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US DEPARTMENT OF STATE
BUREAU OF INTERNATIONAL NARCOTICS MATTERS
INTERNATIONAL NARCOTICS CONTROL STRAGEGY REPORT
FINANCIAL CRIMES AND MONEY LAUNDERING
1994 INTERNATIONAL NARCOTICS CONTROL STRATEGY REPORT
INTERNATIONAL MONEY LAUNDERING
Intelligence findings from North and South America, Eastern and Western Europe, South and East Asia, Africa and the Middle East confirm that another significant shift has occurred in money laundering trends and methods, requiring changes in policy and strategy for 1994.
The critical aspects are the volume of non-drug related money laundering; increased investment of illegal proceeds in legitimate business, including the financial industry; and the targeting of financial systems in countries/territories (some with little or no domestic involvement in drug trading or other serious proceeds-generating crimes) to launder drug and other proceeds generated by crimes committed in other jurisdictions.
In 1988, when the United Nations Convention was signed, and in 1989 when the Financial Action Task Force was created, the movement and conversion of proceeds from drug trafficking was the priority and virtually absolute consideration, and the primary concentration was on the laundering of cash at banks.
By the end of 1993, however, USG analysts estimated that non-drug proceeds may account for a third or even as much as one-half of total illicit proceeds converted in or transiting through US financial institutions. Analysts from various enforcement and intelligence agencies believe that a significant amount of the money being laundered today is derived from a long list of other criminal offenses, including gambling, smuggling, pornography, loan sharking, fraud, etc. (not counting tax evasion). Drug money is still laundered in the United States for transfer overseas and/or to hold in domestic accounts or invest in US businesses, but large quantities of drug proceeds move out of the United States in bulk.
Similarly, European bankers, finance ministries and enforcement agencies report an apparent increase in non-drug money laundering and seem agreed that drug-related money laundering constitutes no more than three-fourths of illegal proceeds transferring through or being converted by West European financial institutions (exclusive of tax considerations), and may be at that level or slightly lower in Eastern Europe where large sums of crime syndicate funds are being invested. Drug money laundering may be no higher, and could be an even lower percentage of total illegal money laundering in other parts of the world, notably Southwest, Southeast and East Asia.
As more governments criminalize non-drug money laundering, there should be a heightened recognition that a significant portion of the what were once presumed to be legitimate proceeds are actually the proceeds of non-drug crime. The increase in non-drug money laundering reported by European bankers and others is probably an indication of their awareness that there is a universe of non-drug crime whose perpetrators also exploit financial mechanisms which are essential to the legitimate financial sector. As increased attention is focused on the universe of money laundering, these estimates of non-drug money laundering will probably increase. It may well be that non-drug money laundering has always been a significant factor in their economies, even more so than drug money laundering in some instances, but that it has not been recognized until recently. These estimates call into renewed question the problem that a great many governments have adopted anti-money laundering legislation that is exclusively drug-related.
The ratios, mathematically imprecise at best, function according to the volume of non-drug-related crime, such as gambling and smuggling. The analytic challenge is to generate statistics on the proceeds of non-drug crime, while continuing to refine the much larger volume of data on drug crimes. The operational challenge is to give more emphasis to detecting and investigating operations at the layering and integration stages; the predominant emphasis today is on the placement stage for drug-related proceeds, especially cash.
The indicated expansion of non-drug money laundering could derive from one or more sources: there has been an increase in non-drug related crime, expanding proceeds from those sectors; and/or, criminals engaged in these pursuits are now exploiting the same kinds of money laundering schemes, directly or more likely through the same professionals who handle drug money; and/or professional money launderers are blending funds from various criminal activities in direct transactions and/or through front companies. The likelihood is that all three factors pertain.
The world of money laundering is obviously evolving through a series of phases or cycles. Five years ago, the focus was on laundering of cash proceeds from drug sales, with a preference for conversion at a teller's window. As the volume of proceeds increased the need for additional outlets, and the increased pressure from law enforcement dictated that money be moved more frequently and less obviously, drug traffickers resorted to wire transfers and widespread use of front companies and shell corporations, with a continued preference for ultimately using banks in major financial center countries.
During the past two years, analysts saw an increasing use of non-bank financial institutions, especially exchange houses, check cashing services, credit unions, and instruments like postal money orders, cashiers checks, and certificates of deposit (particularly in "bearer" form), with transactions occurring in an ever longer list of countries and territories. Equally significant, traffickers were employing professional money managers.
There was a point in time at which major concentrations of drug proceeds could be identified in either producer, transit or major consumer countries. In part, these concentrations reflected drug distribution patterns.
Europe, like much of Asia and other sectors, has always had a horizontally-integrated drug economy, in which middlemen and transporters from Asia, Africa and South America sold the finished product to criminal groups who retained the eventual proceeds. Drug proceeds were commingled with funds from other criminal activities, disguising their origin and frustrating laws which required proof of a drug offense as a predicate crime. While such patterns were especially true of the European heroin, cannabis and hashish trade, the horizontal pattern has also prevailed in cocaine trading. The US market is a hybrid, with Asian and European heroin distribution generally following the horizontal pattern; however, the US cocaine market, like the US markets for Mexican heroin and Jamaican and Latin American cannabis, has been vertically integrated, in which South American and other gangs often control distribution right down to the street, and engage in transfers to return the proceeds to Colombia and other points of origin.
Today, there are numerous locales in which drug and other crime money is laundered or transferred, almost without relation to the presence or absence of domestic drug trading. Increasingly, these financial systems are targeted because their governments have not yet adopted the kinds of controls on which more and more financial center governments are relying. Today's market features a variety of monetary instruments, including cash, from an ever larger international market, often penetrating the major international banks from their overseas branches, again with emphasis upon those jurisdictions which have not adopted effective anti-money laundering standards.
The dispersion to all global sectors which is a hallmark of today's money laundering can be said to reflect directly the increased effectiveness of enforcement measures--but it also reflects the schemes of money managers to circumvent the new measures governments are adding to banking and criminal laws in traditional financial centers.
The dispersion probably reflects as well the use of criminal organizations and their professional money launderers, including the Italian Camorra and Sicilian Mafia, and also some specialized operators in Europe, Asia and elsewhere, including bankers, lawyers and accountants. These professionals once acted as brokers, charging a commission for handling cash and other transactions; today, they increasingly buy the entire proceeds at a discount and control its disposition, reaping profits beyond the discount by investing in legal businesses.
The professional money launderer is more likely to invest the proceeds in a legitimate business, preferably one with a high volume of financial transactions (travel agencies, check cashing services, exchange houses) and, ideally, with a long standing banking relationship. The professionals are also more likely to use sophisticated monetary instruments such as certificates of deposit, debentures, mortgages, securities such as stocks and bonds, et cetera. They also seek non-monetary investments, such as construction companies and their suppliers. Restaurants, hotels, and recreation facilities are increasingly popular investments. These professionals also use a vast array of scams, such as recent cases involving prime bank guarantees.
A special worry is the control of banks by criminal groups or by elements in the pay of or sympathetic to criminals. A number of the 2,000 banks in Russia are believed to be "mafiya" controlled. Some banks in Eastern Europe are also believed to be influenced or controlled by criminal elements. Control aside, many banks in Eastern Europe do not differentiate between legitimate and illegitimate funds. Too often, their governments lack the legal mechanisms and enforcement competency to deal with sophisticated money laundering schemes.
A sophisticated feature of today's market is the financial services company, e.g., a development company or investment firm, which "processes" substantial sums of money without benefit of any kind of license or regulation as a financial institution. The proliferation of such "banks without licenses" is a special concern. In Eastern Europe, such companies are bringing in vast sums of money of unknown origin and investing it in various enterprises, or loaning it at very profitable rates. A device, which has been used in the United States, is for a company to open a single account, but permit a dozen or more companies and individuals to use the account, for a fee; these companies are providing a banking service but avoiding licensing and auditing requirements.
Finally, there is deepening concern about the need for new approaches to the problem, more appropriate to an international financial system that has no geographic horizons, operates around the clock in every time zone, and maintains one of the faster paces on the electronic highway.
In ways perhaps unappreciated until recently, the money laundering world is a microcosm of the larger financial world. There is constant pressure at banks large and small to conclude transactions rapidly, so as not to disrupt time-sensitive deals or fall victim to changing exchange rates. When profits are otherwise slim, some banks, perhaps many, will ask fewer questions when taking greater risks but perhaps charging higher rates.
The pressures of the market place compel governments the world over to invest in securing economic intelligence, not just about trade, but on financial markets and institutions.
The anti-money laundering community has to avail itself of that same kind of financial intelligence, not limited to information about ongoing investigations and other enforcement activities. To keep pace, the anti-money laundering community must have constantly updated intelligence on money laundering methods and typologies. But the anti-money laundering community also has to understand the world of finance from its perspective. The global market operates 24 hours a day, and has no horizons.
Given the volatility of exchange rates, competitive global bidding, and other phenomena which mandate the speedy conclusion of transactions and settlements, the financial world will rely ever more heavily on electronic services. The neat challenge is to ensure the availability of the information enforcement agencies need to protect the financial system without undue disruption to that system.
Today's anti-money laundering policy maker must have a commanding knowledge of financial markets and how money moves through them, for legitimate purposes, which can disguise the illegitimate. To cite just one example, bond markets are proliferating, with offerings designed by some governments to persuade investors to put money into mainstream activities, ostensibly to enhance development but also to identify those funds for later taxation. Those same offerings, as was proven in the case of Pakistan, may offer a means of encouraging people away from underground banking systems, but, structured with guarantees of anonymity, such offering are tailor-made for exploitation. Or, for another example, money managers are creating or buying investment firms, which are often not subject to the same reporting requirements as banks, but which can be effective conduits for criminal proceeds while circumventing many foreign exchange and reporting requirements.
Another example illustrates the increasing dependence of the anti-money laundering community on changes in laws, policies and procedures by the financial community, in ways which have not commonly been thought to be of concern to those authorities. In Russia, it has been cheaper to buy a bank than to buy a luxury auto; until the Central Bank recently raised capital requirements, US$100,000 would buy a bank license and Russia has licensed more than 2,000 banks, some of dubious and perhaps criminal ownership, since the demise of the Soviet Union. If it is true that the incentive to launder money and traffic in drugs will not diminish until there is economic stability, and if it is equally true that there cannot be economic stability in Russia until the banking system is stabilized, which many Russian bankers believe is dependent upon a change in capital requirements, it is also true that no significant steps can be taken against money laundering until the Bank of Russia has real regulatory control over the system.
A CHALLENGE NOT MET
Our knowledge of money laundering trends and methods has improved substantially in the last five years, through improved cooperation among financial center countries and information obtained from seized records of money launderers. But some questions have not been well-framed, and are only infrequently asked.
The larger question is: what happened to all the money? Spending on luxuries and elegant living reached saturation levels for many major criminal organizations a long time ago, and even the newer entrepreneurs quickly reach that plateau. Large sums are held in reserve, in cash or readily convertible instruments, but these sums, like the amounts found on deposit, while impressive, do not reflect the billions of consumer dollars spent on drugs around the globe during the last decade.
There are troubling parallel questions when one makes the assumption that a portion of these funds, perhaps a significant portion, has been invested, not just in cash-intensive businesses like travel agencies, exchange houses, import and export firms, and the like, which are increasingly venues for moving and commingling drug money, but in long-term financial paper, office buildings and apartment houses, and, lately, the construction industry, the textile industry, the communications industry, and the banking industry itself, among others.
What is the true extent of the economic and political influence wielded by drug trafficking and other criminal organizations, as a result of acquiring and investing drug proceeds and the additional gains from other businesses? To what extent has criminal ownership of legitimate businesses distorted the market place, undermining legitimate businesses through non-competitive pricing, or arbitrarily creating surpluses and/or shortages of key commodities?
Many politicians, government officials, bankers, lawyers, accountants and brokers are known to be on traffickers' payrolls. There is particular concern about those agents of influence who can guide the selection of judges, or ensure the passage of laws that lack real enforcement powers, or otherwise ensure, from behind-the-scene, that the system serves the needs of the criminal element. In several countries, we must also be concerned about those persons whose decisions can influence the economic and political stability of entire nations.
Consider just one scenario revealed through seizure of traffickers' records. Drug money passed through one Central American country to a bank in the United States, but was returned to an Asian bank branch in that Central American country, which issued a letter of credit to buy construction equipment in the United States. When the construction equipment was off-loaded at a South American port, two objectives had been reached: the traffickers had laundered several million dollars and, thanks to their lower unit cost, were in a position to become a major factor in the local construction industry by outbidding legal competitors.
Pick any commodity -- and it may be traded with leverage on the same lower unit cost principle. Traffickers' costs per dollar can be as low as 18 cents (US) or about 20 percent, and seldom would exceed 65 percent, even at the end of the chain. Thus, they operate with profit margins of at least 35 percent, compared to most businesses whose profit margins would be 4-10 percent of receipts.
In too many countries, the governments have concentrated on identifying cash deposits at the teller's window, and have failed to mount a total program against money laundering that takes into account all of the traditional and non-traditional resources used today to convert illicit proceeds. Traffickers are all too familiar with traditional customer identification procedures used by banks, so they have adopted new strategies.
Cash is increasingly shipped in bulk, but, at tellers' windows, it is converted in ever-smaller quantities. While transactions of several millions of dollars were not that unusual three years ago, today's transactions are commonly conducted at levels below recording thresholds.
Equally significant, professional money managers increasingly resort to exchange houses, check cashing services and other non-bank financial institutions to place their cash. Because of the increasing risk posed by improved reporting and detection, traffickers also accumulate ever larger bundles of cash, and ship cash in bulk to other countries, where they can store the currency or utilize similar non-bank financial institutions as entry points.
Our greatest challenge, however, is identifying and denying access to the vast array of alternative systems used to move drug proceeds. Cash and other monetary instruments, such as stocks, life insurance policies, letters of credit, bank checks of all kinds, and wire transfers are moved through layers of shell corporations and front companies. Increasingly, these professionals will buy existing companies with established banking practices, adding a layer of legitimacy to their operations.
An Asian trafficker operated more than 300 bank accounts in Hong Kong, the United States, and elsewhere in Asia. A number of these accounts were acquired when he purchased an established import/export firm, licensed in Africa, through a New York bank operating in Hong Kong. Because the shares were not publicly traded, there was no requirement to register the shares as sold, and, as long as he used the same account signatories, usually nominees, none of the banks needed to be told of the change in ownership. One of the major cases broken in Britain similarly involved a well-established import and export firm with bank accounts throughout Europe.
In both instances, these banks thought they knew their customers. While that Basle Committee principle needs constant reinforcement, it is also obvious that we need not only to look at the laws of incorporation (for weaknesses and uniformity) as well as securities registries, but banks need to monitor fluctuations in activity for established accounts as well.
In addition to buying into established companies, or creating shell corporations in out-of-the-way venues, and buying and trading commodities, purchasing equipment, and the like, the more sophisticated money manager puts the traffickers' proceeds into financial paper. Traffickers are known to have bought long-term debt paper, often at fractions of redemption value, because they will need funds in the future, and they could take advantage of offerings to accept repatriated dollars and other funds without questions on sources if the purchasers would help reduce official debt.
Another effect of the economic power of these investments is that, like the drug business itself, these cartel businesses in Asia, Europe, South America, the United States or wherever, provide jobs and otherwise generate economic activity--usually in hard currencies.
In such situations, economic power can translate into political clout. Politicians normally willing to jail any gangster are unwilling to deny incomes to their people--and that reluctance can equate with non-action, or into legislation that is not implemented, et cetera. Perhaps the first and most immediate effect of such economic power is corrupt law enforcement, or at least lax or minimal enforcement.
The question is: Do we have the array of weapons needed to ensure our arsenal is capable of meeting the complete challenge?
While the number of governments which have signed but not yet ratified the 1988 Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances grows smaller (27), that group still includes governments which are significant from a money laundering perspective.
But perhaps the larger concern is how effectively the 95 governments which have ratified the Convention are actually implementing its provisions. Much broader global adherence to the Convention, FATF recommendations, EU Policy Directive, OAS model regulations and other policy guidance is absolutely needed.
We surely do not have enough intelligence--and not just about drug trafficking or even drug money laundering--but about the vast enterprise of money movement--licit and illicit and all the gray shades in between.
If we cannot penetrate attorney-client privilege, or effectively regulate bearer share and shell corporation usage so that beneficial owners as well as officers are known, we can apply a due diligence convention to lawyers, accountants, bankers and other trustees, and incorporators--to ensure that they know their true customers and declare that knowledge when they enable these corporations to enter banking systems or conduct financial operations. Investigations which determine that shell companies have been used to launder money could also result in charges against trustees and incorporators.
We must effect greater asset seizures, not just of bank accounts, but also corporate assets and even corporate entities. We must drive up the money launderer's cost of doing business--which is certainly a major purpose of all our money laundering countermeasures, no matter how stated. We must be ready to impose appropriate sanctions against banking institutions, as well as bankers. Too many banks repeatedly surface in investigation after investigation, many unwittingly. Investigators need the intelligence to distinguish between those banks which are complicit and those which need stronger safeguards--and to act on the difference.
The developed nations have the technical and enforcement capability and, in most instances, the political will to revise strategies to meet new challenges. The 26 FATF government members, the 12 EU nations, the EFTA countries, and the majority of the 95 states party to the 1988 UN Convention are adopting (if not yet fully implementing) legislation that will ultimately improve individual and collective capabilities. By 1993, every EU nation was obliged to mandate the reporting of suspicious transactions, and criminalize money laundering. (Several governments missed the January 1, 1993, target date but legislative changes are underway throughout the EU.) Between 1992 and 1995, all FATF members must be evaluated on performance in implementing FATF recommendations, a certain reckoning that has already promoted change.
However, the pace of change is a cause of some concern. Moreover, most newly developing nations and even some developed nations lack the training, skills, technical sophistication and sometimes the political will to cope with these more complex challenges. If new intelligence has emerged as a crucial developmental priority for 1994, so has the ability and capacity to use it effectively.
Rodriguez Gacha laundered an estimated $130 million, using 82 company and other accounts in 16 countries, including the US, BVI, Panama, Colombia, Luxembourg, Hong Kong, UK (London, Channel Islands, Isle of Man), Switzerland, Austria and Germany.
More recently, the raids conducted by the Colombian National Police reveal that a single money manager had bank accounts in 40 countries--only 15 of them Members of FATF.
Ours is truly a global playing field. It will take the best efforts of all our governments and agencies to provide the training and technical assistance needed.
-- The slow pace at which too many governments in developed as well as under-developed and developing countries and territories are adopting and enforcing the laws needed to enforce the 1988 UN Convention.
-- The limitations too many governments are placing on money laundering countermeasures, particularly the requirement that the offense of money laundering must be predicated upon conviction for a drug trafficking offense.
-- The need for governments and their financial systems to recognize the methods, typologies and volume of non-drug related money laundering.
-- The rapid expansion of electronic transmissions to transfer funds through series of banks worldwide--in seconds.
-- The high vulnerability of many financial systems whose need for capital or capital replenishment could undermine prudent banking practices and safeguards.
-- The concentration of economic power by Colombian and other cocaine traffickers in this Hemisphere, and by criminal organizations in Europe and Asia, which could be translated into political influence in the months and years to come.
-- The use of more sophisticated money laundering techniques which seem designed at least in part to take advantage of more liberal economic regimes in several countries, while simultaneously avoiding the pits and traps of national and international countermeasures.
-- The use of professional money laundering specialists who sell their high-quality services, contacts, experience and knowledge of money movements, supported by the latest electronic technology, to any trafficker or other criminal willing to pay their lucrative fees.
-- The increasing use of non-bank financial systems, unevenly regulated in the United States and most other parts of the world, especially as the placement stage for cash; these include a wide variety of exchange houses (the casas de cambio of Latin America, as well as remittance systems like the "chop" houses of the Orient, and the "hundi" and "hawala" systems of Europe, South Asia and the Middle East).
-- The non-bank systems also include insurers, mortgagors, brokers, casinos, importers/exporters and other trading companies, gold and precious metal dealers, check cashing services, express delivery services and other money movers of varying degrees of sophistication and capability.
