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U.S. Department of State
1997 International Narcotics Control Strategy Report, March 1998

Released by the Bureau for International Narcotics and Law Enforcement Affairs, U.S. Department of State
Washington, DC, March 1998

MONEY LAUNDERING AND FINANCIAL CRIMES

What Is 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 and tax fraud, 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.

Due to the clandestine nature of money laundering, it is difficult to estimate the total volume of laundered funds circulating internationally. Analytic techniques are highly imprecise, involving such measures as multiplying the volume of trade in an illicit activity-such as drug trafficking, arms trafficking, or fraud-by the value of that trade. Such rough estimates place the annual, worldwide value of laundered funds in the range of $300-500 billion.

Weak financial regulatory systems, lax enforcement, and corruption are key factors that make certain jurisdictions particularly attractive for laundering illicit proceeds by international drug trafficking and other criminal organizations, by terrorist groups financing their activities, and by pariah states undertaking financial transactions to evade international sanctions and to acquire technologies and components for weapons of mass destruction.

As the United States assesses a jurisdiction's vulnerability to money laundering, it evaluates the role of the jurisdiction's financial services sector in facilitating illicit financial transactions, including: the laundering or otherwise improper transfer or distribution of funds or maintenance of accounts; the nature and extent of legislation and regulations to prevent illicit transactions; the capabilities and willingness of the government to enforce existing legislation and regulations and the results of the government's actions to enforce those laws; and, the volume of illicit transactions detected by US law enforcement agencies in the financial services sector of that jurisdiction.

There are three elements to the complete laundering of funds, beginning with the placement of currency into a financial services institution ("placement"), continuing with the movement of funds from institution to institution to hide the source and ownership of the funds ("layering"), and concluding with the reinvestment of those funds in an ostensibly legitimate business ("integration").

While countermeasures to all three components of money laundering are important, laundered money is most vulnerable to detection at the placement stage. As a consequence, international regulatory and law enforcement efforts have concentrated especially on developing methods to make it difficult to place illicit funds without detection by developing measures such as suspicious transaction reporting requirements, cross-border monetary declaration requirements, and "know your customer" rules for those accepting cash deposits.

International standards to discourage layering have also begun to develop, through a focus on transparency and through pressure to eliminate techniques such as the use of nominees and numbered accounts to disguise the actual ownership of assets. Of additional importance has been the growing international recognition that bank secrecy rules must give way to permit law enforcement agencies to review financial records in cases where there is an active criminal investigation pertaining to the source of the funds.

Finally, integration of illicit proceeds can be fought through the strengthening of asset forfeiture laws, by which governments can seize the proceeds of criminal activity even when those proceeds have been reinvested in ostensibly legitimate enterprises. Currently, the United States and its international partners are examining methods by which asset forfeiture regimes, and asset sharing among law enforcement agencies of different countries, can be strengthened to place more pressure on money launderers and to make it more difficult for them to assume that after "integration" they have successfully protected their money from the law.

Why Is It Important To Fight Money Laundering?

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 the rapid advances in technology and globalization of the financial services industry. Money laundering can have devastating effects on financial institutions and undermine the stability of democratic nations. Modern financial systems permit criminals to transfer instantly millions of dollars though personal computers and satellite dishes. Money has been laundered through currency exchange houses, stock brokerage houses, casinos, automobile dealerships, insurance companies, and trading companies. The use of private banking facilities, offshore banking, wire systems, shell corporations, and trade financing all have the ability to mask illegal activities. The criminal's choice of money laundering vehicles is only limited 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 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. Money launderers can impact countries 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, but it also deprives criminals of the means to commit other serious crimes.

Many countries around the world already engage in a concerted effort to combat money laundering and other financial crimes. Through the enactment of counter-money laundering laws, bilateral and multilateral agreements, and other cooperative efforts, nations have joined together to foster an international awareness of the seriousness and threat of this criminal activity.

With a complex and sophisticated financial system that is often a target for money laundering, the United States is working hard both at home and abroad to fight this crime. An increasing number of countries have also moved to deny criminals unfettered access to their financial systems. While much progress has been made, there are still nations that are not yet adequately addressing this problem. And the international criminal is taking full advantage, moving vast sums of illicit money through the world's financial systems. International criminals know no geographic boundaries and still operate in "safe haven" jurisdictions that permit, or even encourage, this criminal activity.

If the United States, along with its international partners and allies, is ultimately going to be successful in this fight, then we must make it even more difficult for criminals. Efforts must focus on both those areas where criminals are now operating and where they will try to infiltrate in the future, and we must foster cooperation with those nations that, heretofore, have allowed criminal enterprises to flourish unchecked.

Money Laundering Trends and Typologies

Current Global Trends in Money Laundering

Several general observations can be made regarding the current characteristics of money laundering. One, drawn from the two most recent Financial Action Task Force (FATF) typologies exercises, is that the global nature of the money laundering phenomenon has rendered geographic borders increasingly irrelevant. Launderers tend to move their activity to jurisdictions where there are few or weak money laundering countermeasures. Two, no significant new methods of money laundering have been identified during the past year, and a number of traditional money laundering techniques, such as smurfing and the use of offshore businesses, continue to be prominent methods for hiding the proceeds of crime. Three, while changes continue to be observed in usage of various traditional money laundering methods, there is a growing trend of money launderers moving 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.

Four, 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 countries there are no cross-border controls on the movement of cash, and it is relatively simple for launderers to take large sums of cash by road to neighboring countries. 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 mostly attributable to the success of anti-money laundering measures in banks and other financial institutions.

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-who utilize a variety of vehicles to mask the origin and ownership of tainted funds. The use of shell companies, usually incorporated in offshore jurisdictions, is a common technique. Laundering of accounts held by relatives or friends is also popular.

International Gold Trade

The international gold trade is being used to launder significant amounts of criminally derived funds. There are many reasons for gold's popularity with money launderers. It is a readily acceptable medium of exchange, it offers easy anonymity, and the trade is readily manipulated. Gold is one of the only commodities that acts very much like currency.

There are many different scenarios for the laundering of funds via the purchase of gold. For example, in the US, illicit cash from street drug sales can be accumulated and then laundered by purchasing gold. A drug trafficker in the US could manipulate import records to launder illicit funds by: (1) importing gold at higher than market price; (2) importing gold at the market rate, but substituting it with a lower priced metal (for example, with gold-plated lead bars); (3) overstating the quantity of the gold imported; or (4) importing and paying for merchandise legitimately, but "selling" or giving back the merchandise to the exporter. These schemes allow criminals to move large sums of money out of the US as payments to a foreign "supplier."

The next step in the laundering cycle is to consolidate the gold purchases. One of the unique characteristics of gold is that it can be easily converted into its various forms such as bars, jewelry, and scrap. United States law enforcement sources indicate that most major gold dealers/brokers have several bookkeeping accounts-gold accounts, silver accounts, dollar accounts, and local currency accounts. An easy method to layer illegal funds is simply to transfer the gold on a gold broker's books to these other accounts. This method makes it extremely difficult for criminal investigators to trace the trail of illicit funds. There is an obvious need for countries to have better tools to combat this problem and to monitor the international movement of gold.

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, US currency to black market peso brokers in Colombia who, with their US-based agents, place the US currency into US bank accounts while trying to circumvent the US Bank Secrecy Act (BSA) reporting requirements. The exchangers then sell monetary instruments drawn on their bank accounts in the US 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:

  1. A Colombian drug cartel arranges the shipment of drugs to the United States;
  2. The drugs are sold in the US in exchange for US currency;
  3. The cartel sells its US currency to the Colombian black market peso broker's agent in the United States. The US 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 US dollars into the US financial system;
  4. Once the dollars are delivered to the US-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;
  5. The Colombian broker and his agent now assume the risk for introducing the laundered drug dollars into the US banking system, usually through a variety of surreptitious transactions;
  6. The Colombian black market peso broker now has a pool of laundered funds in US dollars to sell to Colombian importers who use the dollars to purchase goods, either from the US or from other markets; and
  7. Finally, those goods are transported to Colombia, often via smuggling in order to avoid applicable Colombian law.
Black Market Peso Exchange

Money Laundering Activity in the US

The United States continues to have a serious money laundering problem because of the complexity, strength, and stability of our economy and financial system. Examples of money laundering techniques identified by US law enforcement during the past year appear to indicate that the same techniques-structuring, smuggling, and currency exchange-continue to be among the most utilized within the United States. Structuring involves the deliberate division of large amounts of cash into transactions amounting to less than the $10,000 currency reporting threshold in order to evade the BSA reporting requirement, and it still plays a major part in many large scale US money laundering schemes. Increased scrutiny by US banks has caused the actual structuring level to be reduced to less than $3,000 in most cases.

