Money Laundering in A Changed World
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Written November 2001
Updated May 2005
If you shop with a major bank, chances are that all the
transactions in your account are scrutinized by AML (Anti Money Laundering)
software. Billions of dollars are being invested in these applications. They are
supposed to track suspicious transfers, deposits, and withdrawals based on
overall statistical patterns. Bank directors, exposed, under the Patriot Act,
to personal liability for money laundering in their establishments, swear by it
as a legal shield and the holy grail of the on-going war against financial crime
and the finances of terrorism.
Quoted in Wired.com, Neil Katkov of Celent Communications, pegs
future investments in compliance-related activities and products by American
banks alone at close to $15 billion in the next 3 years (2005-2008). The United
State's Treasury Department's Financial Crimes Enforcement Network (finCEN)
received c. 15 million reports in each of the years 2003 and 2004.
But this is a drop in the seething ocean of illicit financial
transactions, sometimes egged on and abetted even by the very Western
governments ostensibly dead set against them.
Israel has always turned a blind eye to the origin of funds
deposited by Jews from South Africa to Russia. In Britain it is perfectly legal
to hide the true ownership of a company. Underpaid Asian bank clerks on
immigrant work permits in the Gulf states rarely require identity documents from
the mysterious and well-connected owners of multi-million dollar deposits.
Hawaladars continue plying their paperless and trust-based trade
- the transfer of billions of US dollars around the world. American and Swiss
banks collaborate with dubious correspondent banks in off shore centres.
Multinationals shift money through tax free territories in what is
euphemistically known as "tax planning". Internet gambling outfits and casinos
serve as fronts for narco-dollars. British Bureaux de Change launder up to 2.6
billion British pounds annually.
The 500 Euro note makes it much easier to smuggle cash out of
Europe. A French parliamentary committee accused the City of London of being a
money laundering haven in a 400 page report. Intelligence services cover the
tracks of covert operations by opening accounts in obscure tax havens, from
Cyprus to Nauru. Money laundering, its venues and techniques, are an integral
part of the economic fabric of the world. Business as usual?
Not really. In retrospect, as far as money laundering goes,
September 11 may be perceived as a watershed as important as the precipitous
collapse of communism in 1989. Both events have forever altered the patterns of
the global flows of illicit capital.
What is Money Laundering?
Strictly speaking, money laundering is the age-old process of
disguising the illegal origin and criminal nature of funds (obtained in
sanctions-busting arms sales, smuggling, trafficking in humans, organized crime,
drug trafficking, prostitution rings, embezzlement, insider trading, bribery,
and computer fraud) by moving them untraceably and investing them in legitimate
businesses, securities, or bank deposits. But this narrow definition masks the
fact that the bulk of money laundered is the result of tax evasion, tax
avoidance, and outright tax fraud, such as the "VAT carousel scheme" in the EU
(moving goods among businesses in various jurisdictions to capitalize on
differences in VAT rates). Tax-related laundering nets between 10-20 billion US
dollars annually from France and Russia alone. The confluence of criminal and
tax averse funds in money laundering networks serves to obscure the sources of
The Scale of the Problem
According to a 1996 IMF estimate, money laundered annually
amounts to 2-5% of world GDP (between 800 billion and 2 trillion US dollars in
today's terms). The lower figure is considerably larger than an average European
economy, such as Spain's.
It is important to realize that money laundering takes place
within the banking system. Big amounts of cash are spread among numerous
accounts (sometimes in free economic zones, financial off shore centers, and tax
havens), converted to bearer financial instruments (money orders, bonds), or
placed with trusts and charities. The money is then transferred to other
locations, sometimes as bogus payments for "goods and services" against fake or
inflated invoices issued by holding companies owned by lawyers or accountants on
behalf of unnamed beneficiaries. The transferred funds are re-assembled in their
destination and often "shipped" back to the point of origin under a new
identity. The laundered funds are then invested in the legitimate economy. It is
a simple procedure - yet an effective one. It results in either no paper trail -
or too much of it. The accounts are invariably liquidated and all traces erased.
Why is It a Problem?
Criminal and tax evading funds are idle and non-productive.
Their injection, however surreptitiously, into the economy transforms them into
a productive (and cheap) source of capital. Why is this negative?
