Index of "International Narcotics Control Strategy Reports"
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U.S. DEPARTMENT OF STATE
INTERNATIONAL NARCOTICS CONTROL STRATEGY REPORT
BUREAU FOR INTERNATIONAL NARCOTICS AND LAW ENFORCEMENT AFFAIRS
FINANCIAL CRIMES AND MONEY LAUNDERING
1995 INTERNATIONAL NARCOTICS CONTROL STRATEGY REPORT
There were a number of significant accomplishments in the world of money laundering in 1994, and a number of new and/or intensified concerns. Accomplishments and concerns are summarized here and explained in detailed sections below.
Accomplishments. Several financial center governments, such as Singapore and Panama, have adopted broad, new anti-money laundering policies and/or laws, and a number of governments were in the final stages of presenting/adopting new legislation.
The Financial Action Task Force completed the evaluations of each of its 26 member governments, all conducted by outside experts and all culminating in recommendations for changes and improvements which will be monitored through continuing examinations beginning in late 1995. The willingness of these leading financial centers to be examined by these experts testifies to the political will of FATF member governments, while reinforcing the universality of FATF's 40 recommendations and setting an example FATF urges other governments to emulate.
FATF took a major policy step in broadening the scope of its mandate to include money laundering from all serious crime, not limited to just drug trafficking, and its members began amending their laws to follow suit. FATF also took this broader approach on the road, urging adoption of its policy recommendations at seminars in Latin America, Asia and Europe.
The successful cooperation between the US and foreign governments on multinational investigations, demonstrated earlier in Operation Green Ice, was manifest again in 1994 through Operations Primero and Dinero (which drew heavily for their successes on Spain, France, Italy, Canada and the UK).
The US also strengthened its domestic and international capabilities through the 1994 Money Laundering Suppression Act which applies the various US anti-money laundering measures to all money transmitters, while also promulgating wire transfer regulations, and reorganizing the Financial Crimes Enforcement Network and adopting a more comprehensive strategy for the Internal Revenue Service with respect to financial crimes.
Justice, Treasury and the Postal Service signed a memorandum of understanding establishing a mechanism for coordinating international drug money laundering undercover operations.
Russia and Eastern Europe received a continuing high level of bilateral and multilateral attention in 1994. Top-ranked officials from Justice, State and Treasury met with senior Russian officials in Moscow on a range of crime issues, and teams of US officials met with counterparts in Russia and Eastern Europe to consult on delivery of training by US agencies to enforcement officials. President Clinton announced an agreement with Hungary on joint operation of a law enforcement training center in Budapest. US officials led a Financial Action Task Force team which reviewed progress on anti-money laundering policy development in Russia, Poland and the Czech Republic. The Financial Crimes Enforcement Network and the National Drug Information Center jointly sponsored a nationwide conference on the money laundering and related aspects of crimes committed in the US and Russia by Russian organized crime groups.
The money laundering issue continued to receive attention from major international policymaking bodies, like the G-7, the Commission of the European Communities, the OAS and others, as well as specialized groups such as the Summit of the Americas and the UN-sponsored crime conference in Naples.
Although the number of governments which have ratified the 1988 UN Convention continues to increase, and many important financial centers have adopted legislation to curb drug-related money laundering, far too many priority financial centers have still not adopted needed legislation and/or ratified the Convention, and, overall, there is concern about the pace of implementation of these laws.
Offshore banking, with the assurance of absolute secrecy by many jurisdictions which license such facilities, and, the manipulation of trade practices to move and conceal or generate illicit proceeds, were of increasing concern at year's end. So too were the counterfeiting of currencies and other monetary instruments, especially bonds; the boom in contraband smuggling; the covert and sometimes overt buying of banks and other financial institutions by suspected criminal groups; the resort by criminals to the use of smaller, less-monitored banks; and the sophisticated use of such new phenomena as direct access and pass-through banking, and electronic cash systems.
There is continuing concern, given that financial crimes and money laundering are occurring with varying degrees of regularity in more than 125 jurisdictions, that some affected and/or vulnerable governments still have not criminalized all forms of money laundering. Some governments have not given sufficient regulatory authority to their central banks and other institutions to deal with this problem; many do not have adequate data systems to monitor trends and methods used in their territories, and many have not made adequate provision for mutual legal assistance.
Because of these issues, countries which have legislative, regulatory and enforcement systems that are vulnerable to money laundering, or limited ability to react to money laundering or other financial crime (whether drug-related or involving other illicit proceeds) can be considered to be of concern. Whether there is current evidence or not of drug-related money laundering in a given jurisdiction, the existence of or vulnerability to other financial crimes in that jurisdiction will eventually attract drug-related proceeds.
To address these matters, the INCSR for 1995 also has broadened its editorial scope. (See Other Financial Crime)
CONCERNS FOR 1995 AND BEYOND
-- Over one hundred governments have ratified the 1988 UN Convention, including the great majority of high to medium priority governments; however, inconsistent enforcement of its anti-money laundering provisions is a key factor in the continued high level of global financial crime.
-- Eight of the governments ranked as High, Medium-High or Medium priority (see table) have signed but not ratified the 1988 UN Convention, and three other governments ranked among the higher priorities have not yet signed. Thus, almost one-fifth of the 67 governments in the three highest priority categories have not ratified this universal accord six years after its declaration.
-- Too many affected or vulnerable governments have not criminalized all forms of money laundering and financial crime, nor given sufficient regulatory authority to central banks. There is need for an intensified education and persuasion effort by the world's major financial institutions and organizations, to ensure a higher level of compliance on a global basis.
-- Too many governments continue to place limitations on money laundering countermeasures, particularly the requirement that the offense of money laundering must be predicated upon conviction for a drug trafficking offense.
-- Too many governments still refuse to share information about financial transactions with other governments to facilitate multinational money laundering investigations.
-- There is need for enhanced bilateral/multilateral international communications to inform governments and financial systems in some systematic and ongoing way about the methods and typologies of drug and non-drug related money laundering and financial crime.
-- The use of more sophisticated money laundering techniques at the layering and integration stages of money laundering (with cash now being held in bulk or placed into the financial system through exchange houses and other non-bank financial institutions) has gone beyond wire transfers to include a seemingly endless variety of licit and illicit financial instruments, including letters of credit, bonds and other securities, prime bank notes and guarantees, without a parallel increase in the capability of the far-flung elements of the world's financial system to verify the beneficiaries or authenticity of instruments.
-- The electronic highway now links banks and non-bank financial institutions (NBFIs) worldwide to facilitate expanding world trade and financial services, placing ever-greater priority on banks of origin to establish the identity of beneficial owners and their sources of funds. There are few controls on electronic transfers, and, compounding the problem, the bank (or non-bank) of origin is increasingly based in a non-major financial center which does not adequately control money laundering and other financial crimes.
-- Narcotics money launderers have adapted the invoicing schemes used by contraband smugglers and are similarly manipulating commercial trade practices to move and convert illegal proceeds. The vast proceeds generated by both types of crime magnifies the need for control mechanisms which address non-drug-related financial crimes.
-- There is emerging concern about new banking practices, such as direct access banking (favored customers are given the bank's software and allowed to process transactions directly through their accounts). This system limits the bank's ability to monitor account activity, such as use of joint accounts and pass-through banking schemes which have been a traditional method of layering. Beneficial owners of funds can now manipulate the identity information on the ultimate recipient of the funds without the review by bank officers. Pass-through banking by itself poses myriad problems for regulators, by creating accounts within accounts, even banks within banks. These new bank services can limit the utility of systems in place to ahve both originator and recipient information travel with the electronic funds transfer.
-- There is continuing concern that the need for capital of many financial systems overwhelms prudent banking practices and safeguards, with respect to deposits, loans and underwriting practices, and contribute to the increasing problem of overt and covert takeovers of banks and non-bank financial institutions by criminal groups.
-- The concern about the concentration of economic power in drug cartels and other criminal organizations, and its potential translation into political power, once primarily a focus in this Hemisphere, now embraces the Caribbean, Europe, the Middle East and Asia as well as the Americas.
-- Professional money laundering specialists sell high quality services, contacts, experience and knowledge of money movements, supported by the latest electronic technology, to any trafficker or other criminal willing to pay their lucrative fees. This practice continues to make enforcement more difficult, especially through the commingling of licit and illicit funds from many sources, and the worldwide dispersion of funds, far from the predicate crime scene.
-- Non-bank financial systems are still unevenly regulated in most parts of the world, especially at the placement stage for cash. (NBFIs in the US will be subject to federal registration when new US regulations are issued.) These include a wide variety of exchange houses, check cashing services, insurers, mortgagors, brokers, importers, exporters and other trading companies, gold and precious metal dealers, casinos, express delivery services and other money movers of varying degrees of sophistication and capability. Even less regulated are the underground banking systems, like the "chop" houses of the Orient, and the "hundi" and "hawala" systems of Europe, South Asia and the Middle East.
-- Asset forfeiture laws have not been adopted or strengthened to keep pace with anti-money laundering investigative authority, much less with the traffickers' wide-ranging schemes; there is a conspicuous gap between the number of institutions and accounts which intensified investigations have identified with money laundering and the authority of many governments to freeze, seize and forfeit drug and money laundering proceeds.
-- An increasing number of countries outlaw money laundering and allow the forfeiture of assets but many remain obliged to inform account holders the government is investigating them and may take action against their accounts--giving traffickers time to move assets and leave town.
-- There is an urgent need to prescribe corporate as well as individual sanctions, including actions against financial institutions that repeatedly fail to take prudent measures to prevent their institutions from being used to launder money.
-- There is need for continuous fine-tuning of bilateral and multilateral strategies, which define responsibilities and objectives on a country-by-country basis, and set specific goals for cooperating with the varying money laundering and money transit countries.
-- US financial systems continue to be exploited, at levels probably not approached by any other country.
-- Many governments and financial systems continue to rely on voluntary reporting mechanisms, despite the inadequacy of voluntary control systems. Reports from government after government demonstrate that the adoption of mandatory controls had not caused declines in legitimate deposits or resulted in threats from traffickers.
-- Prudential supervision of many domestic banking systems has improved with respect to money laundering, but too many branch offices and subsidiaries and other foreign operations continue to figure prominently in drug and other money laundering and financial crime. There is a particular need for the major international banks to ensure that the governments and regulatory agencies in all countries/territories they serve are enforcing the same high standards as their charter governments.
-- 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.
-- The implementation of free trade agreements/compacts, and creation of trading/economic zones, especially cross-border agreements, could increase the use of international trade as a mechanism for laundering the proceeds of criminal enterprises. Whether elimination of border and other customs controls, liberalized banking procedures within these zones, and freedom of access will result in greater smuggling of arms, drugs, money, immigrants, etc., can only be tested over time.
-- There is a need for countries which cooperate on money laundering investigations and prosecutions to share forfeited proceeds so as to reflect equitably their respective contributions. A "finder's keepers" approach is unfair and fails to provide an incentive for multinational efforts.
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 reportedly look for is a good guide.
-- Failure to criminalize money laundering from all serious crime and/or limiting the offense to narrow predicates, e.g., conviction of a drug trafficking offense, thus abetting efforts to commingle funds.
-- Rigid bank secrecy that cannot be penetrated for authorized law enforcement investigations.
-- Minimal or no identification requirements to conduct financial transactions, and/or widespread or protected use of anonymous, nominee, numbered or trustee accounts.
-- No required disclosure of the beneficial owner of an account or the true beneficiary of a transaction.
-- Lack of effective monitoring of currency movements.
-- No recording requirements for large cash transactions.
-- No mandatory requirement for reporting suspicious transactions, and/or a pattern of inconsistent reporting under a voluntary system, and/or a lack of uniform guidelines from which to identify suspicious transactions.
-- Use of monetary instruments payable to bearers. Well-established non-bank financial systems, especially where regulation and monitoring are lax.
-- Patterns of evasion of exchange controls by nominally legitimate businesses. Ease of incorporation, especially where ownership can be held through nominees or bearer shares, or where off-the-shelf corporations can be acquired.
-- Limited or weak bank regulatory controls, especially in countries where the monetary and/or bank supervisory authority is understaffed, underskilled or uncommitted.
-- Well established offshore or tax-haven banking systems, especially countries where such banks and accounts can be readily established with minimal background investigations.
-- Extensive foreign banking operations, especially where there is significant wire transfer activity and/or multiple branches of the foreign banks, and/or limited audit authority over foreign-owned banks/institutions.
-- Limited asset seizure or confiscation capability. Limited narcotics and money laundering enforcement and investigative capabilities.
-- Countries with free trade zones where there is little government presence or other oversight authority.
