary and perhaps Romania. Also a credit to its progress as a FATF-style regional body, all jurisdiction members of PC-R-EV have committed to a schedule of mutual evaluations in order to complete the first round of evaluations by the end of the year 2000.

The first typologies exercise took place on the margins of the December 7- 11, 1998 PC-R-EV plenary meeting. The focus of the exercise was on the laundering of illicit cash proceeds. Much of the discussion focused on the types of crimes in PC-R-EV jurisdictions that commonly generate cash proceeds. Following that, the discussion turned to actual case examples. Although there was less detailed discussion of relevant cases, the PC-R-EV exercise showed promise for the future.

In addition to an established secretariat, this year the PC-R-EV also created a bureau that first met in September 1998 to draft and revise procedures for PC-R-EV. It produced a paper outlining: (1) the steps of COE's mutual evaluation process; and (2) measures to be taken against non- complying members. The PC-R-EV has been recognized within the Council of Europe as an experts body; it was recently asked by the COE/European Committee of Crime Problems to review and provide comments on a proposed protocol to the Strasbourg Convention related to anti-money laundering measures.

United Nations

United Nations General Assembly Special Session on International Drug Control (UNGASS), New York, New York (June 8-10, 1998)

At the UNGASS in June 1998, 185 member states adopted a political declaration agreeing to undertake special efforts against the laundering of money linked to drug trafficking and, for States that have not already done so, adopt by the year 2003 national anti-money laundering legislation and programs. Further, the anti-money laundering addendum to the declaration sets out specific provisions to be implemented and recognises the FATF 40 Recommendations as the standard by which measures against money laundering should be judged.

During a money laundering panel discussion conducted at the UNGASS, the United Nations Office for Drug Control and Crime Prevention (Global Programme Against Money Laundering) distributed its preliminary report entitled Financial Havens, Banking Secrecy and Money Laundering. This publication presented the results of a study on the issues of banking secrecy and financial havens in the context of the fight against money laundering.

United Nations South Asia Conference on Money Laundering, New Delhi (March 3-5, 1998)

This conference was attended by representatives of nine states and several international organizations and bodies, including the FATF, and was designed to improve awareness of the money laundering problem in participating jurisdictions. Among the recommendations agreed to by the conference were increasing cooperation among law makers, ratifying or acceding to the 1988 UN Drug Convention, and taking into account the FATF 40 Recommendations when drafting legislation.

Other International Conferences and Multilateral Activities

Inter-American Development Bank (IDB) Seminar on Asset Laundering, Cartagena (March 17, 1998)

Continuing its support for international anti-money laundering efforts, in March the Inter-American Development Bank sponsored a seminar on banking supervision and asset laundering, as a parallel event to the annual meeting of its Board of Governors. The seminar, held in Cartagena, Colombia, included presentations by expert representatives from the financial sector, academia and multilateral organizations with the objectives of providing a better understanding of money laundering activities in the Western Hemisphere and helping to define the significant role played by multilateral organizations such as OAS/CICAD, FATF, IMF, and IDB.

Joint Meeting of Commonwealth Finance and Law officials on Money Laundering, London (June 1-2, 1998)

The issue of fostering and strengthening regional groups, particularly in Africa, was discussed at this meeting. Participants agreed to create a working group to address the issue of parallel economies.

Financial Intelligence Units (FIUs) and the Egmont Group

Over the past five to eight years, a number of specialized governmental agencies have been created as jurisdictions develop systems to deal with the problem of money laundering. These entities are commonly referred to as "financial intelligence units" or "FIUs." These units have attracted increasing attention with their ever more important role in anti-money laundering programs. FIUs continue to evolve as effective components of anti-money laundering programs both on the domestic and international levels. Jurisdictions that have such units have witnessed their utility and are convinced of their critical role as central repositories of information on money laundering and other financial crimes. FIUs continue to facilitate the conduct of national investigations, as well as serving in a complementary role in the international exchange of financial intelligence.

How FIUs Differ from Other Anti-Money Laundering Agencies

An FIU, quite simply, is a central office that obtains financial disclosure information, processes it in some way, and then provides it to an appropriate government authority in support of a national anti-money laundering effort. Although the definition states that the activities performed by an FIU include "receiving, analyzing, and disseminating" information, it does not exclude other activities that may be performed on the basis of this material. Therefore, an FIU could conceivably perform the activities mentioned in the definition and investigate and/or prosecute violations indicated by the disclosures.

The FIU concept has developed rapidly during the past three years. In spite of the specialized nature of such units, there has often been some confusion between FIUs and other official entities with seemingly similar responsibilities. Police units established for the purpose of investigating financial and white-collar crime--to include money laundering--have often been dubbed "financial investigative units" with the acronym "FIU." These units certainly play an important and useful role in their jurisdictions' overall anti-money laundering effort; however, the simple designation "FIU" does not necessarily mean that the unit functions as defined by the Egmont Group of FIUs.