Because it corrupts government officials, banks and their
officers, contaminates legal sectors of the economy, crowds out legitimate and
foreign capital, makes money supply unpredictable and uncontrollable, and
increases cross-border capital movements, thereby enhancing the volatility of
A multilateral, co-ordinated, effort (exchange of information,
uniform laws, extra-territorial legal powers) is required to counter the
international dimensions of money laundering. Many countries opt in because
money laundering has also become a domestic political and economic concern. The
United Nations, the Bank for International Settlements, the OECD's FATF
(Financial Action Task Force), the EU, the Council of Europe, the Organisation
of American States, all published anti-money laundering standards. Regional
groupings were formed (or are being established) in the Caribbean, Asia, Europe,
southern Africa, western Africa, and Latin America.
Money Laundering in the Wake of the September 11 Attacks
The least important trend is the tightening of financial
regulations and the establishment or enhancement of compulsory (as opposed to
industry or voluntary) regulatory and enforcement agencies.
New legislation in the US which amounts to extending the powers
of the CIA domestically and of the DOJ extra-territorially, was rather
xenophobically described by a DOJ official, Michael Chertoff, as intended to
"make sure the American banking system does not become a haven for foreign
corrupt leaders or other kinds of foreign organized criminals."
Privacy and bank secrecy laws have been watered down.
Collaboration with off shore "shell" banks has been banned. Business with
clients of correspondent banks was curtailed. Banks were effectively transformed
into law enforcement agencies, responsible to verify both the identities of
their (foreign) clients and the source and origin of their funds. Cash
transactions were partly criminalized. And the securities and currency trading
industry, insurance companies, and money transfer services are subjected to
growing scrutiny as a conduit for "dirty cash".
Still, such legislation is highly ineffective. The American
Bankers' Association puts the cost of compliance with the laxer
anti-money-laundering laws in force in 1998 at 10 billion US dollars - or more
than 10 million US dollars per obtained conviction. Even when the system does
work, critical alerts drown in the torrent of reports mandated by the
regulations. One bank actually reported a suspicious transaction in the account
of one of the September 11 hijackers - only to be ignored.
The Treasury Department established Operation Green Quest, an
investigative team charged with monitoring charities, NGO's, credit card fraud,
cash smuggling, counterfeiting, and the Hawala networks. This is not without
precedent. Previous teams tackled drug money, the biggest money laundering venue
ever, BCCI (Bank of Credit and Commerce International), and ... Al Capone. The
more veteran, New-York based, El-Dorado anti money laundering Task Force
(established in 1992) will lend a hand and share information.
More than 150 countries promised to co-operate with the US in
its fight against the financing of terrorism - 81 of which (including the
Bahamas, Argentina, Kuwait, Indonesia, Pakistan, Switzerland, and the EU)
actually froze assets of suspicious individuals, suspected charities, and
dubious firms, or passed new anti money laundering laws and stricter regulations
(the Philippines, the UK, Germany).
A EU directive now forces lawyers to disclose incriminating
information about their clients' money laundering activities. Pakistan initiated
a "loyalty scheme", awarding expatriates who prefer official bank channels to
the much maligned (but cheaper and more efficient) Hawala, with extra baggage
allowance and special treatment in airports.
The magnitude of this international collaboration is
unprecedented. But this burst of solidarity may yet fade. China, for instance,
refuses to chime in. As a result, the statement issued by APEC in November 2001
on measures to stem the finances of terrorism was lukewarm at best. And,
protestations of close collaboration to the contrary, Saudi Arabia has done
nothing to combat money laundering "Islamic charities" (of which it is proud) on
Still, a universal code is emerging, based on the work of the
OECD's FATF (Financial Action Task Force) since 1989 (its famous "40
recommendations") and on the relevant UN conventions. All countries are expected
by the West, on pain of possible sanctions, to adopt a uniform legal platform
(including reporting on suspicious transactions and freezing assets) and to
apply it to all types of financial intermediaries, not only to banks. This is
likely to result in...
The Decline of off Shore Financial Centres and Tax
By far the most important outcome of this new-fangled juridical
homogeneity is the acceleration of the decline of off shore financial and
banking centres and tax havens. The distinction between off-shore and on-shore
will vanish. Of the FATF's "name and shame" blacklist of 19 "black holes"
(poorly regulated territories, including Israel, Indonesia, and Russia) - 11
have substantially revamped their banking laws and financial regulators.