-- Patterns of official corruption and/or a laissez faire attitude toward the business and banking communities.
-- Countries where the dollar is readily acceptable, especially countries where banks and other financial institutions allow dollar deposits.
-- Well-established access to international bullion trading centers in New York, Istanbul, Zurich, Dubai and Bombay.
-- Countries where there is a significant trade in or export of gems, particularly diamonds.
MONEY LAUNDERING METHODS AND TYPOLOGIES. While narcotics trafficking is still regarded as the single most important source of criminal proceeds among members of the Financial Action Task Force responding to a special survey, some FATF member countries are beginning to view white collar crime as a problem of almost equal seriousness. Twenty-one of the twenty-six FATF members took part in the discussion, which also found that banks remain an important mechanism for laundering illegal funds, but money launderers increasingly use a variety of methods for entering the system. In the discussions among FATF members, drugs and white collar crime (bankruptcy, financial fraud, advance fee schemes, etc.) were the most frequently mentioned sources of illegal proceeds. The US delegation noted that, since October 1992, the number of prosecutions for money laundering involving white collar crime had been more or less equal to cases involving drug proceeds.
The links between money laundering and organized crime drew emphasis, the members noting that organized crime groups are involved in a full range of illegal proceeds-generating activities, from traditional "criminal" activities such as prostitution, illegal gambling, loan sharking, etc., to specialized financial crimes such bank and insurance fraud, money laundering, etc. It was noted that some organized crime groups operate increasingly across national borders.
Traditional banks remain an important mechanism for laundering illegal funds, but, money launderers must use increasingly more complex methods for entering funds into the banking system. For example, when banks are used at the placement stage, launderers will attempt to structure their transactions or commingle them with deposits of an ostensibly legitimate commercial enterprise or corporate entity. At the layering and integration stages, launderers, often operating under the guise of offshore corporations, use banks as collection points or conduits for moving funds worldwide.
Confirming a trend seen in the Western Hemisphere, FATF members reported an apparent shift from banks to non-banks, with emphasis on the role played by money changers or exchange houses, and there were reports of criminal groups moving away from major commercial banks to those they think are less likely to make suspicious transaction reports. The group also cited corruption of bank officials as a concern; the Mafia, for example, seek to obtain significant shareholdings in small or provincial banks so that they can install their representatives in the banks and use them for laundering their proceeds.
A new money laundering technique which has emerged is the use of representative offices of foreign banks, where the office accepts deposits and transfers the funds into its "Nostro" account without disclosing the identities of the beneficial owners of the deposits. This would seem to be a counterpart to the global money laundering "holding companies" cited by US investigators in 1993, which are available to any number of criminal organizations to launder drug and non-drug proceeds, and, to the "pass through accounts" practice cited by the Federal Reserve in the 1994 INCSR. The Federal Reserve called attention to sub-accounts established by foreigners who are operating multiple personal and business transactions through a single account; the sub-accounts are usually created by the primary account holder (a foreign bank) within its own country; it then allows its customers to use its US account.
Thus, 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 and its privileges without any records being created on the sub-account holders.
FATF members found little evidence of money laundering through the securities markets, but, in the insurance sector, single premium insurance bonds were cited as an increasingly popular money laundering mechanism.
Overall, FATF members believe that some of these trends result directly from launderers efforts to avoid the anti-money laundering controls FATF members have adopted. In addition to the foregoing, they cited increased use of bulk cash shipments, and imports/exports of gold and jewelry. Invoicing schemes continue, but launderers/criminal groups are also using international trade wherein proceeds of crime are used to purchase goods and products which are then shipped out of the country for resale.
The numerous methods cited in the 1994 INCSR continue to be employed, in the US and abroad. For example, an ongoing DEA case in Florida involves an international polydrug trafficking organization which has laundered hundreds of millions of dollars in drug proceeds using a variety of money laundering methods: bulk smuggling out of Canada; use of the underground banking system in Singapore and Bahrain; shell company accounts in Hong Kong and Europe; and the purchasing of assets in Canada and the US. In the last ten years, this organization imported over 240,000 kilos of hashish and Thai marijuana into the US and Canada, with a gross value of more than $1 billion. The organization is believed to have netted more than $400 million and the leader and two of his Pakistani sources are believed to have profited more than $100 million each after expenses.
Cocaine cartels, which once handled all money operations internally, continue to employ financial controllers who seek bids from money brokers, who may process money for more than one drug trafficking organization. Cartels pay as much as 17 to 20 percent rates to have their money laundered. These criminals continue to minimize paper records, preferring to use computer discs and increasingly sophisticated communications devices, often linked to computers.
As in previous years, cases continue to show that professional money managers rely on a long-list of non-bank financial institutions in addition to banks: exchange houses, finance companies, travel agencies, securities dealers, casinos, real estate agencies, fruit shops, import/export firms, jewelry stores, check cashing services, check sellers, and money transmitters, credit unions, 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-and an uncountable array of shell companies.
Proceeds can take many forms: cash, cashiers checks, bearer bonds and other monetary instruments, stocks, bullion, insurance policies, and even real property, disguised by wire transfers, invoicing schemes, loans, parimutuel winnings, trustee records, stock transfers, investments, and purchase of goods and services.
Millions of dollars in drug assets are laundered each year through the purchase of domestic postal money orders, which are purchased in the US (in a structured way to avoid reporting requirements) and transported to Colombia and other countries for redemption. Money launderers also use postal express mail, which prompted USPS' Inspection Service to initiate a program at JFK international airport. Investigators analyze express mail labels to detect patterns involving Colombia. Sixty-one of 65 express mail packages deemed suspect were found to contain $6.1 million in illicit proceeds, which were seized and forfeited. USPS also investigates accounts into which illicit money orders have been deposited. One seizure in 1994 involved $1.2 million in postal money orders clearing through a US bank from a casa de cambio in Cali.
Cashiers checks are also popular with money launderers, and banks are especially vulnerable to misuse of their instruments when an employee participates in the scheme. In the Banque Leu (Luxembourg) case (it was the first foreign bank to be prosecuted in the US for money laundering), an employee helped facilitate the deposit and processing of more than 400 cashiers checks, totalling $2.3 million, which were purchased in California with drug proceeds, sent to Colombia, and then deposited in Luxembourg. This case was unique; Banque Leu not only forfeited $2.3 million in 1993 after pleading guilty to one count of money laundering, but it agreed to produce yearly audit reports for the US Attorney's office, and to distribute an anti-money laundering compliance manual to clients and correspondent banks.
The belief that financial institutions should apply "know your customer" standards to customers of record when these new policies went into effect, as well as to new customers, was bolstered by an incident involving Union Bank, Switzerland's largest bank. UBS disclosed that it had discovered an account totalling $150 million belonging to Julio Nasser David, a Colombian fugitive drug dealer, who had maintained the account since 1979. The account, which was frozen, was maintained by David's wife, who was arrested near Geneva. Sheila Miriam Arana De Nasser, a Colombian national, was taken into custody by US Marshals on January 3, 1995, and returned to Florida for trial on charges of conspiracy to import and distribute multi-kilogram loads of cocaine and marijuana. The Swiss government has agreed to return $150 million in drug proceeds which were frozen in the account.
REGIONAL CONTRASTS. For the last eight years, the INCSR has focused closely on money laundering in the US, Central America and the Caribbean, and in Western Europe, especially on the laundering of cocaine proceeds. For 1995, the INCSR draws attention to Asia, where not only drug trafficking proceeds but the illicit proceeds of a long list of crimes are permeating not only the traditional underground banking system but the financial institutions of systems large and small.
East Asia & the Pacific. Evidence of financial crimes, including laundering of proceeds of drug trafficking and other money crimes has increased during this decade, coincident with or parallel to the rapid growth of financial centers in East Asia and the Pacific.
Historically, the laundering of drug trafficking proceeds, has been predominantly linked to opium, heroin and marijuana production in the Golden Triangle and the trafficking of narcotics products through Thailand, Hong Kong and other areas. Asian money laundering has included illicit proceeds derived from cocaine and marijuana trafficking and sales of psychotropic substances in the region as well as heroin distribution, and also from contraband smuggling, prostitution, counterfeit manufacture of products, and increasingly sophisticated financial frauds. In this regard, the region is once again catching up to the West in terms of the methods and typologies employed in financial crime.
The drug trade is voluminous, both in terms of gross volume of drugs manufactured and exported (and, importantly, consumed in the region). The non-heroin trade is of increasing importance: the Japanese National Police estimated in 1989 that the volume of methamphetamine (ice) sold in Japan had an annual value in excess of US$3 billion, a figure which has presumably increased. The characteristics of money laundering are changing; not only is cocaine being sold in the region in increasing volume, as noted recently in a report by the Australian National Crime Authority, but cocaine dollars from South America are increasingly detected in Asian financial systems.
Moreover, as in the West, the money laundering trade is not bound by the patterns of drug trafficking. Traditional transit countries like Thailand and Hong Kong are important factors in both the drug trade and money laundering, but the proceeds of crime are also laundered in such major financial centers as Singapore, Australia, Korea, Taiwan and Japan as well as in such remote outposts as Vanuatu, Nauru and other islands. Here too the hand of organized crime is being felt, not just Japanese yakuza and Chinese triads, but independent groups using state-of-the-art electronic technology and taking advantage of the absence of effective laws in many parts of the region.
Given the passage of anti-money laundering laws by each of the Asian FATF members (Japan, Hong Kong, Singapore, Australia and New Zealand), the prospect is that money launderers of every stripe will continue to use traditional financial centers but will increasingly seek alternative arrangements elsewhere in Asia. Moreover, there is continued uncertainty about what changes will be made in the Hong Kong financial system in 1997. There is speculation that legitimate investment will move from Hong Kong to Singapore and perhaps to a resurgent Shanghai, while "grey" and "black" money will find new homes in Thailand, Taiwan, and the offshore facility in Labuan (Malaysia), and perhaps Korea. Thailand, Taiwan and Korea have become principal concerns, both because of increasing evidence of financial crimes and the lack of concerted action by these governments, despite public declarations of concern and drafting of potential laws.
There is considerable concern in Asia about the expansion of offshore banking facilities in the region. Improperly regulated, such money magnets promote capital flight, as well as tax evasion. Such centers can attract a variety of illicit funds, not just drug trafficking. Indeed, there is a belief that these offshore centers may attract just as much proceeds from contraband smuggling as from drug sales (which may be true of money laundering in the region in general).
The recently created offshore facilities in Labuan and Bangkok have not yet attracted large volumes of proceeds, licit or illicit, but their popularity is increasing. The recent decision by Sri Lanka to curtail its offshore facility does not diminish the popularity of such centers; investors did not take advantage of Sri Lanka's offer of secret, numbered bank accounts because of political unrest in the country. The threats implicit in increased laundering of drug trafficking and contraband proceeds are joined by an apparent increase in financial frauds. Information about prime bank guarantees or advanced fee schemes purpetrated on the Pacific Cook Islands mirrors their proliferation in Eastern Europe and other areas with underdeveloped and/or unsophisticated financial systems.
East v West: Similarities and Differences. There are crucial differences but also important similarities between the money laundering techniques of Asian and Western criminal organizations, differences rooted in part in the different methods of distributing cocaine vs heroin and cannabis products, but also in part in their historic financial systems and their cultures.
While Latin American, South Asian and East Asian groups generally control cultivation, refining and initial distribution of their products, significant differences occur in transhipment. Unlike the Colombians, Asia traffickers generally do not attempt to control product or proceeds to the point of final sale on the street. Asians tend to use brokers or middlemen whose couriers convey the drugs from point to point until sold to a street merchant, thus creating many levels of profit and many profiteers. For Asian traffickers, this process fragments connections. Cocaine cartels often control distribution down to the point of consumption, and, their need for accountability for both drugs and proceeds creates a much more visible and potentially more exploitable ladder of vertical control. Colombians use a variety of couriers, but they usually belong to one of the major cocaine organizations; Asians may belong to a triad or yakuza group, or a tribe in Southwest Asia, like the cocaine cartels, but family-dominated organizations are major factors in Asian heroin trafficking and money laundering.
Like cocaine proceeds, Asian heroin money is laundered through both the traditional banking system and informal or underground banking networks. In Latin America, East and Southwest Asia, these networks are increasingly used, not just as parallels to banking systems, but as the placement stage for cash they will eventually move through banks.
The "hawala" or "hundi" systems known to South Asia, Europe and the Middle East, most of which began as remittance systems for foreign workers, have evolved to become significant factors in these economies. Many "hawala" brokers are world traders with proven business connections and demonstrated abilities to move money in large amounts, quietly and quickly. The funding some brokers handle reportedly rivals commercial banking systems.
