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U.S. Department of State
1996 International Narcotics Control Strategy Report, March 1997

United States Department of State

Bureau for International Narcotics and Law Enforcement Affairs


FINANCIAL CRIMES AND MONEY LAUNDERING

OTHER NEW CONCERNS OCCASIONED BY THE EVENTS OF 1996

Beyond institutional concerns with correspondent banking, offshore banking, private banking and the use of cybercurrency, other new or more intensified concerns emerged in 1996. Combined with the continuing concerns (see below) which we carry from year to year, and those institutional concerns, the events of 1996 persuade that the international law enforcement and financial communities are still at a considerable distance from bringing this problem under control.

The imperative need to engage financial centers in every corner of the world in the campaign against money laundering is emphatically demonstrated by the events in nations and territories whose financial centers are rapidly expanding and in some other countries well outside the traditional circle of major financial centers.

In 1996, we raised the priority rankings for several governments, coupled with expressed concerns about their lack of laws, their vulnerability, etc. The upgraded countries included Russia, Turkey, the Netherlands Antilles, Antigua, Austria, Cyprus, Israel, Dominican Republic, Cambodia, the Czech Republic, South Africa, the Seychelles and Slovakia.

These concerns have not abated, except perhaps in the Seychelles which repealed its law which would have permitted large-scale deposits with few questions asked. Several governments including Antigua, Austria the Czech Republic, and the Netherlands Antilles adopted new laws which have yet to be effectively tested, while legislation in Russia and Turkey has not yet been brought into force. There are political concerns commanding the attention of Israel and its neighbors, but the financial crime situation has deepened every year for the last several years and must be addressed soon. Like Austria, Cyprus, and even Antigua, Israel has been penetrated by money laundering schemes of Russian criminal organizations.

The Dominican Republic, Cambodia and Slovakia, however distinct and unalike they may be in most respects, are just three among a too-large group of governments which present a sharp challenge to the efforts of the major financial center governments to achieve an effective, working global consensus on anti-money laundering laws and policies. Notwithstanding questions of political will, many governments do not have comparable cadres of trained personnel to draft and implement these kinds of laws, even in commercial banking sectors. Training is indispensable to that international initiative, and, as noted elsewhere in this report, FATF, the United Nations, the European Union, the Council of Europe, as well as individual governments like the US and UK, are increasing their commitment to financial crime-related training.

Some Latin and Asian banking sector representatives have expressed concerns that their existence can be imperiled by cooperating with law enforcement authorities unless they are given immunity from civil and criminal prosecution. The Dragon Bank case in Indonesia demonstrated that these concerns may be well founded, unless appropriate legislation is in place. While the UK's Standard Chartered Bank maintained that it provided banking data at the request of the government, there is no "safe harbor" provision in Indonesian law and SCB was found in violation of that government's strict bank secrecy laws. While 15 of the 20 High Priority and 9 of the 16 Medium High Priority countries have laws providing disclosure protection, only 8 of the 22 Medium priority and only 7 of the remaining group of more than 150 governments provide a "safe harbor." In sum, bankers who cooperate with law enforcement are safe from bank secrecy prosecution in less than one-fourth of the world's financial community.

There are also cultural barriers to overcome. Secrecy has been a hallmark of Asian banking for centuries, and Asian bankers and businessmen are simply not accustomed to asking or answering the myriad personal questions which routinely fill American data banks. Criminal enterprise aside, quite upstanding Asian businessmen are accustomed to dealing in large sums of currency, and to moving their funds quite freely around Asia without government oversight. Some governments, like Indonesia, not only lack money laundering laws, they have only the most rudimentary forms of banking regulation. Concerned parliamentarians and government officials in Thailand have tried for the last four years to muster the political support to pass anti-money laundering legislation and success is not yet in sight.

The bounds which governments have self-imposed on their ability to prosecute money laundering cases stemming from a proliferating list of crimes by requiring prior conviction on a drug trafficking offense were evident in many countries.