A number of jurisdictions have resolved this confusion by continuing to call the purely police unit an "FIU" ("financial investigative unit"), while terming the intelligence unit an "FAU" ("financial analysis unit"). Making this distinction then allows some jurisdictions to avoid the word "intelligence" (which has a somewhat negative connotation in certain areas) by focusing on the function of the unit rather than the material with which it works.

The creation of FIUs has been shaped by two major influences: law enforcement and detection.

  • Law Enforcement: Most jurisdictions have implemented anti-money laundering measures alongside already existing law enforcement systems. Certain jurisdictions due to their size and perhaps the inherent difficulty in investigating money laundering, decided to provide a clearinghouse for financial information. Agencies created under this impetus were designed, first and foremost, to support the efforts of multiple law enforcement or judicial authorities with concurrent or sometimes competing jurisdictional authority to investigate money laundering.
  • Detection: Through the FATF 40 Recommendations and regional organizations initiatives such as those of the European Union, the Council of Europe, CFATF, and OAS/CICAD, the concept of suspicious transaction disclosures has become a standard part of money laundering detection efforts. In creating transaction disclosure systems, some jurisdictions saw the logic in centralizing this effort in a single office for receiving, assessing and processing these reports. FIUs established in this way often play the role of a "buffer" between the private financial sector and law enforcement and judicial/prosecutorial authorities. This has, in some cases, fostered a greater amount of trust in the anti-money laundering system, with the FIU serving as the honest broker between the private and government sectors.

Over time, FIUs in the first category have tended to add the disclosure receiving function to their list of attributions. Moreover, regulatory oversight has also increasingly become a function of a number of FIUs. Since a disclosing requirement mandates the receiving agency to deal with the disclosing institution, it was logical that some FIUs would become primary forces in working with the private sector to find ways to perfect anti-money laundering systems.

The Egmont Group

The Egmont Group serves as the principal forum for FIUs to network with one another and to work to identify and solve common problems. Over a three- year period this unofficial organization of FIUs has grown from 14 to 38 FIUs. The following are the 38 jurisdictions that have established operational units which meet the Egmont definition of an FIU: Aruba, Australia, Austria, Belgium, Chile, Croatia, Cyprus, the Czech Republic, Denmark, Finland, France, Greece, Guernsey, Hong Kong, Hungary, Iceland, Ireland, Isle of Man, Italy, Jersey, Luxembourg, Mexico, Monaco, the Netherlands, the Netherlands Antilles, New Zealand, Norway, Panama, Paraguay, Slovakia, Slovenia, Spain, Sweden, Switzerland, Taiwan, Turkey, the United Kingdom, and the United States. This year's meeting in June 1998 of the Egmont Group Plenary Session in Buenos Aires, Argentina resulted in the creation of a fourth working group known as the Outreach Working Group. The Outreach Working Group will work closely with the other Egmont Working Groups (Technology, Legal and Training) and will focus its efforts on providing candidate FIUs and potential FIUs with the proper guidance and consultation in the establishment of their units.

Currently 22 operational units (FIUs) are connected to the Egmont Secure Web. These FIUs continue to derive informational benefits from the "virtual private network" or web site that permits competent authorities to communicate and exchange information securely over the Internet. More Egmont Secure Web connections will be made as units already meeting the Egmont Group FIU definition acquire appropriate software and computer configurations. The Egmont Secure Web continues to serve as an indispensable technological tool, a virtual FIU information highway to access sensitive encrypted and protected information.

Money Laundering Comparative Table

Each year, U.S. officials from the various agencies with anti-money laundering responsibilities meet to assess the money laundering situations in more than 175 jurisdictions, including steps taken or not taken to address those situations, each jurisdiction's vulnerability to money laundering, the conformance of its laws and policies to international standards, the effectiveness with which the government has acted, and the government's political will to take needed actions.

The 1999 INCSR assigns priorities to more than 160 jurisdictions using a classification system consisting of three differential categories titled Jurisdictions of Primary Concern, Jurisdictions of Concern, and Other Jurisdictions Monitored.

INCSR priorities draw upon a number of factors which indicate: (1) the extent to which the jurisdiction is or remains vulnerable to money laundering, notwithstanding its money laundering countermeasures, if any; (2) the nature of the money laundering situation in each jurisdiction (for example, whether it involves drugs or other contraband); (3) the ways in which the U.S. regards the situation as having international ramifications; (4) the situation's impact on U.S. interests; (5) whether the jurisdiction has taken appropriate legislative actions to address specific problems; (6) whether there is a lack of licensing and oversight of international financial centers and businesses; (7) whether the jurisdiction's laws are being effectively implemented; and (8) where U.S. interests are involved, the degree of cooperation between the foreign government and U.S. government agencies. There are approximately two dozen sub-factors that are also considered. These sub-factors (Category Criteria) are explained below.