Asset or Monetary Instrument Purchases with Cash Proceeds

One important money laundering technique identified in the US 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 US 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

Some US law enforcement agencies believe that private or personal banking service representatives, i.e., bank employees who provide special services to high-value customers, may be vulnerable to money laundering. Several examples have included instances of private banking representatives establishing bank accounts for foreign nationals without requesting adequate customer identification, and one 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 as sites for money laundering in the US despite a number of efforts at both federal and state levels. NBFIs subject to the BSA include brokers and dealers of securities, the US Postal Service, money order vendors, casinos, money transmitters, check cashiers, 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 US 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, US law enforcement continues to cite bureaux de change and money transmitters as most heavily involved in laundering operations.

Non-Financial Businesses and Professions

The United States has increasingly seen 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.

One US case involved a prominent attorney in a large US city whose practice centered on operating a money laundering network which used domestic and international financial institutions, especially in offshore jurisdictions. The offshore institutions were located in Bermuda, the British Virgin Islands, the Cayman Islands, Isle of Man, and Jersey. The attorney had clientele ranging from drug dealers to tax evaders. One client was responsible for an $80 million dollar insurance fraud in which the attorney assisted him by transferring the money into financial institutions in countries with little or no anti-money laundering provisions. The attorney would establish accounts in these various offshore banks under false corporate and individual names. The illicit funds would be deposited in the form of cash and various types of checks. This money was then commingled by use of wire transfers throughout various other accounts which the attorney controlled. It is perhaps significant that because of the lawyer's status as a prominent attorney, domestic banks did not question the nature of the transactions being conducted.

In another US case, the sole owner of a now defunct insurance company, which had become the leading insurer of student accident and school association liability coverage in the United States, was convicted by a federal jury on money laundering and related charges in a scheme defrauding clients of over $1.6 million in trust fund monies that he had misappropriated from state school activities associations. This amount represented money paid by the various state school associations into a single common pool of trust funds that the defendant contracted to maintain for the associations' exclusive use as a self-risk retention liability program. It was established during trial that the defendant was effectively operating a Ponzi scheme and was not properly funding the trust fund pool. A "Ponzi scheme" is defined as an investment swindle in which some early investors are paid off with money put up by subsequent investors in order to encourage additional and larger risks. The defendant laundered the monies by commingling and integrating the fraudulently obtained insurance premiums into his own accounts and using the monies to pay his business and personal expenses instead of adequately funding the trust fund, and he disguised the laundering by creating false financial statements.

New Payment Technologies

Electronic money (e-money) has the potential to make it easier for criminals to hide the source of their proceeds and 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 countries have reported the increased use of Internet banking and gambling via the Internet. 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. Countries should pay close attention to the emerging threats made possible by these and other new payment technologies being used in money laundering schemes, and they should consider developing of preventative countermeasures. Moreover, even legitimate banking and gambling through the Internet raises 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 thoroughly applied 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 countries 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 reporting and 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 which look at specific governments and specific financial systems.

Over time, a number of specific continuing actions are needed to keep pace with the dynamics of money laundering in a high-tech world. Continuous action is needed on each of the following categories in 1998 and for the foreseeable future:

  1. 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.
  2. 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.
  3. Analysis of Money Management Practices. We need improved information from more countries on what factors influence drug traffickers and their money managers to use particular systems in specific countries, to keep reserves in cash and other monetary instruments, to invest rather than park funds. Interviews of arrested drug money managers are producing detailed profiles of money management schemes. The best data so far applies to the cocaine trade, but we need to develop the same level of knowledge about heroin and marijuana syndicates.
  4. 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 non-drug related money laundering and other financial crimes on the other, and 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.
  5. 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.
  6. Eliminating Systemic Weaknesses. Banks need to maintain similar records on 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.
  7. 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 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.
  8. Analyzing the Impact of Money Laundering on National Governments and Economies. We need more analysis of the impact of a country's political and structural factors on its receptivity to money laundering and more analysis of the impact of money laundering and 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 of entities or states identified as major problems.
  9. 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. They 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.
  10. Continuing to focus attention on offshore banking. The Financial Action Task Force (FATF), working with the Offshore Group of Banking Supervisors (OGBS) and other relevant organizations, have been quite effective in working together, and some of offshore banking centers are either members of FATF or the Caribbean Financial Action Task Force (CFATF) 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 offshore banks, and OGBS should be supported in its efforts to include as many offshore banking centers as possible within its membership and a parallel effort to evaluate progress by its members.
  11. 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 is also beginning to implement such a process for jurisdictions in the Newly Independent States of the former Soviet Union (NIS) and in Central and Eastern 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, Africa and the Middle East.
  12. 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 countries. 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 banking supervisors to determine that the banks they supervise have adequate policies, practices and procedures in place, including strict "know your customer" rules, that promote high ethical and professional standards in the financial sector and prevent the banks from being used, intentionally or unintentionally, by criminal elements. Supervisory authorities throughout the world will be encouraged to endorse the Principles by no later than 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 countries in implementing the Principles.
  13. 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.
  14. Detecting Counterfeit Instruments. Governments and banking systems must be more vigilant in efforts to detect counterfeit currency and other monetary instruments. The 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.
  15. 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 guarantees. The history of such frauds suggests a need for a clearinghouse which can assist the financial services industry in identifying customers and authenticating documents.
  16. Ratifying and Implementing the l988 UN Drug Convention. The United Nations Drug Control Program (UNDCP) should intensify its efforts to ensure that all significant financial center countries are implementing fully the anti-money laundering and asset forfeiture provisions of the 1988 UN Drug Convention. As an immediate priority, UNDCP should focus on securing ratification or accession of the significant financial center governments which have not yet become parties to the Convention.
  17. 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.

US Money Laundering Countermeasures

In the United States, nearly 5,000 personnel-from at least 75 agencies-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 US 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 US 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, US agencies have turned their attention to examining Suspicious Activity Reports (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 which may be money laundering schemes reported by banks 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.

Geographic Targeting Orders

Money transmitters, sometimes referred to as money remitters, are businesses which receive money-usually cash-from customers and arrange for payment to designated recipients in exchange for a commission of up to 10 percent of the value of the transfer. They provide a valuable, legitimate financial service and traditionally serve the "unbanked" segment of the population, typically new immigrants, or other persons who do not maintain bank accounts.

However, in the United States, Colombian drug cartels have been suspected of using certain money transmitters in the New York City metropolitan area to launder their drug profits. Evidence gathered by law enforcement authorities initially indicated that 12 state-licensed money transmitter companies in the New York metropolitan area and their agents were particularly vulnerable to abuse by cartel money launderers. Under the Bank Secrecy Act, a Geographic Targeting Order (GTO) was issued on August 7, 1996 against these 12 money transmitters and their 1,600 agents.

A GTO is a 60-day tool used to impose stricter reporting and record keeping requirements for a limited time period by specified financial service providers in a certain geographical area. The Colombia GTO required the transmitters in question to report all cash remittances to Colombia of $750 or more. The reporting amount was set at $750 so as to not interfere with the average legitimate international remittance of $200 to $500. The original GTO-expanded to include a total of 23 licensed transmitters and approximately 3,500 agents-was extended six times, finally expiring in October 1997. The GTO was expanded to include a total of 23 licensed transmitters and approximately 3,500 agents.

The Colombia GTO caused an immediate and dramatic reduction in the flow of narcotics proceeds to Colombia through New York City money transmitters. The targeted money transmitters' business volume to Colombia dropped approximately 30 per cent. Transmitter business to Colombia declined even from money transmitters not subject to the GTO, suggesting that much of the money remitted to Colombia was controlled centrally by high-level cartel money brokers.

Also during the first six months of the GTO, US law enforcement agencies observed a marked increase in interdiction and seizure activity of cash at east coast US borders-over $50 million in the six-month period, approximately four times more than in prior years.

This GTO also had a significant impact on money laundering activity among the targeted transmitters. Several stopped sending funds to Colombia or went out of business altogether. Approximately 900 agents of these money transmitters, often storefront businesses, closed their doors or moved without leaving a forwarding address. Several money transmitter agents have pled guilty to structuring transactions to avoid the reporting requirements, and law enforcement authorities made numerous additional arrests.

On August 22, 1997, the Department of the Treasury issued two new GTOs (the Dominican Republic GTOs) targeting cash-purchased money remittances of $750 or more to the Dominican Republic. The Dominican Republic GTOs apply to 21 money remitters and their agents in Puerto Rico and the New York City metropolitan area who in recent years have been remitting annually hundreds of millions of dollars to the Dominican Republic. The terms of these GTOs parallel those of the one focused on remittances to Colombia. The Dominican Republic GTOs were made effective on September 2, 1997 for an initial 60-day term; they have been renewed twice, so they are scheduled to expire on February 28, 1998. Issuance and renewal of the Dominican Republic GTOs represent the first time that a GTO has been used in Puerto Rico. Initial reports indicate that the Dominican Republic GTOs have dramatically reduced the volume of cash remittances from Puerto Rico to the Dominican Republic.