New or newly-expanded drug trafficking routes through the Asian sectors of the former Soviet Union, including Azerbaijan, Kazakstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan, and similar new routings through the nether regions of Africa, such as Zimbabwe, Swaziland, and Mozambique raise concerns that the primitive banking systems in these countries are quite vulnerable to exploitation by narcotics traffickers and other criminals.

The year saw a proliferation of financial crimes, beyond drug money laundering, continuing a trend of the 1990's which prompted FATF in 1996 to amend its 40 recommendations and advise governments that reporting of suspicious transactions should be mandatory.

Several European officials are voicing concern about the European Monetary Union and the conversion to a single currency, the Euro. The concern is whether sufficient controls have been put into place to prevent or at least diminish conversions of stocks of currency held by crime groups, from national currencies into the Euro and/or the US dollar or even dollars into Euros. Some Dutch officials, for example, prefer that all guilder conversions take place in Holland to reduce such conversions and speculation.

Much of the focus of experts and bodies like FATF has really been on the so-called placement stage, the initial point of entry into the financial system, and, of late, into the layering stage at which funds are moved from non-banks to banks and/or into other monetary instruments. The evidence is that organized crime groups, drug traffickers, and money brokers are now engaging the integration stage, at which they invest their now laundered proceeds into legitimate businesses. Such business can not only generate additional profits and serve as additional conduits through which to move the proceeds of crime, but, in the form of bank acquisitions, give criminal elements great leverage on a given financial system.

Continuing Concerns

Over one hundred governments have ratified the 1988 UN Convention, including the majority of high to medium priority governments. However, inconsistent enforcement of its anti-money laundering provisions is an important factor in the continued high level of global financial crime.

Sixteen of the 64 eligible governments ranked as High, Medium-High or Medium Priority money laundering concerns by the US Government in 1997 have not ratified the 1988 UN Convention. Thus, one-fourth of the world's important financial center countries have not ratified this universal accord six years after its entry into force.

Too many affected or vulnerable governments have not criminalized all forms of money laundering and financial crime, nor given sufficient authority to banking regulatory bodies. There is need for an intensified education and persuasion effort by the world's major financial institutions and organizations, some of which have been allies in the fight against money laundering, to ensure a higher level of compliance on a global basis.

Too many governments continue to place limitations on money laundering countermeasures, particularly the requirement that the offense of money laundering must be predicated upon conviction for a drug trafficking offense.

Too many governments still refuse to share information about financial transactions with other governments to facilitate multinational money laundering investigations.

There is need for enhanced bilateral and multilateral international communications to inform governments and financial systems in some systematic and ongoing way about the methods and typologies of drug and non-drug related money laundering and financial crime.

The layering and integration stages of money laundering are using more sophisticated money laundering techniques. Cash is now being held in bulk or placed into the financial system through exchange houses and other non-bank financial institutions. Not only is it moved through wire transfers but also through innumerable varieties of licit and illicit financial instruments, including letters of credit, bonds and other securities, and prime bank notes and guarantees, without a parallel increase in the capability of the far-flung elements of the world's financial system to verify the beneficiaries or authenticity of such instruments.

The electronic highway now links banks and non-bank financial institutions (NBFIs) worldwide to facilitate expanding world trade and financial services, placing ever-greater priority on banks of origin to establish the identity of beneficial owners and their sources of funds. There are few controls on electronic transfers, and, compounding the problem, the bank or non-bank of origin is increasingly based outside major financial centers in jurisdictions which do not adequately control money laundering and other financial crimes.

Narcotics money launderers have adapted the invoicing schemes used by contraband smugglers and are similarly manipulating commercial trade practices to move and convert illegal proceeds. The vast proceeds generated by both types of crime magnify the need for control mechanisms to address non-drug-related financial crimes.