Note: A government can have comprehensive laws on its books and conduct aggressive anti-money laundering enforcement efforts, but still be prioritized as a Primary Concern jurisdiction if the volume of money laundering continues to be substantial and/or continued vigilance and effective enforcement by the government is essential to the effectiveness of the overall international effort.

When the severity of the money laundering problem places a jurisdiction in the Primary Concern category and other deficiencies exist, this categorization indicates that this jurisdiction needs to take immediate action to develop or enhance its anti-money laundering regime and will receive near-term priority attention from the U.S. government. In categorizing a jurisdiction as a Primary Concern jurisdiction, the U.S. belief is that near-term remedial action by that jurisdiction is needed to address the problems cited in the individual country summaries or reflected in the Comparison Table. Jurisdictions categorized in the Jurisdictions of Concern category need to develop or to review their anti-money laundering regimes, including their offshore licensing, supervisory and regulatory authorities for enhancement to protect their financial systems from criminal abuse. Jurisdictions in the Other Jurisdictions Monitored category are not of immediate concern, but they will be monitored for changes in their money laundering activity.

Category Criteria

As any financial system can be penetrated, every jurisdiction has the potential of becoming a money-laundering center. There is no precise measure of vulnerability for any financial system, but a checklist of what drug money managers reportedly look for provides a basic guide.

  • Failure to criminalize money laundering from all serious crimes or limiting the offense to narrow predicates, such as prior conviction of a drug trafficking offense.
  • Rigid bank secrecy rules that cannot be penetrated for authorized law enforcement investigations or that prohibit or inhibit large value and/or suspicious or unusual transaction reporting by both banks and non-bank financial institutions.
  • Lack of adequate "know your client" requirements to conduct financial transactions, or allowed use of anonymous, nominee, numbered or trustee accounts.
  • No requirement to disclose the beneficial owner of an account or the true beneficiary of a transaction.
  • Lack of effective monitoring of cross-border currency movements.
  • No reporting requirements for large cash transactions.
  • No requirement to maintain financial records over a specific period of time.
  • No mandatory requirement to report suspicious transactions or a pattern of inconsistent reporting under a voluntary system; lack of uniform guidelines from which to identify suspicious transactions.
  • Use of bearer payable monetary instruments.
  • Well-established non-bank financial systems, especially where regulation, supervision, and monitoring are lax.
  • Patterns of evasion of exchange controls by nominally legitimate businesses.
  • Ease of incorporation, especially where ownership can be held through nominees or bearer shares, or where off-the-shelf corporations can be acquired.
  • No central reporting unit for receiving, analyzing and disseminating to the competent authorities large value, suspicious or unusual transaction financial information that might identify possible money laundering activity.
  • Limited or weak bank regulatory controls, or failure to adopt or adhere to the Basle Principles for International Banking Supervision, especially in jurisdictions where the monetary or bank supervisory authority is understaffed, underskilled or uncommitted.
  • Well-established offshore financial centers or tax-haven banking systems, especially jurisdictions where such banks and accounts can be readily established with minimal background investigations.
  • Extensive foreign banking operations, especially where there is significant wire transfer activity or multiple branches of foreign banks, or limited audit authority over foreign-owned banks or institutions.
  • Limited asset seizure or confiscation capability.
  • Limited narcotics and money laundering enforcement and investigative capabilities.
  • Jurisdictions with free trade zones where there is little government presence or other supervisory authority.
  • Patterns of official corruption or a laissez-faire attitude toward the business and banking communities.
  • Jurisdictions where the U.S. dollar is readily accepted, especially jurisdictions where banks and other financial institutions allow dollar deposits.
  • Well-established access to international bullion trading centers in New York, Istanbul, Zurich, Dubai and Mumbai.
  • Jurisdictions where there is a significant trade in or export of gems, particularly diamonds.
  • Jurisdictions with large parallel or black market economies.
  • Limited or no ability to share financial information with foreign law enforcement.

(1) The twenty six FATF member jurisdictions are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States. The two international organizations are the European Commission and the Gulf Cooperation Council.

(2) These are (in chronological order) Switzerland, the Netherlands, Germany, Italy, Norway, Japan, Greece, Spain, Finland, Luxembourg and Ireland.

(3) These are (in chronological order) the Czech Republic, Slovakia, Malta, Hungary, Cyprus, Slovenia and Lithuania.

(4) Note that this issue is separate and is being addressed independently of the harmful tax competition issue also raised by the G-7 finance ministers and discussed earlier in this section.

(5) Membership of the group consists of Australia, Bangladesh, Taiwan, Fiji, Hong Kong, India, Japan, New Zealand, China, Republic of Korea, Philippines, Singapore, Sri Lanka, Thailand, the United States, and Vanuatu.