Traffickers in East and Southeast Asia exploit a similar remittance system. The "chit" system, or "chop shop" banking, originated in the Chiang dynasty to avoid robberies during cash transfers and as a method of avoiding repressive tax measures. It has varied little since those days when it was known as "Fei Chien" or "flying money," and today conveys the majority of proceeds derived from heroin trafficking in Southeast Asia, and is dominated by ethnic Chinese families.
Both systems offer ethnic communities and drug traffickers alike a nearly invisible means of moving hard currency across international borders, and both systems depend heavily on the mutual trust held by members. The systems frequently involve import-export businesses dealing in cash, gold and precious stones; commodities are often used in lieu of cash transfers. The cross-generational, familial connections and personal introductions which are the essence of the systems provide traffickers an added level of security.
At this more sophisticated level, an Asian businessman wanting to transact business abroad -- but not carry currency or monetary instruments (particularly from those Asian jurisdictions with tight exchange controls) will seek the services of a "hawala" banker or "chop shop." An agreement will be struck on commission and exchange rate, and the businessman will receive a receipt, sometimes just a mark, which will be recognized by the receiving banker in the foreign country. The mark may be a lion, but the mark tells what amount to pay the individual cashing the receipt. The corresponding value of these markers changes in an informal but predetermined manner. These brokers rely on telephones, facsimile messages, and wires. Codes obviate the need for the originator to move the marker physically; to avoid detection, the businessman can rely on his confederates in the foreign country. The broker may profit throughout the transfer process from currency fluctuations and interest. Money moverments are difficult to detect, because no reporting mechanism or paper trail exists.
OFFSHORE BANKING FACILITIES. Much of the published work and ongoing studies of offshore financial centers, e.g., the current analysis by the Organization for Economic Cooperation and Development, concerns the use of these centers as tax havens. There is parallel focus, however, as evidenced in the 1994 INCSR, about the role of offshore financial centers in laundering illicit proceeds from a variety of crimes, including drug trafficking, but also including contraband smuggling, illegal gambling, and crimes of vice, as well as tax evasion, bank fraud and other financial crimes. The common denominator is that money movers -- professional and amateur alike -- are attracted by offshore centers' maintenance of bank secrecy, the ease with which accounts can be opened, even anonymously in some instances, and their electronic transfer capabilities. There are no reliable estimates of the volume of illicit funds which flow through offshore centers, from any source, but informal estimates range from the tens of millions into the billions of dollars.
The Financial Action Task Force is increasingly concerned about offshore banking and, during a plenary meeting in January 1995, agreed to continue working with the Offshore Group of Banking Supervisors in parallel efforts to ensure that offshore banking facilities work with OGBS in adhering to FATF and other standards, and, to encourage OGBS to evaluate its members' compliance with these standards. FATF members noted that, thanks to its external relations program, FATF had already met with the majority of governments licensing such centers.
The FATF is expected to make offshore banking a priority concern during the 1995-1996 round in which the US will be in the presidency of the organization.
OTHER FINANCIAL CRIME. From its inception in 1981, and particularly after passage of the 1986 International Narcotics Control Act, the INCSR has reported on drug-related money laundering. Keeping pace with trends, the focus quickly broadened from cash to include other monetary instruments. The 1993 and 1994 reports expanded coverage to include non-drug related money laundering, which continues to increase, both in volume and in geographic scope.
Today, the concern is not just the laundering of drug proceeds, but the movement and conversion of proceeds from an ever-wider range of serious crimes: drug trafficking; contraband and arms smuggling; prostitution; pornography; illegal gambling, etc. Moreover, the subject of money laundering must be addressed within the larger context of financial crime -- defined by such staples as bank fraud, insurance scams, counterfeiting, etc. as well as money laundering. Some schemes may involve a sequence of financial crimes, such as laundering the proceeds of bank fraud, or, invoicing schemes which can be used to conceal the movement of an infinite list of contraband, but, also used to cover movements of drug money.
There is increased concern about the plethora of instruments used in committing financial crimes, such as prime bank guarantees, bonds and other securities which have been used to commit a wide variety of frauds, and about the use of such instruments and related processes to launder/convert/move the proceeds of other crimes, such as drug trafficking, as well as the downstream laundering of the proceeds of sales of such instruments. Phony bonds, counterfeits of legitimate bonds, stolen bonds, resale and use of cancelled bonds -- are all seemingly valuable financial instruments which are increasingly used in a variety of financial crimes, including fraud and money laundering. But, legitimate or authentic bonds are also used to launder money; purchased outright for cash or other monetary instruments, these bonds are usually made out to bearer and are convertible on a worldwide basis. Bonds from all of these sources have appeared worldwide but in Eastern Europe in particular.
There is also concern about the penetration and manipulation of many elements of the financial world by drug traffickers and other criminals: commercial, investment and retail banking; bonds, stocks and other securities industries; insurance; -- and, increasingly, the non-bank financial world: finance and exchange houses, check cashing services, casinos, and certain high volume retail businesses.
Moreover, the continuing reliance of criminal organizations upon professional money managers to process and commingle the illicit proceeds of a variety of crimes has sorely compounded the difficulties faced by prosecutors, particularly those in jurisdictions which require prior proof and/or conviction for a predicate offense such as drug trafficking. That problem is particularly accentuated by the multinational dimension of many criminal operations, the predicate crime occuring in one jurisdiction, the money laundering offense occurring in another, sometimes far distant country.
The practice of over/undervaluing invoices of international shipments as a means of laundering money is an ever-increasing threat to international trade in many countries. The practice is used to disguise contraband smuggling, a major generator of illicit proceeds, as well as to launder drug money. For example, a recent narcotics investigation disclosed that a shipment of shrimp and other seafood products with an actual value of $2 million was imported from Colombia to the US at an inflated invoiced value of $4 million. The supermarket chain, which was in a partnership with the Colombian drug cartel, purchased the $2 million worth of seafood products and could now "legally" transfer the extra $2 million back to Colombia as payment for the $4 million voucher.
Commercial cargo shipments are being used to smuggle unreported currency and negotiable instruments from US to South America and numerous haven banking countries. Although a significant quantity of money that is currently being laundered offshore is transferred electronically, smuggling of bulk currency, particularly drug proceeds, is increasing, not only from the US to countries where the drugs originate, but from these source countries to and through neighboring countries, e.g., from Colombia and Bolivia to Brazil and the Southern Cone.
The American Bankers Association (ABA) and the International Bankers Association (IBA) have expressed concern over the extensive use of computer technology to counterfeit corporate checks, bonds, securities and negotiable instruments of the United States, other governments and corporations. The counterfeits are virtually indistinguishable from the genuine items. In addition to counterfeit currency, bonds and other monetary instruments, there has been an escalation in the international production and fraudulent use of counterfeit access devices: commercial credit cards, telecommunications, computers, identification documents.
WHAT WE NEED TO DO. 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.
Considerable attention has been 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.
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.
Over time, a number of actions can be seen as needed on a continuing basis to keep pace with the dynamics of money laundering in a high-tech world, and ten action categories were identified in the 1994 INCSR. Continuous action is needed on each of those categories in 1995, and for the foreseeable future, but the changing dynamics of the field prompt the addition of five new action categories for 1995 and beyond:
11. The United Nations Drug Control Program (UNDCP) should intensify its efforts to ensure that all significant financial center countries are implementing fully the anti-money laundering and asset forfeiture provisions of the 1988 UN Convention. As an immediate priority, UNDCP should focus on securing ratification by the 12 significant financial center governments which have not yet ratified the Convention.
12. The Financial Action Task Force, working with the Offshore Group of Banking Supervisors and other relevant organizations, should focus increased attention on offshore banking. FATF has been quite effective in reaching out to this group; a majority of offshore banking centers are either members of FATF or the Caribbean FATF, or, have participated in FATF/CFATF seminars which provided guidance on adopting/implementing FATF and UN guidance. More analysis is needed of the methods used to move money through offshore banks, and OGBS should be supported in efforts to include as many offshore banking centers as possible within its membership, and, a parallel effort to evaluate progress by its members.
13. The adoption by governments of information standards recommended by FATF and the SWIFT banking information network is a welcome if not yet universal step, but, many more governments need to cooperate with their banking system on developing regulations which help curb the misuse of electronic transfer and payment mechanisms to launder illicit funds.
14. Governments and banking systems alike must be more vigilant in efforts to detect counterfeit currency and other monetary instruments. The schemes involving counterfeit bonds and other securities (usually as collateral) suggest there is also a need for an international clearinghouse which assists banking and financial systems outside the major centers in determining the authenticity of offered documents (an acute need, from all indications, in Eastern Europe).
15. Governments and banking systems must exert greater efforts to identify and prevent a wide range of financial crimes, not just drug and non-drug money laundering, but also the variety of financial frauds, such as prime bank guarantees. Again, the history of such frauds suggests a need for a clearinghouse which can assist financial houses in identifying customers and authenticating documents.
The continuing action categories are:
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" funds. Interviews of arrested drug money managers are producing detailed profiles of money management schemes. The best data so far applies to the cocaine trade, but we need to develop the same level of knowledge about heroin and marijuana syndicates.
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 another 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. Illicit funds and corrupt officials represent a continuing threat to democracy in literally every region of the world.
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. the interplay between political and structural factors in a country, and its involvement in money laundering needs to be better understood. 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? We need to evaluate the potential effect of economic countermeasures, such as decertification by governments, or exclusion from the system by major financial concerns, on those banks and others with a "do anything for capital" mentality.
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 disrupt cartel operations. 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 United Nations, Financial Action Task Force, European Union, Council of Europe, Organization for Economic Cooperation and Development, Caribbean FATF and Organization of American States 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.
1994 LEGISLATION. The Money Laundering Suppression Act of 1994, strongly endorsed by Justice and Treasury, overturned the Supreme Court's adverse structuring decision in Ratzlaf v United States; it requires federal registration of money exchangers and transmitters; and requires declarations of foreign bank drafts being brought into or taken out of the United States.
TREATIES AND AGREEMENTS. Mutual legal assistance treaties (MLATs) and executive agreements, which are negotiated by the Department of Justice in cooperation with the Department of State to facilitate cooperation in criminal matters, including money laundering and asset forfeiture, are in force with 17 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), Uruguay, Morocco, Spain and Thailand. MLATs have been signed but not brought into force with ten other governments: Jamaica, Belgium, Colombia, United Kingdom, Korea, Panama, Hungary, the Philippines, Austria and Nigeria. Similar treaties are in various stages of negotiation elsewhere. The US also has signed the OAS Mutual Legal Assistance Treaty.
The US has entered into executive agreements on forfeiture cooperation, including: (1) an agreement with the UK providing for forfeiture assistance and asset sharing in narcotics cases; (2) a drug-related forfeiture agreement with Hong Kong; (3) a forfeiture cooperation and asset sharing agreement with the Netherlands (but not yet in effect with Aruba and the Netherlands Antilles). The US has asset sharing agreements with the Cayman Islands, Colombia (non-reciprocal), and Ecuador. The US has agreed on the text of an asset sharing agreement with Canada, which should be signed in 1995.
Treasury has completed Financial Information Exchange Agreements with Mexico, 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. Justice and State cooperate in these negotiations.
US Customs has mutual assistance agreements with Argentina, Australia, Austria, Belarus, Belgium, Canada, Cyprus, Czechoslovakia (now extended to the Czech Republic and Slovakia), 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.
WIRE TRANSFER REGULATIONS. The Annunzio-Wylie Anti-Money Laundering Act of 1992 authorized Treasury and the Federal Reserve jointly to promulgate regulations requiring maintenance of certain records for certain funds transfers by domestic financial and nonbank financial institutions. On January 3, 1995, two rules were issued under the Bank Secrecy Act that will for the first time require uniform recordkeeping for wire transfers. The first rule, which was issued jointly, requires the collection and retention of information related to wire transfer transactions, notably identification of parties to the transactions.
The second rule issued by Treasury on the same date requires each financial institution involved in wire transfer transactions to include information in the payment orders sent to the next institution in the wire transfer link (so that the information "travels" with the payment order). Once implemented on January 1, 1996, the rules will add an important investigative weapon to law enforcement's arsenal to enhance detection of domestic and international money laundering through funds transfer systems.
FINANCIAL INTELLIGENCE UNITS. A goal of the USG, consistent with its pursuit of harmonization of efforts and strategies in the fight against money laundering, is to achieve linkages of policy and purpose (and, where appropriate, of data) among financial intelligence units, and to promote creation of such units in the significant financial center countries. Too often, the US has found, governments are not yet agreed on which competing agency should receive and analyze critical financial and crime data, which limits such governments effectiveness in developing strategies against money laundering. Examples of existing financial intelligence units (which vary in structure, purpose and authority) include FinCEN, France's TRACFIN, Australia's AUSTRAC, the United Kingdom's NCIS, and Belgium's CTIF. Efforts are underway to establish a similar organization in other countries, a number of which have received technical and policy guidance from the United States.