Development of Anti-Money Laundering Accounting Standards

The United States has followed with interest the development in foreign jurisdictions of accounting standards specifically designed to counter money laundering within financial institutions. As a result, the United States has embarked on the development of appropriate accounting standards to counter money laundering within financial institutions, and has created a sub-group of the Bank Secrecy Act Advisory Group to focus efforts and attention on this process. Members of the sub-group include the primary US regulator of the accounting industry, the Securities and Exchange Commission, the Controller General of the United States, the US Department of the Treasury, large accounting firms, and foreign experts in this area.

Targeting Cash Proceeds Money Laundering

In 1997, the Departments of Justice and the Treasury co-sponsored for the first time two major anti-money laundering conferences. The objectives of these joint conferences, held in Washington, D.C., were to acquaint the participants with new anti-money laundering developments both at home and abroad and to seek input for attacking, through a coordinated financial sector targeting approach, the laundering of billions of dollars of drug proceeds in, through and out of the United States. The first conference, held in May 1997, was attended by approximately 160 representatives from the US Attorneys' Offices and federal and state law enforcement agencies from 14 core money laundering districts, as well as representatives from the financial regulatory authorities.

The conference presentations reviewed recent anti-money laundering developments including: the use of the New York City/New Jersey GTO; the use of FinCEN advisory notices to alert banks and other financial institutions to suspicious financial activities such as the use of foreign bank drafts; suspicious activity reporting by banks and nonbank financial institutions; wire transfer record keeping requirements for banks and other financial institutions; the proposed FinCEN regulations with respect to money service businesses; US Postal Inspection Service, US Customs Service (USCS) and the federal regulators' recent anti-drug proceeds money laundering initiatives.

A follow-up conference was held in December 1997 and was attended by more than 200 Assistant US Attorneys and federal and local law enforcement agents from 20 districts. Immediately preceding the second conference, interagency working groups convened to examine and discuss two specific money laundering methods: the use of money orders to launder drug cash proceeds and the shipping of bulk cash into and out of the United States. Representatives from these working groups reported their findings to the conference and made recommendations to enhance enforcement in these areas. The money order working group was led by a representative of the US Postal Inspection Service. The bulk cash working group was led by representatives of the USCS.

Like the first conference, the second conference provided an opportunity for money laundering prosecutors, agents and forfeiture attorneys from around the country to examine the money laundering issue on a national level and to coordinate their efforts to maximize the results from their investigations and prosecutions. By spending a significant amount of time discussing the Black Market Peso Exchange scheme, law enforcement actions on a local level take on more significance as they become part of a larger picture. Similarly, by increasing awareness of law enforcement and regulatory tools, as well as legal developments in foreign countries, the participants were able to begin to prepare a coordinated plan of attack against money laundering both domestically and internationally.

In October and November 1997, the Attorney General issued three memoranda to the 94 US Attorneys, the Director of the FBI, and the Administrator of the DEA, stating:

Laundering the billions of illicit dollars produced on the streets of our cities requires a highly sophisticated and tightly controlled financial structure for use by the cartels producing, transporting and selling their illicit products. At the same time, where organized criminal activity generates its profits in the form of cash, the sheer volume of this illicit cash and the need of the enterprise to enter it into the legitimate financial system are vulnerabilities for that criminal enterprise, and could provide law enforcement with perhaps its best opportunity to target those illicit proceeds.

Accordingly, she directed these Department of Justice components to give their immediate attention as follows:

Where cash proceeds money laundering is a significant problem in your district, allocate the personnel, time and effort necessary to develop interagency expertise to identify, target, and take a comprehensive approach to dismantling the drug money launderers' use of financial sectors, or their methods of moving the cash physically in bulk.

Enforcement Cases

Mexican Drug Conspiracy

The United States Customs Service completed a civil investigation that resulted in the seizure and forfeiture of $9,041,599 in narcotics proceeds from the former Mexican Deputy Attorney General Mario Ruiz Massieu. From December 1994 to March 1995, Inspector General Jorge Stergios of the Mexican Attorney General's Office of Mexico transported more than $9,000,000 in cash from Mexico into the Houston Intercontinental Airport in Texas. Stergios transported this cash in suitcases and cardboard boxes during more than twenty trips into Houston. Stergios completed the required Currency and Monetary Instruments Report on each trip. The cash was subsequently deposited into an account held by Ruiz Massieu at the Texas Commerce Bank (TCB). The TCB completed the required Currency Transaction Report on each transaction.

In March 1997, a federal district judge ruled that there was probable cause to believe that Ruiz Massieu and Stergios were involved in a drug conspiracy with Mexican drug traffickers and other Mexican law enforcement officers. A federal jury then determined that almost $7.9 million of the monies deposited in TCB had come to Ruiz Massieu as a result of bribes paid by the drug traffickers and, as such, should be forfeited to the United States.

Illegal Importation of Controlled Refrigerant Gas

Refrigeration USA, a Miami and Hallandale, Florida based corporation, and its president, along with a bookkeeper and an import/export clerk, all pled guilty-only six days into a projected six week jury trial-to conspiring with others to import the controlled refrigerant gas, CFC-12, without holding consumption allowances required by the Federal Clean Air Act. They orchestrated an involved scheme featuring bogus bills of lading filed with the USCS, the Environmental Protection Agency, and the IRS. The defendants purchased CFC-12 from a variety of sources in Europe and caused payment for the gas to be made from accounts opened under fictitious names in Switzerland and the Channel Islands. The president of the corporation falsely claimed to hold a virtually exclusive license to import the gas into Florida, thus accounting for the inordinate amounts of money flowing through the accounts.

The defendants also employed nominee corporations in the Turks and Caicos islands to conceal their activities from US authorities and to further their efforts to impede the IRS in collection of excise taxes due to domestic sale of the gas. During the presentation of evidence in the criminal trial, the government employed bank records to illustrate the illegal transactions. The documents were provided through the cooperation of the Turks and Caicos pursuant to a MLAT between the United States and the United Kingdom on behalf of Turks and Caicos.

The plea agreement by the president of the corporation required the immediate surrender to the United States of over $4,470,000 in cash held in offshore accounts, the forfeiture of real property in Miami and London, England, valued at over $3,400,000, the forfeiture of stock in a domestic bank, and the surrender of 11,200 thirty-pound cylinders of gas seized by the USCS in December 1994, which had a market value of $6,700,000. The United States District Court levied a fine of $37 million and ordered payment of $30 million in delinquent taxes.

The importation of CFC-12 is subject to strict regulation by the US Environmental Protection Agency. The United States has international treaty obligations under the Montreal Protocol on Substances that Deplete the Ozone Layer to reduce and/or phase out the production and consumption of ozone depleting substances, including CFC-12. In order to protect the environment from depletion of the ozone layer, Congress imposed significant excise taxes on the sale or use of such chemicals. In 1993, the earliest year of the activity identified in the indictment, the excise tax was $3.35 per pound. Thereafter, the excise tax increased each year by an additional dollar to $5.35 per pound in 1995. The US Attorney in Miami, Florida noted that this is one of the largest forfeitures of assets achieved in an environmental crimes case.

Queens Money Remitter

On July 22, 1997, one of Queens, New York's largest money remitters was indicted for allegedly sending hundreds of millions of dollars, most of which were laundered drug profits, to Colombian cartels through branch offices in Queens. The company and its former chief executive officer were indicted for laundering narcotics proceeds and for structuring financial transactions, and the government seeks the forfeiture of at least $10 million, representing the proceeds of the money laundering and structuring activities. The CEO eventually pled guilty to conspiracy to launder money.

The case was investigated jointly by the USCS and the New York Police Department (NYPD) under the auspices of the El Dorado Task Force. The investigation arose from allegations of money laundering and structuring cash deposits in amounts less than $10,000 so as to avoid the Bank Secrecy Act (BSA) filing requirements. The government alleges that the defendants remitted in excess of $775 million to Colombia, the bulk of which consisted of narcotics proceeds. As the investigation progressed toward the indictment of the company and its CEO, approximately twenty-five persons were convicted on money laundering charges over a three-year period. Collectively, these agents accounted for more than $195 million of the funds remitted to Colombia.

Nigerian Fee Scam

Three Nigerian nationals were indicted on charges that they conspired with others to defraud several German nationals out of more than $800,000. This Nigerian scheme involved the promise to release $22.3 million on deposit with the Central Bank of Nigeria once certain fees had been paid. Approximately $500,000 in fees were initially paid in three installments by the Germans directly to an account in London, England. The defendants then made an additional demand for a 1.5 per cent "cable and communication charge" totaling $330,000. On May 13, 1994, $330,095 was wire transferred from a Luxembourg bank, an account belonging to the victims, to one of the defendant's personal accounts at Boatmen's First National Bank of Oklahoma, Oklahoma City, Oklahoma. After the money was credited to the account, the defendant was directed by the other co-defendants to conduct numerous transactions to dissipate the funds. This included the purchase of several luxury cars, a night club, and several large wire transfers to the People's Republic of China, England, and Washington D.C. The German victims never received the $22.3 million.