-- As our global network widens in response to traffickers' wide-ranging schemes, there is a conspicuous gap between the number of institutions and accounts these intensified investigations have identified with money laundering and the authority of many governments to freeze, seize and forfeit drug and money laundering proceeds.
-- The need to prescribe corporate as well as individual sanctions, including actions against financial institutions which repeatedly fail to take prudent measures to prevent their institutions from being used to launder money.
-- The need for continuous fine-tuning of bilateral and multilateral strategies, which define responsibilities and objectives on a country-by-country basis, and set specific goals for cooperating with the varying money laundering and money transit countries.
-- The unchecked flow of funds into second and even third-tier financial systems, including countries which had not been of prior concern to anti-money laundering efforts.
-- The continued exploitation of US financial systems, at levels probably not approached by any other country.
-- The reluctance of governments to expand predicate offenses for money laundering beyond narcotics.
-- Many countries outlaw money laundering and allow the forfeiture of assets but remain obliged to inform the account holders that the government is investigating them and may take action against their accounts--giving traffickers time to move assets and leave town.
-- The continued reluctance of some bankers and governments to adopt anti-money laundering regulations, despite the obvious weakness of many voluntary control systems and despite reports from government after government that the adoption of such controls had not caused declines in deposits or resulted in threats from traffickers.
-- Many US and West European banks are tough on money launderers, but too many of their branch offices and subsidiaries in Latin America and elsewhere continue to figure prominently in Colombian cartel and other money laundering. These banks, as well as regulators and enforcement officials in the countries in which they operate, could do more to ensure that money laundering countermeasures are practiced abroad as well as at home.
-- Many governments superimpose money laundering controls on systems which still employ loose incorporation standards and permit bearer share ownership, which can minimize the effect of these controls.
-- There are concerns which can only be answered over time--such as whether the Schengen accord, which eliminates internal border controls for nine of the EU countries, results in greater smuggling of arms, drugs, money, immigrants, et cetera.
MONEY LAUNDERERS' SHOPPING LIST
Given that 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 check list of what drug money managers look for is a good, simple guide.
-- Countries maintaining rigid bank secrecy that cannot be penetrated for authorized law enforcement investigations.
-- Minimal or no identification requirements to conduct financial transactions, and/or widespread use of anonymous accounts, and/or protected use of nominee accounts.
-- Lack of effective monitoring of currency movements.
-- 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.
-- Use of monetary instruments payable to bearers.
-- Failure to criminalize money laundering.
-- Well-established non-bank financial systems, especially where regulation and monitoring are lax.
-- No recording requirements for large cash transactions.
-- No requirement for reporting suspicious transactions.
-- Limited asset seizure or confiscation capability.
-- Limited or weak bank regulatory controls, especially in countries where the monetary and/or bank supervisory authority is understaffed, underskilled or uncommitted.
-- Limited narcotics and money laundering enforcement and investigative capabilities.
-- Well established offshore or tax-haven banking systems, especially countries where such banks and accounts can be readily established with minimal background investigations.
-- Countries with free trade zones where there is little government presence or other oversight authority.
-- Well-established access to international bullion trading centers in New York, Istanbul, Zurich, Dubai and Bombay.
-- Extensive foreign banking operations, especially where there is significant wire transfer activity and/or multiple branches of the foreign banks.
-- Patterns of official corruption and/or a laissez faire attitude toward the business and banking communities.
-- Countries with a high volume of interbank transfers of currency and monetary instruments.
-- Countries where the dollar is readily acceptable, especially countries where banks and other financial institutions allow dollar deposits.
-- Countries where banks allow nominee or numbered accounts, or do not require disclosure of the beneficial owner of an account or the true beneficiary of a transaction.
-- Countries where there is a significant trade in or export of gems, particularly diamonds.
METHODS AND TYPOLOGIES
FATF reports, drawing on cash seizures and investigations in the United States, Europe and elsewhere, reveal that cash movement and money laundering in other countries generally follow the same patterns as in the United States and, like US drug proceeds, are increasingly "internationalized" and equally sophisticated.
For example, lira generated by narcotics sales on Italian streets by one organization were bundled into large bags, shipped as freight to Switzerland for deposit into a Swiss bank, and, with the complicity of a bank manager, transferred to the accounts of a Colombian-owned "casa de cambio" at a bank in Los Angeles.
An Australian group purchased commercial properties with illicit proceeds and used a variety of loan-back schemes and transactions through offshore companies and tax havens to disguise the return of the money to the traffickers.
Luxembourg authorities investigated a case in which drug proceeds were smuggled out of the United States, deposited in accounts in Panama, and then wire transferred to accounts in various EU countries opened by a Luxembourg financial consultant. The funds were ultimately washed through the accounts of various shell companies in EU countries and invested in Colombia.
An increasing number of schemes involve gold and diamonds, with transactions occurring in countries which previously had not been factors in international money laundering.
Drug traffickers have learned many techniques from professional money managers; indeed, many professional money managers (PMMs) now number drug cartels among their many clients, and make available to them the same mechanisms used by other clients to smuggle gold, or to hide profits and shelter proceeds from the tax collector, et cetera. The UK investigated a case in which gold smuggling proceeds were smuggled as cash to Luxembourg and deposited into a company account, and transferred across the globe to be used in the purchases of property in France and Thailand in the name of a Guernsey shell company.
A random reading of cases reveals that these PMM's use banks, exchange houses, finance companies, travel agencies, securities dealers, casinos, real estate agencies, fruit shops, import/export firms, jewelry stores, and an uncountable array of shell companies to launder money, which alternates as cash, cashiers checks, bearer bonds and other monetary instruments, stocks, bullion, insurance policies, and even real property, disguised by wire transfers, invoicing schemes, loans, pari-mutuel winnings, trustee records, stock transfers, investments, and purchase of goods and services.
FATF delegates report the detection of increased laundering of proceeds from non-narcotic crimes, such as arms smuggling and "white collar" crime.
USG investigators report that some bank accounts involved in Operation Green Ice and Operation Cabbage Farm were used by a number of different drug trafficking syndicates. USG agents cite indications of the existence of global money laundering "holding companies," available to any number of criminal organizations to launder drug and non-drug proceeds.
The Federal Reserve has called attention to sub-accounts established by foreigners who are operating multiple businesses through a single account; hundreds of individuals may have access to the account in a US bank nominally held by a foreign bank in its name, thus giving them access to the US banking sector.
Drawing on records seized through Colombian National Police raids and their own investigations, USG agents say that Cali cartels, which once handled all money operations internally, now employ financial controllers. In another changed feature, the controllers now seek bids from money brokers, who may process money for more than one drug trafficking organization. Cartels will now pay as much as 17 to 20 percent rates to have their money laundered. One after-effect of the massive document seizures is that these controllers now minimize paper records, preferring to use computer discs and increasingly sophisticated communications devices, often linked to computers.
In a variation on this procedure, some money brokers are buying cash in bulk, at a discount rate of 23 percent. The drug trader or other criminal gets his proceeds back from the point-of-sale countries without having the burden of making the moves himself. The broker may lay off some of the proceeds at a different discount rate, or launder the entire batch, through investments or further transfers and conversions.
While bulk deliveries of cash are still common, and banks remain a preferred medium, money managers are using an ever-expanding array of non-bank financial institutions as a medium for penetrating the banking community. In addition to check cashing services, check sellers, and money transmitters, they also use credit unions, currency exchange houses, savings and loan associations, commodities and securities and insurance brokers, real estate and investment brokers. But they also use antique dealers, auction houses, car (or boat or plane) dealers, coin dealers, gold dealers, liquor outlets and bars, pizza parlors, postal services, convenience stores, pharmacies, hotels, restaurants, scrap metal dealers, cleaning and shoe repair shops, supermarkets, trucking companies, vending machine companies, gas stations, waste material firms, and even folk art dealerships--either to conduct transactions, or, in many instances, by buying these kinds of cash intensive firms and using them as front companies.
The public perception of a check cashing service may be of the "mom and pop" variety store, but case after case shows that these check cashers can move substantial sums.
The IRS arrested two men in Tampa attempting to launder $16 million in stolen Canadian government checks through a check cashing service. A Los Angeles cocaine ring owned the check cashing services through which it laundered $4 million per month in "crack" proceeds. A Boston group laundered $3 million in gambling and loan shark earnings. Check cashers avoid US reporting requirements by issuing cashier's checks, money orders and traveler's checks, in amounts less than $10,000, in exchange for lump sums of cash. Check cashers also use drug money to cash legitimate checks, thus avoiding the need to record bank deposits and withdrawals.
The Commercial Crime Bureau of the International Chamber of Commerce recently warned banks and small businesses about the increasingly fraudulent use of standby letters of credit, which are legitimate financial instruments. This misuse has also drawn the scrutiny of the Federal Reserve. The ICC report indicates that a growing number of banks and other investors are falling victim to individuals purporting to be dealers of standby letters or traders in so-called "prime bank guarantees, prime bank notes and zero coupons." The swindlers persuade clients that standby letters can be bought at a discount, traded in the international market and sold for a profit. The Salvation Army reportedly lost more than $10 million when money it invested in standby letters was misappropriated to bank accounts in Luxembourg, Panama and Argentina. Reports also indicate that the Republic of Nauru and the Bank of Croatia lost millions of dollars in similar schemes.
Credit card fraud was a major topic of conversation at the FATF money laundering seminar in the Bahamas in 1993. FINCEN reports that counterfeit and stolen credit card fraud is continuing at an alarming rate, with annual losses estimated at $900 million. West African criminals have stolen bulk shipments of cards at airports, giving them and similar groups entire sets of legitimate cards. There is also a growing business in reprocessing codes on the magnetic strips of stolen cards. Some groups also manufacture counterfeit credit cards. One group in Macau sent its counterfeit cards through the United States, destined for the Bahamas.
TAX HAVENS & OFFSHORE BANKING FACILITIES
There is no question that money laundering occurs through a number of so-called "tax haven" jurisdictions, and that offshore banking facilities are utilized to launder drug and other criminal proceeds in various locales. However, the terms are frequently misinterpreted to give the impression that all or much of the financial activity which occurs in these jurisdictions or through these facilities is at least suspect, if not perhaps illegal. Such assumptions are incorrect.
A "tax haven" is defined by Butterworth's Tax Havens Encyclopedia as a jurisdiction (a) where there are no relevant taxes; or (b) where taxes are levied only on internal taxable events but not at all or at low rates on profits from foreign sources; or (c) where special tax privileges are granted to certain types of taxable persons or events.
Depending on the presence of these and other factors, the Encyclopedia ranks jurisdictions as either "principal" or "marginal" tax havens.
The Encyclopedia lists the "principal" tax havens as Aruba, Bahamas, Barbados, Bermuda, British Virgin Islands, Cayman Islands, Costa Rica, Cyprus, Gibraltar, Guernsey, Hong Kong, Isle of Man, Jersey, Liberia, Liechtenstein, Luxembourg, Nauru, Netherlands, Netherlands Antilles, Nevis, Panama, Switzerland, Turks and Caicos, and Vanuatu. The "marginal" havens are Andorra, Ireland, Israel, Malta, and Monaco.
Offshore banking, a term which originally applied to banks in the Caribbean, i.e., off-the-shores of the United States, has by extension come to apply to banks in all tax haven jurisdictions. Many of the world's major banks, Butterworth's notes, have banking and trust company operations in tax havens, providing a wide range of financial services to residents and non-residents, not limited to the companies and individuals in their home countries.
The concern is not that these governments and banking systems offer tax privileges. The concern, which varies from locale to locale--and applies also to a large number of countries which are not known as tax havens--are the other special considerations a tax haven may offer.
Foremost among these is strict bank secrecy, which can take many forms. Disclosure of banking information (account owners, beneficiaries, addresses, balance and transaction data) is a criminal offense in many tax havens (and not a few non-tax havens), and, while several of the tax havens listed above have criminalized money laundering and/or taken steps to ensure that a banker's duty of secrecy is relieved in order to permit a criminal investigation to go forward, that is not yet a universal feature.
Tax havens also have varying rules on disclosure of the true ownership of accounts. Some cast a veil of secrecy over beneficial owners by allowing shares to be held by nominees or trustees, often through bearer shares. A tax haven may only require that changes in officers be reported, some not even that much data. Requirements with regard to company audits vary considerably. Some tax havens waive their foreign exchange controls for non-residents.
Some tax havens also offer "free zones" where imports may be landed under certain conditions without paying customs duties. The problem with free zones is that other customs rules are also relaxed, including inspection of non-dutiable cargoes. Some large "zones" also have financial institutions which are seemingly exempt from rules that apply to banks in traditional commercial sectors.
Finally, but not least, there is the matter of licensing. Requirements vary widely for creating offshore banks and companies, and many are held through nominee shareholders or even trustees, like lawyers. The issue of who owns an offshore facility and who has access to its use is not readily resolved in many jurisdictions.
Fortunately, an effort is being made to ensure that offshore banking jurisdictions comply with the 1988 UN Convention and FATF recommendations. The Offshore Group of Banking Supervisors has adopted the recommendations, and recently conducted a survey among its members on their money laundering countermeasures, which must now be legislated in order to maintain membership in the Group. The members include Aruba, Bahamas, Bahrain, Barbados, Bermuda, Cayman Islands, Cyprus, Gibraltar, Guernsey, Hong Kong, Isle of Man, Jersey, Lebanon, Malta, Mauritius, Netherlands Antilles, Singapore and Vanuatu. Panama had been a member but the GOP did not respond to the survey; nor, in the opinion of the Group, has it taken the necessary statutory actions to comply with membership.
GOLD - THE ETERNAL MEDIUM
Whether it is traded in gold bars, or Austrian coronas, Mexican centenarios or South African krugerrand, or simply as jewelry, gold has always been man's most prized medium of exchange, and in times of uncertainty about currency stability, his preferred medium. Perhaps it's always been a factor in the drug trade, but our eye was on the teller window. The Magharian affair illustrated the billion dollar potential for the gold connection, and there is no denying that today the heroin trafficker and the gold smuggler are in league.
The exchange of gold jewelry for drug dollars (the jewelry is later sold in Colombia) has been a factor in the Colon Free Trade Zone laundering schemes for nearly a decade. Gold is a factor in deals in Asia, Europe, Africa, the Middle East, and in this Hemisphere--in Colombia, Brazil, Bolivia, Peru, Paraguay, Mexico and Panama among Latin countries as well as in Aruba. Operation Polar Cap showed that gold exports from South America to the United States were used to cover money laundering.
Indeed, the gold/drug trade is a growth industry. Gold smuggling in India, believed to be tied to the narcotics industry, has driven prices as high as 50 percent over the international rate. Traffickers are actively working the gold markets in the United States (New York), Switzerland, UAE (Dubai), Turkey, and Hong Kong.
Even the bogus trade is growing. One operation shut down by USG authorities in Polar Cap laundered more than $6 billion over two years, disguised as payments for Bolivian gold--for which the official export volume is less than $80 million a year. Although Ecuadorian mine production has steadily declined in recent years, the number of people who list gold mining as their livelihood continues to rise.
There are no sure-fire methods to deny traffickers access to gold markets, especially the real ones, because gold, like currency, is a legal medium, open to everyone with the price. Thus, most of the controls envisioned are patterned after currency controls like know-your-customer, transaction declarations at the border as well as at bank windows, and the like, with a special requirement that all export payments for gold be linked to specific sales.
Not surprisingly, this market, like the diamond trade, has caught the attention of the Italian Mafia, who are increasingly brokers for a significant portion of the world's illicit money.
In January 1994, Italian police arrested eight people who were accused of running a worldwide money laundering ring that shipped a ton of gold a month from Italy to Latin America. The group used banks in the United States and Europe, and gold firms in Italy, Panama and Colombia. The gold was purchased with drug money from the United States, which was transferred through banks in Mexico, Spain and Switzerland as well as the United States. Panamanian companies shipped the gold onward to Colombia. The operation, which may have been conducted over several years, was so large that it may have slightly depressed the price of gold in South America and Italy during 1993. Those arrested included Gustavo Upequi del Gado, described as the Cali cartel's top recycling expert.
WHAT WE NEED TO DO
Considerable attention has focused on establishing international standards, on obtaining cooperative agreements concerning exchanges of information, establishing linkages for cooperative investigations, and on overcoming political resistance in various key countries to ensure such cooperation.
In an electronic world in which the banking system operates through chain-linked computers 24 hours a day, there must be increased emphasis upon thorough vetting of personal, company and financial institution accounts at the bank of origin, wherever in the world it is located. There is no substitute for a thoroughly applied know-your-customer policy.
Governments need laws which: establish corporate criminal liability for bank and non-bank financial institutions; apply to all manner of financial transactions not limited to cash at the teller's window; draw from a long list of predicate offenses not limited to drug trafficking; criminalize investments in legitimate industry if the proceeds were derived from illegal acts; and enable the sharing of financial and corporate ownership information with law enforcement agencies and judicial authorities.
But governments also need strategies, end-games which project change and progress along the same continuum as the changes in both financial system procedures and the methods criminals develop to exploit them--strategies which focus on specific governments and specific financial systems.
The actions needed to keep pace with the dynamics of money laundering in a high-tech world may be summarized as follows:
1. Constant Monitoring of Money Laundering Patterns, Trends, Typologies. More sophisticated techniques, involving both bank and non-bank financial institutions, in a wider array of traditional and non-traditional financial center countries, 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.
2. Analysis of Money Management Practices. We need improved information from more countries on what factors influence traffickers and/or money managers to use particular systems in specific countries, to keep reserves in cash vs. other monetary instruments, to invest rather than "park." Interviews of arrested 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.
3. Analysis of Non-Drug Related Money Laundering and Other Financial Crimes. Traffickers seldom invent new methods or practices but utilize techniques perfected by corporations and individuals to shelter proceeds from taxation or to avoid strict currency controls. Money is also laundered by terrorists, arms dealers, other criminals. We need to identify the parallels between drug money laundering and financial crimes of every description--and achieve an equal capability to investigate and prosecute such crimes. A number of governments are willing to impose new restrictions on drug-related financial crimes, but hesitate to apply such strictures to other forms of financial crime.
4. Equating Economic Power with Political Clout. The increasing concentrations of wealth among criminal groups in several parts of the world is a concern, not only because of possible impacts on investments and real estate values as well as legitimate commerce, and, on a other plane, government integrity, but also because these organizations have immense campaign coffers available to them and to candidates who overtly or covertly do their bidding. We need to assess the national security and political implications of these shifts and accumulations of wealth--for all financial centers where such wealth is being concentrated.
5. Eliminating Systemic Weaknesses. At one level, we need banks to maintain the same kinds of records on clients which are also financial institutions, as they do for other customers, and to report suspicious transactions by such clients. At another level, we need to take action when the same financial institutions are named repeatedly in investigation after investigation--including but not limited to revocation of licenses, changes in ownership and management, levying of fines, and prosecution.
6. Assessing The Trafficker as Entrepreneur. We need to explore the extent to which criminal organizations, by regions, are penetrating legitimate financial and other businesses, using their vast resources to gain control and to impact economic, financial and business decisions.
7. Analyzing Money Laundering as a Function of Economics. We need to ask a whole series of questions about impacts. To what extent do depressed economies weaken financial system enforcement? When do bankers and other financial managers become more willing to take money from any source with fewer questions asked? Can we set up a scale of predictability using economic factors that will help identify weaknesses and points of vulnerability in the global network?
8. Regulating Exchange Houses and Remittance Systems. There is ample evidence that the various "hundi, hawalla, 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 in the Western financial community. They serve vital functions for key sectors of many economies; how can they be regulated without destroying the very informality that makes them effective and desirable?
9. Concentrating Efforts for Maximum Effectiveness. Enforcement operations have proven we can stagger the cartels. For a time, money was hard to move, operations were disjointed, organizational structures wobbled. But these organizations are resilient and recovered quickly, and now employ professional managers. The obvious question is how much money do we have to take out of the system, for how long a period of time, to destabilize an entire organization for a sustained period--after which it becomes inoperative? What parallel pressures should be applied when money is on hold and the cartels are sorting out whom to trust with their proceeds? Given some unknown level of volume, at what point do monetary seizures really hurt? How hard do we have to hit them to score a knockout? Is a knockout possible?