TRAINING AND TECHNICAL ASSISTANCE. During 1994, US departments and agencies conducted bilateral and multilateral training on the topics of drugs, money laundering, white collar crime, customs violations, mutual legal assistance, and forfeiture-related matters in every sector of the globe. Governments which received such assistance overseas included: Andorra, Armenia, Australia, Bangladesh, Cambodia, Chile, China, Czech Republic, Ecuador, Finland, Germany, Hong Kong, India, Indonesia, Italy, Kenya, Korea, Kyrgyzstan, Laos, Latvia, Lithuania, Maldives, Mexico, Moldova, the Netherlands, New Zealand, Panama, Paraguay, Philippines, Portugal, Russia, Singapore, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Tajikistan, Thailand, Turkey, Ukraine, United Arab Emirates, United Kingdom, Uzbekistan, Venezuela, Vietnam and Zimbabwe. In addition to these bilateral initiatives, US agencies collaborated with UNDCP, OAS, Interpol, World Customs Organization, and FATF in seminars and training programs.
ENFORCEMENT. OPERATION DINERO was a DEA/IRS long-term undercover money laundering operation in Atlanta, which was initiated in 1992 and taken down in December 1994. Operation Dinero, which targetted the illicit drug proceeds of the Cali Mafia, resulted in 88 arrests in the US, Spain, Italy and Canada, the seizure of nine tons of cocaine, and the seizure of more than $50 million in cash and other property. The first phase focused on undercover money pickups which connected drug trafficking and money laundering groups in the United States. The second phase used an ostensibly legitimate offshore bank (actually operated by DEA) in Anguilla, set up with the help of IRS and UK authorities. Promoted by DEA undercover agents, the bank began taking drug trafficker accounts in 1994. In addition, various undercover corporations were created to provide services such as loans, cashiers' checks, wire transfers, peso exchanges, etc. The Cali cartel also engaged the bank to sell three paintings, including a Picasso, a Rubens and a Reynolds, which were seized.
OPERATION PRIMERO, a Customs investigation which targetted more than 100 businesses in the US, South America and Europe, resulted in indictments in June 1994 against six members of a Colombian drug confederation. The investigation centered on Universal de Cambios, a wire transfer business in Atlanta, which was allegedly one of the largest international money laundering organizations for the Cali cartel. Universal is one of several financial organizations alleged to belong to the confederation. The indictment in Atlanta charged the defendants with laundering drug proceeds (by wire) from the US, Spain, France and Italy. The investigation resulted in the arrest of 91 persons in those three countries, and led to the seizure of $15 million in cash, 43 kilos of cocaine, and 250 pounds of marijuana.
THE HUGO CUEVAS GAMBOA ORGANIZATION. In mid-October, law enforcement officials from the US, UK and nine Latin American nations launched an unprecedented coordinated operation against the Hugo Cuevas Gamboa Organization (HCGO), an alleged drug money launderer. The operation represented the largest joint money laundering operation to date, involving US enforcement agencies, the intelligence community and Embassy country teams, and, provided an invaluable learning epxerience by boosting confidence in liaison counternarcotics collection capabilities, analytic expertise, and ability to plan and execute a complex operation against a sophisticated target. The raids, which disrupted the organization's operations, particularly in Central America, generated extensive press coverage of the money laundering problem in Latin America.
THE MIZUNO CASE. Customs continues to investigate the financial activities of Ken Mizuno in the United States. On June 16, 1992, an indictment was returned in U.S. District Court (Nevada) charging Mizuno with money laundering. A Federal arrest warrant was issued for Mizuno but he remains in Japan under investigation on charges of tax evasion. Customs has seized real property and other assets in the United States valued at more than $108 million, making this investigation the second largest non-drug money laundering case prosecuted by the US government.
OPERATION CHOZA RICA is a long-term undercover operation that began in 1990. On November 21, 1994, a banking arm of the American Express Company settled for $32 million a Customs money laundering investigation that involved Mexico's largest drug cartel, also a principal conduit for Colombian cocaine entering the United States. This was the largest civil penalty ever assessed against an American financial institution for laundering money. American Express Bank International was accused of laundering drug money through Cayman Island accounts for the Juan Garcia-Abrego Drug Organization. On June 2, 1994, a Federal jury in Brownsville, Texas convicted two American Express Bank International employees for their roles in laundering approximatesly $30 million in drug proceeds. On August 12, 1994, the two employees received sentences of 10 and 3.5 years respectively. In a prepared statement, American Express Bank International admitted to no wrongdoing but said that it had legal responsibility for its employees' actions, and agreed to forfeit its interest in any account used by the money launderers. The case resulted in the criminal forfeiture of $29.8 million in laundered money, and AEBI agreed to pay a $14 million criminal penalty under 18 USC 1956 while spending $3 million to improve its compliance program. The Government agreed not to seek criminal charges against the bank.
THE SPENCE CASE, a DEA/FBI investigation, led to Justice filing charges on November 30, 1994, against 23 defendants, including a lawyer, two principals of a private Swiss bank, a stockbroker, a local bank official, two rabbis, an Honorary Consul General for the Republic of Bulgaria, and a New York City Police Officer and a firefighter, with participating in a major international money laundering organization responsible for laundering tens of millions of dollars in narcotics proceeds. The defendants are members of an oganization based in various cities around the world, including New York City, Los Angeles; Mulheim, Germany; Zurich, Switzerland; and Cali, Colombia that laundered narcotics proceeds for drug traffickers in the US, Canada, Puerto Rico and in cities throughout Europe. Law enforcement officials seized $5 million from the members of the organization. A substantial portion of the monies being laundered by the organization were sent to a private bank in Zurich through which the organization laundered an estimated $70-100 million during 1993.
OPERATION PROMO, a two-year undercover investigation by DEA in cooperation with the IRS and the sheriff's office in Tampa, led to the indictment of two top executives of Merrill Lynch in Panama, who allegedly played a key role in the laundering of millions of dollars of perceived drug proceeds. They were among a group of 28 persons implicated in five indictments. The alleged money laundering involved funds disguised as proceeds of an import/export business, which were moved through shell corporations and investment accounts in Florida, New York, British Virgin Islands, Panama and Liechtenstein. The list of defendants includes senior bank officials, businessmen and drug dealers from Panama and the United States. The laundering operation allegedly exploited a Colombian government program called "Reintegros" which permits the repatriation of Colombian export profits and conversions from US dollars to pesos.
The GOLDEN TRASH investigation, an FBI international drug/money laundering investigation, was directed at the infiltration and prosecution of a major Colombian organization controlled by David Mier in Miami and the Borrelli-Mier family based in Colombia which was responsible for smuggling cocaine and heroin and laundering their proceeds. On August 10, 1994, 52 subjects, including David Mier, were indicted by the District of San Juan. On August 16, 1994, the first phase of the investigation resulted in the arrest of 34 subjects. To date, about $10 million in cash and assets have been seized (including 83 vehicles, seven boats and 13 houses), 85 subjects have been indicted, 65 subjects have been arrested and over 500 kilograms of cocaine have been seized.
OPERATION CUP also demonstrated the vulnerability of banks to insider participation in money laundering schemes. This joint operation by Customs/IRS ended November 14, 1994, with the arrest in the Southern District of Florida of Jean Jacques Handali, an account director of the Union Bancaire Privee (CBI-TBD), a large private bank in Geneva, along with three co-defendants. Handali's operation laundered $2.5 million during the period of the investigation, which began April 1993.
ASSET SHARING. 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 spending of these assets to improve narcotics law enforcement. The long term goal has been to encourage governments to improve asset forfeiture laws and procedures, and undertake independent investigations.
From 1989 through December 1994, the international asset sharing program administered by Justice resulted in the forfeiture in the US of $105,800,838, of which $34,105,828 was shared with foreign governments which cooperated in the investigations. In 1994, the Department of Justice transferred forfeited proceeds to: Bahamas ($56,323); Canada ($64,325); Cayman Islands ($422,388); Channel Islands-Guernsey ($297,713); Ecuador ($330,317); Hungary ($8,415); Liechtenstein ($20,500); Netherlands Antilles ($22,500); Romania ($23,700); and Switzerland ($5,512,389). The Justice Asset Forfeiture Fund received $2.5 million in drug proceeds from two cases in which the Swiss forfeited assets with assistance from the United States.
Prior recipients of shared assets (1989-1993) 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 eight forfeitures, receiving about US$20 million, or more than half the total distributed. Additional sharings are in the process of being approved.
The Customs Service in 1994 remitted $58,586 to the Government of Nicaragua, $116,685 to the Royal Canadian Mounted Police, $134,498 to the Vancouver Police, and $39,970 to Panama's Technical Judicial Police. Previously, Customs had shared $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.
BANK OF CREDIT & COMMERCE INTERNATIONAL (BCCI). In July 1991, after allegations of worldwide money laundering, convictions of BCCI employees in the United States for money laundering, allegations of worldwide fraud and corruption, and an irreversible liquidity crisis, regulators from countries in which BCCI operated engaged in coordinated closure of the bank. Several months after the closure, the worldwide liquidator of BCCI entered a plea of guilty on behalf of BCCI to criminal and civil charges in the U.S., related to frauds perpetrated by BCCI.
In January 1994, the US entered into a settlement with the former majority shareholders of BCCI, who consisted of various high ranking officials and agencies of the government of Abu Dhabi, United Arab Emirates. These shareholders agreed to transfer to the US their interest in shares of the parent of First American Bank, and relinquish other associated rights, all valued at approximately $450 million. Additionally, the majority shareholders agreed to cooperate with US authorities in the continuing BCCI probe by, among other things, providing access to millions of BCCI documents and turning over to the US Swaleh Naqvi, the Number Two executive at BCCI.
In July 1994, Naqvi entered a plea of guilty to various Federal criminal charges and is now serving eight years incarceration in the United States. He continues to face criminal charges in the State of New York.
The US also has been extremely active in reaching negotiated settlements with various foreigners who may have participated in BCCI's illegal activities in the United States. To date, the US has collected over $750 million in penalties and restitution, most of which will be ultimately returned to the innocent victims of BCCI's fraud, abuse and other illicit activities. Also, the US has forfeited more than $600 million which was in BCCI accounts with US banks at the time of the 1991 closure or in other US assets. Half of these monies will be returned to the innocent victims of BCCI's abuse.
THE FINANCIAL ACTION TASK FORCE. In 1994, FATF focused on several major areas in its fight against money laundering. An experts group met to assess the current money laundering methods and typologies and to discuss possible actions. These results are being reviewed by the FATF plenary to determine its future course of action. The FATF has completed the mutual evaluations of the status of its members' implementation of the recommendations and has started a stocktaking of the existing 40 FATF recommendations and interpretive notes. Wire transfers, currency exhange houses, and offshore financial services are some of the areas of interest. The Netherlands is the FATF President for 1994-95, and the United States (the Department of the Treasury) will be the next President (1995-1996).
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, World Customs Organization, and the Organization of American States.
FATF operates through a steering committee, which includes the President (Netherlands), the past President (United Kingdom), the next President (US/Treasury), and additional delegates named by the President for the 1994-95 term (Italy, Norway, Australia, France and US/State). For 1994-95, FATF abolished its three working groups (Legal, Financial and External Relations) to concentrate more issues into plenary discussions.
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 a nearly unique action 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.
FATF members meet regularly to consider trends and methods used to launder money; where appropriate, they recommend changes or new interpretations of the 40 measures. They 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, offshore banks and related entities to facilitate money laundering.
An FATF objective 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 conducts seminars, drawing experts from member governments and international organizations, and also conducts high-level visits of FATF officials, some of which are quasi-seminars in nature. FATF seminars involve regulators as well as bankers, finance and justice ministries, enforcement agencies and prosecutors. Each seminar is designed to explain the policy approach to the specific problems of a given region, and to provide guidance on implementation and evaluation. Three major seminars were held in 1994. Two, in cooperation with OAS, were held in Buenos Aires and Quito, and attracted all of the significant Latin American financial center governments: Argentina, Paraguay, Uruguay, Chile, Brazil, Peru, Bolivia, Colombia, Ecuador, Venezuela, Panama and Mexico. The third was held in Kuala Lumpur (the second large meeting of East, South, and Southeast Asian and Pacific governments) where the leaders announced creation of an Asian FATF Secretariat, to be located in Sydney (thanks to a generous donation from Australia). The 1994 seminar included Pakistan, India, Bangladesh, Nepal, Sri Lanka, Thailand, Malaysia, Indonesia, Brunei, Korea, People's Republic of China, Taiwan, the Philippines and Laos, as well as FATF Members Singapore, Hong Kong, Japan, New Zealand, Australia, UK, France, Italy and United States.