(6) CFATF membership is as follows: Anguilla, Antigua and Barbuda, Aruba, Commonwealth of the Bahamas, Barbados, Belize, Bermuda, British Virgin Islands, Cayman Islands, Costa Rica, Dominica, Dominican Republic, Grenada, Jamaica, Montserrat, Netherlands Antilles, Nicaragua, Panama, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, Turks and Caicos, Trinidad and Tobago, and Venezuela.

(7) As of December 1998, CFATF had completed and adopted the mutual evaluation reports on the following CFATF members: Cayman Islands, Trinidad and Tobago, Costa Rica, Panama, the Bahamas, Barbados, and the Dominican Republic. In addition, the mutual evaluations of Aruba and the Netherlands Antilles were completed by the FATF.

(8) The four mutual evaluation visitations were to Antigua and Barbuda, Turks and Caicos, Bermuda, and St. Lucia.

Changes in INCSR Priorities, 1998-1999

UpgradesDowngrades Additions
Dominica-Other­PrimaryAruba-Primary­
Concern
Palau­Other
Haiti-Other­ConcernCosta Rica-Primary­Concern St. Lucia­Other
Honduras-Other--ConcernCote D'Ivoire-Concern­Other
Hungary-Concern­PrimaryMorocco-Concern­Other
Latvia-Other­ConcernPeru-Primary­
Concern
Montserrat-Other­Concern
Nepal-Other­Concern
Niue-Other­Concern

Glossary of Terms

"Criminalized Drug Money Laundering": The jurisdiction has enacted laws criminalizing the offense of money laundering related to drug trafficking.

"Criminalized Beyond Drugs": The jurisdiction has extended anti-money laundering statutes and regulations to include non-drug-related money laundering.

"Record Large Transactions": By law or regulation, banks are required to maintain records of large transactions in currency or other monetary instruments.

"Maintain Records Over Time": By law or regulation, banks are required to keep records, especially of large or unusual transactions, for a specified period of time, e.g., five years.

"Report Suspicious Transactions": An "M" (for "mandatory") indicates that by law or regulation, banks are required to record and report suspicious or unusual transactions to designated authorities. A "P" indicates that by law or regulation, banks are permitted to record and report suspicious transactions. An effective know-your-customer policy is considered a prerequisite in this category.

"Financial Intelligence Unit": The jurisdiction has established a central, national agency responsible for receiving (and, as permitted, requesting), analyzing, and disseminating to the competent authorities disclosures of financial information concerning suspected proceeds of crime, or required by national legislation or regulation, in order to counter money laundering. These reflect those jurisdictions that have met the Egmont definition of an FIU.

"System for Identifying and Forfeiting Assets": The jurisdiction has enacted laws authorizing the tracing, freezing, seizure and forfeiture of assets identified as relating to or generated by money laundering activities.

"Arrangements for Asset Sharing": By law, regulation or bilateral agreement, the jurisdiction permits sharing of seized assets with third party jurisdictions which assisted in the conduct of the underlying investigation.

"Cooperates w/Domestic Law Enforcement.": By law or regulation, banks are required to cooperate with authorized law enforcement investigations into money laundering or the predicate offense, including production of bank records, or otherwise lifting the veil of bank secrecy.

"Cooperates w/International Law Enforcement": By law or regulation, banks are permitted/required to cooperate with authorized investigations involving or initiated by third party jurisdictions, including sharing of records or other financial data.

"International Transportation of Currency": By law or regulation, the jurisdiction, in cooperation with banks, controls or monitors the flow of currency and monetary instruments crossing its borders. Of critical weight here are the presence or absence of wire transfer regulations and use of reports completed by each person transiting the jurisdiction and reports of monetary instrument transmitters.

"Mutual Legal Assistance": By law or through treaty, the jurisdiction has agreed to provide and receive mutual legal assistance, including the sharing of records and data.

"Non-Bank Financial Institutions": By law or regulation, the jurisdiction requires non-bank financial institutions to meet the same customer identification standards and adhere to the same reporting requirements that it imposes on banks.

"Disclosure Protection 'Safe Harbor'": By law, the jurisdiction provides a "safe harbor" defense to banks or other financial institutions and their employees who provide otherwise confidential banking data to authorities in pursuit of authorized investigations.

"Offshore Financial Centers": By law or regulation, the jurisdiction authorizes the licensing of offshore banking and business facilities.

"States Parties to 1988 UN Drug Convention": The jurisdiction is a party to the 1988 United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, or the jurisdiction that is responsible for the jurisdiction's international relations has extended the application of the Convention to the jurisdiction.

Country/Jurisdiction Table [Excel file 54.0KB]

Offshore Financial Centers Chart [Excel file 28.5KB]

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