10. Pursuing A Continuously Evolving Strategy. For much of the 1980s, concerned governments operated under a strategy which involved a handful of key countries whose cooperation was essential and/or which were drug money laundering centers.
But the traffickers have changed tactics and moved to new locales, and now they are part of a larger criminal order which considers the world its playground. Banks are but one portal; they use securities brokers, insurance companies, a galaxy of import and export companies--in fact, every means the worlds of business and finance have to offer, all linked by wireless and facsimile transmissions, are used by traffickers and the managers of their illicit proceeds.
At the policy and regulatory levels, organizations like the UN, FATF, EU, CoE, OECD, CFATF and OAS help ensure that the burden of responsibility for change is shared. But the need is for quick, flexible action by a maximum number of governments. Bilateral and multilateral outreach efforts must be intensified to involve that second and even third tier of vulnerable financial systems--in a concentrated effort to counter money laundering from all serious crime.
In sum, we must have a continually evolving strategy which embraces all countries of significant interest, and carries with it the resolve and resources necessary to implement and enforce it. Governments must be as flexible, responsive and resourceful as the criminal organizations.
TREATIES AND AGREEMENTS
Mutual legal assistance treaties (MLATs) are in force with 11 governments including: Switzerland, Turkey, Italy, the Netherlands, Canada, Mexico, the Bahamas, Argentina, the United Kingdom with respect to its Caribbean dependent territories (the Cayman Islands, Anguilla, British Virgin Islands, the Turks and Caicos Islands and Montserrat), Spain and Thailand. MLATs have been signed but not brought into force with nine other governments: Uruguay, Jamaica, Belgium, Colombia, United Kingdom, Korea, Panama, Morocco and Nigeria. Similar treaties are in various stages of negotiation elsewhere.
Treasury has completed Financial Information Exchange Agreements with Colombia, Ecuador, Peru, Panama (as part of the MLAT which has not been ratified by the US Senate), Paraguay (which awaits approval by the Paraguayan Senate) and Venezuela.
US Customs has mutual assistance agreements with Argentina, Australia, Austria, Belarus, Belgium, Canada, Cyprus, Czechoslovakia, Finland, France, Germany, Greece, Hungary, Italy, Korea, Mexico, Norway, Poland, Russia, Spain, Sweden, United Kingdom and Yugoslavia. Customs has negotiated agreements with other countries that are not yet in force: Denmark and Honduras.
TRAINING AND TECHNICAL ASSISTANCE
Several sections of Justice's Criminal Division conduct training and provide assistance. In addition to supporting initiatives by FATF and OAS, the Money Laundering Section met with officials from the following countries to discuss money laundering initiatives: Panama, Brazil, Nicaragua, Venezuela, Ecuador, Italy, Belgium, Australia, United Kingdom, Ireland, Indonesia, Portugal, Paraguay, the Czech Republic, Italy, the Netherlands and Denmark.
Treasury's Office of Financial Enforcement provided training and/or briefings for foreign officials, including sessions in Washington for officials from Guatemala, Nicaragua, Belize, Panama, Hong Kong, Australia (Austrac), Ecuador, Paraguay, Argentina, and the UN Drug Control Program. Treasury also provided training or briefing sessions in Belize, the Czech Republic, Slovakia, Poland, and Hungary, as well as at the Federal Law Enforcement Training Center.
The Drug Enforcement Administration and US Customs provide training in the conduct of financial investigations and related subjects to a broad list of countries under a program funded and managed by the Department of State's Bureau of International Narcotics Matters, in addition to their own directly-funded training programs.
DEA provided training in asset forfeiture in 1993 through four regional seminars, which attracted an estimated 98 foreign officials from 49 countries. The week-long seminars were held in Guatemala, Malaysia, Romania and the Netherlands Antilles. Also in 1993, DEA coordinated 58 international trips which were either fully or partially related to financial crime, and provided training in Washington to 36 foreign delegations.
Customs offers seven different types of programs: Executive Observation Programs in the US; mid-management seminars in the US; training for trainers; in-country enforcement training; contraband enforcement team training; short-term assistance projects tailored to individual country needs; and seminars. Customs provided money laundering training for law enforcement, banking officials and regulators in 1993 in Jamaica, Costa Rica, Germany, Aruba, Belize, Ecuador, Panama, Turkey, Hungary, Poland and Romania. In addition, over 30 foreign government officials received training on money laundering control and enforcement techniques at Customs headquarters.
The Federal Reserve has provided specialists for each of FATF's seminars in addition to conducting its own training programs for regulators.
OPERATION DRACHMA, prosecuted in Connecticut with the assistance of the Department of Justice (Money Laundering Section) and US Attorneys offices, resulted in the indictment of 13 individuals who had laundered $22.5 million. The principal defendant, Szion Jacob Abenhaim of Cali, Colombia, worked with associates in Israel, and orchestrated cash pickups of cocaine proceeds on New York City streets. Unwittingly, the group hired an FBI undercover agent to launder funds through designated accounts around the world. In many instances, these designated accounts were held by purportedly legitimate Colombian businesses which wanted to hold assets in US currency. These businesses agreed to repay Abenheim's organization in Colombian pesos through bank accounts in Colombia, in exchange for deposits in US dollars.
OPERATION CHOZA-RICA is a long-term undercover money laundering operation that began in 1990. Undercover Customs agents posed as currency facilitators for narcotics and arms traffickers to US bankers and Mexican "casa de cambio" owners More than $40 million in currency and financial instruments has been seized to date. In March 1992, violators from three different banks and 10 Mexican nationals associated with the cambio activity were arrested. As a result of these arrests and consequent search warrants, agents traced accounts in California and Texas to a New York bank where $35 million was seized. Also in March, a 25-count indictment for various money laundering, bank fraud and conspiracy charges was unsealed, resulting in the arrests of high level officials from Texas banks, as well as owners and operators of cambios in Monterrey, California.
This investigation continues to produce results. In August 1993, a US District Court denied a motion to abate the indictment of a principal defendant, whose family attempted to have $33 million of frozen assets returned to them in Mexico, on grounds the defendant was deceased. US Customs has evidence to show that the defendant faked his death in Mexico to avoid prosecution.
The KEN MIZUNO investigation in Las Vegas involves the fraudulent sale of more than 52,000 golf memberships in Japan and the subsequent transfer and laundering of $242 million in the United States. The USG has seized or attached $108 million in property that Mizuno and his associates purchased with the proceeds. Ken International, Mizuno's company, has pleaded guilty to four charges.
Pursuant to the provisions of the 1988 US law, the Departments of Justice, State and Treasury have aggressively sought to encourage foreign governments to cooperate in joint investigations of drug trafficking and money laundering, offering the inducement of sharing in forfeited assets. A parallel goal has been to encourage the spending of these assets to improve narcotics law enforcement. Further, the long term goal has been to encourage governments to improve asset forfeiture laws and procedures, and undertake independent investigations.
From 1989 through October 1993, the international asset sharing program administered by Justice has resulted in the forfeiture in the United States of $87,098,527, of which $27,347,258 was shared with foreign governments which cooperated in the investigations.
Recipients of shared assets include: Canada, Switzerland, United Kingdom, British Virgin Islands, Cayman Islands, Colombia, Venezuela, Paraguay, Guatemala, Costa Rica, Argentina, Egypt, and the Bahamas. Switzerland has shared in five forfeitures, receiving about US$16 million, or more than half the total distributed. Additional sharings are in the process of being approved. Still other transfers were made by US Customs during the period, including $226,506 in seized assets with Canada (three awards) and Trinidad and Tobago, as well as earlier awards of $2 million to France and $3 million to the United Kingdom.
THE FINANCIAL ACTION TASK FORCE
The Financial Action Task Force was created by the Economic Summit in 1989 and now includes 26 governments: United States, France, Germany, UK, Canada, Japan, Belgium, Netherlands, Luxembourg, Italy, Sweden, Denmark, Norway, Finland, Iceland, Ireland, Spain, Portugal, Greece, Austria, Switzerland, Turkey, New Zealand, Australia, Hong Kong, Singapore, the European Union (represented by the Commission of the European Communities) and the Gulf Cooperation Council.
The FATF Secretariat is housed in the Organization for Economic Cooperation and Development. FATF consults with the UN Drug Control Program, Council of Europe, World Bank, European Bank for Reconstruction and Development, International Monetary Fund, Interpol, Customs Cooperation Council, and the Organization of American States.
FATF operates through a six-member steering committee. It includes the President (United Kingdom), the past President (Australia), the next President (Netherlands), and the chairmen of three working groups: Legal Issues (Italy), Financial Cooperation (France) and External Relations (United States). Treasury's Assistant Secretary for Enforcement heads the US delegation; State (INM) chairs the external relations group.
The FATF program has three principal components. In May 1990, FATF adopted 40 recommendations on money laundering countermeasures, which among other purposes are intended to build upon the provisions of the 1988 United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances. In one of the most unique actions taken by an international organization, members agreed in April 1991 that each of the 26 governments would be evaluated by experts from among the membership on comparative progress in implementing these recommendations. This action underscored the political commitment of FATF members and heightened FATF's credibility in the world's financial and enforcement communities.
The Working Groups on Legal Issues (I) and on Financial Cooperation (II) meet regularly to consider trends and methods used to launder money; where appropriate, they recommend changes or new interpretations of the 40 measures. These Working Groups also engage in discussions, internally and with outside experts, on such major issues as regulating wire transfers, standards for non-bank financial institutions, asset forfeiture and asset sharing, and the use of shell corporations and related entities to facilitate money laundering.
The Legal Affairs and Financial Working Groups monitor the implementation by Member countries and conduct the evaluations of Members based on experts examinations. The two Groups also combine to monitor Members' actions relating to funds transfers through national payment systems. FATF Members have been requested to ensure that accurate originator and beneficiary information is contained on funds transfer forms so that such information is available at all stages of the transfer.
The Legal Group has drafted an Interpretive Note concerning the use of shell corporations to hide or obscure the identity of the true beneficial owners of transactions, and is also considering how non-bank financial institutions may be regulated. Interpretive Notes serve to deepen the FATF recommendations. Another Note was developed by the Legal Group concerning the use of controlled deliveries.
The objective of the External Relations Working Group (III) is to engage all financial centers and other governments significant from a money laundering perspective in the FATF consensus. Through its external relations program, FATF urges other countries to endorse and implement these recommendations, and to agree to be evaluated on their progress. FATF attempts to provide, directly or in association with the UN, the EU and other organizations, a sufficient level of training and technical assistance to meet those objectives.
FATF conducted six seminars during 1993, some involving 40 or more experts from as many as 10 nations. The seminars offered a total policy perspective, involving regulators as well as bankers, finance and justice ministries, enforcement agencies and prosecutors. Each seminar was designed to explain the policy approach to the specific problems of a given region, and to provide guidance on implementation and evaluation.
The first seminar in Hungary in February attracted delegates from throughout Eastern Europe, and was followed by another seminar in Poland in March. Nearly two dozen countries met with FATF experts at a symposium in Singapore in April for East and South Asian governments. A fourth seminar was held in Riyadh in October for the six states of the Gulf Cooperation Council. A fifth seminar was held in October in the Bahamas for Caribbean region bankers and regulators. A sixth seminar was held in Moscow for Russian bankers and government agencies in November.
FATF also employed high level visits of its senior officers to several countries, including the People's Republic of China and Israel. Similar high-level missions will be conducted in 1994, including Mexico, Thailand, Malaysia, Taiwan and Morocco.
Five FATF Members (US, UK, France, Netherlands and Canada) continued to support and finance the Caribbean Financial Action Task Force, which established a Secretariat in Port-of-Spain following the selection of Trinidad and Tobago as president. A major task is to implement 59 recommendations (the FATF 40 plus 19 indigenous to the region) which ministers from Caribbean Basin governments endorsed at a plenary meeting in Kingston, in November 1992. The resolutions include a commitment to evaluate their progress at one and three year intervals. A Steering Group was selected which includes the Bahamas, Panama, Grenada, Netherlands Antilles, Cayman Islands and Trinidad; this group met in November to approve a strategy for 1994-95.
Other participating governments include Antigua and Barbuda, Aruba, Brazil, British Virgin Islands, Canada, Colombia, Dominican Republic, France, Jamaica, Mexico, Netherlands, St. Vincent and the Grenadines, Turks and Caicos, United Kingdom, United States and Venezuela.
The FATF donors agreed in 1993 to fund a CFATF Secretariat, which began operating in the latter part of the year from offices in Port-of-Spain. First year emphasis will be upon evaluating progress among these governments. FATF is considering the formation of other regional groups.
FATF also supports the OAS in its efforts to foster adoption and implementation of its model laws, which are based on the 1988 UN Convention. The OAS anti-money laundering model laws also incorporate FATF recommendations. FATF and OAS plan to collaborate on seminars in Latin America during 1994.
FATF plans a further approach to East and South Asia, to follow up on the work done at the 1993 symposium in Singapore. The goal, as elsewhere, is to secure endorsement and implementation of the recommendations, and to measure progress. The 1993 seminar included Pakistan, India, Bangladesh, Nepal, Sri Lanka, Myanmar, Thailand, Laos, Malaysia, Indonesia, Brunei, Korea, People's Republic of China, Taiwan and the Philippines, as well as FATF Members Singapore, Hong Kong, Japan, New Zealand, Australia, UK and United States.
The expectation for 1994 is that FATF will continue to give priority to its external relation efforts in Eastern Europe, the Caribbean, and East Asia, but initiatives will also be undertaken in South America, South Asia and Africa. A Working Group III strategy based upon these priorities for 1994 but projected to 1999 was approved by FATF in January, 1994.
This strategy supports a "futures paper" adopted by FATF in January, 1994, which broadens the group's mandate to include money laundering from all serious crime, i.e., not limited to the laundering of drug proceeds.
1988 UN CONVENTION
Ninety-nine states have now become parties to the 1988 UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, an increase from the 72 states reported in the 1993 INCSR. This is an excellent showing five years after the initial signing ceremony in Vienna.
These states became parties to the Convention in 1993: Burundi, Colombia, Guyana, Fiji, Antigua/Barbuda, Malaysia, El Salvador, Romania, Zambia, Slovakia, Argentina, Dominica, Croatia, Zimbabwe, Germany, Bosnia/Herzogovenia, Netherlands, Armenia, Dominican Republic, Azerbaijan, Brunei, Mauritania, Sudan and the former Yugoslav Republic of Macedonia.
Three states have moved towards compliance as recently as this year. Panama became a party to the Convention on January 13, 1994, and Finland and Latvia deposited their instruments of accession in February 1994.
The following governments had become parties to the Convention in prior years: Afghanistan, Australia, Bahamas, Bahrain, Bangladesh, Barbados, Belarus, Bhutan, Bolivia, Brazil, Bulgaria, Burkina Faso, Cameroon, Canada, Chile, China, Costa Rica, Cote d'Ivoire, Cyprus, Czechoslovakia, Denmark, Ecuador, Egypt, France, Ghana, Greece, Grenada, Guatemala, Guinea, Honduras, India, Iran, Italy, Japan, Jordan, Kenya, Luxembourg, Madagascar, Mexico, Monaco, Morocco, Myanmar, Nepal, Nicaragua, Niger, Nigeria, Oman, Pakistan, Paraguay, Peru, Portugal, Qatar, Russian Federation, Saudi Arabia, Senegal, Seychelles, Slovenia, Spain, Sri Lanka, Suriname, Sweden, Syria, Togo, Tunisia, Uganda, Ukraine, United Arab Emirates, United Kingdom, United States, Venezuela and Yugoslavia. The European Community confirmed Article 12.
The twenty-six governments which are signatories to the Convention but not yet moved to become a party include several important financial center countries, among others: Algeria, Austria, Belgium, Cuba, Gabon, Holy See, Hungary, Indonesia, Ireland, Jamaica, Kuwait, Maldives, Mauritius, New Zealand, Norway, Philippines, Poland, Sierra Leone, Switzerland, Tanzania, Trinidad and Tobago, Turkey, Uruguay, Yemen and Zaire.
As of February 1, 1994, thirty-nine governments had neither signed the Convention nor become a party; 22 of the governments on this list, which contains fewer key financial centers than the list above, are in Africa, which has received comparatively less attention from money launderers and/or groups attempting to counter it: Albania, Angola, Belize, Benin, Botswana, Cape Verde, Central African Republic, Chad, Comoro Islands, Congo, Cook Islands, Djibouti, Equitorial Guinea, Ethiopia, The Gambia, Guinea-Bissau, Haiti, Iceland, Iraq, Kampuchea, Kiribati, North Korea, South Korea, Laos, Lebanon, Lesotho, Liberia, Libya, Liechtenstein, Malawi, Mali, Malta, Mongolia, Mozambique, Namibia, Papua New Guinea, Rwanda, St. Kitts and Nevis and St. Lucia.
OAS LEGAL EXPERTS GROUP
During 1991-92, a 13-nation group of experts prepared model legislation on narcotics-related money laundering and asset forfeiture for the Inter-American Drug Abuse Control Commission (CICAD) of the Organization of American States (OAS). The drafting process was completed in early 1992 and the model statutes were adopted by CICAD on March 10, 1992. On May 22, 1992, the OAS unanimously approved the model legislation and recommended that it be enacted by the 34 OAS member states.
The model statutes consist of 19 articles, which focus on three areas of regulatory and enforcement activity. The first three articles provide definitions and set forth a model statute to criminalize money laundering. The second group of articles sets forth model statutes for the seizure and forfeiture of assets. The third set provides a framework for regulations involving financial institutions and currency transaction recording/reporting.
During the past 14 months, OAS/CICAD has sponsored three in a series of four regional conferences to discuss the model regulations. The conferences present a "hands-on" approach to assist participants to see the practical realities of the model legislation and are designed to encourage them to draft and implement corresponding legislation in their countries.
The first conference was held in December 1992 in Chile, for governments in the Southern Cone. The second conference was held in Panama in June 1993, for governments from Central America and the northernmost countries of South America. A third conference was held in Martinique in January 1994, for governments of the Caribbean Basin. The final conference is tentatively scheduled for May 1994 in Mexico.
The accompanying charts are provided to comply with the International Narcotics Control Act of 1992, P.L. 102-583, which established reporting requirements for FY 1993 and 1994, including a requirement that the INCSR identify the major money laundering countries, and provide specific information for each such country.
There is no uniformly reliable way of estimating the volume of currency or monetary instruments flowing through a given financial system, and therefore no mathematical definition of "major money laundering country." However, there is enough information about the majority of nations and territories to identify them as high, medium or low rank in terms of their comparative significance on the world stage.
From such rankings, an inference can be made that a given nation or territory is a major concern to the USG if it is considered of high or medium-to-high significance and thus of high or medium-to-high priority for bilateral and multilateral intervention. The designations for each nation or territory are shown as (H), (M) or (L) or (NP) for no priority. Those which are (M-H) or (H) are shown in the compliance table.
Admittedly, intelligence on money in transit and under conversion through bank and non-bank financial systems results in Switzerland, which has adopted and enforces very strong laws, and Britain, which is a mainstay in international enforcement efforts, appearing on the same list with governments which have, comparatively speaking, done little or nothing to stop the significant flow of drug proceeds and other illegal funds through their financial systems.
The chapter therefore provides data tables and other information which show the relative degree of compliance with such critical criteria as criminalizing money laundering, or requiring the reporting of unusual or suspicious transactions.
Said another way, the higher priority grouping is that list of governments from which effective action is needed if the international community is to make any headway in the collective effort to stem and prevent the laundering and/or transit of the proceeds of serious crime.
A number of governments were ranked High priority because it is believed that, if new or improved laws were more effectively applied, it would make a difference in the money laundering world. For example, the passage of new laws in Switzerland prompted movements of money away to other locales. That is, its reduced utility to traffickers and/or money launderers would have an impact.
These rankings can change. India was a Medium priority in 1992; it was considered a potential money laundering country on the basis of the flow of money related to India's role in the Southwest Asian heroin trade. Now, the flow of money and gold related to India's own drug trade compels a higher priority. When the Bahamas was assigned a Medium priority in 1993, there was an expectation that the Commonwealth would take action to ensure full statutory compliance with the Convention and also address the shell corporation problem, but it has done neither. Colombia has now ratified the Convention, as has Panama, but Colombia took key exceptions--and neither has undertaken the kind of enforcement effort consistent with the goals and objectives of the Convention. Thus, both retain their High priority rankings.