Coupled with the tightening of US, UK, and EU laws and the wider
interpretation of money laundering to include political corruption, bribery, and
embezzlement - this would make life a lot more difficult for venal politicians
and major tax evaders. The likes of Sani Abacha (late President of Nigeria),
Ferdinand Marcos (late President of the Philippines), Vladimiro Montesinos
(former, now standing trial, chief of the intelligence services of Peru), or
Raul Salinas (the brother of Mexico's President) - would have found it
impossible to loot their countries to the same disgraceful extent in today's
financial environment. And Osama bin Laden would not have been able to wire
funds to US accounts from the Sudanese Al Shamal Bank, the "correspondent" of 33
Quo Vadis, Money Laundering?
Crime is resilient and fast adapting to new realities. Organized
crime is in the process of establishing an alternative banking system, only
tangentially connected to the West's, in the fringes, and by proxy. This is done
by purchasing defunct banks or banking licences in territories with lax
regulation, cash economies, corrupt politicians, no tax collection, but
The countries of Eastern Europe - Yugoslavia (Montenegro and
Serbia), Macedonia, Ukraine, Moldova, Belarus, Albania, to mention a few - are
natural targets. In some cases, organized crime is so all-pervasive and local
politicians so corrupt that the distinction between criminal and politician is
Gradually, money laundering rings move their operations to these
new, accommodating territories. The laundered funds are used to purchase assets
in intentionally botched privatizations, real estate, existing businesses, and
to finance trading operations. The wasteland that is Eastern Europe craves
private capital and no questions are asked by investor and recipient alike.
The next frontier is cyberspace. Internet banking, Internet
gambling, day trading, foreign exchange cyber transactions, e-cash, e-commerce,
fictitious invoicing of the launderer's genuine credit cards - hold the promise
of the future. Impossible to track and monitor, ex-territorial, totally digital,
amenable to identity theft and fake identities - this is the ideal vehicle for
money launderers. This nascent platform is way too small to accommodate the
enormous amounts of cash laundered daily - but in ten years time, it may. The
problem is likely to be exacerbated by the introduction of smart cards,
electronic purses, and payment-enabled mobile phones.
In its "Report on Money Laundering Typologies" (February 2001)
the FATF was able to document concrete and suspected abuses of online banking,
Internet casinos, and web-based financial services. It is difficult to identify
a customer and to get to know it in cyberspace, was the alarming conclusion. It
is equally complicated to establish jurisdiction.
Many capable professionals - stockbrokers, lawyers, accountants,
traders, insurance brokers, real estate agents, sellers of high value items such
as gold, diamonds, and art - are employed or co-opted by money laundering
operations. Money launderers are likely to make increased use of global, around
the clock, trading in foreign currencies and derivatives. These provide
instantaneous transfer of funds and no audit trail.
The underlying securities involved are susceptible to market
manipulation and fraud. Complex insurance policies (with the "wrong"
beneficiaries), and the securitization of receivables, leasing contracts,
mortgages, and low grade bonds are already used in money laundering schemes. In
general, money laundering goes well with risk arbitraging financial instruments.
Trust-based, globe-spanning, money transfer systems based on
authentication codes and generations of commercial relationships cemented in
honour and blood - are another wave of the future. The Hawala and Chinese
networks in Asia, the Black Market Peso Exchange (BMPE) in Latin America, other
evolving courier systems in Eastern Europe (mainly in Russia, Ukraine, and
Albania) and in Western Europe (mainly in France and Spain).
In conjunction with encrypted e-mail and web anonymizers, these
networks are virtually impenetrable. As emigration increases, diasporas
established, and transport and telecommunications become ubiquitous, "ethnic
banking" along the tradition of the Lombards and the Jews in medieval Europe may
become the the preferred venue of money laundering. September 11 may have
retarded world civilization in more than one way.
Asset Confiscation and Asset Forfeiture
The abuse of asset confiscation and forfeiture statutes by
governments, law enforcement agencies, and political appointees and cronies
throughout the world is well-documented. In many developing countries and
countries in transition, assets confiscated from real and alleged criminals and
tax evaders are sold in fake auctions to party hacks, cronies, police officers,
tax inspectors, and relatives of prominent politicians at bargain basement
That the assets of suspects in grave crimes and corruption
should be frozen or "disrupted" until they are convicted or exonerated by the
courts - having exhausted their appeals - is understandable and in accordance
with the Vienna Convention. But there is no justification for the seizure and
sale of property otherwise.