During 1994, FATF returned to Russia for an assessment of progress since its 1993 seminar in Moscow (see Russia in country section), and was briefed on a proposed new money laundering law which incorporates many of the recommendations made at the seminar. FATF officials also visited the Czech Republic where they consulted on proposed anti-money laundering policies. FATF conducted a visit to Malaysia, Thailand, and Taiwan in May 1994 which laid the groundwork for the successful all-Asian seminar. FATF also participated in the Council of Europe conference where meetings were held with several East European governments, and the Commonwealth Secretariat Conference in Trinidad.
Five FATF Members (US, UK, France, Netherlands and Canada) continued to support and finance the Caribbean Financial Action Task Force (CFATF), which established a Secretariat in Port-of-Spain in 1994. Trinidad and Tobago is CFATF 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 1993 and again in March 1994 to approve a strategy for 1994-95. This planning led to a technical workshop in November 1994 at which governments reported on their progress in adopting laws to implement the Convention and recommendations. A key outcome of the discussions were commitments by Trinidad, the Cayman Islands, and Bahamas to be examined by outside experts, using the FATF evaluation format.
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.
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.
The expectation for 1995 is that FATF will continue to give priority to its external relation efforts in Eastern Europe, the Caribbean, and Asia, but initiatives also will be undertaken in Africa. High-level visits are contemplated for Morocco, the People's Republic of China, Korea, Indonesia and the Philippines.
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
Over one hundred states are parties to the 1988 UN Convention, which requires signatories to pass legislation making money laundering a crime. This number includes the great majority of high to medium priority governments. Treaty reservations, lack of domestic enabling legislation, and inconsistent enforcement of anti-money laundering and asset forfeiture provisions however, are key factors in the continued high level of global financial crime.
Ten states became parties to the Convention in 1994: Sierra Leone, Panama, Latvia, Saint Vincent and Grenadines, Poland, Colombia, Kyrgyzstan, Ethiopia, Finland and Norway.
These states had become parties to the Convention in prior years: Afghanistan, Antigua/Barbuda, Argentina, Armenia, Australia, Azerbaijan, Bahamas, Bahrain, Bangladesh, Barbados, Belarus, Bhutan, Bolivia, Bosnia/Herzogovenia, Brazil, Brunei, Bulgaria, Burkina Faso, Burundi, Cameroon, Canada, Chile, China, Costa Rica, Cote d'Ivoire, Croatia, Cyprus, Czechoslovakia, Denmark, Dominica, Dominican Republic, Ecuador, Egypt, El Salvador, Fiji, France, Germany, Ghana, Greece, Grenada, Guatemala, Guinea, Guyana, Honduras, India, Iran, Italy, Japan, Jordan, Kenya, Luxembourg, Madagascar, Malaysia, Mauritania, Mexico, Monaco, Morocco, Myanmar, Nepal, Netherlands, Nicaragua, Niger, Nigeria, Oman, Pakistan, Paraguay, Peru, Portugal, Qatar, Romania, Russian Federation, Saudi Arabia, Senegal, Seychelles, Slovakia, Slovenia, Spain, Sri Lanka, Sudan, Suriname, Sweden, Syria, Togo, Tunisia, Uganda, Ukraine, United Arab Emirates, United Kingdom, United States, Venezuela, Yugoslavia, Zambia, Zimbabwe, and the former Yugoslav Republic of Macedonia. The European Community confirmed Article 12.
The twenty-one governments which are signatories to the Convention but have not yet moved to become a party include several important financial center countries -- (high) Switzerland; (medium-high) Turkey and Uruguay; (medium) Austria, Belgium, Hungary, Kuwait, and the Philippines, (low-medium) Trinidad and Tobago -- as well as some governments ranked low or no priority -- Algeria, Cuba, Gabon, Holy See, Indonesia, Ireland, Jamaica, Maldives, Mauritius, New Zealand, Yemen and Zaire.
As of February 1, 1994, thirty-eight 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, 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. Of these, three (Liechtenstein, South Korea, and Lebanon) are significant from a money laundering perspective.
ORGANIZATION OF AMERICAN STATES. The Inter-American Drug Abuse Control Commission (CICAD) of the Organization of American States issued the "Declaration of Santiago" at its sixteenth semi-annual session in October, 1994, which renewed the political commitment of the member states to support CICAD and strengthen Hemispheric cooperation against drug trafficking and abuse. The members agreed that CICAD should launch an evaluation of the status of money laundering control in the Hemisphere, and, devote its October 1995 semi-annual meeting to the issue of money laundering.
The evaluation, which will include an assessment of the difficulties countries may be having in implementing the OAS model regulations, as well as their degree of conformity, is due at CICAD's March 1995 meeting. This evaluation and an accompanying assessment of technical assistance needs will become part of the basis for deliberations by Ministers at the conference agreed to at the Summit of the Americas.
CICAD had a very active anti-money laundering agenda in 1994. In addition to assisting member states in adopting and implementing the OAS model regulations, CICAD co-sponsored two major seminars with the Financial Action Task Force. The first seminar was held in Buenos Aires, the second in Quito in late September. While a majority of OAS members have adopted some portion of the OAS regulations, which are consistent with FATF's 40 recommendations, some countries have not adopted even basic laws, and, implementation is not yet at desired levels on a hemisphere-wide basis.
The OAS model statutes, which were drafted by a 13-nation group during 1991-92, and unanimously approved by OAS in May, 1992, 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. The OAS Mutual Legal Assistance Treaty which would provide a mechanism for the exchange of evidence and information on money laundering and other criminal activity is open for signature.
REPORTING COMPLIANCE. 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, and as amended FY 1995, 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 illicit drug or non-drug related 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. Aruba, the Netherlands Antilles, Argentina, Costa Rica, Antigua, Cuba, Dominican Republic, Vanuatu, Anguilla, Cambodia, Iran, Iraq, Romania, St. Kitts and St. Vincent are among the governments whose priorities have been raised since the 1994 report. Conversely, the situation in the Bahamas seems to have improved and its ranking is lowered, as have the rankings for Burma, Ivory Coast, and Nepal.
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 all material in this chapter, 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, Secret Service and the Office of National Drug Control Policy.
The table below responds to Section 489(a)(7)(c) 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.
[CHART: ACTIONS BY PRIORITY GOVERNMENTS]Replace
[CHART: MONEY LAUNDERING CHART]
Canada. (High) On August 31, 1994, Canadian authorities concluded their largest-ever anti-money laundering operation, arresting 57 people, including three lawyers, and charging them with 1,744 counts of laundering the proceeds of drug trafficking. Arrests and raids on homes, businesses, and financial institutions occurred in Montreal, Trois Rivieres, Quebec City and Vancouver. More than 30 Montreal companies were implicated. The sting operation by the Royal Canadian Mounted Police revealed that proceeds laundered through a storefront in Montreal's exchange district wired drug proceeds into more than 200 bank accounts in the US, Europe and South America. Another Canadian sting operation targeted money exchange houses from Montreal to Vancouver and, in June 1994, resulted in 190 charges being filed against 36 companies and 65 individuals in seven Canadian cities.
Drug proceeds dominate the Canadian money laundering scene, including Colombian cocaine proceeds, Southwest and Southeast Asian heroin proceeds, and proceeds from the sale of all kinds of drugs in the US. Canadian officials believe that 80 percent of the money laundering which occurs, primarily in US dollars, is international in scope. The balance is from sales of drugs in Canada. The Solicitor General reports that banks and other deposit-taking institutions, currency exchange houses, front companies, real estate transactions, and gold shops are the principal venues for money laundering. Canadian banks are also attractive because of their Caribbean branches; officials say a common method is to deposit illicit proceeds in a Canadian bank, then transfer the funds to the Caribbean branch.
Canada and the US negotiated an asset sharing agreement in September 1994, which should be signed in March 1995, and new regulations for asset sharing have been prepared. US Customs shared US$251,000 in two cases with Canadian agencies. Canada has averaged seizures of about C$21.5 million per year, but seized more than C$30 million in the first eight months of 1994.
US officials continue to believe Canada and the US would benefit from a Canadian system of monitoring cross-border currency movements. No declarations are required at present. Canada does require banks and non-bank financial institutions to maintain records of significant cash transactions, and banks keep similar records voluntarily on checks, money orders and wire transfers. But banks continue to oppose mandatory reporting of suspicious transactions (about 50 voluntary reports are made each month.)
United States. (High) As discussed in Accomplishments section, the United States strengthened its domestic and international capabilities through the 1994 Money Laundering Suppression Act. The act required Treasury to make the transaction reporting system less burdensome and more efficient. It requires federal registration of all non-bank financial institutions and encourages state licensing. In April 1994, the Bank Secrecy Advisory Group, comprised of representatives from banks, securities dealers, money transmitters, casinos, and other parts of the financial sector, as well as officials of federal and state government, was established. This unique partnership between business and government has been tasked with assisting in efforts to shape effective counter-money laundering policies while reducing any unnecessary regulatory burden. Its goal is to enable the financial community to be more effective and efficient in preventing and detecting money laundering and supporting swift enforcement actions.
Mexico. (High) Mexico ranks among the top money laundering countries in the Western Hemisphere. But current tools for controlling money laundering are inadequate. The serious money laundering problem results from several factors: close working relationships between Colombian/Mexican drug cartels; a lengthy land border that facilitates smuggling currency into Mexico from the US; insufficient money laundering laws; inadequately trained law enforcement agents who must enforce fiscal tax laws regarding money laundering; resistance by Mexican banks and money exchanges to new legislation that would regulate money transactions; and corruption within existing Mexican political, judicial, and law enforcement systems.
US concerns have been intensified by reports that drug traffickers have been buying bank stocks and seeking election to bank boards, after which they open numerous accounts through which they funnel drug money, often into real estate or other assets in Mexico.
Illicit proceeds are generated through the sale of Mexican heroin and marijuana, but also from heroin, marijuana, and cocaine from Colombia. Investigations indicate that as much as ten percent of total cocaine proceeds are laundered in Mexico. Much of the money laundering occurs through casas de cambio; a great deal of currency also is leaving the US through vehicles, transiting Mexico enroute to South America, or being integrated into the Mexican financial system and then transferred by wire. Mexican bank drafts are increasingly the financial instrument of choice of money launderers, particularly along the US-Mexico border. US currency is taken to Mexican banks, which do not report large cash transactions; the smugglers receive bank drafts drawn on the Mexican banks' accounts in US banks. The bank drafts may be smuggled back into the US, deposited into US bank accounts and/or transferred by wire. The drafts also may be used to finance shipments of both contraband and licit goods, as noted in Panama. Because Mexican bank drafts are not recognized as bearer instruments by the US Treasury, a currency and monetary instrument report (CMIR) does not have to be filed when bank drafts are transported across the border. In addition, a currency transaction report (CTR) is not required when bank drafts are deposited in US banks. This makes Mexican bank drafts an excellent vehicle for laundering illegal funds. Mexican banks use their correspondent banking relationships with U.S. banks to clear bank drafts. The clearing bank is usually chosen by the purchaser of the draft, who, unlike the Mexican bank, is not required to have an account at the correspondent US bank. Over 500,000 Mexican bank drafts enter the US annually. Analysis of one Arizona bank's activity in clearing bank drafts on behalf of three Mexican banks revealed that the average value of the drafts was $65,000, that it was not unusual to clear drafts in the $200,000-$400,000 range, and that 10 percent of the drafts were for amounts under $10,000.
Casas de cambio (currency exchange houses) on both sides of the border are the primary non-bank financial institution used for money laundering in the US-Mexico border area. Investigation of exchange houses operating in Monterrey and on the border with McAllen, Texas resulted in the prosecution of owners of several exchange houses as well as officers of banks in the US who were charged with laundering drug dollars for the Abrego organization. More than $30 million was seized and forfeited. The primary legitimate function of the exchange house is to change US dollars to Mexican pesos (or the reverse) for tourists, businessmen and workers. However, casas de cambio generally provide numerous other financial services as well, such as selling money orders and cashier's checks, wiring transfers of funds, and making payments for customers who have accounts with them. Because Mexico's casas de cambio are virtually unregulated except in terms of capitalization requirements, they have proved fertile ground for laundering activity. Their criminal customers are afforded many bank-like services with little risk of detection or enforcement action. Casas de cambio launder money by accepting currency and then transferring it by wire to locations within or outside of Mexico, by depositing currency in a money exchange's US or Mexican bank account and then wire transferring it through a series of accounts controlled by the criminal customer, by serving as "brokers" to their criminal customers in purchasing real estate and other assets using illegal funds, and by issuing cashier's checks, personal checks, money orders, or other monetary instruments in exchange for currency. These instruments may be made payable to anyone or to the bearer as desired by the customer. Currency transaction records are either falsified or not even filed in this type of transaction.