A Medium priority county designation can indicate a country in transition, where the threat is real but hasn't fully materialized, or simply a country where a significant but not market-shaping volume of money laundering is believed to occur, or one which gives moderate but important assistance to anti-money laundering enforcement efforts.
A Low priority country is one in which there is only a moderate amount of money laundering, and one in which we do not expect the situation to worsen in the immediate future. By definition, we would not expend major resources in such a country.
No Priority means that we either are not aware of any money laundering, or that it is too insignificant to be a factor in the international drug money market.
These rankings, like the material in the country summaries, were developed in a series of meetings involving State, Justice, Treasury, Federal Reserve, Comptroller of the Currency, Central Intelligence Agency, and included the Drug Enforcement Administration, Customs, Federal Bureau of Investigation, Financial Crimes Enforcement Network, Internal Revenue Service, and the Office of National Drug Control Policy.
The table below responds to Section 489(a)(7) of the Foreign Assistance Act of 1961, as amended. For these purposes, it is assumed below that each of the high or medium-to-high priority nations or territories can be considered major; that a significant but unknown amount of US and other drug-related currency flows through their financial systems, in an amount or manner of importance to the United States; and, that the USG either has agreements in force which permit needed exchanges of data and other information or that there is sufficient compatibility of laws to permit such sharing as needed. It should be noted that the USG has pursued agreements in only a small number of instances.
An important change from the 1993 to 1994 INCSR is that, in addition to showing whether a government has become a party to the 1988 UN Convention, the table this year indicates whether that government is fully meeting the goals and objectives of the Convention. In 1993, that finding was expressed in the country summaries; now it is in both the table and the summaries. A finding that a government has not become a party to the Convention, or not adopted legislation to criminalize money laundering, or to require banks to maintain records, has not permitted reporting of suspicious transactions, or established systems to forfeit assets, or cooperated on investigations--or has not made a good faith effort to implement the legislation it has adopted--is grounds for a finding that a government is not fully meeting the goals and objectives of the Convention.
That given, the concentration below is on demonstrating whether a government has become a party to (UN 88) and is meeting the goals (Goals) of the 1988 UN Convention, shown as UN88 in the table, and, in response to Subsection (7)(C), whether a government has:
(i) criminalized narcotics money laundering;
(ii) required banks and other financial institutions to know and record the identity of customers engaging in significant transactions, including the recording of large currency transactions at threshholds appropriate to that country's economic situation;
(iii) required banks and other financial institutions to maintain, for an adequate time, records necessary to reconstruct significant transactions through financial institutions in order to be able to respond quickly to information requests from appropriate government authorities in narcotics-related money laundering cases;
(iv) required or allowed financial institutions to report suspicious transactions;
(v) established systems for identifying, tracing, freezing, seizing, and forfeiting narcotics-related assets;
(vi) enacted laws for the sharing of seized narcotics assets with other governments;
(vii) cooperated, when requested, with appropriate law enforcement agencies of other governments investigating financial crimes related to narcotics; and
(viii) addressed the problem of international transportation of illegal source currency and monetary instruments.
Actions by High and Medium-to-High Priority Governments
Government Ci Cii Ciii Civ Cv Cvi Cvii Cviii UN88 Goals
Aruba Y Y Y N N N Y N ** N
Bahamas N V V V Y N Y N Y N
Brazil N Y Y N Y N Y ? Y N
Burma N N N N N N N N Y N
Canada Y N Y V Y N Y N Y Y
Cayman Islds Y Y Y Y Y N Y Y ** Y
Colombia N Y Y Y Y Y Y N Y N
Ecuador Y Y Y N Y N* Y N Y N
Germany Y Y Y Y Y N Y Y Y Y
Hong Kong Y N Y Y Y N Y N ** N
India Y Y Y ? Y N Y Y Y N
Italy Y Y Y Y Y N Y Y Y Y
Ivory Coast Y Y Y Y Y N Y Y Y N
Japan Y Y Y Y Y N Y N Y Y
Liechtenstein Y ? Y ? Y N Y ? N N
Luxembourg Y Y Y Y Y N Y N Y Y
Mexico Y N N N Y N Y Y Y N
Netherlands Y Y Y Y Y N Y N Y Y
Nigeria Y Y Y N N N Y N Y N
Pakistan N N N N N N Y N Y N
Panama Y Y Y N Y N Y N Y N
Paraguay N Y Y N ? N Y N Y N
Russia N N N N N N Y N Y N
Singapore Y Y Y Y Y N Y ? N N
Spain Y Y Y Y Y N Y ? Y Y
Switzerland Y Y Y Y Y N Y N N (1)
Thailand N N N N Y N Y N N N
Turkey N N N N N N Y N N N
UAE N ? N ? ? N Y ? Y N
UK Y N Y Y Y N Y Y Y Y
US Y Y Y Y Y Y Y Y Y Y
Uruguay N Y Y N N N Y N N N
Venezuela Y Y Y Y Y N Y N Y N
Legend: Y = Yes N = No V = Voluntary
* US-Ecuador asset sharing agreement will be signed soon.
** UN Convention does Not apply
(1) Switzerland has Not ratified but substantially meets the
goals and objectives of the 1988 UN Convention.
[Money Laundering Chart - high/low]
MONEY LAUNDERING CHAPTER
Note: The United States recognizes that some governments included in the reports below are dependencies of sovereign governments, or, like Aruba and the Netherlands Antilles, and the French overseas departements, and Madeira and the Azores, are parts of governments. In several instances, these dependencies etc. have separate identifications as financial systems, e.g., as members of the Offshore Group of Banking Supervisors or the Caribbean Financial Action Task Force. They are treated individually here for those reasons. US dependencies, such as the Virgin Islands and Puerto Rico, are similarly treated. Comparative priorities are shown for each government.
Canada. (High) Canada has emerged as a major money laundering center; its authorities estimate that US$10-12 billion in drug-related proceeds passes through Canada's banking and non-bank financial institutions annually; the proceeds are generated by the sale of drugs domestically and sales of drugs abroad, including US sales. Colombian cocaine cartels carry on organized money laundering schemes; typically, Canadian dollars are converted into US dollars, then sent by wire to bank accounts in the United States or Panama. The hundreds of currency exchange houses on the US border, which are not required to report suspicious transactions, are often used to convert and transfer drug proceeds. The currency exchanges help traffickers around the problem of retaining Canadian currency by wiring US dollars to US banks for collection. There is evidence ethnic Chinese traffickers in Seattle are using the "hundi" underground banking system in Canada to convert heroin proceeds into US dollars. A Middle Eastern organization is known to have laundered drug money through Canada. Drug profits have been laundered through import and export businesses, as well as front companies and shell corporations.
Although Canada criminalized money laundering in 1989, few prosecutions have resulted. The seizure total of $21.5 million in 1992 is small compared to the estimated volume of money laundering traffic. New regulations were adopted in 1993 to implement a 1991 law which requires financial institutions to maintain records for five years on transactions of more than C$10,000. Reporting of suspicious transactions is voluntary, but the Canadian Bankers Association, whose members oppose mandatory controls, says that 100 suspicious transaction reports are filed with the government each month.
Although assets may be seized and forfeited without related arrests and prosecution for drug offenses, this does not happen in practice. Forfeited assets are placed in the general fund, and Canada passed legislation in 1993 that would distribute such assets among federal, provincial, municipal and perhaps foreign authorities. However, Canada has not promulgated regulations to implement the 1993 legislation, and Canada is unable to share assets domestically with the United States.
United States. (High) The Annunzio-Wylie Anti-Money Laundering Act (H.R. 5334) enabled the United States to comply fully with FATF recommendations. The law gives Treasury regulatory authority to require suspicious transactions reporting, which regulatory agencies have required from banks since 1984, by all financial institutions subject to the Bank Secrecy Act, including securities brokers, casas de cambio and other non-bank financial institutions. The Act also authorizes regulations to require depository institutions to identify and report the names of non-bank financial institution account holders. The Act broke new ground by permitting revocation of license for a depository institution convicted of currency or money laundering violations.
Mexico. (High) Money laundering is extensive, and US enforcement officers rank Mexico behind only the United States, Panama and possibly Venezuela in the Western Hemisphere as money laundering centers. Although Mexico has increased sanctions against money laundering through revisions to its tax code, the Mexican financial system remains vulnerable to drug and non-drug related money laundering. Foreign and domestic currency movements are unmonitored; any amount of deposited currency can be transferred by wire, between domestic banks or between foreign and domestic institutions. There are no mandatory reporting requirements relating to cash deposited in banks or wire transfers.
Much of the money laundering occurs in "casas de cambio" or exchange houses which proliferate along Mexico's lengthy, porous border with the United States. These "casas" can only exchange one form of currency for another; another role in money laundering is to create a layer of anonymity between the owner of the currency and the financial institution where the "casa" has an account; that account can be used to wire transfer funds. A great deal of currency is also returned from the United States through Mexico, enroute to South America. Traffickers are reverting to bulk shipments of drug currency; having been "stung" by enforcement officials through Operation Green Ice, they are more fearful of being detected through improved US bank reporting requirements. Large quantities of cash are secreted in tractor trailers or cars, often carrying legitimate merchandise, which are driven across the Southwest border (some bulk shipments are by air). Inside Mexico, the cash is placed into the financial system, or wire transferred, or moved further in bulk to South America.
Illegal proceeds are also invested in legitimate enterprises and the money laundering which occurs can involve loans, letters of credit, offshore banking transactions and other schemes.
Sensitive to these vulnerabilities, Mexico has taken a number of regulatory and enforcement actions, but further action is needed to comply fully with the goals and objectives of the 1988 UN Convention. In June 1993, President Salinas created the National Institute for the Fight against Drugs, which has overall responsibility for counternarcotics activities and targets drug trafficking, money laundering and arms smuggling. Hacienda officials travelled to Washington for a day of policy discussions with Treasury, State and Justice. There are plans for a visit to Mexico by an FATF delegation; Mexico has applied for membership in the Organization for Economic Cooperation and Development, which should be approved by May or June 1994.
Mexico published new regulations in July 1993 which require persons entering the country to declare currency and checks in their possession in excess of 30,000 pesos (roughly US$10,000). The government has also proposed changes in its 1990 tax code to permit prosecution of money laundering as an independent offense related to drug trafficking. Although the revisions are drawn from the model legislation approved by the Inter-American Drug Abuse Control Commission (CICAD), money laundering would remain a tax rather than a criminal offense. A similar approach is being taken with respect to asset forfeiture; the PGR has agreed to inform the Hacienda of property seizures so that a determination can be made whether or not any tax laws were violated.
Money laundering enforcement actions were stepped up in 1993, resulting in increased seizures of drug assets, and the arrest of two major money launderers, Rafael and Eduardo Munoz-Talavera. Their case confirmed that drug money is not only laundered in Mexico, but invested. The brothers owned restaurants, bars, meat shops, farms and homes worth an estimated US$23 million in Juarez alone. Colombian and Mexican drug traffickers, who are reportedly seeking to legitimize as much of their wealth as possible, also own cement companies, assembly plants, motels, biotechnology firms, aviation companies and other enterprises in Mexico.
Argentina. (Medium) Narcotics-related money laundering is increasing, both from domestic sales of drugs and from drug sales abroad, but Argentine lawmakers have not so far provided the kinds of countermeasures expected from an increasingly important money laundering center, although changes are being considered. Colombian, Italian, Bolivian and Argentine traffickers are laundering drug money through banks, businesses, hotels and casinos; traffickers are also investing in office buildings, shopping malls, hotels and condominiums.
The volume of drug dollars processed through Argentina is believed to have increased as a result of the Central Bank's decision in January 1993 to allow Argentinians to hold US dollar accounts and write dollar denominated checks; without question, these steps have increased the flow and availability of US dollars, which were already dominant in the monetary system. The Joint Control Commission is studying money laundering methods and will propose measures to detect money laundering and prosecute offenders. At present, money laundering is an offense only when explicitly linked to narcotics activity. Banks are encouraged to report suspicious transactions, but these reports are made on an infrequent and irregular basis and bankers, who are required by law to protect the identify of depositors unless presented with a court order, say there is little or no protection for bankers who voluntarily cooperate without a court order. The two banking associations recommend keeping records for five years but there are no legal requirements to do so. The lack of a law protecting informants with regard to illegal banking activities also prevents adequate criminal investigations. Argentina is considering CICAD model laws but there is substantial opposition to reform within the banking and business communities. There are no controls on the import/export of cash. The MLAT with the United States went into force in February, 1993.
Bolivia. (Medium) Bolivia is not an important financial or money laundering center, and known money laundering activity occurs within exchange houses, and is drug related. Bolivia is being downgraded from a Medium-High to Medium Priority ranking among money laundering countries, given the absence of evidence which would confirm major exploitation of the banking system. But serious questions remain. Bank deposits in foreign currency are permitted. Over 87 percent of all deposits are in US dollars, in part due to the lack of Bolivian confidence in its currency, following the hyper-inflation of the mid-1980's.
The widespread use of US dollars means that the proceeds of drug trafficking can be easily hidden. Moreover, Bolivia has made no serious effort to meet the goals and objectives of the 1988 UN Convention. Money laundering is not a criminal offense, and there are no controls on the amounts of money which can be moved into or out of Bolivia. Bank secrecy laws prohibit the sharing of information to facilitate investigations. There is concern that traffickers could exploit this situation, with Bolivia becoming an alternative to Colombia and Peru for money laundering. The lack of stringent banking regulations reflects the strong opposition of banks to changes in bank secrecy laws.
Brazil. (Medium-High) Drug traffickers are reportedly exploiting Brazil's lack of effective anti-money laundering controls and are investing US dollars in businesses, hotels/motels and condominiums. The dollars, generally moved to Brazil in bulk quantities and probably representing proceeds of large shipments by Colombian, Bolivian and Brazilian traffickers, are also laundered, with exchange houses as well as travel agencies, the underground lottery, the gold market and front companies being preferred mediums.
Laundering of any illegally-gained assets is a criminal offense. Brazilians are limited to taking US$4,000 per trip out of the country, and banks are required to report currency transactions of US$10,000 or more. Brazil also has asset forfeiture and seizure laws. However, bank secrecy laws make it difficult for enforcement officers to identify and trace assets through the banking system, and inhibit cooperation with officials from other countries.
While a new scandal involving the laundering of public funds has again focused attention on banks and bank regulation, exchange houses and other non-bank institutions are not included and remain unregulated. There have been no arrests or prosecutions for money laundering. In sum, Brazil has ratified but not yet met the goals and objectives of the 1988 UN Convention.
Chile. (Medium) Government officials acknowledge that drug money flows through Chilean banks and also through investments in the booming construction and fishing industries. Numerous "casas de cambio" are known to launder drug money from Peru, Colombia and Bolivia. The presence in Chile of money laundering specialists who represent the worldwide interests of the Medellin and Cali cartels, other Colombian and Peruvian groups, and European arms and heroin organizations suggests that Chile is becoming a more important money laundering location. There are no anti-money laundering laws to offset the stringently enforced bank secrecy statutes. A bill has been in Congress since 1992 which, if enacted, would allow the Central Bank or State Defense Council to investigate money laundering crimes.
Colombia. (High) Colombia continues to be one of the primary money laundering concerns in the Western Hemisphere. While the Colombian Government ratified the 1988 UN Convention in 1993, the last of the Andean governments to do so, it took important reservations, notably to the money laundering measures, asset forfeiture and confiscation provisions and extradition clauses. Colombia has not met the Convention's goals and objectives.
In September 1993, the Central Bank introduced amendments to the foreign exchange code which would expedite transactions while imposing stringent controls on speculative or illegal capital. While Resolution 21 requires the reporting of suspicious transactions and recording of transactions in foreign currencies, the Superintendent of Exchange, citing a lack of enforcement resources, has suspended the requirements for exchange houses to identify individuals conducting currency exchanges of US$7,000 or more. A code of conduct for banks, drawn on recommendations from the EU, Basle Committee and others, and including a "know your customer" policy, has been adopted, with untested results.
Money laundering per se is not a crime (although illegal enrichment is). The government can confiscate the assets of drug traffickers, but only after a criminal conviction for drug trafficking or another crime. However, this law has many loopholes and its enforcement has been blunted by corruption. All 52 of the accounts blocked as a result of the late 1991 raids were subsequently released. Other assets besides bank accounts, which were seized from Rodriguez Gacha and Pablo Escobar were also returned. This is due to the lack of and/or weak laws which would give the government the authority to confiscate and forfeit assets associated with narcotics trafficking.
To circumvent enforcement regulations, as well as the 15-20 percent tariff imposed on US dollars entering Colombia, traffickers use Venezuelan banks, where dollars are converted into bolivares or other non-US currency, then transferred to Colombia or wired elsewhere. The drug trade is believed to be a factor in the continuing purchase of Colombian banks by Venezuelans. Millions of dollars of US postal money orders have been purchased by traffickers to move drug proceeds back to Colombia, where they are exchanged for pesos at casas de cambio and then deposited in banks.
Moreover, substantial inflows of foreign capital continue to enter the Colombian economy under the stimuli of a liberalized exchange regime and high interest rates, and this flow of foreign exchange is believed to include drug proceeds. While experts believe the cartels continue to invest abroad large amounts of the proceeds from cocaine, heroin and cannabis sales, US dollars are also returned in bulk to the cartels.
Ecuador. (Medium-High) The banking community believes that hundreds of millions of dollars in cocaine proceeds are laundered yearly through their system; the Solicitor General estimates the cumulative volume at more than US$1 billion. Ecuador's emergence as an important money laundering center owes much to its strict bank secrecy laws, but especially to its offshore banking system. In late 1993, the Government moved to exercise some control over these offshore banks. Money laundering also occurs in domestic banking and non-bank institutions. Ecuador has ratified but is not yet meeting the goals and objectives of the 1988 UN Convention.
Ecuador has signed an agreement with the United States to share information on currency transactions involving more than US$10,000, but some financial institutions do not comply with the requirement for retaining records, and the Superintendency of Banks cannot easily share data on domestic transactions with police because of bank secrecy laws. Still, several banks have cooperated with GOE and USG agencies on investigations, notably the Reyes Torres case, and the Superintendent signed an agreement in January 1994 on police access to bank data. Assets can be forfeited only if there is a conviction for drug trafficking; there have been no trafficking convictions so no property has been forfeited. Some Reyes Torres assets have been frozen but the courts have not yet adjudicated the case.
Guyana. (No Priority) Police suspect money laundering occurs but they have no hard evidence, and the volume is not significant.
Paraguay. (Medium-High) Although officials have expressed their intent to curtail money laundering, liberal banking and foreign investment laws, as well as the lack of anti-money laundering laws, a comparatively large financial sector, limited law enforcement capabilities, and, not least, the contraband-influenced economy, give Paraguay the potential to become an even more significant money laundering center. Paraguay has ratified but does not fully meet the goals and objectives of the 1988 UN Convention. However, the Congress has drafted legislation to criminalize money laundering and strengthen related laws which will be considered in the session starting March 1994.
Drug money laundering is believed to be increasing. The well-established contraband sector of the economy, which involves more than $400 million in goods smuggled each year, is believed to conceal a large portion of the drug proceeds flowing through the banking system. Casas de cambio, which are not effectively regulated due to manpower shortages, are heavily used in the exchange of US dollars, and are known to have been involved in worldwide transactions of drug proceeds. There are no restrictions on the import/export of currency, but banks are required to report transactions of US$10,000 or more, information which can be shared pursuant to an agreement with the United States.
Peru. (Medium) Although drug-related money laundering occurs in both banks and non-bank financial institutions, especially exchange houses, Peru is not considered a significant money laundering center. Laundered money includes funds paid to Peruvian cocaine trafficking organizations by Colombian traffickers who use US dollars (from drug sales in the United States) to buy the raw coca materials from Peruvian suppliers. US currency enters and leaves Peru free of exchange controls. Peru signed an information exchange agreement with the United States in 1992; to implement that agreement, banks and formal financial institutions are required to report the identity of customers conducting significant transactions in US currency. But banks are not required to report suspicious transactions. Peru can seize drug-related proceeds and other assets but must prove a direct connection between the funds and an antecedent offense like drug trafficking.
