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repealed its law which would have permitted large-scale deposits with few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
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
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.
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
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
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
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
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
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
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
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.