Investments by money launderers include cement companies, assembly plants, motels, biotechnology companies, aviation companies and other enterprises, many jointly owned by Colombian and Mexican traffickers, each seeking to legitimatize his wealth. The Munoz-Tavalera brothers owned restaurants, bars, meat shops, farms and homes worth an estimated US$23 million in Juarez. The Attorney General's office estimates that US$4 billion in drug money has been invested in the Monterrey area, which newspapers have called the money laundering capital of Mexico. Arturo Gallegos and several associates, who were arrested in August 1994, laundered money for the Cali-based Rodriguez-Orjuella trafficking group. One method was to secret drug proceeds in the front of tractor trailers loaded with toys, novelties and T-shirts for delivery in Mexico. In addition to the drug-related money laundering cases cited above, the US cooperated with Mexico on a bank fraud/money laundering case in which the Mexican government was defrauded of $700 million.
However daunting the task, there has been some progress by Mexico on the enforcement front. Mexico, which is a party to the UN Convention, signed a mutual cooperation agreement with the US in October 1994 which provides for exchanges of financial information. Mexico revised its customs law to require declarations by persons entering Mexico of currency and checks in their possession valued at US$10,000. Still, while Mexico has increased sanctions against money laundering through revisions in its tax code, the Mexican financial system remains vulnerable to both drug and non-drug related money laundering. Foreign and domestic currency movements are not monitored and any amount of deposited currency can be wire transferred to foreign or domestic banks.
Mexico's proposed revisions to its tax code are drawn from OAS model legislation but money laundering would remain a tax rather than criminal offense. US officials believe this is an inadequate base from which to attack the widespread money laundering, and have urged Mexico to criminalize money laundering from all serious crime, and to enact mandatory reporting requirements for cash deposits and wire transfers, at both banks and exchange houses.
To assist Mexico, a task force of US and Mexican officials has been established which will focus on formulation of new and more effective anti-money laundering legislation and investigative techniques.
Argentina. (Medium-High) Argentina is an increasingly important financial center in the Southern Hemisphere, which US officials believe has become a more important money laundering center, notably through non-bank financial transactions. Large sums of drug money are allegedly laundered through construction of office buildings, hotels, shopping malls, and condominiums in Buenos Aires. Illicit proceeds from drugs and other criminal activities are often commingled with proceeds from legitimate business interests, compounding the problems of detection. Argentina's increased importance as a money laundering center seems to parallel its increased importance as an intermediary location for drug deals between European criminal groups and Colombian cartels. Currency exchange houses offer unregulated banking services to prospective money launderers. Therefore, Argentina in 1995 is being upgraded one step in priority.
Argentine officials participating in the OAS/FATF seminars expressed determination to enact more effective anti-money laundering laws. Bankers are required by law to protect identities of depositors, unless ordered by a court seeking specific information; the bankers' association guidelines are voluntary and bankers are reportedly not certain about the limits on their cooperation with enforcement authorities, absent a court order. Banks allegedly do not observe the Central Bank requirement to report transactions of more than US$100,000, nor are banks required to report suspicious transactions. Argentina has criminalized money laundering explicitly related to narcotics activity, which the activities above seem designed to circumvent. There have been no convictions for money laundering, but Federal Police seized $225,000 in cash and 28 properties belonging to convicted money launderer Raul Silvio Vivas in late 1994. In October, the National Guard dismembered a link in a money laundering chain connected with Colombian Hugo Cuevas Gambo who allegedly handled financial matters for the Cali and Medellin cartels. The Argentine's Operation Chimborazo revealed money laundering by travel offices.
Bolivia. (Medium) The Bolivian financial system is not a significant factor in South American drug money laundering. With total bank deposits just over US$2 billion, its economy and financial sector probably could not absorb truly large sums. But, Bolivia is a serious concern because money laundering, like corruption, contraband smuggling, and drug trafficking, is widespread, and there are few effective controls to prevent it. Money laundering is not illegal and bank secrecy provisions make it extremely difficult to obtain timely information about transactions. The Association of Banks is spearheading an effort to get banks to agree on a code of ethics; the Association maintains that banks have a duty to report suspicious currency deposits. Perhaps the only prospect for remedial legislation, given that drug money laundering has not reached significant levels, is that the banking community wants to be considered a serious player in international financial circles and benefit from enlarged trade and capitalization programs.
Brazil. (Medium-High) Brazil's lack of control over its banks and exchange houses, and the substantial flow of dollars into and out of the country, were both confirmed by a report from the special investigations commission of the Secretary of Federal Administration which declared that US$20 billion illegally gained from corruption, tax evasion, narcotics trafficking and other crimes left Brazil illegally over a four year period, was laundered through offshore banks, and returned to Brazil as "clean" money. Money changers are believed to transfer thousands of dollars a day to New York and other financial centers. The flow of drug dollars, which may be increasing, is believed by Brazilian authorities to stem from Colombian and Bolivian trafficker sales of large shipments, rather than from proceeds of drug sales in the US or Brazil. But, US officials believe bulk quantities of drug proceeds enter Brazil from the US and Europe. Money laundering, which is not illegal, occurs within the banking system but especially through exchange houses which are virtually unregulated. The exchange houses are primarily controlled by affluent people, who handle large sums of cash, travellers checks, cashier and personal checks on a daily basis. Many own travel agencies which are licensed to conduct transactions involving US currency and other monetary instruments. The underground lottery also is used to launder drug proceeds. Lottery managers launder their profits (10-15% per transaction) into casinos in Paraguay and then into the Paraguayan banking sector. The Uruguayan financial sector is also used as a depository for Brazilian drug trafficking proceeds. The use of exchange houses circumvents Brazil's requirement that banks report currency transactions of more than US$10,000. However, the tax code provides the only basis for prosecuting money laundering, and bank secrecy laws inhibit investigations. The Central Bank in 1994 imposed a higher limit of US$10,000 on the amount that could be taken out of the country without declaration, but there is no mechanism in place to oversee these declarations and recordings.
Chile. (Medium) Anti-money laundering legislation was enacted in September 1994 but remains under debate by the Constitutional Tribunal which is determining the constitutionality of the law. The new law would criminalize money laundering; authorize the State Defense Council to investigate and prosecute cases; require suspects to prove the legitimacy of assets they have acquired; and permit law enforcement authorities access to bank accounts of persons suspected of laundering drug money. Having such legislation, a priority with the Frei administration, would seem more imperative than in previous years. Chile's robust economy is apparently attracting drug dollars as well as legitimate investment; moreover, drug money is laundered not only in the banking system but also through the booming construction and fishing industries. Also, casas de cambio are reportedly laundering drug money from Peru, Colombia and Bolivia. The Superintendent of Banks, the Central Bank and the bankers association, however, have been reluctant to identify money laundering as a problem, and banking community opponents of the new law contend that lifting the veil of bank secrecy is unconstitutional. Until this legislation is finally approved, money laundering is not a crime and strict bank secrecy laws prevail, which prevent the government from thoroughly investigating drug-related financial crimes. Alleged drug trafficker Mario Silva Leiva was arrested on tax evasion charges; the government could not charge him with money laundering in the absence of legal authority. Chile has ratified the 1988 UN Convention but cannot fully implement its provisions without the new legislation.
Colombia. (High) While cooperating with US agencies on some money laundering investigations, Colombia has not taken the types or levels of action commensurate with its place in the global money laundering spectrum, or with its status as a significant Latin American financial center. Country reports throughout this chapter reference schemes to launder money for Colombian cartels through foreign financial systems in every part of the world, and particularly in the Western Hemisphere, often for ultimate return to Colombia. Now, proceeds from the expanding trade in Colombian heroin are entering financial systems, along with cocaine money. While Colombia is an outspoken advocate of financial reform to combat money laundering, and has even drafted a notional Hemispheric convention, the fact is that Colombia is not in compliance with the 1988 UN Convention and indeed has taken reservations on key sections of the Convention dealing with extradition and international cooperation on crimes like money laundering, drug trafficking, etc. Moreover, the Samper Administration faces strong challenges to its effort to pass effective laws needed to comply with the 1988 UN Convention. It has failed to muster the votes needed to pass an anti-corruption law, introduced last November, which would also criminalize money laundering (notably, given the use of contraband smuggling to launder drug proceeds, the bill would criminalize all money laundering, not just drug-related crimes). At the same time, the government had to defeat an effort in its Congress to repeal the illicit enrichment statute and the law barring use of "front persons" to conceal assets, and Congressional opponents of the corruption bill threaten to propose amendments which would weaken the bill. The government now says it will pass the corruption bill in March after Congress reconvenes. But, even if this bill becomes law, there are substantial questions about enforcement. The US and Colombia have concluded a Treasury agreement on exchanges of financial data but this has not been utilized. Colombia continues to hold that its nationals should not be extradited to the US for trial.
There is a substantial question whether Colombia has the resource capability, as well as the political will, to contain the money laundering activity in its banks and exchange houses, and to curb the financial and political power of the cartels by seizing and forfeiting their assets. A current law requiring banks to maintain records on cash transactions (US$10,000) reportedly has been rendered ineffective by bribery, threats and intimidation by traffickers. Regulations requiring casas de cambio to identify individuals conducting significant transactions (US$7,000) were suspended because the government reportedly lacked the enforcement capability. There is a substantial question as to the degree to which the drug trade has contributed to the expansion of the Colombian economy, particularly after liberalization. While US and Colombian authorities may disagree on the amounts, numerous investigations in the US and abroad confirm that substantial sums of drug proceeds are returned to Colombia every day.
Ecuador. (Medium-High) Ecuador continues to be a significant money laundering center, largely because of its proximity to Colombia and the close economic and social ties between the two countries. Most money laundering activity involves cocaine proceeds, which are owned by Colombians, but the anticipation is that, as heroin production increases in Colombia, these proceeds will be directed toward Ecuador also. Ecuador has signed an agreement to share currency transaction information with the US but the agreement has not been tested. Instructions to banks on recordkeeping were issued by the Superintendent of Banks in late 1994. The National Drug Council expects to issue instructions in early 1995, requiring all financial institutions to keep records and file reports on all individuals conducting large transactions. The data, which will be processed through a computer system provided by INM, will permit analysis of such transactions which should benefit enforcement agencies. The Council also plans to issue instructions requiring declarations of negotiable monetary instruments by persons entering or leaving Ecuador. Following a US-assisted seminar in 1994, the Association of Private Banks drafted a manual on banking procedures to prevent money laundering. While money laundering is illegal, there have been no convictions for this offense. However, Ecuador has charged Jorge Hugo Reyes Torres (JRT) with money laundering, and has cooperated with the US on this investigation. In 1994, the US shared $330,000 with Ecuador, as a share of JRT assets which were forfeited to the US. The US anticipates that, in 1995, it will share a portion of $11.5 million in JRT assets transferred by the Swiss government to the US, which have been forfeited.
Paraguay. (Medium-High) Historically a haven for smuggling, Paraguay, with its liberal banking and foreign investment laws, stable financial infrastructure, and weak anti-money laundering laws, has attracted proceeds from the sale of drug and other contraband which are laundered through banking and non-banking systems (exchange houses). Narcotics money laundering involves significant amounts of US currency resulting from the sale of Colombian-owned drugs. The proceeds of domestic cocaine and marijuana sales are primarily owned by Paraguayan and Brazilian drug trafficking organizations. Laundering of drug proceeds is believed to be increasing and well hidden as a result of commingling with other illicit funds flowing through the financial system. A bill was introduced on July 5, 1994 which would criminalize money laundering. Currently, there are no controls on currency flows and, while banks are required to report all transactions over US$10,000, the requirement is not well enforced. There is no requirement to report suspicious transactions, and banks are not protected against breaches of bank secrecy if they cooperate with police. Paraguay has asset forfeiture laws, but these are carried out on an ad hoc basis and the law does not reach legitimate businesses which may have been purchased with illicit proceeds.