Suriname. (Low) Tight banking restrictions and a practically non-convertible currency make Suriname an unattractive place to launder money, despite its lack of preventive legislation.
Uruguay. (Medium-High) Uruguay is an important financial center in the Southern Cone. USG, European and Southern Cone enforcement agencies believe narcotics traffickers launder money in Uruguay, although the scope is undetermined. Legislation which will criminalize money laundering, passed by the Senate, is awaiting approval by the chamber of deputies. The 1988 Vienna Convention has been ratified by the lower House but awaits Senate (upper House) action.
The authority to investigate money laundering is predicated on a drug offense. The Chamber of Deputies recently passed a bill calling for registration of gold exports. However, the bill exempts "internationally recognized banks and exchange houses." The exchange houses are not effectively regulated by the Central Bank. New legislation is based on CICAD model laws. While the current law provides for criminal forfeiture, the law has never been applied against drug traffickers, nor has the GOU seized any funds in banks or businesses. Uruguay has ratified the MLAT with the Unite States which, when in force, should ease the exchange of evidence in money laundering cases.
Venezuela. (High) Venezuela, which has become a significant money laundering center, adopted a law in September 1993 criminalizing drug money laundering. While the law has limited scope, it does require the reporting of suspicious transactions and is one of the few statutes in this Hemisphere which imposes a due diligence principle on bankers. Venezuela invoked the new law when its National Guard raided a series of exchange houses and businesses in Tachira and arrested more than 100 persons. The Central Bank requires banks and exchange houses to record transactions involving more than $10,000 in US currency, but the requirement is not rigidly enforced, e.g, among exchange houses in the Maracaibo region. Brokerage houses are not considered to be financial institutions, and therefore have not been required to report. The Central Bank plans to create a data base that will improve its ability to detect money transfers related to drug trafficking. There are no asset forfeiture laws, and Venezuela would benefit from implementing a system for freezing, seizing and forfeiting narcotic-related and other criminal assets. Venezuela has ratified but has not met the goals and objectives of the 1988 UN Convention.
Money laundering generally involves the exchange of US dollars for Colombian pesos or Venezuelan bolivares; the proceeds are primarily owned by Colombians while Venezuelans, who have been buying Colombian banks and are benefitting from Colombia's 15-30 percent tariff on US dollars entering that country, own the money laundering networks. Most money laundering occurs through banks, exchange houses, casinos, the stock market or real estate investments, and involves the proceeds of cocaine trafficking. Drug funds deposited into banks can be converted into US dollar checks and distributed to individuals and companies in Colombia or Panama. Substantial sums of money are believed to flow through real or dummy financial corporations in Tachira and Zulia states.
Belize (Medium) Money laundering is now considered a potential threat to Belize, which has no laws regulating the movement of currency and allows unrestricted use of bearer-negotiable instruments. Belize, which has not criminalized money laundering, has significantly increased exports of US dollars to correspondent banks. The government has sought USG assistance.
Costa Rica. (Medium) Money laundering appeared to increase in 1993; several USG investigations involve front companies in Costa Rica which are linked to Colombian traffickers, and indicate that Costa Rica is being used not only as a transhipment point for drugs but also for bulk shipments of cash. In February 1994, the GOCR arrested the operator of an exchange house, with alleged ties to Colombian, Central American and US money laundering groups. The USG believes that the exchange house laundered between US$400,000 and $750,000 daily. Colombians have been investing in real estate and hotels in Costa Rica, which is a tax haven. There are also indications that Italian organized crime families have established front companies in Costa Rica. Four Colombian drug money launderers were caught in Operation Green Ice, but Costa Rica has not yet extradited these offenders, pending resolution of appeals. The Costa Rican Constitutional Court has ruled that the US/Costa Rican extradition treaty is "inapplicable," and the GOCR is currently processing USG extradition requests under a domestic Costa Rican extradition law.
El Salvador. (No Priority) There is no indication of any significant money laundering activity.
Guatemala. (Medium) USG officials share the Central Bank's concern that money laundering may have increased along with trafficking in cocaine; the lack of conclusive evidence on money laundering may reflect an intelligence gap. Other indicators abound, including high real estate prices and a construction boom, beyond the norms associated with market conditions. Moreover, there is evidence that bulk shipments of US currency to Colombia are routed through Guatemala. At the same time, Guatemalan drug traffickers are known to use Florida banks to launder money, as well as domestic front companies, apparently acting in behalf of Colombian groups. Guatemala has a well-developed financial system and a network of informal financial institutions, both operating under minimal controls. While a financial sector reform program has been initiated to improve prudential bank supervision, it is unlikely to deter money laundering. The government is issuing bearer bonds at very favorable interest rates; bearer bonds have been exploited by money launderers in a number of jurisdictions. Money laundering is not a crime, nor are there controls on currency movements, but banks are required to report transactions of more than US$5,000. There has been no enforcement of a new forfeiture law which limits government seizures to those assets directly involved in narcotics offenses (instrumentalities). Bank secrecy is constitutionally mandated and extremely difficult to pierce.
Honduras. (Low) Some foreign investment in the service sector of the economy may be drug-financed, particularly the growing tourism industry of the bay islands. A money laundering law is pending before the Congress. Honduras has an asset seizure law, but it has only been used to confiscate some vehicles.
Nicaragua. (No Priority) Laundering of drug proceeds probably occurs in bank and non-bank systems but is not significant.
Panama. (High) Panama deposited its instrument of ratification, with respect to the 1988 UN Convention, on January 13, 1994, and has proposed implementing legislation that would complement its 1986 law. However, Panama is not fully meeting the goals and objectives of the Convention with respect to money laundering countermeasures; nor has Panama, which is one of the world's major tax havens and offshore banking centers, adopted the kinds of banking and financial regulations which the Financial Action Task Force, the Organization of American States and the Offshore Group of Banking Supervisors (OGBS) believe are essential to prudential supervision of the financial systems.
Although Panama has proposed a more effective system of statutory controls, many of the transactions in drug proceeds which US enforcement agencies have traced to Europe, Asia, the United States and the Caribbean continue to have Panama as a common link. Panama continues to rank second in this Hemisphere only to the United States as a money laundering concern to USG agencies. The sophisticated banking structure which makes Panama an important and successful financial center, coupled with loose money laundering laws and ineffective enforcement, continue to contribute to Panama's vulnerability to money laundering and make it a venue of choice for drug traffickers, especially the Colombian cocaine cartels, and other money launderers. The attraction is heightened by: a dollar-based economy; lax and/or poorly enforced regulations on banking, offshore banking, and customs; loose standards for incorporation and anonymity for owners of shell corporations; corporate ownership through bearer shares; and unlimited flows of currency and monetary instruments into and out of Panama. In sum, Panama offers the kind of sophisticated banking that is essential to the professionally managed schemes used today by drug cartels and other criminals.
Drug money is converted within the financial system and through the Colon Free Zone, and also transits Panama. The United States stopped issuing 50 and 100 dollar notes to Panama in 1986, yet the return of currency in these denominations is very high. The system's vulnerability was well demonstrated in 1993 when the New York account of the Panama branch of Hong Kong Shanghai Bank was frozen, as the result of an investigation involving US postal money orders. Until that case broke, Panama accounted for much of the worldwide total of misused money orders. Subsequently, banks in Panama have virtually stopped accepting US money orders, a confirmation that conclusive enforcement actions can have results in Panama. The continued use of the Free Zone to launder money, some of which may be drug-related, was confirmed again by the discovery of fictitious import/export companies using false invoicing schemes, one of the most popular methods globally to launder proceeds from various crimes. There is also concern that traffickers are investing in the construction industry.
Like Panama's banking regulations, its judicial processes, customs and enforcement procedures, as well as internal bank policies, are also not consistent with international standards. The compliance tables in this chapter compare Panama and a number of other governments on such basic criteria as: the criminalization of money laundering; requiring that banks keep adequate records for mandated periods of time, sufficient to ensure effective investigations; requiring that banks keep records of significant transactions; requiring that banks record and report suspicious transactions; establishing systems for identifying, tracing, freezing, seizing and forfeiting narcotics related and other assets; enacting laws for the sharing of seized assets with other governments; cooperating with appropriate law enforcement agencies of other governments; and addressing the problem of international transportation of illegal source currency and monetary instruments.
While Panama has been an inactive member in recent years, it has been warned by OGBS that it cannot be a member in good standing unless it adopts statutory countermeasures; after an exchange of correspondence with Panama, the OGBS Secretariat has recommended to its members that Panama's membership be withdrawn.
Adopting legislation or regulations to these effects is but one test; as FATF has demonstrated through its mutual examinations, the parallel test, to which other governments are also being held accountable in this year's INCSR, is whether the government is actually implementing these and related measures, and thus meeting the goals and objectives of the 1988 UN Convention. For example, money laundering is a crime, but the record of GOP-led investigations pales in comparison to known levels of activity.
The only successful prosecution under the 1986 law, which criminalized money laundering but provides that the defendant must know that the funds were drug proceeds, occurred in 1993. The conviction resulted from a Panamanian investigation, but was based primarily on evidence provided by USG agencies (the conviction occurred in absentia and involved a defendant who had confessed in the United States).
While the banking association has issued new guidelines for "know your client" procedures and banks must record significant currency transactions, there remains a need for more effective money laundering controls and improved enforcement. There is no requirement upon banks to report suspicious transactions. The government, however, took action March 9, 1994, to redress another serious problem, by requiring that all persons entering Panama must now declare whether they are carrying more than US$10,000 in cash or negotiable instruments. The regulation is too new to test its effectiveness, which will, hopefully be at a higher level than the limited controls applied to and through banks.
Secrecy laws on business ownership permit traffickers to set up corporations with anonymous boards of directors and to hold ownership through bearer shares. Panama needs to improve its capability to analyze financial crimes, and would benefit from the appointment of special prosecutors to investigate these crimes, as has been proposed in draft bills pending in the Assembly.
The long distance between concept and result in Panama is well illustrated by its ineffective implementation of its asset forfeiture laws. While Panama cooperated in the blocking of numerous bank accounts in recent years, none of these accounts has been forfeited. A number of these accounts, including some holding funds for slain Medellin leader Rodriguez Gacha, were released by the former Attorney General, who was subsequently convicted for abuse of authority.
Anguilla. (No Priority) Money laundering, never extensive, appears to have diminished substantially as a result of Anguilla having shut down all but one of its offshore banks -- which is under investigation for alleged financial crime activity.
Antigua and Barbuda. (Low-Medium) USG officials believe Antigua has the potential to become a prime money laundering location. There has been a significant expansion of offshore banking, with 18 licensees now operating. Some banks which were shut down in Montserrat after discovery of money laundering activity have since moved to Antigua. The Government acceded to the 1988 UN Convention in 1993, and passed a series of laws to implement it. The USG has asked for designation under the new mutual assistance law, which would enhance USG ability to obtain confidential bank records and freeze drug proceeds; Antigua has not responded to the request. The Proceeds of Crime Act covers all money laundering cases with unlawful activity at their core.
Aruba. (Medium-High) Aruba has increased in importance as a money laundering center in the Caribbean, and its ranking is upgraded from Medium to Medium-High, but with the recognition that Aruba has stepped up its efforts to acquire the legal and regulatory capability to deal with the problem. Aruba, which is an offshore banking center, is preparing legislation to comply with the 1988 UN Convention, and has criminalized narcotics and non-narcotics money laundering. Banks have agreed to record the identities of persons engaged in cash transactions of more than US$10,000, including final beneficiaries, but the requirement only applies to non-clients. Proposed legislation would require banks to report unusual transactions.
The key is the degree of effective enforcement and bank regulation, both of which Aruba is improving. Until legislation is effectively enforced, Aruba cannot be said to be meeting the Convention's goals and objectives. In November 1993, the US Federal Reserve dispatched a team of specialists to Oranjestad to provide training for Central Bank employees. Aruba has agreed to become part of a Kingdom of the Netherlands examination by the Financial Action Task Force in 1994. In 1993 Aruba cooperated with a USG money laundering investigation which resulted in the seizure of $65,000, which was awarded to Aruba, one of several instances of such cooperation.
Suspected drug trafficker Randolph Habibe was indicted in December, but other Aruban families with connections to banks in Venezuela and to cocaine cartels in Colombia are strongly suspected of involvement in drug trafficking and money laundering.
Drug money continues to come to Aruba through a variety of methods. A large number of Venezuelans are reported to carry cash to Aruba, and Bahamian traffickers are known to move their proceeds through Aruba. The island has long been a sanctuary for Italian organized crime money laundering agents, money which is believed to include proceeds from worldwide drug sales. In February 1993, slot machines shipped from the United States to Aruba were found to contain millions of dollars in secret compartments. In addition to bulk shipments of cash, there is evidence of "layering" through shell companies (the further movement of money within the financial and business systems to disguise its origin). Drafts drawn on a bank in the Netherlands were used to fund money to a well-documented Panamanian-based drug organization, which was disclosed through a US-Dutch investigation of such shell companies. There is also concern that drug money is "integrated" into the Aruban economy through real estate purchases.
The Bahamas. (Medium-High) USG and Bahamian officials disagree on the vulnerability of the country's banking system to money laundering, and on the further steps needed to meet fully the goals and objectives of the 1988 UN Convention. The GCOB believes more sophisticated forms of money laundering may be occurring, but not on a significant scale, and contend that existing controls are largely adequate to deal with the threat. USG officials believe that money laundering is occurring but is going undetected because it is not being investigated. USG officials are concerned that money launderers can take advantage of existing, largely voluntary requirements and minimal regulations to set up their sophisticated money laundering operations.
Moreover, USG officials believe that additional statutory actions are needed to comply fully with the international consensus on prudent banking measures, and the recommendations of the Basle Committee, the Financial Action Task Force, the Caribbean FATF, and the Offshore Group of Banking Supervisors, to which the Bahamas subscribes. Both governments agree that cash money laundering through Bahamian banks has diminished.
The GCOB has made clear its reluctance to take legislative or regulatory action that would adversely affect its status as a "tax haven" and/or its offshore banking sector. Banking is the second most important sector of the economy and the second largest source of foreign exchange after tourism.
The most fundamental requirement of compliance with the 1988 UN Convention is the criminalization of money laundering, which is not a crime in The Bahamas. The Attorney General's Office says that money laundering cases can be prosecuted, but no cases have been brought before the courts.
The GCOB does not require financial institutions to report suspicious transactions, relying instead on voluntary efforts by the banks to do so. The government believes voluntary codes of conduct, combined with possible (but rarely applied) sanctions for violations are a sufficient deterrent to suspicious transactions.
However, bankers are concerned about violating the country's strict bank secrecy laws, and have reported only a handful of suspicious transactions in recent years, none of which resulted in a prosecution. Recordkeeping requirements, which are a mainstay of FATF, and other recommendations on measures to comply with the Convention are also voluntary, and are neither uniformly maintained nor applied to all customers. However, most financial institutions appear to be determined to avoid drug money and observe a "know your customer" rule with respect to cash transactions by non-account holders.
No such rules apply, however, to shell corporations, which can be used to conceal movements of drug proceeds while providing anonymity to the true beneficial owners of the companies. Other sectors of the financial community, particularly casinos, insurors, and wire transfer services remain vulnerable to money laundering. The law provides for the confiscation of assets, but is brought into play only upon conviction, which could allow defendants to hide assets. The Financial Action Task Force conducted a seminar, primarily for Bahamian bankers, in October, which featured experts from the UK, Switzerland and the United States, who offered a variety of examples of how various financial centers were employing "prudential supervision" concepts without suffering losses of business.
The Bahamas, which attended but declined to be a sponsor of the seminar, has not indicated subsequently that it is prepared to adopt any of these measures, although banking officials had high praise for the seminar and GCOB officials assured FATF that it would work closely with the Caribbean FATF. USG and FATF officials believe that the examples set by the Bahamas, Cayman Islands and Panama will heavily influence decisions by others in the region.
Barbados. (Low) The government actively encourages the development of offshore financial services, which have expanded considerably in recent years. There is no indication of money laundering through the domestic or offshore sectors, and money laundering is illegal. Moreover, there are strict controls on the amount of money which can be converted into foreign currency or taken out of the country, and banks are expected to report large or unusual transactions voluntarily. The USG has asked for designation under a new mutual assistance law, which would enhance USG ability to obtain confidential bank records and freeze drug proceeds.
Bermuda. (Low) Some money laundering occurs in this offshore banking center, as evidenced by a recent investigation of a drug trafficking network, which employed a prominent lawyer to launder drug proceeds. Money laundering is a crime and, in 1993, the government forfeited US$85,000 in drug proceeds belonging to a Cuban trafficker convicted in 1991.
British Virgin Islands. (Low) The BVI passed an asset seizure act in 1993 and is prosecuting its first offender. There are indications that a few companies have been used to launder drug proceeds, but money laundering appears to be minimal.
Cayman Islands. (High) Strict bank secrecy laws and easy access to shell companies continue to make this offshore banking center a haven for money launderers, although cash money laundering and transhipments appear to have diminished. The banking sector is very concerned about maintaining a good reputation and bankers believe any money laundering "exposes" harm the industry. Moreover, the government has become one of the more progressive of Caribbean governments in adopting and implementing countermeasures.
Like all British Dependent Territories (BVI, Montserrat, Anguilla, Turks and Caicos), officials of the Caymans are adopting and implementing the anti-money laundering provisions of the European Union policy declaration. This includes mandating the reporting of suspicious or unusual transactions. Thus, the Caymans government is believed to be meeting the goals and objectives of the 1988 UN Convention. Cayman Island officials have also shown an increasing willingness to prosecute money launderers. These actions could make the Cayman Islands less attractive in the future to money launderers. Its vulnerability continues to be in its haven banking business: as of August 1993, there were 23,500 trading companies and 548 banks with more than US$400 billion in cash deposits, compared to a population of 26,000.
Cuba. (Low) Cuba could become a principal in Caribbean money laundering. In July 1993, Fidel Castro advised the National Assembly that it may be necessary to legalize the use of foreign currency; a black market in US dollars has been acknowledged. The legalization of dollar use, coupled with new foreign investments and an expanding tourist trade, could increase the prospects for Cuba becoming a money laundering center--unless the government takes preventive actions. There are confirmed reports of Cuban-American organized crime elements, based in Florida, laundering money in Panama. However, there are also some indications that Cuba will cooperate with the United States on drug and money laundering investigations.
Dominica. (No Priority) The government ratified the UN Convention in 1993, and criminalized money laundering, which is considered minimal. A new crime act gave greater authority for search and seizure of assets of persons convicted of a drug offense and increased access to financial data of suspected money launderers. There are controls on the export of money and unusual foreign exchange transactions are reported, but other large or unusual transactions are only subject to self-policing by banks.
Dominican Republic. (Low) The Dominican Republic is not an important financial center, nor a tax haven or offshore banking center, and is not considered a hub for Caribbean drug money. However, some drug money laundering occurs each year, primarily by Dominicans who invest in legitimate business such as cattle ranches, auto dealerships and supermarkets, as well as real estate. Ironically, while US dollar accounts are permitted, there are no dollar accounts anywhere in the country. An anti-money laundering/asset seizure law may be enacted in 1994.
French West Indies. (Low) There is evidence of money laundering in these French "departements" or states (Guadeloupe and Martinique and also St. Martin, which is part of the Guadeloupe departement). Some drug proceeds may enter the French banking system through branches in the Caribbean. St. Martin in particular is considered a site for money laundering, primarily through its casinos and offshore banking facilities, as well as through its easy access to the relatively less-controlled Dutch half of the island. The French have provided training through their regional center in Martinique, and in January collaborated with the OAS on a money laundering seminar in Martinique.
Grenada. (No Priority) There is no evidence of money laundering.
Haiti. (Low) USG enforcement agencies cannot confirm US media reports of money laundering by the Haitian military or others. While the lack of currency control laws and anti-money laundering laws would seem to make the country vulnerable, the political and economic turmoil on the island probably ensure that Haiti will not become a money laundering center in the near future.