American Express Bank International

In June 1994, Antonio Gerald and Lourdes Reategui, officials with American Express Bank International (AEBI), were convicted on money laundering conspiracy and other charges for laundering the drug trafficking proceeds of the notorious Mexican drug trafficker Juan Garcia Abrego. The Giraldi investigation resulted in leads that Giraldi and Reategui were also laundering drug trafficking proceeds for a Texas man later indicated on drug trafficking, money laundering and related charges.

In February 1989, the Texas defendant had become a client of Giraldi and Reategui at Bankers Trust, (New York) and later at AEBI. Giraldi and Reategui created a series of offshore holding companies for the defendant and opened bank accounts in the names of the various offshore companies, into which the defendant secreted his drug trafficking proceeds via electronic wire transfers. From February 1989 through 1993, the defendant wire transferred approximately $17 million into these accounts. All of the $17 million was traced to Mexican banks or to accounts held by Mexican banks in US banks in El Paso, Texas. During 1993, the defendant liquidated the funds held by his offshore companies through wire transfers to Mexican bank branches and to another offshore investment company. The US government utilized Mutual Legal Assistance Treaty (MLAT) requests to Mexico, Switzerland, and the Cayman Islands during the investigation to gather information and documentary evidence for prosecution, as well as to attempt to identify the disposition of the funds after the defendant liquidated his accounts in l993.

An investigation of the Texas defendant had been initiated by the USCS Financial Crimes Task Force (Operation Costa Rica) comprised of the USCS, IRS-CID, DEA, and the Pharr, Texas, Police Department. The investigation revealed that from at least 1986 to 1996, the defendant was involved in the transportation of large quantities of cocaine from Mexico into the United States. The defendant's drug trafficking activities ranged in area from South Texas throughout the southwest border region to Los Angeles, California, and included the transportation of 21 tons of cocaine, seized at Sylmar, California, in September 1989.

On August 13, 1996, a federal grand jury in Brownsville, Texas returned a five-count indictment charging the Texan defendant with conspiracy to launder money, money laundering, narcotics and criminal forfeiture charges. On March 27, 1997, he pled guilty to money laundering and drug trafficking conspiracy charges. On June 30, 1997, he was sentenced to life in prison.

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 two 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 countries, [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, National Security Council, 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 US 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 PDD-42 has been the imposition of sanctions under the International Emergency Economic Powers Act (IEEPA), attacking 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. On January 15, 1997, the Treasury Department identified an additional 21 businesses and 57 individuals determined to be directly involved with illegal traffickers and their so-called legitimate business fronts. Over the past two years, a total of 426 individuals and businesses have been subjected to these IEEPA sanctions. 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.

United States agencies continued to identify money laundering centers that have important implications for US national security and where expanded cooperation would significantly strengthen global anti-money laundering efforts. Several of these centers have been approached by the United States in an effort to increase cooperation bilaterally as well as multilaterally and to reduce the threat posed by money laundering.

Combating the rise of international crime requires far-reaching cooperation among US agencies as well as with other nations. Under PDD-42, US agencies have worked together to collaborate with foreign law enforcement and other government authorities to support US law enforcement abroad, seize accounts, and prosecute, convict, and imprison criminals. United States agencies 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.

Bilateral Activities

Training and Technical Assistance

During 1997, a number of US law enforcement and regulatory agencies provided training on money laundering countermeasures and financial investigations to their law enforcement, financial regulators, 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 US locations as well as within the countries to which the programs were targeted.

Department of State

The Department of State's Bureau of International Narcotics and Law Enforcement Affairs (INL) has developed a fiscal year 1997 $36.2 million dollar program for providing law enforcement, rule of law, and central bank training and assistance to emerging democracies. A prime focus of the training program is a multi-agency approach to addressing international financial crimes, law enforcement development, organized crime, 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 1997, 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 identified countries 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 proved successful in various parts of the globe, from Central and South America to Russia, the Newly Independent States (NIS) of the former Soviet Union, and Central Europe. INL provides funding for many of the 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) is extensively involved in multi-agency international money laundering training programs. The USCS has developed and implemented anti-money laundering and asset forfeiture programs for law enforcement and banking officials in Argentina, Venezuela, Russia, Vietnam, Indonesia, Cyprus, and Jersey. As participants in the multi-agency money laundering assessments, USCS has met with officials in Kazakhstan, Kyrgyzstan, Uzbekistan, Romania, Cyprus, and Antigua to evaluate the extent of money laundering and to determine possible training needs.

As co-hosts with the Internal Revenue Service Criminal Investigation Division (IRS-CID), USCS has conducted money laundering training for officials in Brazil, El Salvador, and Barbados.

USCS also participated in two money laundering and anti-corruption training programs held at the International Law Enforcement Academy in Budapest, Hungary, for officials from Uzbekistan and Kazakhstan. In addition, USCS conducted United States Agency for International Development (USAID) grantee sponsored training for central bank and law enforcement officials in Kiev, Ukraine.

USCS co-hosted with the Drug Enforcement Administration (DEA) money laundering and asset forfeiture training for law enforcement officials and prosecutors from Mexico, Israel, Costa Rica, Ecuador, and the Bahamas. USCS has also participated with the US Secret Service in training for Russian bank officials, customs officers and law enforcement officials.

In addition, USCS has briefed high-level government officials from Panama, Thailand, Italy, Japan, Paraguay, India, Malaysia, Ireland, Denmark, Singapore and Brazil, as well as the Taiwan authorities, concerning USCS money laundering programs and initiatives.

Internal Revenue Service (IRS)

The IRS Criminal Investigation Division (IRS-CID) continued to play a significant role in multi-agency international training and technical assistance programs to foreign law enforcement agencies during the past year. The training included instruction in financial investigative techniques, utilization of suspicious activity and currency transaction reports, and management of multi-agency money laundering investigations.

A Suspicious Activity Report/Currency Transaction Report training seminar was conducted by IRS-CID representatives in Mexico for money laundering law enforcement investigators and members of the Hacienda.

Regional seminars on anti-money laundering were also provided to executives of law enforcement investigative agencies of Trinidad and Tobago, El Salvador, and Brazil. The focus of these seminars was to establish an awareness of the overall threat posed from money laundering and its impact on these regions. The overall goal was to foster an atmosphere of cooperation and exchange between these countries and the United States in a joint effort to combat global money laundering activities.

IRS-CID conducted a financial investigative techniques course in St. Petersburg, Russia. The presentation was directed to high and mid-level directors and managers of the Tax Police. This training was conducted under the auspices of the Freedom Support Act (FSA).

A financial investigative techniques course was also provided to investigative officials of Estonia, Latvia and Lithuania at the Federal Law Enforcement Training Center (FLETC). This training was conducted under the auspices of the Support for Eastern European Democracy Program (SEED).

In addition, a financial investigative techniques course was provided in Kiev, Ukraine. The course was tailored to more advanced programs with special emphasis on computer based investigative techniques. Also, a financial investigative techniques course was given at FLETC to Russian Tax Police. Both classes were conducted under the auspices of the FSA.

Federal Law Enforcement Training Center (FLETC)

An international financial fraud training program course was conducted at FLETC for participants from Thailand, Hong Kong, Brazil, Venezuela, Honduras, and Trinidad and Tobago. The course was conducted under the auspices of the Internal Revenue Service, Office of Tax Advisory Assistance Service.

Federal Bureau of Investigation (FBI)

The Federal Bureau of Investigation continues to develop and deliver international training programs for foreign law enforcement officials in the area of financial crimes, including money laundering, to support the FBI's international and domestic investigative responsibilities.

In addition to the white collar crime courses conducted at the International Law Enforcement Academy in Budapest, Hungary, the FBI conducted thirteen money laundering training courses during fiscal year 1997 in Albania, Chile, People's Republic of China, Colombia, the Czech Republic, Egypt, Latvia, Malaysia, Mexico, Moldova, the Philippines, Romania, and Russia. One practical case training initiative involving money laundering was conducted in Panama.

Drug Enforcement Administration (DEA)

During fiscal year 1997, the DEA International Training Section (TRI) conducted three asset forfeiture and money laundering seminars. The three seminars were conducted in Israel, Ecuador, and the Bahamas. The seminar in Israel was taught in Jerusalem and attended by forty students from Israel and five students from Cyprus. The seminar in Ecuador was conducted in Quito and attended by thirty-nine participants from Ecuador, Bolivia, Colombia, Peru, Venezuela, Costa Rica and Panama. The last seminar was conducted in Nassau, Bahamas, and attended by thirty-nine delegates from throughout the Caribbean including: the Bahamas, Grenada, the Cayman Islands, St. Kitts, St. Vincent, St. Lucia, Aruba, Caracas, Jamaica, Belize, Turks and Caicos, Trinidad and Tobago, Barbados, and the Dominican Republic.

The funding for these seminars came from the US Department of Justice Asset Forfeiture Fund. In FY 98, DEA/TRI plans to conduct four additional seminars. These seminars would be conducted with participation from various DEA components (TRI, Financial Investigations Section (HQS), Asset Forfeiture Section (HQS), DEA field elements) as well as with the DOJ Office of International Affairs, the US Marshal's Service, and the Customs Service.