Peru. (Medium) Notwithstanding its leading role in coca production, Peru is neither a major financial center nor a major money laundering country. Drug money laundering occurs, but on two distinct tiers. A significant share of money laundering occurs in rural areas. This activity is difficult to control because traffickers, usually Colombians, pay Peruvian farmers for their coca, generally in dollars carried in on the same planes which ferry the coca leaf out. The farmers spend some money on continuing cultivation of coca, but mostly on personal items. Thus, most of these dollars enter the legal financial system through grocery and hardware stores, bars and other small commercial enterprises. Money laundering also occurs in the formal banking system and through exchange houses; these dollars are controlled by the major drug trafficking groups in Peru. There is little or no money laundering from other sources, and the government of Peru took the position at the Summit of the Americas that hemispheric governments should restrict their efforts to drug-related money laundering, rather than attempt to contain all forms of money laundering.
Suriname. (Low). Tough banking controls and a weak economy limit the attractiveness of Suriname to money launderers.
Uruguay. (Medium-High) Money laundering is still not a criminal offense in Uruguay. There are no controls on the amount of currency or gold entering or leaving Uruguay, despite widely-held beliefs that Uruguay has become an important transfer center for drug funds. The government has not adopted an effective asset forfeiture regime, and its effort to adopt the OAS model regulations failed. The central bank does not effectively monitor exchange houses, which are popularly believed to be the initial point of entry for drug cash placed into the Uruguayan financial system. Banks are required to keep records on significant transactions and, usually after some delay, do provide information to enforcement authorities. But, the banking community is said to be opposed to additional regulations, such as the mandatory reporting of suspicious transactions.
Venezuela. (High) Venezuela has been a significant center for money laundering since 1992, but much needed anti-money laundering legislation has been stalled in the legislature since 1993. The Caballero case confirmed that large scale money laundering operations occur in Venezuela. Moreover, Venezuelans are believed to be buying financial institutions in Colombia on behalf of drug traffickers. A Venezuelan senator, Cristobal Fernandez, who heads the investigative committee on money laundering, accused four major Venezuelan banks of money laundering in May 1994; he estimated total drug profits laundered through Venezuela at US$25 billion. In the Caballero case, National Guard units conducted raids in late 1993 against currency exchange houses and other businesses belonging to alleged money laundered Sinforoso Caballero. More than 100 people were arrested, but a corrupt judge overturned the indictments. The Venezuelan Supreme Court in 1994 overturned the judge's decision, reopening the case, but Caballero has not been arrested. That investigation revealed bulk shipments of drug cash from the US, through Colombia, for deposit into Venezuelan casas de cambio, where the dollars were converted into Colombian pesos and Venezuelan bolivares. To avoid the Colombian tariff on US dollars, the local currencies were then transfered to Colombia for deposits into banks.
Belize. (Medium) While there is no evidence of significant money laundering through Belize, the potential remains unabated, and the flow of US dollars from Belize to correspondent banks continues to increase. Money laundering is not a crime, nor are there laws regulating currency movements. Offshore investments are loosely regulated and the law allows unrestricted use of bearer-negotiable instruments. The Bank of Belize has now licensed more than 1,000 companies under the International Business Companies Act, with minimal controls on their formation and operation.
Costa Rica. (Medium-High) Drug money laundering continues unabated in Costa Rica, where the banks serve as repositories for drug proceeds and conduits for drug money destined elsewhere. A recent investigation exposed one operation which laundered more than US$180 million in a year for the Cali cartel. US investigations have linked front companies (e.g., travel agencies) in Costa Rica to Colombian cartels, and Colombian traffickers have invested drug proceeds in real estate and construction of hotels in Costa Rica. Shell companies are also used. Also, Italian organized crime groups are believed to be making inroads in Costa Rica, and have allegedly used shipping firms as front companies for money laundering. Costa Rican law enforcement agencies cooperated with US agencies in an October 18, 1994 raid on wire transmittal houses and associated residences in Costa Rica which were part of the Hugo Cuevas Gamboa money laundering organization, laundering as much as US$200 million. In February, GOCR officials cooperated in an investigation of the Cedelsa/Lombard credit corporation, an exchange house which allegedly laundered US$400,000-750,000 daily. Although Costa Rica mandates banks to file cash transaction reports, some banks are believed to be accepting large sums of US and Costa Rican currency from money launderers but not filing the reports. After a two-year legal struggle, Costa Rica finally agreed in May 1994 to extradite two Colombian money launderers to the US; they had been identified through DEA's Operation Green Ice in 1992.
Guatemala. (Medium) Money laundering is not currently a significant problem, but the potential is high and could increase as Guatemala liberalizes its economy. Bank secrecy is very tight, bank oversight is weak, and money laundering is not illegal. While there are no estimates of money laundering volume, one financial exchange house was temporarily closed as a result of an investigation into the Colombian-based Hugo Cuevas Gamboa money laundering organization.
Honduras. (Low) Honduras is not an important financial center, offshore tax haven, or significant money laundering center, although ongoing US investigations indicate that money exchange services are being used to launder drug proceeds. Money laundering is not a criminal offense. Draft anti-money laundering legislation is bogged down in a delayed general overhaul of the country's banking laws for reasons unrelated to narcotics or money laundering.
Nicaragua. (No priority) Nicaragua is not considered an important regional financial center, tax haven, or significant money laundering center. In October 1994, Nicaragua cooperated with a hemisphere-wide operation against Cali cartel money laundering activities. While no arrests were made in a raid conducted on a Colombian owned, Managua based exchange house, information linking the enterprise to the cartel was obtained. New narcotics legislation stipulates that banks must report any deposit over $10,000 to an interagency banking Commission, but the Commission has not yet been formed. The new legislation permits the seizure of any assets used in the commission of a narcotics related crime and establishes how the asset sales proceeds are divided among the involved government ministries. To date, no goods have been seized.
Panama. (High) In November 1994, President Perez Balladares announced a new anti-money laundering policy for Panama, crafted by a blue-ribbon panel of bankers, executives and officials, which draws heavily upon the 40 FATF recommendations. The new policy capped a year of significant decisions by both the executive and legislative branches, admittedly motivated, as is the banking community, by findings that the integrity of the Panamanian financial system is in question in US and European banking circles. The legislation approved by the legislature in July, which increased penalties for money laundering while giving investigators more authority, and decrees issued by the Endara Administration in March 1994, requiring declarations of cross-border currency movements, are limited to drug-related money laundering. The government of Perez Balladares maintained this drug-related approach to money laundering, both in the new policy decree on money laundering and in a September decree imposing a know-your-customer requirement on attorneys dealing with or incorporating companies (a number of companies such as import/export firms serve as fronts for money laundering). The US has advised that it thinks the Panamanian approach is too narrow, particularly given the contraband smuggling through the Colon Free Zone (CFZ), which generates substantial illicit proceeds. Smuggling revenues are often commingled with drug proceeds, compounding the burden of proof on the government in trying to establish a drug connection. The US believes that, notwithstanding the progress on laws and regulations, enforcement should be intensified, given Panama's status as one of the major regional narcotics money laundering centers, serving as a link to money transfers by Colombian traffickers to Europe, Asia, the Caribbean and US. The US has pledged training and technical assistance to help Panama attain a more aggressive plan of enforcement.
Money laundering in Panama has become quite diversified. In addition to cash transactions through banks and contraband smuggling, money launderers are investing drug and other dollars in legitimate businesses. The CFZ is becoming a money laundering center in its own right; presigned and prestamped blank invoices made out to fictitious companies are becoming common, as are fraudulent invoices over/under representing goods shipped, both methods designed to cover money transfers. In addition to cash deposits into CFZ businesses, traffickers and smugglers are making large deposits of third-party checks drawn on US banks, where cash deposits have accumulated through structuring techniques. Many of these checks have been transported from Colombia to Panama, and are intended to give a legitimate "cover" to transactions. Also becoming quite popular are Mexican bank drafts, issued by banks in Mexico against their own dollar accounts in US banks, a reflection in part of the substantial movement of drug cash in bulk to Mexico.
The following examples illustrate the diversity of money laundering schemes involving Panama. In January, 1994, a Panamanian-based front company involved in fraudulent purchases of gold came under scrutiny after its Italian affiliate was raided on suspicion of money laundering, which resulted in the seizure of six bank accounts containing US$2 million. The three Italian principals of the Panamanian company were arrested. Millions of dollars had been paid to the Panamanian company for alleged gold purchases. In a second example, a major Colombian money launderer reportedly used a Panamanian lawyer and shell company to create a trafficking/money laundering link to Nigeria. Another money launderer allegedly working for Mafia-connected heroin traffickers allegedly uses casinos, gold and oil interests in various parts of the world and Panamanian shell companies to launder drug proceeds. Another investigation discovered two Panamanian money launderers and a Colombian were transporting bulk US currency from Miami to Panama in containerized cargo; they reportedly attempted to buy a company in Panama for cash to ship containers through the CFZ.
Caribbean Regional Summary
The Caribbean has long been regarded as a haven for money laundering, which developed in parallel to the expansion of drug trafficking through the region. The decline of traditional one-crop economies and the rapid development of offshore financial services have enhanced the attractiveness of the region to money launderers. Large cash transactions have apparently declined in several areas, but cash still moves and several banking systems have been exploited by sophisticated schemes involving wire transfers, shell corporations and other devices. In 1990, Caribbean states and territories (26 members by 1994) created the Caribbean Financial Action Task Force, under the sponsorship of the Paris-based FATF. In 1994, a CFATF Secretariat was established in Trinidad and Tobago to promote anti-money laundering measures and serve as a coordinator for training and focal point for donor assistance. At its most recent meeting, a number of CFATF members reported slow but steady progress in adopting FATF/CFATF recommendations.
The heads of government of the regional organization, CARICOM, and Commonwealth Ministers have issued strong statements calling for enhanced efforts to counter money laundering.
Some money laundering takes place in the French Caribbean, and drug proceeds may enter the French banking system through Caribbean bank branches. 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.
Caribbean Dependent Territories of the UK. (Mixed Priorities) In 1994, legislation was completed enabling the Dependent Territories (Cayman Islands, Turks and Caicos, British Virgin Islands, Montserrat and Anguilla) to comply with the requirements of the 1988 UN Convention, and the UK extended the Convention to the Territories and Bermuda on February 8, 1995. There is no new information to report on Montserrat, or Turks and Caicos Islands. While some money laundering occurs in the British Virgin Islands, UK officials who recently visited Tortola believe the volume is low. There are 130,000 International Business Companies licensed in the BVI; there have been inquires about less than 200 since the British reporting requirements went into effect.
Anguilla. (Low) Operation Dinero (see text) used a bank in Anguilla created for the purposes of the US/UK investigation, the first occasion in which such a sensitive investigative probe was used. The operation revealed links to Italy, Spain and Canada. More than US$90 million in currency and property were seized, with almost 9 tons of cocaine; 116 persons were arrested.
Antigua and Barbuda. (Medium) The priority for Antigua and Barbuda is being raised to Medium. Antigua has experienced numerous instances of money laundering, following the rapid development of a financial services/offshore banking industry which in practice is unregulated. The number of offshore banks has doubled to 25, amidst rumors of investments in the banking industry by Russian nationals whose funds are of unknown origin. There are also reports of a presence by Russian as well as US mafia members on Antigua. In 1994, an individual attempting to launder $23 million through a "paper bank" was successfully prosecuted in the US. The potential for further abuses exists. The Proceeds of Crime Act covers funds earned or received through money laundering; no money laundering cases were successfully prosecuted in 1994. The USG is continuing to pursue designation under the mutual legal assistance treaty through Antigua's Attorney General's office.
Aruba. (High) Aruba was upgraded to Medium-High priority in 1994, but the legislation anticipated a year ago has not been enacted, and the loopholes and deficiencies in both law and regulation which permit money laundering to flourish continue to its detriment. While Aruban police continue to cooperate with US authorities on investigation, the money laundering situation is seemingly more serious than a year ago. Thus, for 1995, Aruba is upgraded to High Priority.
There are continuing discussions between the governments of the Netherlands and Aruba (and the Netherlands Antilles) and also between the US and the Netherlands on corrective measures. Aruba has criminalized money laundering in both narcotic and non-drug related cases. Banks have agreed to record identities of persons engaged in currency transactions of more than US$10,000. However, the requirements to record identities of transactors and beneficial owners only applies to non-clients, and there is no requirement to report suspicious transactions. At present, it is not uncommon for persons to enter Aruba (and the other islands) carrying hundreds of thousands of dollars without being questioned by local authorities.
Until effective legislation has been adopted and enforced, Aruba cannot be said to be in compliance with the 1988 UN Convention; it is a signatory as part of the Kingdom of the Netherlands. In that same capacity, Aruba is scheduled to be evaluated in early 1995 by the Financial Action Task Force. Attorney General Jan Zwinkels has been quoted as saying money laundering is a growing problem for Aruba, which he relates to Aruba's lack of resources to provide law enforcement with the ability to monitor the financial industry.