Jamaica. (Low) Although money laundering is considered minimal, Jamaica still has not adopted the kinds of regulations considered consistent with prudent banking supervision, nor taken adequate legislative steps to prevent its occurrence. Asset seizure and money laundering laws, including the legislation needed to ratify the MLAT signed with the United States, is pending; however, passage continues to be delayed. As a result, money laundering is not a criminal offense, and banks and other financial institutions are not required to know, record or report the identity of customers engaged in large or unusual currency transactions. Nor does Jamaica have adequate asset forfeiture laws.
Montserrat. (Medium) The Government, which has also subscribed to EU policies on money laundering, has new bank licensing rules which make any bank subject to consolidated home state supervision. These regulations require South American banks, for example, which have had branches licensed in Montserrat with parallel ownership, to become subsidiaries of their home banks, subject to the supervision of the home state--as well as Montserrat, which hopes this increased supervision will reduce opportunities for money laundering and other financial crimes. Montserrat once had 300 banks, but a British study in 1989 led to a forced reduction to about 20 today. There is concern about financial crime in the non-bank sector, including the insurance and reinsurance business.
Netherlands Antilles. (Medium) In this island group, which is a member of the Kingdom of the Netherlands, Curacao, Bonaire and St. Maarten have become more important money laundering centers, according to USG and Dutch investigators. Saba and St. Eustasius are also part of the Antilles, but are not significant from a money laundering perspective. Money laundering is considered a factor in hotel/casino development, and money is funneled through offshore corporations to banks in Europe and South America.
The money laundering networks are primarily found in Curacao, and several reports associate US organized crime figures with the casinos in Curacao, which is also the base of operations for Dutch and Surinamese drug traffickers. Italian organized crime groups are allegedly involved in money laundering networks in St. Maarten. In addition to cooperating with USG authorities, Dutch police have increased their training for Antillean police forces. The Central Bank declared in April 1993 that it was applying pressure on banks to curb money laundering practices, and the Government recently enacted money laundering legislation. However, under this legislation, bank reporting of suspicious transactions is voluntary, and there seem to be jurisdictional disputes over implementation which could undermine the effectiveness of the legislation. The government will reportedly adopt further legislation in 1994, which will mandate reporting of unusual transactions. Banks are required to know and record the identify of customers engaging in large and unusual transactions. Like Aruba, the Netherlands Antilles will be the subject of an examination by the Financial Action Task Force in 1994.
Puerto Rico. (Low) Although the amount of money laundering activity in Puerto Rico is not believed to be extensive, there is evidence of Colombian drug organization involvement in money laundering. One major cocaine/heroin group laundered over US$7 million in 1993 through casinos. Assets seized in 1993 from another group included homes, businesses and even some small islands. Drug money is also "structured" in Puerto Rico, using US postal money orders sent to Colombia. As a US dependent territory, banks in Puerto Rico must complete Currency Transaction Reports, but USG officials believe that only 10-25 percent of the money actually being deposited is reflected in the CTRs. Drug money is also invested in real estate, condominiums, transportation and construction companies.
St. Kitts & Nevis. (No Priority) There is little evidence of money laundering, but Nevis is a tax haven and has the potential to attract money launderers. To become a party to and comply with the UN Convention, the Parliament enacted the Proceeds of Crime Act in 1993. The law provides for the confiscation and forfeiture of assets belonging to persons engaged in drug trafficking or related crimes like money laundering, and police have been granted the power to seize currency in excess of US$3,000 from people entering or leaving, which may be held for 72 hours for investigation of its origin.
St. Lucia. (Low) Like St. Kitts, the Parliament passed the Proceeds of Crime bill, thus enabling ratification of the UN Convention. While modeled after British law, the St. Lucia law does not mandate the reporting of suspicious transactions, but does criminalize money laundering and puts controls on exports of money. There is some money laundering, primarily through false invoicing of imports. St. Lucia continues to deny licenses to several offshore banks which are allegedly fraudulent.
St. Vincent & Grenadines. (Low-Medium) There is a strong possibility that offshore banks are used to transfer drug and other illicit proceeds to banks in the United States and elsewhere, and the volume has the potential to increase. The priority ranking has been upgraded from Low to Low-Medium. St. Vincent has become the second major supplier of cannabis in the Caribbean, reportedly generating more than $100 million in proceeds, and one of the largest seizures of cocaine was connected to St. Vincent. There is also evidence of large amounts of undeclared cash being present in St. Vincent--which actively encourages the development of offshore banks, other financial services and shipping companies. St. Vincent is expected to enact legislation in 1994 to become a party to the 1988 UN Convention.
Trinidad & Tobago. (Low-Medium) The opposition party in Parliament announced in February 1994 that it will finally support anti-money laundering legislation that will enable Trinidad to ratify the UN Convention. The National Security Ministry says there are "huge amounts" of drug money in circulation which are having a distorting effect on the economy. A single organization is reportedly shipping 1,000 kilos of cocaine per month through Trinidad, which would generate local revenues. Press reports suggest traffickers are using stockbrokers, insurance companies, and other non-bank financial institutions to launder drug money. The new legislation will address gaps and weaknesses in existing law, but will not address questions of resources and political will, which currently constrain police action.
Turks & Caicos. (No Priority) Like other islands, the government is actively pursuing policies to transform the Turks and Caicos into an offshore banking center, which increases its potential for money laundering unless corrective measures are also adopted, but there are no current indications of significant activity.
US Virgin Islands. (No Priority) There is very little evidence suggesting that money laundering occurs in this US dependency.
Andorra. (Low) Enforcement officials are investigating the possible use of the Andorran financial system by Colombian traffickers and money launderers, and advise of their willingness to work with USG investigators.
Austria. (Medium) A new banking law became effective in January 1994 which requires banks and other financial institutions to know and record the identities of customers engaging in transactions of more than AS200,000 (about US$18,000) if the transactions do not occur within the scope of a permanent business relationship. If the banks believe the transaction is suspicious, they are required to report it. The new law does not end the anonymity which Austria accords to its citizens with respect to passbook savings accounts denominated in schillings.
However, also as of January 1, 1994, nonresidents were barred from opening anonymous securities accounts, thus repealing a practice begun in 1985 which permitted nonresidents to open securities accounts at commercial banks for amounts up to US$870,000 without requiring identification. Existing customers can keep their securities accounts but must provide documented identification when they pay more into the account. The new law also contains a "due diligence" clause. Money laundering controls are also applied to non-bank institutions. The law does not provide for monitoring imports/exports of currency. Notably, the new law applies to all money laundering, which is now a criminal offense, and not just to drug-related cases. The Austrian asset forfeiture law allows authorities to seize the proceeds of the narcotics trade.
Belgium. (Medium) Money laundering by drug cartels is believed to be increasing, and the government created a special police brigade in November 1993 to counter it. Headed by a magistrate and composed of judicial and financial experts, the unit will receive information from the banking community on suspicious financial transactions. Belgium has met the requirements of the EU policy directive.
Denmark. (Medium) Laws against money laundering have been strengthened, and drug and non-drug money laundering has been criminalized. Banks and other financial institutions are required to know, record and report the identity of customers engaging in significant, large currency transactions; to maintain records for an adequate time; and to report suspicious transactions. The law protects bankers who assist enforcement agencies. Denmark has also adopted "due diligence" laws which hold bankers responsible if their institutions launder money. Money laundering controls are also applied to non-bank financial institutions. Danish law permits asset forfeiture in all criminal cases.
Finland. (Low) The GOF adopted legislation in January 1994 criminalizing money laundering, which occurs on a small scale.
France. (Medium) Money laundering is a crime only if it is related to a drug offense, but French authorities are reportedly considering amendments which would expand the definition of money laundering to include proceeds which can be traced to organized crime and terrorist group activities. France continues to limit undercover work by French police on money laundering cases, but otherwise cooperates closely with USG and other investigators.
This cooperation has improved since France broadened the role of TRACFIN, its financial intelligence unit which has become a substantial source of intelligence and investigatory leads. Asset forfeiture laws continue to apply only to certain criminal matters, and assets can be forfeited only after a conviction. One "bureaux de change" had laundered US$300 million, which was transferred to Swiss accounts by a Colombian national whom French police have arrested.
Germany. (High) The Law for the Tracing of Profits from Major Crimes went into effect in November 1993, which builds upon the 1992 law criminalizing money laundering and makes it more effective by requiring banks and other financial institutions to identify depositors and report all transactions in excess of US$12,000, as well as all suspicious transactions. Most of the obligations which the new law prescribes for banks also apply to non-bank financial institutions and to many non-financial institutions. Once notified, agencies will have 48 hours to determine whether they should seek an order to freeze an account.
Press reports indicate money laundering has increased to US$50 billion annually--which would make Germany one of the major money laundering centers in the world. Banks are the main medium, with lawyers and tax accountants also involved. The German Federal Intelligence Service reports that money launderers are interested in buying life insurance companies, and also invest in travel agencies. The Italian Mafia and the Cali Cartel are believed to be involved in some of these schemes.
Gibraltar. (Medium) The offshore banking sector is actively supported by the government, which hopes to see Gibraltar become a leading international finance center. However, USG and some European enforcement agencies believe the banks, protected by bank secrecy laws, are increasingly attracting drug money.
Greece. (Medium) The government has now adopted legislation making money laundering from narcotics trafficking and other crimes a criminal offense. The amount of "black money" from all of these activities, which include arms sales and gold smuggling, has been estimated at nearly US$2 billion annually. Although the legislation helped Greece comply with both the UN Convention and the EC policy directive, the government still lacks an established system for identifying, seizing, and forfeiting narcotics-related assets.
Iceland. (No Priority) Iceland is not considered significant from a money laundering perspective.
Ireland. (Low) The imminent passage of a money laundering law will enable ratification of the UN Convention. There is continued concern about the money laundering activities of the Irish Republic Army, but also about racketeering by criminals.
Italy. (High) The government assigns an increasingly higher priority to curbing domestic money laundering and developing a more effective asset forfeiture system. According to a 1993 Guardia di Finanza (financial police) report, significant investments in the financial sector are made by organized crime, including investment of the proceeds of narcotics trafficking. The Italian real estate market depends to a lesser extent on laundered money.
Italian ministries believe that money laundering involves a range of crimes, not limited to drug trafficking. Organized crime groups from Italy have become major factors in global money laundering, and deal with traffickers in heroin, cocaine, cannabis and contraband of many varieties, charging fees of 20 percent and more for successfully laundering funds for these groups--or buying their proceeds at a discount and managing investments for themselves.
Italy, which was already deemed by the EU to have met the criteria of its policy directive on money laundering, has now ratified the Council of Europe Convention on confiscation. In a unique interpretation of that Convention, some Italian authorities believe their implementing legislation can be used to protect intellectual property rights. The Italian law, which took effect in October, 1993, provides extremely stiff penalties for laundering or reinvestment of ill-gotten gains (money or goods). While the law was targeted at narcotics trafficking, Italian officials believe that intellectual property rights (IPR) piracy falls within its scope. The 1993 law establishes five predicate offenses for the crime of money laundering: kidnapping, narcotics, extortion, arms trafficking, and aggravated robbery. The law also mandates the reporting of suspicious transactions, in keeping with EU policy.
Liechtenstein. (Medium-High) Reports filed with the Offshore Group of Banking Supervisors indicate that, while Liechtenstein has not ratified the 1988 UN Convention, it is moving toward meeting the Convention's goals and objectives with respect to money laundering. The government has criminalized money laundering; banks are required to maintain records that will permit reconstruction of significant transactions; a system has been established for tracing, freezing and forfeiting assets, and cooperated with other governments on financial investigations.
Luxembourg. (Medium-High) Luxembourg has a tough money laundering law and was the first EU country to obtain a criminal conviction for money laundering, which resulted in two Cali cartel operatives serving five-year sentences. However, Luxembourg suffered a major disappointment on October 21, 1993, when the Supreme Court ruled that US$7.8 million in Cali cartel money should be returned. However, the Luxembourg government has assured USG officials it has no plans for immediate release of the funds subject to the Supreme Court decision. An additional US$28 million in Cali cartel money has been frozen elsewhere in Europe at the request of Luxembourg and the United States. Luxembourg has also frozen more than US$40 million traced to the late Rodriguez Gacha. The USG has pressed the GOL to transfer these proceeds to the special asset forfeiture fund created in 1992, which to date has received no forfeited assets.
Malta and San Marino. (Low) Their banking systems may be used by Italian crime groups but there is no indication of significant narcotics money laundering in either locale. Malta is ranked as an offshore banking center.
Monaco. (Low) Legislation to combat money laundering, adopted in June 1993, requires banks, insurance companies and stockbrokers to report suspicious transactions and to disclose identities. The suspicious transaction requirement also applies to customers buying chips in casinos. Property purchased with illicit proceeds can now be confiscated, and another new law makes such purchases a criminal offense.
Netherlands. (High) New legislation went into effect February 1, 1994, which meets the requirements of the EU policy directive and FATF recommendations. The Dutch, who criminalized money laundering, passed two laws. One mandates that financial institutions report unusual transactions, and offers criteria for identifying suspect transactions. The legislation uses a threshold of 25,000 guilders or its equivalent as an initial guideline for reporting unusual transactions. In addition to other criteria, all foreign exchange transactions of that amount or more must be reported, as must any transaction of less than 25,000 guilders if the financial institution believes the transactions have been broken into smaller amounts just to avoid reporting. The second law deepens requirements on customer identification. A month earlier, the Central Bank extended its reporting requirements to include currency exchanges.
Norway. (Low) Money laundering laws were amended in 1993 to apply to proceeds from all criminal activity, not just narcotics trafficking. Further regulations relating to banker responsibility are expected to enter into force in 1994; these regulations will increase bank reporting and record keeping, and require banks to report suspicious transactions. These new rules will bring Norway into conformity with the EU policy directive, and also meet the FATF recommendations.
Portugal. (Low-Medium) Entry into the European monetary system has made the escudo, which became fully convertible in 1993, more attractive to potential money launderers. New money laundering legislation which conforms to the EU policy directive also became effective in January 1993. However, the principal concern remains the autonomous regions of Madeira and the Azores, which have some exemptions from Portuguese law, e.g., the offshore banks report only end-of-day totals, not individual account transactions. Seventeen banks and several hundred companies are registered at Madeira's offshore center, which investigators believe may be used to launder money and is considered a Medium priority.
Spain. (Medium-High) Legislation was enacted in December 1993 which refined Spain's money laundering laws and put the country in compliance with the EU policy directive. Building on the 1992 law which criminalized narcotics money laundering, the new law criminalizes money laundering activity related to terrorism and organized crime. The new legislation includes due diligence and banker negligence provisions. Spanish law also provides for the seizure of assets related to narcotics transactions. In July 1993, Spain ratified the MLAT with the United States. Spanish law does not permit undercover operations; consequently, Spain is not participating in Operation Green Ice, Phase II, although it did cooperate in the first phase.
Already contending with the Colombian cartels, with traffickers from Nigerian and Middle Eastern groups as well as Turkish traffickers, Spain is also focusing attention on money laundering through Spanish enclaves in Cueta and Melilla. Officials believe as much as US$200 million generated by the hashish trade has been laundered through Cueta, where seven Spanish banks are located. Exchange houses act as brokers between traffickers and the banks, enabling transfers without the identification of clients. An investigation by Spanish Customs led to the arrest of several bank officers, and the examination of 1,100 bank accounts belonging to 125 persons.
Sweden. (Low) Although not considered a major money laundering center, Sweden has nevertheless taken a series of prudent steps to counter money laundering and to comply with the UN Convention. In 1993, a highly specialized unit of financial police was created to deal exclusively with money laundering, which is a criminal offense. Also in 1993, legislation took effect which requires banks and other financial institutions to be stricter in requiring the identification of customers who are new or conducting large transactions.
Switzerland. (High) The Swiss, who set the tone for much of the European action against money laundering earlier in the decade with the due diligence convention for bankers and curtailing of secret bank accounts, added other hallmarks in 1993. The Swiss became the first to share drug proceeds forfeited in their courts with the United States (previous sharings were from proceeds forfeited in United States courts). Switzerland ratified the Council of Europe Convention on confiscation of criminal wealth. Swiss law does not limit confiscation to drug cases, but includes all types of crime (as does its law criminalizing money laundering). But authorities must prove the assets were produced by a specific offense.
Proposed revisions to the penal code will allow judges to estimate the amount a proven criminal earned illegally, and order confiscation of assets up to that amount without having to prove that these assets were derived from crime. These revisions should become law by summer 1994. The revised penal code will also allow bank employees to report suspicious transactions without fear of violating bank secrecy. Another provision would criminalize membership in or support of a criminal organization.
The government is considering another package of measures which would extend money laundering controls to non-bank financial institutions, such as insurors, currency traders and casinos. Moreover, the new laws would establish an obligation, not merely the right, to report suspicious transactions. Ratification is not likely until late 1994. In addition, the Federal Council (cabinet) wants to establish a new administrative body to lead the fight against organized crime.
Thus, while Switzerland has not yet ratified the UN Convention because of a continuing lack of national consensus on punishing narcotic users, it has adopted and is implementing legislation which meets the objectives of the Convention.
Turkey. (Medium-High) Given the high volume of drug trafficking through Turkey, and the involvement of Turkish groups in drug trafficking in Western Europe, it is highly likely that narcotics proceeds are returned to or retained in Turkey, and are probably invested in legitimate business. Turkey has no legislation prohibiting money laundering. Turks may freely purchase foreign exchange and hold accounts denominated in foreign currencies. However, the government is preparing for ratification of the UN Convention, and laws have been drafted which would criminalize money laundering, create a financial investigations bureau, and strengthen asset forfeiture powers.
United Kingdom. (High) The UK significantly broadened the reach of its anti-money laundering laws when Parliament passed the Criminal Justice Act of 1993, which extends the UK's money laundering statutes to all types of criminal offenses, not limited to narcotics and terrorism. The Act becomes effective on April 1, 1994. On that date, UK banks will be required to maintain records on and report the identity of customers engaging large currency transactions (and report the data regularly to a central authority), and to report suspicious transactions to the National Criminal Intelligence Service.
Channel Islands. (Medium) The British crown dependencies of Guernsey, Isle of Man, and Jersey are offshore banking centers. The OGBS, which is headquartered on Jersey, reports that each government has criminalized money laundering and required the reporting of suspicious transactions. Each has adopted systems for tracing and forfeiting assets. Jersey, however, does not yet require banks to record significant transactions or to keep records for a definite period.
EASTERN EUROPE AND BALKAN STATES
Albania. (No Priority) Money laundering is probably related to smuggling or other crimes, rather than drug trafficking. The money does not go through the seriously underdeveloped banking system, so much as it goes around the banks, which afford more difficulties than opportunities for traders. Thus, there is an almost total absence of traditional money laundering, and asset forfeiture laws have no internal or external impact.
Bulgaria. (Medium) There is increasing concern about the vulnerability of the poorly-regulated financial system to money laundering. Such money laundering as may occur is just as likely related to the sheltering of illicit gains by the former "nomenklatura" (officials) as it is to narcotics proceeds. Bulgaria has participated in several seminars on money laundering policy but has not drafted legislation.
Czech Republic. (Low) The privatization process following the overthrow of communism has allowed an influx of large amounts of capital whose origins are not always clear. Organized crime groups from former Soviet republics and the former Yugoslavia, as well as the Italian Mafia and Camorra, are active in the Republic, and reportedly engage in money laundering. But it is not clear to what extent these funds are derived from drug trafficking as opposed to other criminal activities. Although the Republic accepted obligations undertaken by Czechoslovakia, which ratified the UN Convention, the Czech Republic has not adapted its national legislation to the requirements of the Convention. Bank secrecy remains strong, and there is no centralized system for identifying suspicious transactions.
Croatia. (No Priority) Information on possible money laundering is largely anecdotal, even apocryphal, but the indication is that such activity as does occur is related to illegal arms imports and other non-narcotics smuggling. The political situation may offset any attraction traffickers might normally find in the absence of anti-money laundering controls.
Hungary. (Medium) In November, the Central Bank reported that, as one consequence of the FATF seminar in Budapest in February, 1993, Hungary had adopted laws criminalizing money laundering and requiring the reporting of suspicious transactions. Hungary's bankers view themselves as the "Switzerland of Central Europe," and the banking system leads other former Warsaw Pact nations in modernization and technology development. A strong bankers association actively encourages adherence to the Basle Accords. Still, the continuing banking crisis, which has threatened the solvency of many banks, and the government's loose control over the financial industry have made Hungary an attractive alternative to West European banking systems.