Secret Service

The Secret Service continues its involvement in the training of foreign law enforcement officials in the areas of investigative techniques, types of international fraud schemes, and identification of systemic weakness in their financial systems that lead to fraudulent financial activity. During 1997, the Secret Service provided training to foreign law enforcement and banking officials from the following countries: Russia, Latvia, Estonia, Lithuania, Belarus, Poland, Ukraine, Hungary, Bulgaria, Romania, Moldova, Slovakia, Czech Republic, Cyprus, Hong Kong, Thailand, Cambodia, Indonesia, Singapore, Laos, Vietnam, Korea, South Africa, and Mexico.

Financial Crimes Enforcement Network (FINCEN)

FinCEN, the US financial intelligence unit (FIU), has an international training program with two main components: (1) instruction provided to a vast array of US and foreign government officials, financial regulators, bankers and others on the subjects of money laundering and FinCEN's mission and operation; and (2) training in financial analysis and in the creation and operation of FIUs, modeled after FinCEN and other FIUs throughout the world. FinCEN works closely with other agencies in supporting US 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) offering specialized training and technical assistance in computer systems architecture and operation; and (4) providing assessments of money laundering regulations and procedures. While much of FinCEN's international training is done abroad, increasingly FinCEN is providing training and technical assistance to foreign officials at its offices in Vienna, Virginia.

In 1997, FinCEN provided an overview of its role and mission in the global fight against financial crime to delegations visiting from: Argentina, Aruba, Australia, the Cayman Islands, the People's Republic of China, Colombia, Costa Rica, the Dominican Republic, Ecuador, France, Germany, Ghana, Hong Kong, India, Ireland, Japan, Mexico, Moldova, the Netherlands, Panama, Paraguay, Poland, Romania, Russia, Singapore, Spain, Sweden, Switzerland, Taiwan, Thailand, Trinidad and Tobago, the United Kingdom, Uruguay, and Venezuela.

FinCEN worked closely with Mexico and Panama throughout this past year by providing support and technical assistance to their respective FIUs. FinCEN's technical staff made several trips to Mexico's Secretaria de Hacienda y Credito Publico (Hacienda) to assess the technological requirements of the FIU, including the development of a suspicious activity report (SAR) and analytical database. FinCEN provided specialized intermediate analytical training to the Director of the Mexico FIU, and in September, six intelligence analysts received intensive overall analytical training on theory, concepts and process. In addition to FinCEN personnel, trainers from the IRS, USCS, DEA, FDIC, OCC, FRB, FBI, and New Jersey State Police made presentations that were specifically tailored to meet the training needs of the participants. In November 1997, FinCEN hosted a delegation of members of Mexico's National Banking and Securities Commission (CNBV) and representatives from the Mexico Banker's Association.

In March 1997, FinCEN provided technical and analytical training to analysts from Panama's financial analysis unit (FAU). Representatives from the FBI, IRS, DEA, FDIC, OCC, and FRB also provided training to the delegation from Panama. In September 1997, the Director of the Panamanian FAU participated in the training provided for the Mexican FIU.

In March 1997, FinCEN and Panama hosted a financial seminar in Vienna, Virginia. Participants included high-level Panamanian and USG officials from both the private and public sectors, including law enforcement, regulatory agencies, and banking communities. Use of third party checks, foreign bank drafts, and money orders as a means of furthering the money laundering process dominated the discussions. As a follow-up to the seminar, FinCEN and the Panamanian FAU reached an agreement to conduct a joint study of Panama's Colon Free Trade Zone.

This past year, a Department of Justice legal detailee to FinCEN and senior FinCEN legal and analytical personnel have provided legal and technical assistance to a number of countries in drafting and revising their anti-money laundering legislation. These countries included Costa Rica, Ecuador, El Salvador, Nicaragua, and Venezuela.

In late 1997, a FinCEN representative visited India, Sri Lanka, and Nepal. In India, consultations were held with government officials involved in the drafting of India's anti-money laundering legislation. Research was also conducted on the hawala alternate remittance system as part of a joint FinCEN-INTERPOL/FOPAC study on parallel banking in Asia. Finally, groundwork was laid for the "Asia Watch" survey of money laundering in South Asia that will be conducted jointly by FinCEN and INTERPOL/FOPAC in early 1998. In Sri Lanka, FinCEN consulted with senior law enforcement personnel on draft money laundering legislation. In Nepal, FinCEN worked closely with Embassy officials in Katmandu to provide detailed assistance to the Nepali officials involved with drafting Nepal's anti-money laundering legislation. In addition, FinCEN reviewed a proposal for the establishment of offshore banking facilities in Nepal and conducted research on the Nepali gaming industry.

FinCEN hosted a delegation consisting of members of the Cyprus Unit for Combating Money Laundering and a representative of the Central Bank of Cyprus, in which the OCC and FRB also participated.

FinCEN hosted several visitors from Paraguay's anti-money laundering and anti-drug unit (SENAD) in September 1997 to discuss technical and training assistance needs for Paraguay's future financial intelligence unit.

In December 1997, FinCEN sent a working level needs assessment team to Venezuela to meet with Venezuelan law enforcement, banking, and regulatory officials. The purpose of the visit was to gain a better understanding of the status of the anti-money laundering legislation and the roles of the various organizations in Venezuela concerned with combating money laundering and to help FinCEN better advise the officials of Venezuela on how to establish and operate a financial intelligence unit.

Also in December 1997, FinCEN sent a delegation to Jamaica to meet with Jamaican officials to discuss their anti-money laundering system and to explore the possibility of providing assistance in developing an FIU in that country.

International Law Enforcement Academy (ILEA) - Budapest

Five 12-hour training segments were presented at ILEA in Budapest. These segments provided instruction in financial investigative techniques and money laundering. They were attended by participants from the region, including representatives from Hungry, Croatia, and the Former Yugoslav Republic of Macedonia, Estonia, Latvia, and Lithuania. These courses were a portion of a consolidated interagency curriculum presented by various US law enforcement agencies during an 8-week period.

Treaties And Agreements

Mutual Legal Assistance Treaties (MLATs) allow generally for the exchange of evidence and information in criminal and related matters. In money laundering and asset forfeiture cases, they can be extremely useful as a means of exchanging banking and other financial records with 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 countries: Argentina, the Bahamas, Canada, Hungary, Italy, Jamaica, Mexico, Morocco, the Netherlands, Panama, the Philippines, Spain, South Korea, 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 signed but not yet brought into force with another 21 governments: Antigua and Barbuda, Australia, Austria, Barbados, Belgium, Brazil, Colombia, the Czech Republic, Dominica, Grenada, Hong Kong, Israel, Latvia, Lithuania, Luxembourg, Nigeria, Poland, St. Kitts and Nevis, St. Lucia, Trinidad and Tobago and Venezuela. The United States is actively engaged in negotiating additional MLATs around the world. The United States has also signed the Organization of American States' MLAT.

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 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 Turks and Caicos.

Financial Information Exchange Agreements (FIEAs) facilitate the exchange of currency transaction information between the US Treasury Department and other governments' finance ministries. The United States has FIEAs with Colombia, Ecuador, Mexico, Panama, Paraguay, Peru, and Venezuela. FinCEN has a Memorandum of Understanding or an exchange of letters in place to facilitate exchange of information with the FIUs of the following countries: Argentina, Australia, Belgium, France, Slovenia, Spain, and the United Kingdom.

The United States has Customs Mutual Assistance Agreements (CMAAs) with the European Community and with the following countries: Argentina, Australia, Austria, Belarus, Belgium, Canada, Cyprus, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Italy, Japan, Korea, Mexico, Mongolia, New Zealand, Norway, Poland, Portugal, the Russian Federation, Slovakia, Spain, Sweden, Ukraine, the United Kingdom, and Yugoslavia. (The US 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.) The United States has also concluded CMAAs which are not yet in force with the following countries: Honduras, Ireland, Kazakhstan, the Netherlands, Turkey, and Venezuela. In addition, the United States has non-binding CMAAs with both Hong Kong and the United Kingdom. All of these agreements are patterned after a World Customs Organization Model CMAA. Since assistance can be provided under these agreements in the enforcement of any laws related to customs, the USCS 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 the 1988 UN Drug Convention, 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 forfeited assets. A parallel goal has been to encourage use 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 against property within their own borders. The United States and its partners in the Eight (formerly the G-7 industrialized nations plus Russia) are currently examining ways of strengthening asset forfeiture and asset sharing regimes. To date, Canada, Switzerland, Jersey and the United Kingdom have shared forfeited assets with the United States.

From 1989 through December 1997, the international asset sharing program, administered by the Department of Justice, resulted in the forfeiture in the US of $190,275,879 of which $66,096,963 was shared with foreign governments which cooperated and assisted in the investigations. In 1997, the Department of Justice transferred forfeited proceeds to: Canada ($84,669); the Cayman Islands ($58,439); Luxembourg ($18,104,348) and the United Kingdom ($244,238). Prior recipients of shared assets (1989-1996) include: Argentina, the Bahamas, the 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 on Money Laundering (FATF), 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 utilized in future criminal activities and from affecting legitimate economic activities.