In Switzerland, financial institutions are obliged to
automatically freeze suspect transactions for a period of five days, subject to
the review of an investigative judge. In France, the Financial Intelligence Unit
can freeze funds involved in a reported suspicious transaction by administrative
fiat. In both jurisdictions, the fast track freezing of assets has proven to be
a more than adequate measure to cope with organized crime and venality.
The presumption of innocence must fully apply and due process
upheld to prevent self-enrichment and corrupt dealings with confiscated
property, including the unethical and unseemly use of the proceeds from the sale
of forfeited assets to close gaping holes in strained state and municipal
In the United States, according to The Civil Asset Forfeiture
Reform Act of 2000 (HR 1658), the assets of suspects under investigation and of
criminals convicted of a variety of more than 400 minor and major offenses (from
soliciting a prostitute to gambling and from narcotics charges to corruption and
tax evasion) are often confiscated and forfeited ("in personam, or value-based
Technically and theoretically, assets can be impounded or
forfeited and disposed of even in hitherto minor Federal civil offenses
(mistakes in fulfilling Medicare or tax return forms)
The UK's Assets Recovery Agency (ARA) that is in charge of
enforcing the Proceeds of Crime Act 2002, had this chilling statement to make on
May 24, 2007:
“We are pursuing the assets of those involved in a wide range of crime
including drug dealing, people trafficking, fraud, extortion, smuggling,
control of prostitution, counterfeiting, benefit fraud, tax evasion and
environmental crimes such as illegal dumping of waste and illegal fishing."
Drug dealing and illegal fishing in the same sentence.
The British firm Bentley-Jennison, who provide Forensic
Accounting Services, add:
"In some cases the defendants will even have their assets
seized at the start of an investigation, before any charges have been
considered. In many cases the authorities will assume that all of the assets
held by the defendant are illegally obtained as he has a “criminal lifestyle”.
It is then down to the defendant to prove otherwise. If the defendant is judged
to have a criminal lifestyle then it will be assumed that physical assets, such
as properties and motor vehicles, have been acquired through the use of criminal
funds and it will be necessary to present evidence to contradict this.
The defendant’s bank accounts will also be scanned for
evidence of spending and any expenditure on unidentified assets (and in some
cases identified assets) is also likely to be included as alleged criminal
benefit. This often leads to the inclusion of sums from legitimate sources and
double counting both of which need to be eliminated."
Under the influence of the post-September 11 United States and
the FATF (Financial Action Task Force on Money Laundering), Canada, Australia,
the United Kingdom, Greece, South Korea, and Russia have similar asset recovery
and money laundering laws in place.
International treaties (for instance, the 1959 European
Convention on Mutual Legal Assistance in Criminal Matters, the 1990 Convention
of the Council of Europe on Laundering, Search, Seizure and Confiscation of the
Proceeds from Crime (ETS 141), and The U.N. Convention against Corruption 2003-
UNCAC) and European Union Directives (e.g., 2001/97/EC) allow the seizure and
confiscation of the assets and "unexplained wealth" of criminals and suspects
globally, even if their alleged or proven crime does not constitute an offense
where they own property or have bank accounts.
This abrogation of the principle of dual criminality sometimes
leads to serious violations of human and civil rights. Hitler could have used it
to ask the United Kingdom's Assets Recovery Agency (ARA) to confiscate the
property of refugee Jews who committed "crimes" by infringing on the infamous
Nuremberg race laws.
Only offshore tax havens, such as Andorra, Antigua, Aruba, the
British Virgin Islands, Guernsey, Monaco, the Netherlands Antilles, Samoa, St.
Vincent, the US Virgin Islands, and Vanuatu still resist the pressure to join in
the efforts to trace and seize suspects' assets and bank accounts in the absence
of a conviction or even charges.