Hungary is seeking entry into the European Union, and is pursuing legislation to conform to EU standards of "due diligence" in its banking operations. Additional legislation is being drafted to permit ratification of the 1988 UN Convention. New regulations are expected to impose short deadlines on financial institutions to develop reporting procedures. However, privatization of the banking sector has resulted in a significant number of experienced central bank staff joining the private sector, resulting in inexperienced regulators and insufficient legal resources to supervise the nation's financial system.
The government is working to overcome a mistrust of the competence of law enforcement agencies to investigate and prosecute criminal organizations which have penetrated the banking system. Like other Eastern European countries, Hungary's efforts in this regard encounter a cultural aversion to strong police forces, as well as an enormous backlog of legislation.
Poland. (Medium) The National Bank requires banks to record information on individuals conducting transactions of more than 200 million zlotys (US$10,000), but bills which would have imposed criminal penalties for economic crimes, including money laundering, were not passed by the legislature (Sejm) before it dissolved. The bills included provisions granting increased powers to police and security services to conduct undercover operations, and there was public concern that these powers could be used for political purposes. There is concern that the anti-money laundering legislation has not been reintroduced.
Romania. (No Priority) The banking system is ineffective, and there are no indications of drug money laundering to any important degree.
Russia. (Medium-High) Crime, organized and independent, but covering virtually every type of economic activity, has been declared a national security problem of the highest priority. Reports indicate that criminal elements are channeling illicit incomes from bank fraud, contraband and arms smuggling, car theft, racketeering, prostitution, embezzlement, and narcotics into an equally diverse array of businesses, including joint ventures, recently privatized firms, and banking institutions. In its study on organized crime, released January 26, the Analytical Center for Socioeconomic Policy, a Russian think tank, described a variety of financial crimes which occur daily, and which, it maintains, are stifling Russia's economic recovery.
The report, prepared for President Yeltsin, says 70 to 80 percent of private enterprises and commercial banks in major cities are forced to pay a tribute of as much as 10-20 percent of their proceeds to organized crime. The report estimates that such crimes, including money laundering, monopoly pricing, debt collection, payoffs and kickbacks, account for about 25 percent of Russia's inflation rate, which last year averaged 20 percent a month. The study delivered some of its gravest warnings over what it described as the flexing of political muscle by criminal organizations.
A similarly bleak picture was painted by the Interior Ministry, which said in a year-end statement that about a third of these organized crime groups specialize in the laundering of illegal profits, large-scale embezzlements, and financial and property manipulation. The Ministry says organized crime controls as many as 40,000 businesses, including 2,000 state enterprises.
Narcotics money laundering is a concern; domestic sales of drugs are estimated at upwards of US$200 million a year, a figure that doesn't include sums earned for transporting drugs from East to West. The total of narcotics money is undoubtedly much larger, when the funds invested in legal and illegal markets by the Italian Mafia and other Western crime groups are included; even the Medellin cartel is rumored to be active in Russian financial transactions.
But Russian and foreign observers agree that drug money is a small component of the money laundering scenario. Adding to the proceeds of the crimes listed above are stolen Party funds and profits from price fixing schemes; tax evasion, graft and corruption add to that total. The gross moving through licit and illicit channels back to the West also includes private capital fleeing Russia's political and financial instability.
Russia's efforts to curb money laundering, like its efforts to encourage private capital to stay home, are confounded by the antiquated financial system. Ironically, the inability of the system to provide fundamental services has had notable side effects. Initially, traffickers and money launderers probably made more extensive use of front companies and the black market, as opposed to banks; only 12 banks have wire transfer capability.
More recently, criminal organizations obtained banking licenses to cover their operations while also avoiding the bureaucratic problems associated with the bigger banks. Frustration with a shortage of bank services, and doubts about the economy mixed with political uncertainty, have probably added to the influx of US dollars in circulation, hampering the Central Bank's efforts to solidify the ruble's position.
The Financial Action Task Force conducted a seminar in Russia in November 1993. While explaining and recommending the FATF countermeasures, the advice offered by experts from the UK, Germany, France, Italy, Finland and United States centered on the need to reform the regulatory process as the first step in a program to strengthen the economy and curb money laundering. The FATF recommended an increase in capital requirements for bank licenses.
The Bank of Russia (Central Bank) had issued 2,048 banking licenses, for fees ranging from US$50,000 to $100,000. As one Russian banker said, "It's cheaper to buy a bank in Russia than to buy a Mercedes." The Bank of Russia announced at the seminar that its major goals for 1994 included lifting the capital requirement and, in February, raised the requirement twenty-fold to two billion rubles (US$1.27 million). In 1999, the capital requirement will jump to a European Union level threshold of five million ECU (US$5.5 million). A central banker noted that only seven percent of Russia's banks meet the new 1994 threshold; the banker acknowledged that many of these institutions were not "proper banks" and that the increase was designed to "slash the number of banks in Russia."
The Central Bank also acknowledged it did not have adequate information about the ownership of many of these banks. Interior Ministry officials said a "big proportion" of the banks were linked to the Russian "mafiya" and other criminal gangs, and were involved in money laundering. Once effective regulation of banks has been established, the FATF experts advised, Russia could institute such measures as a requirement for identifying beneficial owners of corporate and private accounts, essential given the number of joint ventures with Western companies, many of which were effectively acting as financial service companies without licenses. Once regulatory controls are also extended to non-bank financial institutions, the Bank can apply such measures as suspicious transaction reporting, cross-border currency monitoring, and other controls.
Also as a result of the FATF seminar, new banking regulations were issued in January which require commercial banks to report transactions of more than US$10,000 to the Central Bank.
Russian officials indicated that they would have new legislation in place in 1994, and tentatively agreed with FATF for a review of countermeasures, perhaps as early as April. The Russians have also taken some steps toward improving the banking infrastructure, obtaining guidance from Germany's Deutsche Bank, the US Citibank and others. Several senior Russian officials who took part in the FATF seminar see a broad linkage between their efforts to stabilize the economy, strengthen the banking system, curb money laundering and stop crime.
The Russians have goals apart from curbing money laundering within their financial system; they want to locate the funds which Russians, especially former Soviet officials, are believed to have transferred to the West.
Slovakia. (No Priority) Parliamentary approval of a draft law on organized crime which includes money laundering provisions is expected in early 1994. Banks are already required to keep records on cash transactions of more than 200,000 crowns, but have enacted no other money laundering or asset forfeiture laws.
Ukraine. (Low) Due to the weakness of the national currency and the state of the banking system, Ukraine is not attractive as a tax haven or offshore banking center. These weaknesses and a lack of regulatory controls probably contribute to capital flight processes, which may be facilitating money laundering.
Other Newly Independent States. (No Priority) Azerbaijan, Tajikistan, Turkmenistan and other former Soviet republics are not significant from a money laundering perspective.
Other Balkan States. (No Priority) The limited information available indicates there is no significant money laundering activity in Romania, or the former Yugoslavian Republic of Macedonia, or Yugoslavia.
Money laundering activity has increased parallel to criminal activity of several kinds, and the three countries in this region have been upgraded to Low priority.
Estonia. (Low) The country serves as a transit point for drugs from Russia, Ukraine, the Asian republics of the former Soviet Union, and the Middle East, on their journey to Scandinavia and Europe. Russian and Central Asian organized crime groups dominate, but drug groups from Afghanistan, Turkey and Pakistan are also active in Estonia. Money laundering is now regarded as an increasingly serious problem, but there is no legislation to counter it. The Estonian State Police have created a special unit to combat organized crime, including money laundering and drug trafficking.
Latvia. (Low) In May 1993, the government ratified the three UN Conventions, but the legal framework for enforcing international narcotics policies has not been established. There are indications that Latvian organized crime groups are involved in the transport of drugs from East to West, but Latvian police are ill-equipped to cope with the problem. Latvia is emerging as a regional banking center. A national commission is drafting laws which would give effect to the UN Conventions, but there are currently no restrictions which might inhibit money laundering.
Lithuania. (Low) Declining living standards and the erosion of law and order have stimulated drug trading, particularly by organized criminal elements who have developed ties to other gangs in Europe and in the former Soviet Republics. The regulation of the private banking sector is still in the formative stage; the country's banks are vulnerable to money laundering operations but there is no legislation yet to support effective investigations.
Cyprus. (Medium) The island's strategic location has made Cyprus a favored location for brokering narcotics deals and transshipping both illicit narcotics and drug money. The pattern of previous years remains unchanged: cash and bullion transit Cyprus, often enroute to Lebanon, but do not enter the domestic economy. Cyprus is seldom the final destination for drug funds.
Egypt. (Low-Medium) The threat potential cited in the 1993 INCSR has not materialized, and Egypt can be downgraded in priority. The probability of money laundering through the Egyptian financial system is fairly low, in view of the relatively undeveloped financial system with its less-than-adequate infrastructure. Egypt is not a major player in international finance; its financial services industry is dormant; and the concern among Western policymakers about Egypt's decision to permit numbered accounts has lessened, since there has been no great influx of money taking advantage of such accounts, reflecting the lack of other financial incentives.
Iran. (No Priority) Given its limited international financial capabilities and its isolation, Iran is not considered an efficient base for money laundering operations.
Iraq. (No Priority) A once dominant position in the Arab banking world, and a role in international money laundering, are well behind the Iraq of today, where the financial center continues to be ineffective.
Israel. (Medium) Israeli nationals are among the members of various money laundering syndicates involved in the processing of millions of dollars of proceeds from sales of Colombian cocaine throughout the United States and Canada. Recently, Israeli organized crime figures involved in drug money laundering have processed drug proceeds through Israeli financial institutions, in Israel and abroad, using US dollars. Israel has assumed greater importance as an international finance center; its three major banks and several smaller banks offer comprehensive services in the United States and Europe.
But money laundering in Israel is not limited to narcotics proceeds, and the bulk of the proceeds are probably owned by foreigners. Benign banking laws, lack of taxation on foreign accounts and a lucrative stock exchange make Israel an attractive investment and financial safe haven. Money laundering is not a crime in Israel, but can be prosecuted in connection with other crimes. However, that situation will be changed. The Attorney General's office, the Central Bank, National Police, Customs, and the banking association met in November with a delegation from the Financial Action Task Force to consult on possible legislation which would make money laundering a criminal offense, not limited to drug trafficking crimes, and provide for a more effective asset forfeiture regime.
One of the major objectives of the Israel National Police is to augment major trafficking convictions with asset forfeiture proceedings; Israeli law permits both criminal and civil forfeiture. In these meetings and others with the US Federal Reserve, there was emphasis on the need for Israel to improve bank regulation. The prospect is for legislative action in 1994, which should also permit Israel to ratify the UN Convention.
Jordan. (No Priority) There is little money laundering potential.
Lebanon. (Medium) The threat assessment on Lebanon has been upgraded from Low to Medium, and Lebanon could become a High priority if current trends continue. Although the drug trade flourished amidst the internal strife of the 1980's, the banking system deteriorated substantially, and heroin and hashish proceeds were filtered through Lebanon and other sites and deposited in banks in Europe, Africa and North America.
While drug proceeds continue to be invested in US real estate, in front companies in Europe, and in African banks, hard currency is increasingly returned to Lebanon where banks are being revitalized, with little or no regulatory controls.
The dollar flow has become so large that the Central Bank has difficulty in disposing of the excess. The bank consortium, which handles about 60 percent of dollar remittances to the United States, says it returned more than US$350 million in a recent six-month period.
Given that these are excess dollars, the amount is substantial in an economy that is estimated at US$4-6 billion annual GDP. The flow of hard currency into and through Lebanon may well increase with the recent involvement of Lebanese traffickers with Colombian cocaine cartels. Counterfeiting is also a major concern in Lebanon, and elsewhere in the Middle East.
Syria. (Low) There are no laws specifically controlling money laundering, but Syria's strict foreign exchange controls and policies prohibiting foreigners from holding bank accounts make the Syrian financial system unattractive to money launderers. Instead, Syrian moneychangers, who until recently smuggled cash across the Lebanese border, now use offshore banks, mostly in Beirut, to process currency transfers. However, this practice is largely intended to evade foreign exchange controls, and Syria, despite the involvement of Syrians in the drug trade, is not considered a money laundering site to any significant degree.
Yemen. (No Priority) Yemen is not a money laundering concern.
THE GULF STATES
Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates are treated en bloc because, acting through the Gulf Cooperation Council, these states have agreed to implement the recommendations of the Financial Action Task Force, which held a seminar in Riyadh in October 1993, and to take other legislative and policy actions in common. All but Kuwait have ratified the UN Convention. Bank fraud and counterfeiting have equal priority with money laundering as financial crimes.
Bahrain. (Medium) A significant Middle East financial center, and offshore banking hub, Bahrain has an open economy and international banking system vulnerable to money laundering.
Kuwait. (Medium) Scandals involving theft and fraud in the oil and banking industries have recently surfaced, as have reports of corruption and vulnerability in the banking and other sectors of the economy. Kuwait has moved more slowly than other Gulf states in adopting corrective regulatory measures, but the National Assembly continues to pursue the issue of financial corruption. There has been no lessening of Kuwait's commitment to GCC goals.
Oman. (No Priority) Although not a money laundering threat, Oman was among the first to implement the FATF regulations; directives were issued to its banks in 1992 which take a position like Australia and Switzerland by warning banks about transactions involving companies and individuals from countries which do not adhere to the same international standards.
Qatar. (No Priority) Qatar is not a money laundering threat.
Saudi Arabia. (No Priority) The Saudi Arabian Monetary Authority carefully monitors worldwide money laundering trends to ensure that none are carried out successfully in its tightly controlled banking system. SAMA co-hosted the successful FATF-GCC seminar last October, in which experts from the United States, UK, Italy, Netherlands, Germany, Switzerland and France provided guidance to bankers and regulators, prosecutors, and enforcement agencies, on complying with UN and FATF provisions. There is no indication that money laundering is a significant problem in Saudi Arabia itself.
United Arab Emirates. (Medium-High) An important offshore banking center and tax haven in the Middle East, the UAE is also the principal Western concern among the Gulf States from a money laundering perspective. The particular focus is on Dubai's banks and gold markets, the latter a traditional hub for gold smuggling. There is evidence that these gold markets have laundered drug proceeds from several drug markets, including India and Pakistan, and from other locales as far away as Australia. The likelihood is that narcotics proceeds are also laundered through banks in the UAE; it is a certainty that the underground Hawalla system has been used to transmit drug proceeds.
Money laundering is also believed to occur in currency exchange houses, which do not keep records of currency transactions. The UAE dirham is freely convertible, and all currencies are freely exchanged. The UAE has ratified the UN Convention but has not met its goals and objectives or those of the FATF by adopting the requisite legislation: money laundering has not been criminalized; banks are not required to report currency transactions nor is there a mandatory recordkeeping requirement; financial institutions are not legally required to report suspicious transactions; and there are no controls on the amount of money which can be imported or exported. However, this situation is being remedied. The Gulf States have agreed to act in concert to adapt the FATF recommendations, and thereby comply with the Convention. The FATF provided texts of major policy documents, which were translated into Arabic and then distributed to all States; countermeasures were discussed in detail at the FATF seminar in Riyadh. The GCC expects corrective action by all of the Gulf States during 1994, which will be reviewed by FATF.
Afghanistan. (Low) Despite a flourishing drug trade, Afghanistan is not a money laundering concern in the banking sense, but it is in the context of drugs-for-arms conversions. Payment for opium and heroin in US dollars, German marks, or gold is used by traffickers and warring factions to purchase weapons in Pakistan or Iran, or to buy commodities smuggled back in to Afghanistan. Major traffickers also keep money in foreign banks.
Bangladesh. (No Priority) The country continues to be more important as a transhipment point for Southeast and Southwest Asian heroin than as a money laundering concern, given the inadequacies of its domestic financial system.
India. (Medium-High) India is a significant money laundering and money movement center for the heroin trade in Southwest Asia. While India has taken a number of actions, such as criminalizing money laundering related to narcotics trafficking, requiring records to be kept by banks on large currency transactions, and securing training for enforcement officers, asset forfeiture laws are largely ineffective, the court system is inefficient, and an otherwise liberalized banking system is weakened by methods of accounting and settlement which are decades out of date. Drug proceeds have traditionally returned to India in gold, which also has cultural and religious value.
To curtail gold smuggling, the government liberalized its import policy, but Indian enforcement officials say the new policy has not eliminated the flow of drug-related gold. Moreover, in 1993, the government began allowing Indians to deposit gold without questions being asked about its origins.
India has succeeded, by all reports, in reducing the flow of currency through the Hawalla system, but may not have reduced the utility of this system to drug traffickers and tax evaders. Recently, there is concern about drug money funneled into India via Nepal, where Indians open bank accounts, buy letters of credit or invoices, and bank transfers to bring money back into India while avoiding India's currency restrictions. Some Indian drug money has reportedly transited Nepal enroute to Hong Kong, Singapore and Switzerland.
Maldives. (No Priority) Despite their use as a drug transhipment point, the Maldive Islands are not considered significant from a money laundering perspective.
Nepal. (Medium) The country is significant primarily because its banks and sophisticated communications systems service traffickers and money launderers in India, Hong Kong and Singapore. There is little evidence of domestic money laundering. Hard currencies are freely available on the black market in Kathmandu, and the banking and foreign exchange regulations were not designed specifically to control money laundering, although banks are supposed to report all foreign exchange transactions.
There are no penalties for money laundering, nor has the government investigated money laundering. Drug money moves easily over the border with India or through Nepal's banks, including international bank branches. Gold from Hong Kong, Thailand and Dubai is also smuggled through Nepal, under the control of Indian traffickers.
Pakistan. (Medium-High) The 1991 liberalization of foreign exchange laws had the GOP-desired effect of drawing financial transactions into the mainstream banking system while encouraging repatriation of Pakistani holdings abroad. Estimates of the flow of currency into Pakistan in the last three years range upwards from US$1 billion. However, this liberalization was not accompanied by measures to prevent drug and other illicit money from entering the economy; on the contrary, Pakistan simultaneously dropped requirements that banks maintain records of large currency transactions and identify customers making such transactions.
Banks do not have to report suspicious transactions. Pakistanis can freely exchange the world's major currencies, and customers are assured complete anonymity of their transactions. More, the informal "hundi" system continues, perhaps at lower volume, but it would serve as an alternative to efforts at reform unless regulations were also applied to the non-bank sector. Given this situation, US experts believe drug proceeds are part of the currency flow into Pakistan.
Gold smuggling is also a factor. The government is reportedly considering countermeasures, but planning remains at the early stages. Some steps which have been taken were decidedly limited. Assets can be forfeited only when the defendant receives a life sentence; a 1993 ordinance lowered the threshold to two years, but the ordinance had a life of only four months. A permanent ordinance has been promised.
Although it ratified the UN Convention in 1991, Pakistan has not made money laundering a criminal offense, and has not met the goals and objectives of the convention.
Sri Lanka. (Low-Medium) The increasing amounts of narcotics transiting and being sold within Sri Lanka indicate that drug money movements are occurring, and, while current volume may be low, USG officials believe the potential exists for Sri Lanka to become a money laundering center. The priority has been upgraded.
Sri Lanka's strict bank secrecy and efforts to spur the economy by infusing it with hard currency come at a time when international trafficking organizations are moving funds away from traditional depositories, especially those with strengthened anti-money laundering laws. However, the government has drafted laws which, if enacted, would bring Sri Lanka into compliance with the 1988 UN Convention; the proposed laws include anti-money laundering and asset seizure provisions. Also, the Central Bank has recommended that secret bank accounts be abolished.
Burma (Myanmar). (Medium-High) The drug law which was enacted in January 1993 has done little to curb the various money laundering practices. Much of the illicit traffic in money as well as that in gems and gold is conducted outside the banking system, and there is very little domestic capacity for carrying out sophisticated financial investigations. While money laundering primarily involves the drug trade, the black market is institutionalized and there is a vigorous trade in contraband. Also, underground banking flourishes, providing the funds to sustain the drug trade and contraband smuggling. The underground economy is estimated to account for a quarter to a third of Burma's GNP.