The FATF currently consists of 26 jurisdictions and two international organizations. Its membership includes the major financial center countries of Europe, North America and Asia. The 26 FATF member countries and governments are: Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Iceland, Ireland, Italy, Japan, Luxembourg, the Kingdom of the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, Turkey, United Kingdom, and the United States. The two international organizations are the European Commission and the Gulf Cooperation Council. 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 into the policy-making process.

In 1997, the FATF focused on several major initiatives. Perhaps the greatest achievement during 1997 is that all FATF members now have anti-money laundering legislation substantially in line with the FATF 40 Recommendations. With the strong encouragement of its FATF co-members, Turkey passed significant anti-money laundering legislation and enacted implementing regulations which put the law into force in 1997.

The FATF's second round of mutual evaluations, which commenced in early 1996 and is currently underway, is focused on the practical effectiveness of members' anti-money laundering measures and also assesses follow-up action taken in response to the recommendations for improvement made in the first round. During 1997, FATF conducted 11 second round mutual evaluations. Denmark, the United States, Austria, Belgium, Switzerland, Canada, Netherlands, Germany, Italy, Norway and Japan. In addition, the Gulf Cooperation Council (GCC) agreed to institute a self-assessment program for its member states. This is a first step in addressing the problem that although the GCC is a FATF member, the GCC member states are not subject to FATF member requirements.

In February 1997, discussion began on the future of the FATF after 1999. At the Denver Economic Summit held in June 1997, the G-7 Heads of State issued a Statement which "urged the FATF to review ways to advance its essential work and consider renewal of its mandate for an additional five-year period." Specific issues, such as expansion of membership and identification of possible new members, will be discussed by the FATF in early 1998. The FATF will then provide a report outlining its conclusions to the G-7 prior to the May 1998 Birmingham Summit.

Importantly, last year, the Society for Worldwide Interbank Financial Telecommunications (SWIFT) agreed to the FATF proposal to change the SWIFT message format to allow for inclusion of additional information useful to financial investigators. A major concern for financial investigators in the past had been the absence of key data in the message format regarding international funds transfers. The previous SWIFT message format did not include a designated field for the originator's account number (or other numeric identifier). SWIFT introduced a new and revised SWIFT message format in November 1997, known as MT 103, that includes a designated field for the originator's account number (or other numeric identifier). SWIFT will encourage senders to complete this field in their messages. This is an important success that has been long sought by law enforcement agencies around the globe.

The FATF adopted a policy allowing those international organizations that have agreed to carry out mutual evaluations of their members and whose evaluation procedures have been validated by the FATF Plenary to attend the discussions of the FATF mutual evaluation reports and to receive the related documents. Specifically, the FATF endorsed the mutual evaluation procedures of the Caribbean Financial Action Task Force (CFATF), the Council of Europe (which will be focusing on those of its members which are not FATF members), and the Offshore Group of Banking Supervisors (OGBS). The FATF will provide guidance to these organizations and may issue public statements regarding efforts made by non-members to combat money laundering. This will further encourage non-FATF members to adopt the FATF's recommendations and procedures.

In addition, several Multilateral Development Banks, including the International Monetary Fund (IMF) and the World Bank, are increasingly focusing on anti-money laundering issues, and the FATF has established a constructive dialogue with them. The FATF has approached these organizations and attempted to gain their support for inclusion of anti-money laundering programs in their operations.

Other external relations activities included the participation of FATF representatives in the June 1997 United Nations Center for International Crime Prevention's Regional Ministerial Workshop on Organized Crime in Dakar, Senegal. In September 1997, a FATF mission to Cyprus was conducted to assess the money laundering situation and measures to combat it. In October 1997, the FATF co-hosted a money laundering seminar with the Bank of Russia in St. Petersburg. FATF provided a detailed exposition of anti-money laundering guidelines and recommendations of various FATF member countries and addressed the issue of cooperation between the financial sector and law enforcement authorities. FATF plans to co-host another money laundering seminar with the Black Sea Economic Cooperation (BSEC) in early 1998.

In June 1997, Mr. Jean Spreutels of Belgium assumed the FATF Presidency for FATF's ninth round of work (1997-1998). In June of 1998, FATF will continue to work with the private financial services sector by hosting another Financial Services Forum. The President-Elect for FATF-X (1998-1999) is Mr. Jun Yokota from Japan's Ministry of Foreign Affairs. This will be the first time an Asian FATF member will serve as President of the FATF.

During June 1997, FATF established an Internet web site that allows it to reach a much wider audience, providing access to basic FATF documents, such as the 40 Recommendations and the annual Typologies Reports on money laundering methods and trends, as well as other key documents on money laundering (including the 1988 UN Drug Convention, the 19 Aruba Recommendations, and the Riga Declaration), and other documents of concern to FATF members. The site also serves as a single location in which the texts of various anti-money laundering statutes and regulations for both FATF and non-FATF members may be placed. Additionally, users will be able to find still more related information either through links to other related sites or through contact information provided within the site. The FATF web site can be found at http://www.oecd.org/fatf.

In 1997, FATF created a regional Ad Hoc Group on Central and Eastern Europe, chaired by the Netherlands, to support, coordinate and exchange information between the other international organizations who are conducting anti-money laundering initiatives in the region. There are currently Ad Hoc Groups on Asia (Australian Chair) and Latin America (French Chair). The regional ad hoc groups serve as a catalyst for external relations efforts in each particular region and have been instrumental in creating FATF regional bodies.

An Ad Hoc Group on Estimating the Magnitude of Money Laundering, chaired by FinCEN's Director, was also established last year to develop a methodology to measure the money laundering problem from a global perspective. The purpose is to confirm that money laundering is a significant element in the global financial system and to quantify the amount of money laundering activity. Each participating country has formed an advisory board of experts for the purpose of identifying the quantifiable sources of data. This Ad Hoc Group will compile a draft methodology which will be used to develop a quantifiable estimate of the problem. Several international organizations, including the OECD, IMF, INTERPOL, Commonwealth Secretariat, and OAS/CICAD, are actively contributing to the work of this group. Once determined, this figure will allow policy makers and the public, through press reporting, to appreciate the critical value of anti-money laundering programs and their relationship to ensuring the integrity of the global financial system.

In November 1997, the FATF concluded a highly successful meeting on money laundering typologies. The purpose of the typologies exercise 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 new payment technologies, remittance services and the use of non-financial businesses in money laundering schemes. Money laundering countermeasures were also discussed in greater detail than in prior years. Overall, FATF jurisdictions found that conventional money laundering methods are still being used with refinements being made to existing techniques. In addition, as new countermeasures are developed, money launderers continue to shift from traditional financial institutions to non-financial businesses. As in the past two years, the FATF will produce two versions of the typologies report-an internal version and a public version. The public version of the report is expected to be issued in early 1998.

Asia Pacific Group on Money Laundering (APG)

In order to make progress in the external relations work of the Financial Action Task Force (FATF), an "FATF Asia Secretariat" was created in 1994 to set up a regional anti-money laundering body in the Asia/Pacific region. The United States has been working with the FATF to create regional anti-money laundering groups to form an international alliance against money laundering. Through the results of the FATF Asia Secretariat and other FATF members, the Asia Pacific Group on Money Laundering (APG) was formally established in February 1997 at the Fourth Asia/Pacific Money Laundering Symposium in Bangkok, Thailand. Initial membership of the group consists of Australia, Bangladesh, Hong Kong, Japan, New Zealand, People's Republic of China, Philippines, Singapore, Sri Lanka, Taiwan, Thailand, the United States, and Vanuatu. The establishment of this group is a positive step toward recognizing that money laundering is a significant international issue that affects the Asia/Pacific region and that jurisdictions within the region need to cooperate in combating money laundering.

The APG will meet twice yearly to provide a focus for regional anti-money laundering efforts and will work in close cooperation with the FATF and the CFATF. The first goal of this group is to develop a statement of principles and measures for application within the region.

The Fourth Asia/Pacific Money Laundering Symposium also resulted in a set of proposed recommendations and a consensus that money laundering is a serious threat that must be addressed globally. Participants recognized that money laundering undermines the integrity of the region's financial institutions and that anti-money laundering controls have a positive effect on economic growth by attracting legitimate investments and capital. There was agreement that bank secrecy laws should not interfere with the ability to ensure the integrity of financial institutions and that central banks and Finance Ministries play a very important role. It was also recognized that the offense of money laundering should cover all serious crimes.

In July 1997, the first meeting of the APG's Working Party was held in Beijing, China. The Working Party developed a work program and a statement of principles and measures for application within the region in relation to money laundering. The Working Party agreed that the APG accepts the FATF 40 Recommendations in principle as the "international standard" and discussed how they can be applied in the region. The APG will have members complete anti-money laundering "jurisdiction reports" which will include each jurisdiction's relevant laws as well as identify what training is needed.