There is emerging concern about new banking practices, such as direct access banking which permits customers to process transactions directly through their accounts by computer operating off software provided by the bank. This system limits the bank's ability to monitor account activity, such as of joint accounts and pass-through banking schemes which have been a traditional method of layering. Beneficial owners of funds can now manipulate the identity of the ultimate recipient of the funds without the review by bank officers. Pass-through banking by itself poses myriad problems for regulators, by creating the ability of depositors unilaterally to create accounts within accounts, or even to provide quasi-banking services to off-line customers in a kind of bank within a bank. These new bank services can limit the utility of systems in place to have both originator and recipient information travel with the electronic funds transfer.

There is continuing concern that the need for capital of many financial systems overwhelms prudent banking practices and safeguards, with respect to deposits, loans and underwriting practices, and contributes to the increasing problem of takeovers of banks and non-bank financial institutions by criminal groups.

The concern about the concentration of economic power in drug cartels and other criminal organizations, and its potential translation into political power now embraces the Caribbean, Europe, the Middle East and Asia as well as the Americas.

Professional money laundering specialists sell high quality services, contacts, experience and knowledge of money movements, supported by the latest electronic technology, to any trafficker or other criminal willing to pay their lucrative fees. This practice continues to make enforcement more difficult, especially through the commingling of licit and illicit funds from many sources, and the worldwide dispersion of funds, far from the predicate crime scene.

Non-bank financial systems are still unevenly regulated in most parts of the world, especially at the placement stage for cash. The US, which is taking a leadership role in monitoring financial transactions through non-bank financial institutions, is still drafting the regulations that would subject them to federal regulation. Non-bank financial institutions include a wide variety of exchange houses, check cashing services, insurers, mortgagors, brokers, importers, exporters and other trading companies, gold and precious metal dealers, casinos, express delivery services and other money movers of varying degrees of sophistication and capability. Even less regulated are the underground banking systems, like the "chop" houses of the Orient, and the "hundi" and "hawala" systems of Europe, South Asia and the Middle East.

Asset forfeiture laws have not kept pace with anti-money laundering investigative authority, much less with traffickers' wide-ranging schemes. There is a conspicuous gap between the number of institutions and accounts identified by government investigations with money laundering and the authority of many governments to seize and forfeit drug and money laundering proceeds.

Many banking systems remain obliged to inform account holders that the government is investigating them and may seize their accounts, providing criminals the opportunity to move assets and leave town.

There is an urgent need to prescribe corporate as well as individual sanctions, including actions against financial institutions that repeatedly fail to take prudent measures to prevent their institutions from being used to launder money.

There is need for continuous fine-tuning of bilateral and multilateral strategies, which define responsibilities and objectives on a country-by-country basis, and set specific goals for cooperating with the varying money laundering and money transit countries.

Many governments and financial systems continue to rely on voluntary reporting mechanisms, despite the inadequacy of voluntary control systems. Reports from government after government demonstrate that the adoption of mandatory controls has not caused declines in legitimate deposits or resulted in threats from traffickers.

Prudential supervision of many domestic banking systems has improved with respect to money laundering, but foreign branch offices, subsidiaries and other foreign operations continue to figure prominently in drug and other money laundering and financial crime. There is a particular need for major international banks to ensure that governments and regulatory agencies in all jurisdictions they serve are enforcing the same high standards as home jurisdictions and governments.

Many governments seek to superimpose money laundering controls on systems which still employ loose incorporation standards and permit bearer share ownership, which vitiate the impact of these controls.

The implementation of free trade agreements and regional compacts, creating trading and economic zones which transcend national borders could increase the use of international trade as a mechanism for laundering proceeds of criminal enterprises. The impact of the liberalization of border and other customs controls, liberalized banking procedures within these zones, and freedom of access within the zones creates additional potential risks for the future.

There is a need for countries which cooperate on money laundering investigations and prosecutions to share forfeited proceeds so as to reflect equitably their respective contributions. A "finder's keepers" approach is unfair and fails to provide an incentive for multinational efforts.

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