Even worse, unlike in other criminal proceedings, the burden of
proof is on the defendant who has to demonstrate that the source of the funds
used to purchase the confiscated or forfeited assets is legal. When the
defendant fails to furnish such evidence conclusively and convincingly, or if he
has left the United States or had died, the assets are sold at an auction and
the proceeds usually revert to various law enforcement agencies, to the
government's budget, or to good social causes and programs. This is the case in
many countries, including United Kingdom, United States, Germany, France, Hong
Kong, Italy, Denmark, Belgium, Austria, Greece, Ireland, New Zealand, Singapore
According to a brief written by Jack Smith, Mark Pieth, and
Guillermo Jorge at the Basel Institute on Governance, International Centre for
"Article 54(1)(c) of the UNCAC recommends
that states parties establish non-criminal systems of confiscation, which have
several advantages for recovery actions: the standard of evidence is lower
(“preponderance of the evidence” rather than “beyond a reasonable doubt”); they
are not subject to some of the more restrictive traditional safeguards of
international cooperation such as the offense for which the defendant is accused
has to be a crime in the receiving state (dual criminality); and it opens more
formal avenues for negotiation and settlements. This is already the practice in
some jurisdictions such as the US, Ireland, the UK, Italy, Colombia, Slovenia,
and South Africa, as well as some Australian and Canadian States."
In most countries, including the United Kingdom, the United
States, Austria, Germany, Indonesia, Macedonia, and Ireland, assets can be
impounded, confiscated, frozen, forfeited, and even sold prior to and without
any criminal conviction.
In Australia, Austria, Ireland, Hong-Kong, New Zealand,
Singapore, United Kingdom, South Africa, United States and the Netherlands
alleged and suspected criminals, their family members, friends, employees, and
partners can be stripped of their assets even for crimes they have committed in
other countries and even if they have merely made use of revenues obtained from
illicit activities (this is called "in rem, or property-based confiscation").
This often gives rise to cases of double jeopardy.
Typically, the defendant is notified of the impending forfeiture
or confiscation of his or her assets and has recourse to a hearing within the
relevant law enforcement agency and also to the courts. If he or she can prove
"substantial harm" to life and business, the property may be released to be
used, though ownership is rarely restored.
When the process of asset confiscation or asset forfeiture is
initiated, banking secrecy is automatically lifted and the government
indemnifies the banks for any damage they may suffer for disclosing confidential
information about their clients' accounts.
In many countries from South Korea to Greece, lawyer-client
privilege is largely waived. The same requirements of monitoring of clients'
activities and reporting to the authorities apply to credit and financial
institutions, venture capital firms, tax advisers, accountants, and notaries.
Elsewhere, there are some other worrying developments:
In Bulgaria, the assets of tax evaders have recently begun to be
confiscated and turned over to the National Revenue Agency and the State
Receivables Collection Agency. Property is confiscated even when the tax
assessment is disputed in the courts. The Agency cannot, however, confiscate
single-dwelling houses, bank accounts up to 250 leva of one member of the
family, salary or pension up to 250 leva a month, social care, and alimony,
support money or allowances.
Venezuela has recently reformed its Organic Tax Code to allow
" (P)re-judgment enforcement measures (to) include closure
of premises for up to ten days and confiscation of merchandise. These measures
will be applied in addition to the attachment or sequestration of personal
property and the prohibition against alienation or encumbrance of realty. During
closure of premises, the employer must continue to pay workers, thereby avoiding
an appeal for constitutional protection."
Finally, in many states in the United States, "community
responsibility" statutes require of owners of legal businesses to "abate crime"
by openly fighting it themselves. If they fail to tackle the criminals in their
neighborhood, the police can seize and sell their property, including their
apartments and cars. The proceeds from such sales accrue to the local
In New-York City, the police confiscated a restaurant because
one of its regular patrons was an alleged drug dealer. In Alabama, police seized
the home of a senior citizen because her yard was used, without her consent, for
drug dealing. In Maryland, the police confiscated a family's home and converted
it into a retreat for its officers, having mailed one of the occupants a package
About the Author
Sam Vaknin is the author of "Malignant Self Love - Narcissism Revisited" and
"After the Rain - How the West Lost the East". He is a columnist in "Central
Europe Review", United Press International (UPI) and ebookweb.org and the editor
of mental health and Central East Europe categories in The Open Directory,
Suite101 and searcheurope.com. Until recently, he served as the Economic Advisor
to the Government of Macedonia.
His web site:
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Article Published/Sorted/Amended on Scopulus 2007-11-03 22:48:32 in Economic Articles