In 1997, the Asia Pacific Economic Cooperation (APEC) continued to express support for anti-money laundering initiatives. The APEC Finance Ministers issued a Joint Ministerial Statement on April 6, 1997 which supported the establishment of the APG. The anti-money laundering text of that statement follows:

Anti-Money Laundering. Money laundering remains a priority concern because of the threat it can pose to the integrity of legitimate financial institutions. In this regard, we welcome the establishment of the Asia-Pacific Group on Money Laundering of which several APEC economies are members. We pointed out however that money laundering is a global phenomenon and in this regard, we encourage all other economies to join in a determined global effort to effectively address it . We ask the assistance of the relevant international organizations to integrate support for anti-money laundering activities in their operations to strengthen the integrity of financial systems.

Caribbean Financial Action Task Force (CFATF)

The Caribbean Financial Action Task Force (CFATF) continues its important anti-money laundering initiatives in the region. The CFATF requires its member jurisdictions to implement the FATF 40 Recommendations as well as an additional 19 recommendations specific to the region that CFATF adopted (the Aruba 19 Recommendations). Barbados currently chairs the organization, and Attorney General David Simmons will serve as Chairman until October 1998. The Cayman Islands has been elected as the next CFATF chair. The Secretariat of the CFATF is housed in Trinidad and Tobago.

In October 1996, the CFATF adopted a Memorandum of Understanding (MOU) which formalizes the organization by delineating its mission, objectives, and membership requirements. Since November 1996, the following have been CFATF members: Anguilla, Antigua and Barbuda, Aruba, the Bahamas, Barbados, Belize, Bermuda, the British Virgin Islands, the Cayman Islands, Costa Rica, the Dominican Republic, Grenada, Guatemala, Montserrat, the Netherlands Antilles, Nicaragua, Panama, St. Lucia, St. Vincent and the Grenadines, Turks and Caicos, and Trinidad and Tobago. In October 1997, Jamaica and Venezuela subscribed to the CFATF MOU, and in December 1997, Dominica subscribed as well, raising the organization's membership to a total of 24 members. Additional countries are expected to sign the MOU in the near future. There has been no change in membership of the five Cooperating and Supporting Nations (Canada, France, the Netherlands, the United Kingdom, and the United States), which have provided financial and other support to CFATF since its inception.

The pace of CFATF's activities has continued to increase. In 1997, CFATF conducted mutual evaluators of four of its members (the Dominican Republic, Barbados, St. Vincent and the Grenadines, and the Bahamas). Six additional CFATF mutual evaluations are scheduled to occur in 1998: Antigua and Barbuda, Turks and Caicos, Bermuda, St. Lucia, St. Kitts and Nevis, Nicaragua.

In July 1997, CFATF and FinCEN co-sponsored a Casino Regulatory Conference in Aruba as part the CFATF typologies exercise. The conference identified vulnerabilities to money laundering within the gaming industry and as well as minimum regulatory and legislative standards needed to address those vulnerabilities. Representatives from Aruba, the Bahamas, Belize, Brazil, the British Virgin Islands, Canada, Cayman Islands, Chile, Colombia, Costa Rica, Dominica, the Dominican Republic, France, Jamaica, the Netherlands Antilles, Panama, Peru, St. Lucia, the Netherlands, Trinidad and Tobago, the United Kingdom, the US Virgin Islands, Uruguay, the United States, and Venezuela attended the conference.

CFATF also completed two typologies exercises, which are used to assess current trends in money laundering in the Caribbean and to develop effective countermeasures. The first typologies exercise focused on domestic financial institutions, and the second addressed the casino and gaming industry in the region.

The CFATF will play a leading role in implementing the joint US- EU anti-money laundering training and technical assistance initiative for the Caribbean. This comprehensive program, covering financial, legal, law enforcement, and regulatory measures, is the culmination of a number of efforts to develop a regional training and technical assistance program by the US, EU, CFATF, and UNDCP. At the December 1997 regional meeting held in the Dominican Republic to review the progress in implementing the May 1996 Barbados Plan of Action, the participants agreed, in the Santo Domingo Declaration, to implement the regional anti-money laundering project through CFATF in association with the EC, the US, and other cooperating and supporting countries. Funding to implement this project has been committed jointly by the European Commission and the United States government. The CFATF Council is to determine the location of the project office by March 1, 1998, and it is anticipated that the training and technical assistance program activities will begin as early as 1998.

Summit of the Americas Follow-Up

With respect to the money laundering issue, the Summit of the Americas in Santiago, Chile in April 1998 will focus on measures needed to support the Inter-American Drug Abuse Control Council of the OAS (OAS/CICAD) in its efforts to adopt and implement the December 1995 Buenos Aires Communiqué Plan of Action on money laundering.

OAS/CICAD

In recognition of the growing importance of money laundering issues and the need to develop a framework to assist member governments in implementing the provisions of the Buenos Aires communiqué, the OAS/CICAD reconvened the CICAD Experts Group to Control Money Laundering in June 1996. Substantive discussion of regional money laundering issues now regularly occurs within this Experts Group under the OAS framework.

In its most recent meeting in Santiago in October 1997, the Experts Group made a number of significant recommendations, which were officially adopted by the OAS/CICAD in its November 1997 meeting in Lima, Peru. Among the recommendations of the Experts Group were:

  • To amend, for the first time, the OAS Model Regulations on money laundering by adding language which encourages governments to establish Financial Intelligence Units (FIUs) in accordance with the Egmont Group definition.
  • To harmonize the OAS Model Regulations with the provisions of the Summit of the Americas Buenos Aires Communiqué Plan of Action, and to examine the Model Regulations to determine if the Model Regulations need to be revised further in order to keep them abreast of new money laundering methods.
  • To formulate a comprehensive training and technical assistance plan to assist governments in their efforts to implement the provisions of the 1995 Buenos Aires Communiqué Plan of Action. This training plan will include provisions for training and technical assistance in the financial sector, for FIUs, and for law enforcement personnel, judges, magistrates and prosecutors.

The Experts Group agreed to conduct a yearly typologies exercise to determine the money laundering methods being utilized in the hemisphere by sharing experiences in dealing with this problem. Annual typologies reports will be produced.

An initial analysis of member responses to the CICAD Self-Assessment Questionnaire (used to determine progress in implementing the Buenos Aires Communiqué Plan of Action) was produced and an English text will be widely circulated in the near future.

Finally, progress also continues on the joint Organization of American States/Inter-American Development Bank Anti-Money Laundering Training and Technical Assistance Initiative. It is expected that the IDB will provide funding in 1998 for a pilot project focused on "know your customer" policies and reporting of suspicious transactions for banking regulators and key management positions within financial institutions as well.

Financial Intelligence Units (FIUs) and the Egmont Group

Over the past five to seven years, a number of specialized governmental agencies have been created as countries 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.

How FIUs Differ from Other Anti-Money Laundering Agencies

The FIU concept has developed rapidly during the past two years. In spite of the specialized nature of such units, there has often been some confusion between FIUs "financial intelligence units" 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 countries' overall anti-money laundering effort; however, the simple designation "FIU" does not necessarily mean that the unit functions as defined by the Egmont Group.

A number of countries 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 countries 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.

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

  • Law Enforcement: Most countries have implemented anti-money laundering measures alongside already existing law enforcement systems. Certain countries, 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 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 countries 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

Despite the fact that several FIUs were created throughout the world in the early 1990s, their creation was at first seen as individualized phenomena related to the specific needs of the jurisdictions establishing them. Since 1995, a number of FIUs have begun working together in an informal organization known as the Egmont Group (named for the location of the first meeting at the Egmont-Arenberg Palace in Brussels). The goal of the Group is to provide a forum for FIUs to find ways of improving support to their respective national anti-money laundering programs. This support includes expanding and systematizing the exchange of financial intelligence information, improving expertise and capabilities of personnel of such organizations, and fostering better communication among FIUs through application of technology. Within the Egmont Group, working groups are focused on three major areas: legal matters, technology, and training.

Recent Egmont Meetings

The fourth meeting of the Egmont Group took place on November 21-22, 1996 in Rome, Italy. With over thirty countries in attendance, along with four international organisations, the Egmont Group moved one step closer to becoming the primary framework for co-operation among FIUs. The Egmont Group examined the functions of the various FIUs and similar agencies so as to determine those missions and functions that are carried out in common. The conference came to an agreement on the definition of an FIU, a definition that will likely facilitate the establishment of new units by setting a minimum standard for such a unit.

According to this definition, a financial intelligence unit is "a central, national agency responsible for receiving (and, as permitted, requesting), analysing [sic] and disseminating to the competent authorities, disclosures of financial information: (i) concerning suspected proceeds of crime, or (ii) required by national legislation or regulation, in order to counter money laundering."

The purpose of defining an FIU was to develop a specific identity for the Egmont Group as distinct from FATF or other international organizations concerned with money laundering. The definition was meant to be specific enough to describe these apparently distinct agencies from other types of government authorities, yet generic enough to include the many variations as found in the countries establishing such units. The definition also specifically avoids emphasizing any particular type of organization (i.e., police, judicial, administrative, or regulatory). Since its adoption, the definition appears to have become a standard against which newly forming units are being measured.