China. (Medium) Responding to evidence that their burgeoning economy and the rapid expansion of their financial services sector have created opportunities for drug and other money laundering, the People's Republic of China advised the Financial Action Task Force in December that its ministries are drafting legislation, with a target date of April 1994, that will criminalize money laundering and provide other safeguards. FATF officials consulted in Beijing with the People's Bank of China (Central Bank), Bank of China, Ministry of Finance, and Ministry of Public Security on a range of regulatory, financial, legal and enforcement policies. There was also a pledge of cooperation by Chinese authorities regarding FATF's strategy for engaging governments throughout Asia in implementing FATF money laundering countermeasures.
Money laundering is not now a crime, although Chinese officials have enforced laws on concealing assets and committing fraud. The financial sector is very open in an effort to attract foreign investment, and joint ventures with foreign concerns are encouraged. There are five special economic zones. Nearly 100 foreign banks operate in China, including banks from Hong Kong and Taiwan, and foreigners can conduct banking business in foreign currencies. In January 1994, the Bank ended the two-tiered rate structure for the yuan.
The liberalized economy offers several opportunities for money launderers, not limited to traffickers who facilitate the opium and heroin trade in southern China, and the priority for China has been upgraded to Medium. Chinese authorities raided a money laundering syndicate in Fujian province, and seized US$1.38 million. An estimated $40 million in bank fraud proceeds was laundered by a syndicate uncovered by Australia's National Crime Authority. There are no estimates on the volume of drug money that is being laundered, or on the proceeds of the revived black market in Chinese cities.
Hong Kong. (High) The government won a major victory in May when the Privy Council in London upheld the constitutionality of a provision in the 1989 Drug Trafficking/Recovery of Proceeds Act, that enabled HK authorities to investigate money laundering crimes. Reports by banks under the Act virtually ceased after Hong Kong's High Court ruled in August 1992 that the money laundering provision in the Act violated the colony's Bill of Rights.
Money laundering in Hong Kong involves more than the processing of drug proceeds. Although heroin and cannabis from the Golden Triangle and the Philippines do pass through Hong Kong, or are consumed there, a network of organized crime groups, known as Triads, are engaged in loan sharking, prostitution and the black market, as well as in drugs. Funds from these activities are invested in import/export businesses, trading companies, the seafood industry and other legitimate outlets, with a preference for cash-intensive businesses. Proceeds of crime also follow the traditional route of remittance networks, which operate throughout Asia and reach into the United States and Canada.
The banking laws require that suspicious transactions be reported, but the volume has been well below expectations, giving rise to a belief that the banking industry is not willing to sacrifice customer goodwill through stringent compliance. The banking industry has successfully resisted requirements to maintain records of large currency transactions, and there are no currency controls.
However, the banking industry has generally been cooperative with HK police on money laundering investigations. There are guidelines for banks to follow in preventing money laundering, and rules for identifying suspicious transactions. The government is considering how to apply these guidelines to the non-bank financial sector, including insurance companies, the security industry and the bullion markets. The vast underground banking system is unregulated, but Hong Kong law enforcement officers maintain that drug money laundering constitutes only a small part of the total transactions handled by this system.
Cross-border currency movements can be used to transfer drug and other proceeds, given the lack of controls, and HK officials believe substantial sums enter the colony every day.
Given these factors -- unlimited foreign exchange, free movement of currency into and out of the colony, the continued trade in narcotics and a vast smuggling enterprise -- the belief is that money laundering continues to be an important factor in the world's fourth largest financial center, despite the aggressive actions of its enforcement agencies.
The government does plan some upgrades of its controls; e.g., amending the 1989 ordinance, which targets persons who facilitate money laundering, to include the persons who own the funds. Hong Kong enforces its asset forfeiture act upon conviction for a predicate crime. As of October, 1993, the government had seized US$47 million in assets, about $19 million of this amount in pursuit of USG orders. The HK government has agreed in principle to share forfeited assets with the United States.
Japan. (Medium-High) USG officials continue to believe that narcotics and other money laundering in Japan is a more serious problem than is indicated by arrests or prosecutions, and thus continue to rank Japan as a Medium-to-High priority. DEA agents estimate that approximately 40 percent of the income of the Boryokudan organized crime syndicates comes from drug trafficking, the remainder from other criminal activities.
The National Police have been quoted as estimating the value of the domestic methamphetamine trade at more than US$3 billion annually. DEA is aware of at least five transactions in the last eighteen months to transfer large sums to Colombia, proceeds of the cocaine trade. These and other data suggest that money laundering has occurred at significant levels for several years, but this belief cannot be quantified by investigative data.
While Japan adopted financial control laws in 1991, enforcement agencies have never investigated thoroughly the extent of money laundering by organized crime groups. Strict bank secrecy statutes make such investigations difficult, and the parallel belief is that crime groups would not hesitate to exploit such a vulnerable system. Although banks are required to submit currency transaction reports as well as suspicious transaction reports, the latter have been almost non-existent. Only one case of money laundering has been successfully prosecuted under the new laws, which apply only to drug-related money laundering.
Korea. (Medium) Money laundering is not prohibited and there have been no known major cases of money laundering. There are strict controls on money in transit, and unconfirmed reports suggest that Colombian and Nigerian traffickers have declared thousands of US dollars on entry. Once past Customs, however, there are few other controls. Thanks to recent liberalization measures, banks can sell gold and currency, but most domestic banks are not permitted to conduct foreign exchange. Foreign bank branches are not under the same regulations, nor are accounts audited.
President Kim Young Sam has banned false-name financial accounts but granted amnesty to then-current holders; the ban does not apply to business accounts (which could have hidden owners). Still, it not known if heroin smugglers are laundering proceeds in Korea, despite the system's attractions, although it is assumed that Korean traffickers are laundering or investing the large sums they earn from the Asian trade in methamphetamine.
Macau. (Medium) Long suspected of being a money laundering haven because of the lack of regulation of its banks and casinos, Macau has taken action through the Financial Systems Act, which compels the 23 banks and other financial institutions to record the identity of persons making significant transactions. Banks will have to cooperate with police on investigations and allow access to confidential information necessary to combat criminal acts. Moreover, any institutions which accept funds over the US$12,500 limit will be committing a criminal offense. The moves were made by the Monetary and Foreign Exchange Authority to safeguard against money laundering and prevent the "possible international discredit" of its financial system. The new laws do not cover the eight casinos, which entertain 50,000 customers per day and contribute about one-third of Macau's GNP. Macau is a Special Territory of Portugal but will become a Special Administrative Region of China in 1999.
Taiwan. (Medium) Money laundering and other financial crimes are believed to have increased in the wake of Taiwan's measures to liberalize its financial system. Tracking illicit proceeds is difficult, because licit and illicit funds are intermingled through the underground financial system, which has become sophisticated enough to process large loans, and even stock trades which rival the exchanges. The underground economy volume is roughly estimated to be 25 percent as large as the legitimate economy.
To curb money laundering, the Ministry of Finance has adopted a number of countermeasures, including requirements that banks provide training to staffs in preventive techniques, but it has not criminalized money laundering. Taiwan is not a signatory to the UN Convention, but requires banks to maintain records of transactions exceeding US$250,000, and to report foreign exchange transactions of more than US$500,000. Banks are also required to report suspicious transactions, but there are no guidelines for the banks, nor training for their employees on recognizing suspicious transactions or on reporting practices.
Cambodia. (No Priority) Cambodia is not a money laundering concern.
Indonesia. (Low) Although Indonesia is not considered a significant money laundering country, the government is considering additional legislation to cover money laundering, conspiracy and asset forfeiture.
Laos. (Low) The government has not moved to adopt anti-money laundering legislation, presumably because there is no indication that drug or other proceeds are being laundered through the formal financial system. The open banking system offers confidentiality and a variety of offshore privileges which ensure that banks can do business with little oversight.
Malaysia. (Medium) The government ratified the 1988 UN Convention during 1993, and is bringing its laws into conformity. Money laundering has been outlawed; prosecutors can bring both civil and criminal actions to forfeit seized assets; police have full access to bank records, notwithstanding bank secrecy laws, and share information with foreign authorities.
While there are no limits on currency imports/exports, there are some controls on foreign exchange transactions. Malaysian authorities are reportedly considering still further steps to prevent money laundering as their advanced financial industry expands.
Western authorities still watch with concern the development of the offshore facility at Labuan, which had 19 operating banks and 250 offshore companies in operation; another 200 banks had been given licenses but had not yet commenced operations at the end of 1993. While not yet an important financial center in the region, the relaxed approach to regulation which is a feature of this facility, and the series of seminars and promotions may attract investors to development projects on the island; they also may attract money launderers of several stripes.
Singapore. (High) On August 30, 1993, the Parliament passed legislation conforming banking rules with the 1992 Drug Trafficking Act's Confiscation of Benefits provisions. The new law allows bilateral treaties and agreements to facilitate mutual assistance, and should enable Singapore to ratify the UN Convention. Under the new law, which has not been implemented, banks will be required to disclose information to law enforcement agencies on the accounts of individuals suspected of drug money laundering, subject to a court order.
Drug money laundering is a criminal offense; suspicious transactions must be reported, and banks must positively identify customers making large currency transactions, and also keep adequate records to assist law enforcement. Another provision allows the Attorney General to assist a foreign government investigating an offense which is also an offense under Singaporean law, but this cooperation will be subject to an agreement between the governments.
Prior to enactment of this legislation, the few requests the USG made in investigating narcotics-related financial crimes were denied because of bank secrecy laws. Under the new law, such assistance through access to bank records can only occur it there is a bilateral designation agreement in place. Singapore has not yet established the rules for such agreements, although the USG has repeatedly stated its willingness to negotiate.
USG officials continue to believe that the very features which make Singapore the world's fifth largest financial center, and a likely successor to Hong Kong as the major regional center after 1997 also attract money launderers. The belief that drug and other money is laundered through both the bank and non-banking financial systems is based upon cases in Australia, Hong Kong and elsewhere which have a Singapore connection, but there are not enough data to project a volume which would confirm Singapore as a major money laundering center. There have been no arrests under the new law, but it is expected that the legal and administrative machinery will be in place by early 1994. The 1992 law on asset forfeiture has also not been tested.
Thailand. (High) The Thai government is aware of the money laundering that is perhaps inevitable, given the combination of an expanding and sophisticated financial center which now has an offshore sector in Bangkok and a large volume trade in opium and heroin, but it has not adopted remedial legislation. There is also an extensive and apparently unregulated "shadow lottery" and gambling business.
Recent financial asset investigations reveal that banks and other traditional financial institutions play a larger role in money laundering than was previously believed. However, gold shops, resort industries, remittance businesses and other non-traditional outlets remain significant factors in laundering the proceeds of the drug trade.
The major financial centers sought by Sino-Thai traffickers are in Singapore, Taiwan and Malaysia. The likelihood of a money laundering statute being enacted in the immediate future is not good; the asset seizure law was under consideration 10 years before being enacted in 1991
Thailand continues to permit numbered bank accounts and the use of nominees, although the Thai are studying possible legal changes to this situation. The FATF proposes to visit Thailand in mid-1994 to spur legislative action and compliance with the UN Convention. The Thai do not meet the Convention's goals and objectives. There is no information with which to assess the potential vulnerability of the offshore facility created in 1992 to channel investment funds to Cambodia, Laos and Vietnam.
Vietnam. (Low) Police made their first asset seizure in 1993, arresting a fugitive from US justice who had laundered drug proceeds by investing US$500,000 in real estate. While there are no reliable estimates on how much money is being generated by the drug trade, Australian authorities have expressed concern about gold smuggling between Vietnam and Australia, which they say is connected to large deposits of currency into Hong Kong banks and is possibly heroin-related.
Australia. (Medium) The government continues to be the leader in the Asia and Pacific region, in terms of both the scope of legislation enacted and the aggressiveness of its implementation. The 1987 Proceeds of Crime Act makes it a crime to launder the proceeds of all criminal activity; the Financial Transaction Reports Act of 1987 mandates the filing of reports by all cash dealers on transactions of A$10,000 or more and by all persons entering or leaving Australia with more than A$5,000, and also requires reporting of suspicious transactions.
Building on these laws, Australia has initiated a system of monitoring wire transfers which are cross-checked with all the other financial data by its pioneering Financial Data Collection and Analysis Agency, AUSTRAC, which provides information on money laundering and other financial crimes to the principal enforcement agencies at the federal and state levels. Asset forfeiture remains conviction-based.
Australia is perhaps coping with a more diverse money laundering situation than when it took these preventive steps. The Japanese "yakuza" and Vietnamese gold smugglers are active in Australia, as are Hong Kong "triads," and ethnic Chinese from Hong Kong and Singapore. The National Crime Authority, which investigates all organized crime, recently aided the People's Bank of China in uncovering a money laundering operation from the mainland.
The Philippines. (Medium) Although strict bank secrecy laws and a lack of enforcement measures would seem to create ample opportunity for money laundering, there have been few reports to confirm an increasing belief that drug money is laundered. USG agencies are uncertain whether the paucity of reports is due to an actual lack of such activity, or if money laundering has been obscured by the high level of corruption in business circles.
With increased governmental stability and an effort to eliminate corruption, it is expected that reporting of money laundering will be commensurate with the suspected levels of use of the Philippines by narcotics traffickers from Singapore, Thailand and Hong Kong. Other types of financial crime proliferate. Tax evasion is the norm, and residents hide their true worth through shell companies, dollar accounts held under false names, and through foreign bank accounts.
The Philippines has ratified the 1988 UN Convention but has not developed implementing legislation. There are controls on the amount of money which may be brought in, but money laundering is not a criminal offense and the bank secrecy laws prevent effective investigations. There is no asset forfeiture law, and a draft law under consideration by the Congress faces strong opposition.
New Zealand. (Low) The government is testing the asset forfeiture legislation passed in 1992 through its first seizure, valued at NZ$400,000. No action was taken during 1993 to pass laws which would comply with the UN Convention, and possible enactment in 1994 will face considerable resistance. Money laundering is not a criminal offense, but there is no evidence that New Zealand is experiencing a major money laundering problem.
Vanuatu. (Low) Despite the attraction of strict bank secrecy coupled with a lack of foreign exchange controls, and a sophisticated offshore banking center with connections to Thailand, Hong Kong, England and France, there is no evidence of significant money laundering through the more than 100 banks on Vanuatu.
Other Pacific. (No Priority) The Cook Islands, Nauru, Kiribati, Marshall Islands, Micronesia, Northern Marianas, Tuvalu, Solomon Islands, Western Samoa, Papua New Guinea and Fiji were reviewed but are not significant from a money laundering perspective.
Algeria. (No Priority) Even with liberalized measures in force, the banking sector is largely dependent on the state, making the financial climate unfavorable for an influx of foreign capital. There is no evidence of narcotics money laundering.
Cote d'Ivoire (Ivory Coast). (Medium-High) Money laundering is a criminal offense in this major West African financial center, but the country is believed to be both a transit and conversion point for narcotics money. Some money laundering probably occurs within the banking system, but it is rumored that money laundering chiefly occurs in the real estate market. Banks are required to maintain records on large currency transactions, which are reported to the GOCI, as are suspicious transactions. Money laundering controls do not apply to non-bank financial institutions, but there are controls on imports/exports of currency, and GOCI has asset seizure laws.
Ghana. (Low) Ghanians are involved in heroin trafficking from Southwest and Southeast Asia into Western Europe, Canada and the United States. There are increasing indications in the United States that drug proceeds and the proceeds of criminal activity are being laundered through non-bank financial institutions which are controlled and operated by Ghanians. In Ghana, foreign exchange bureaus, many of which have US affiliates, are very loosely regulated by the Bank of Ghana; these exchanges were introduced to control the black market in foreign currency by providing authorized outlets to service "spot" needs. The need for foreign exchange is acute because Ghana's exports do not pay for its imports, a situation which places a premium on the acquisition of foreign exchange. Consequently, the government is reluctant to impose extensive currency controls.
Kenya. (Low) Parliament's failure in 1993 to pass legislation implementing the 1988 UN Convention, which Kenya has ratified, has stalled plans to initiate an anti-money laundering program. Given the trafficking by African and South Asian couriers through Nairobi and Mombasa, and the reported presence of Italian Mafia figures in Mombasa (which may account for transfers of Italian lira from Kenya to banks in Singapore), there is concern about drug money being exchanged as well as concern about other criminal activity.
Morocco. (Medium) Moroccan officials have advised FATF of their concern about narcotics proceeds transiting or being converted in their country, and FATF has scheduled a meeting in 1994 for the purpose of encouraging the adoption of its countermeasures. As noted above, Spanish officials believe that US$200 million from the Moroccan hashish trade has been laundered through banks in the Spanish enclave of Ceuta. Hashish profits are also reported to return to Morocco in the form of contraband goods, which are converted into investments in businesses and real estate. There are foreign currency regulations, and Moroccan law permits officials access to bank records for investigations, but the asset seizure law is limited.
Nigeria. (High) USG officials now consider Nigeria the major drug trafficking and money laundering center in Africa. Lagos is home to at least five drug trafficking groups which use the financial system to convert drug proceeds into local currency or launder the proceeds for reuse elsewhere. These conversions through banks, non-bank financial institutions and exchange houses are believed to be conducted exclusively by Nigerian traffickers.
The financial system is not safe enough for investors who are not connected to the political system; those with connections find Nigeria a very favorable money laundering climate, with corruption and fraud prevalent throughout society. While heroin proceeds dominate money laundering activity, which is largely conducted in US dollars, some cocaine proceeds are also laundered. Some traffickers are converting cash into commodities that can be exported to Nigeria and sold, the proceeds deposited into Nigerian banks.
Nigeria has ratified the UN Convention, and money laundering was made a criminal offense in 1989. But Nigeria does not have an effective oversight mechanism for banks, and the non-bank sector is subject to even less oversight. There are no restrictions on imports/exports of foreign currency (a currency declaration requirement is not enforced). Assets can be seized upon conviction, but there is no system for tracing, freezing, or seizing traffickers' assets and no assets were seized in 1993. There have been no prosecutions under the 1989 decree, despite an increase in the number of money laundering investigations. Given this situation, Nigeria is not considered to be meeting the goals and objectives of the 1988 UN Convention.
Sierra Leone. (Low) There is little money laundering in the traditional sense, but there is heavy traffic in diamonds which are smuggled out of the country. Diamonds are used to buy narcotics which are brought into the country for sale to wealthy addicts and tourists.
South Africa. (Low) Comprehensive legislation to combat money laundering was adopted in April 1993, which includes both criminal and civil asset forfeiture. However, there is no evidence that South Africa, which has the most advanced financial sector in the region, is a significant money laundering center. There is evidence that South American cocaine is being sold in South Africa, as is the drug mandrax, both of which generate large profits.
Tunisia. (No Priority) There is no indication that any significant amount of money laundering occurs, but Tunisia has adopted anti-money laundering countermeasures as a preventive step.
Zambia. (Low) Relative to the size of the economy, money laundering is an increasing problem. Economic liberalization and elimination of foreign exchange controls have enabled traffickers to launder drug profits with comparative ease through banks and exchange houses. In some cases, proceeds from mandrax sales in South Africa are converted through purchases of luxury automobiles and manufactured goods, which are then imported into Zambia and resold, often after bribes are paid to reduce customs duties. A new drug law, effective November 1993, provides for seizure of assets obtained through narcotics trafficking.
Other Africa. The following countries were reviewed for the INCSR but are not considered to be money laundering centers or particularly significant from a money laundering perspective: Angola, Benin, Botswana, Burkina Faso, Burundi, Cameroon, Cape Verde, Central African Republic, Chad, Comoros, Congo, Djibouti, Equitorial Guinea, Eritera, Ethiopia, Gabon, Guinea, Guinea-Bissau, Lesotho, Liberia, Libya, Madagascar, Mali, Malawi, Mauritania, Mauritius, Mozambique, Namibia, Niger, Rwanda, Senegal, Seychelles, Somalia, Sudan, Swaziland, Tanzania, The Gambia, Togo, Uganda, Western Sahara, Zaire and Zimbabwe.
END OF INTERNATIONAL NARCOTICS CONTROL STRATEGY REPORT, APRIL 1994.
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