The fifth meeting of the Egmont Group took place on June 23-24, 1997 in Madrid, Spain. There were 35 countries and 5 international organisations present at this meeting. The Egmont Group took a significant step forward in several areas. Perhaps the most important of these was the adoption by the Group of its Statement of Purpose, which describes the work accomplished so far, as well as current goals within the framework of assisting national and international anti-money laundering efforts. The FIU definition adopted in Rome was applied to all participating agencies-28 of them were found to meet it-and this definition was incorporated into the Statement of Purpose. A comprehensive Egmont Group training program for FIU personnel began to take shape over the course of the conference. Finally, the Egmont Group decided to study ways to continue enhancing information exchange among FIUs and ultimately create a more formalized structure for the Group itself. The next meeting of the Egmont Group is scheduled to be held in Buenos Aires, Argentina in June 1998.

Secure Information Exchange: The Egmont Secure Web

The effort to increase communication among FIUs has been furthered by development of a secure web site or "virtual private network" that was first demonstrated in Rome. This web site permits Egmont FIUs to access information on other FIUs (missions, organisations, and capabilities), money laundering trends, financial analysis tools, and technological developments. It also permits the participating FIUs to communicate by means of a secure electronic mail system. Since the web site is not accessible to the public, FIUs may share certain types of sensitive information in this protected environment, a capability that is not available anywhere else for FIUs. The "Egmont Secure Web" became operational in February 1997, when FinCEN and four European FIUs (from Belgium, the Netherlands, the United Kingdom, and France) became the first units to be connected. Connections to the FIUs in Spain, Sweden, and Slovenia in May 1997 were followed by those to the units in the Czech Republic, Slovakia, and Austria in August 1997. Monaco was connected to the web site in November 1997, bringing the total number of units on-line to twelve. More connections will be made as units already meeting the Egmont Group FIU definition acquire appropriate software and computer configurations.

Other International Conferences and Multilateral Activities

In early 1997, a FinCEN paper entitled "Black Hawala, Financial Crimes and the World Drug Trade" was presented at a conference on Global Drugs Law sponsored by the United Nations Drug Control Program (UNDCP) and the Indian Law Institute (ILI). This paper was well received, and has subsequently been published by the ILI.

In April 1997, the United States government and INTERPOL co-hosted a conference in Buenos Aires on the Analysis of Financial Records. Presentations included case studies dealing with money laundering from law enforcement and banking personnel. Representatives from Argentina, Aruba, Australia, the Bahamas, Barbados, Belgium, Bolivia, Brazil, Canada, Chile, Colombia, Costa Rica, Denmark, the Dominican Republic, Ecuador, France, Germany, Guinea, Haiti, India, Italy, Japan, Mexico, the Netherlands, Panama, Paraguay, Peru, St. Lucia, Spain, the United Kingdom, the United States, Uruguay, and Venezuela attended the conference.

In October 1997, the United States government gave presentations and chaired the Law Enforcement Workshop at the FATF and Bank of Russia Money Laundering Seminar. The seminar provided guidance to Russian law enforcement, financial, regulatory, and banking officials on the establishment of effective money laundering controls within Russia.

Money Laundering Comparative Chart

Each year, US officials from the various agencies with anti-money laundering responsibilities meet to assess the money laundering situations in more than 200 nations and territories, 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 1998 INCSR assigns priorities to more than 150 nations and territories, using a new classification system consisting of three differential categories titled Countries of Primary Concern, Countries of Concern, and Other Countries Monitored. The 1997 INCSR used a system of six categories titled High Priority, Medium-High Priority, Medium Priority, Low-Medium Priority, Low Priority, and No Priority. The 1998 INCSR collapses the six 1997 INCSR categories into the new three-tiered system for clearer classification and ease of comparison. In the conversion, the former High Priority and Medium-High Priority categories have become the new Countries of Primary Concern category. The former Medium Priority and Low-Medium Priority categories have become the new Countries of Concern category, and the former Low Priority and No Priority categories have become the new Other Countries Monitored category. This conversion is designed to facilitate presentation to the reader. It does not represent any change whatsoever in the analyses of the money laundering situations in the various jurisdictions.

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 US regards the situation as having international ramifications; (4) the situation's impact on US 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 offshore banks and businesses; (7) whether the jurisdiction's laws are being effectively implemented; and (8) where US interests are involved, the degree of cooperation between the foreign government and US 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 US government. In categorizing a jurisdiction as a Primary Concern jurisdiction, the US 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 Countries 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 Countries 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 country and territory 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 countries where the monetary or bank supervisory authority is understaffed, underskilled or uncommitted.
  • Well-established offshore or tax-haven banking systems, especially countries 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 the 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.
  • Countries 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.
  • Countries where the US dollar is readily accepted, especially countries 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.
  • Countries where there is a significant trade in or export of gems, particularly diamonds.
  • Countries with large parallel or black market economies.
  • Limited or no ability to share financial information with foreign law enforcement.

Changes In INCSR Priorities, 1997-1998

Upgrades

AustraliaMedium Priority - Country of Primary Concern
BahamasMedium Priority - Country of Primary Concern
BurmaMedium Priority - Country of Primary Concern
FranceMedium Priority - Country of Primary Concern
GuernseyMedium Priority - Country of Primary Concern
IndonesiaMedium Priority - Country of Primary Concern
JerseyMedium Priority - Country of Primary Concern
LebanonMedium Priority - Country of Primary Concern
The Isle of ManMedium Priority - Country of Primary Concern
AlbaniaNo Priority - Country of Concern
BarbadosLow Priority - Country of Concern
British Virgin IslandsLow Priority - Country of Concern
Cook IslandsLow Priority - Country of Concern
El SalvadorLow Priority - Country of Concern
IrelandLow Priority - Country of Concern
North KoreaLow Priority - Country of Concern
Marshall IslandsNo Priority - Country of Concern
NauruNo Priority - Country of Concern
RomaniaLow Priority - Country of Concern
SamoaLow Priority - Country of Concern
SeychellesLow Priority - Country of Concern
Turks and CaicosNo Priority - Country of Concern
UkraineLow Priority - Country of Concern
VietnamLow Priority - Country of Concern
Yugoslavia FRLow Priority - Country of Concern
Downgrades
ArgentinaMedium-High Priority - Country of Concern
KuwaitMedium Priority - Other Countries Monitored
CubaLow-Medium Priority - Other Countries Monitored
MontserratLow-Medium Priority - Other Countries Monitored

The following comparative table identifies the actions taken by each of the governments to combat money laundering. This reference table provides a comparison of a broad range of elements which define legislative activity and identify other characteristics that can have a relationship to money laundering vulnerability.

Glossary of Terms

  1. "Criminalized Drug Money Laundering": The government has enacted laws criminalizing the offense of money laundering related to drug trafficking.
  2. "Criminalized Beyond Drugs": The government has extended anti-money laundering statutes and regulations to include non-drug-related money laundering.
  3. "Record Large Transactions": By law or regulation, banks are required to maintain records of large transactions in currency or other monetary instruments.
  4. "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.
  5. "Report Suspicious Transactions": By law or regulation, banks are required to record and report suspicious or unusual transactions to designated authorities. This is indicated by an "M" for Mandatory in the column. 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.
  6. "Financial Intelligence Unit": The government 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 countries that have met the Egmont definition of an FIU.
  7. "System for Identifying and Forfeiting Assets": The government has enacted laws authorizing the tracing, freezing, seizure and forfeiture of assets identified as relating to or generated by money laundering activities.
  8. "Arrangements for Asset Sharing": By law, regulation or bilateral agreement, the government permits sharing of seized assets with third party governments which assisted in the conduct of the underlying investigation.
  9. "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.
  10. "Cooperates w/International Law Enforcement": By law or regulation, banks are permitted/required to cooperate with authorized investigations involving or initiated by third party governments, including sharing of records or other financial data.
  11. "International Transportation of Currency": By law or regulation, the government, 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 country and reports of monetary instrument transmitters.
  12. "Mutual Legal Assistance": By law or through treaty, the government has agreed to provide and receive mutual legal assistance, including the sharing of records and data.
  13. "Non-Bank Financial Institutions": By law or regulation, the government requires non-bank financial institutions to meet the same customer identification standards and adhere to the same reporting requirements that it imposes on banks.
  14. "Disclosure Protection 'Safe Harbor'": By law, the government 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.
  15. "Offshore Financial Centers": By law or regulation, the government authorizes the licensing of offshore banking facilities.
  16. "States Parties to 1988 UN Drug Convention": The country is a party to the 1988 United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, or the country that is responsible for the jurisdiction's international relations has extended the application of the Convention to the jurisdiction.
  17. "Compliance w/UN Convention": The government is meeting the goals of the 1988 UN Drug Convention by effectively applying implementing legislation.

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