Money laundering organizations, including non-Arubans, continue to utilize the offshore banking facilities, the free zone, and casinos to transfer and launder drug and other proceeds. A network of ethnic Chinese money launderers based in New York is allegedly operating in Aruba through front companies, e.g., Chinese-owned factories. This group also is believed to launder drug proceeds from Europe and North America through investment houses and funeral homes in England, and offshore investment companies in Aruba. Bulk shipments of drug proceeds destined for prominent Aruban individuals are allegedly flown to Aruba by way of Miami; bulk shipments also arrive in Aruba via cruise ships, commercial airlines, and fishing vessels.
Alleged drug trafficker Randolph Habibe was indicted in December, but other Aruban families with alleged connections to banks in Venezuela and cocaine cartels in Colombia, who are suspected of both drug trafficking and money laundering, have not been charged. Habibe is charged as being part of the La Costa cartel which allegedly engaged in drug trafficking, money laundering, and chemical smuggling; Habibe was allegedly the chief money launderer for this group, which allegedly generated and laundered more than US$800 million in drug proceeds.
The Bahamas. (Medium) The priority ranking has been reduced from Medium-High to Medium, on the basis that Bahamanian banks continue to be effective in applying a "know your customer" policy and the US agrees with Bahamian officials that cash money laundering has diminished. Current GCOB laws are not adequate to control sophisticated money laundering techniques, and US officials believe that drug and other money continues to move through the Bahamas through shell corporations, casinos, and wire transfer services. However, Bahamian officials indicate that the proposed anti-money laundering legislation will effectively criminalize money laundering. The draft bill also would strengthen the obligation of financial institutions to report suspicious transactions and establish a mandatory "know your customer" requirement. Currently, compliance is voluntary, and the volume of suspicious transaction reports are quite low for a financial system the size of the Bahamian system. An assessment of the GCOB's effective use of the new law will be heavily dependent upon regulations which have not been published, e.g., to impose a system for reporting suspicious transactions and to improve asset forfeiture capabilities which are sorely in need of strengthening. The International Business Companies Act of 1990 offers companies exemption from taxes, exchange controls and stamp duties. International Business Companies (IBCs) can be incorporated within 24 hours for a minimal fee. No drug-related money laundering investigations involving the more than 30,000 Bahamian IBCs, offshore banks, shell corporations or other financial entities were initiated by the GCOB in 1994. The ease with which off-the-shelf companies can be bought in the Bahamas undoubtedly attracts criminal organizations looking for methods to conceal illicit profits (who exploit similar vulnerabilities elsewhere in the Caribbean). The Bahamas is an active member of the CFATF and has volunteered to be examined by CFATF experts during 1995.
Barbados. (Low) The offshore financial services industry continues to develop in Barbados, with particular prominence given to companies based in Canada. Barbados is determined to develop a legitimate industry by keeping the sector under relatively close surveillance and by regulating limited "tax haven" privileges. The belief is that enforcement of strong offshore banking laws will provide a defense against money laundering, e.g., strict controls on the amount of money which can be converted into foreign exchange and taken out of the country. Banks are expected to report (voluntarily) large and unusual transactions. The potential for money laundering will increase, however, as the sector becomes liberalized.
Cayman Islands. (High) The Cayman Islands, one of the largest offshore financial service centers in the world, is the primary British territory in the Caribbean in which money laundering is a significant threat. Confidentiality legislation, the immense size of the offshore financial community, and easy formation of shell companies continue to make the Caymans attractive to money launderers, especially those processing the proceeds of the US drug trade. There are an estimated 26,000 banks and trading companies in the Cayman Islands, with deposits in excess of $400 billion -- or about $15 million for each of the 26,000 residents. The government has a very limited capability to monitor its huge offshore sector (which includes all but about 60 of the several thousand banks). The Cayman Islands has adopted/implemented, in association with the UK, the European Union anti-money laundering policy, including criminalization of money laundering and reporting of suspicious transactions. The government, which is deemed to have met the standards of the 1988 UN Convention in terms of laws in place, recently amended its legislation to better enable bank regulators to exchange information with other governments' regulators, and has enhanced the capacity of the police to investigate money laundering and commercial crime. The CI has also increased regulation in the insurance sector and of mutual funds. The Cayman Islands volunteered to be the first of the members of the Caribbean Financial Action Task Force to be examined by outside experts; the evaluation was conducted in January 1995. The government, which believes that much of the money laundering affecting the Caymans originates in the US banking system, cooperates closely with US authorities and has received US$1.5 million in assets shared from cooperative investigations.
Cuba. (Low-Medium) A consideration of changes in Cuba warrant a move upward from Low, with an anticipation that Cuba will move even higher in months to come. Cuba is acquiring some of the same financial characteristics which attracted money launderers to Panama. US dollar transactions are now legal and the trend is toward a dollar-based economy. Cuba does not currently have a business-friendly tax and legal system, there are indications this too will change in order to attract foreign investment. The expectation is that Cuba, to compete with its neighbors, will permit creation of shell companies and protected bank accounts. Cuba does not at present have a well-developed financial infrastructure but money laundering is flourishing in former Communist states which also lack developed sectors. Not only is Cuba only 90 miles from Florida, but daily flights from Havana to Bogota, Colombia were reestablished in 1994.
Dominica. (No Priority) Money laundering is believed to be minimal, due in part to the undeveloped financial sector. However, some US-based criminal elements have developed interests on the island, and US law enforcement agencies have discovered "paper banks" operating. There may be some laundering of drug proceeds by domestic trafficker groups. Dominica has ratified the 1988 UN Convention, criminalized money laundering, put controls on the export of money, and required banks to report unusual foreign exchange transactions.
Dominican Republic. (Low-Medium) The priority ranking is being moved up from Low to Low-Medium, based on reports that the Dominican Republic is a significant drug money transit route (although not an important financial center). There is concern that exchange houses are laundering drug proceeds by commingling them with legitimate funds. The bundles of cash are then flown to San Juan or Miami, and declared as licit proceeds from the exchanges. GODR officials have worked closely with USG personnel to intercept these transfers. However, GODR financial investigation units currently lack the legal basis to enforce those few laws that exist. A proposed money laundering law would provide the GODR some means to counter illegal efforts to launder money. It was not acted upon in the last session of Congress and will be resubmitted in 1995.
Grenada. (No Priority) There is no evidence of significant money laundering, a reflection of the limited development of the financial services industry.
Haiti. (Low) US enforcement agencies cannot confirm media reports of money laundering. Haiti does not have currency control or anti-money laundering laws. In February 1994, Haitian authorities seized approximately US$104,000, the largest single drug money seizure. It is not a party to the UN Convention.
Jamaica. (Low) The lack of comprehensive money laundering laws makes Jamaica susceptible to money laundering. While there is insufficient money laundering activity in Jamaica to justify a priority effort to pass a money laundering bill, introduction of a bill in early 1995 is expected. An asset forfeiture law passed August 1994 which included provisions for forfeiture orders (against tainted property) or pecuniary penalty orders (against convicted persons), but specific mechanisms for the new law's implementation are unknown. There is also provision for restraint orders to prevent the liquidation of assets of convicted persons. The US has ratified a mutual legal assistance treaty with Jamaica, however, Jamaica has not yet ratified it. Legislation enabling Jamaica to comply with the treaty is expected in 1995. It is expected that Jamaica will ratify the treaty shortly thereafter.
Netherlands Antilles. (Medium-High) Like Aruba, the Netherlands Antilles is an important link in the transhipment of cocaine from South America to the US and Europe, and, like Aruba, the Netherlands Antilles, and especially Curacao, are increasingly active and important money laundering centers. The 1994 report of the International Narcotics Control Board calls attention to the increased prominence of these islands as links to narcotics trafficking. The expectation is that the money laundering situation has been similarly intensified. The priority for the Netherlands Antilles is therefore raised from Medium to Medium-High, close on the heels of Aruba. A joint action with the US and Dutch authorities documented money laundering in Curacao, St. Maarten and Bonaire, which involved organized crime groups from the US, Colombia, and Italy. Money launderers use the offshore banking sector, free zones, and casinos to transfer and launder drug proceeds. The government has joined with Aruba and the Hague in cooperative actions against money laundering. New laws and regulations requiring the reporting of unusual transactions, drawing on the Dutch model, are expected to be in place by mid-1995.
Puerto Rico. (Low) Puerto Rico is increasingly being used as a conduit for drug money entering the United States from the Dominican Republic. In 1994, $400 million entered the US in this manner. Twenty three seizures of cash and financial instruments valued at over $3 million were made from airline passengers arriving in San Juan, who claim to have been provided the currency from exhange houses in the Dominican Republic. A heroin trafficking organization bought millions of dollars worth of heavy industrial equipment in the United States and shipped the equipment to vehicle and construction related businesses in Puerto Rico. Those purchases, ranging in amounts from $10,000 to $180,000, were made in denominations of 5, 10, 20 and 50 dollars.
St. Kitts and Nevis. (Low) The increase in drug trafficking through St. Kitts and increased efforts by traffickers to penetrate the society has put this mini-state at greater risk for money laundering. There are active money laundering operations in St. Kitts, but the volume is low.
St. Lucia. (Low) Under the Proceeds of Crime Act, money laundering is illegal and there are controls on exports of money. Officials are adamant about protecting their banking system, and therefore enforce offshore banking laws, although some money laundering continues. In 1994, a US court convicted a national of a third country for attempting to launder several million dollars through a "paper bank." The government of St. Lucia was very cooperative with US enforcement officials on the case.
St. Vincent and the Grenadines. (Medium) Financial institutions and other businesses in St. Vincent are suspected of increased but low-level involvement in laundering domestic and foreign funds generated by drug trafficking and other crimes. Foreign criminal organizations, including at least one major organized crime group, are believed to be engaged in significant financial operations, including money laundering. Overall volume is probably limited by the relatively small size of the financial services industry. However, the situation could change and bears watching. The number of offshore banks is increasing, encouraged by liberal policies of the government. Moreover, money launderers are believed to employ other sectors, including major construction projects, to launder their funds. The priority is being upgraded to Medium. US concerns could heighten, depending on the effects of a liberalization of exchange controls recently announced by the government -- which will permit even greater use of the dollar. Although its laws are considered strong, and in accord with the 1988 UN Convention, St. Vincent has not yet brought charges of money laundering against anyone.
Trinidad and Tobago. (Low-Medium) The islands are attempting to become a more important regional financial center, but are not significant from a money laundering perspective. Money laundering does occur, in both the bank and non-bank systems; the proceeds generated by marijuana and cocaine trafficking are believed to be primarily owned by local criminal groups. The Caribbean FATF maintains its headquarters in Port of Spain, and Trinidad has agreed to be evaluated by outside experts on its money laundering controls.
Turks & Caicos. (No priority) The government is continuing to pursue policies to transform the country into an offshore banking center, which would increase the potential for money laundering. Currently, there is concern about the use of shell companies to launder drug proceeds.
Virgin Islands. (No priority) While the U.S. Virgin Islands along with Puerto Rico, have been designated the first High Intensity Drug Trafficking Area outside of the continental United States, the Virgin Islands do not appear to have become a significant drug money laundering center.
Andorra. (Low) Although not a major financial center or money laundering haven, Andorra has enacted strong laws. Any act designed to conceal the origin of money or other assets derived from drug trafficking, prostitution, or terrorism, by a person who is aware or should have been aware of that origin, and any subsequent lawful use of such money or other assets by such a person, is punishable by imprisonment and fine. Andorran officials continue to be concerned about Colombian traffickers and money launderers using their system and have promised to cooperate with the US.
Austria. (Medium) Having enacted comprehensive anti-money laundering laws which became effective in January 1994, Austria engaged in enforcement activities against both drug and non-drug related money laundering. During January through November of 1994, Austrian banks reported 280 suspicious transactions involving a total of US$200 million. The Interior Ministry's special force for organized crime found evidence of possible money laundering in transactions totalling US$42 million. In June, Austrian authorities arrested a Brazilian in a non-drug money laundering investigation who allegedly laundered money for a US-based investment fraud ring. The defendant's suitcase contained 52 million schillings (US$4.7 million) and bank books totalling 81 million schillings. A proposed law will permit Austria to enforce foreign forfeiture orders.
Belgium. (Medium) Belgium established a special unit within the Ministry of Finance in 1993 to track suspicious transaction reports; in the ten months from December 1993 to September 1994, the unit received 1,033 notifications, of which 81, with a value of US$272 million, were referred to prosecutors. The majority of these cases involved exchange houses in Antwerp and Brussels being used by non-Belgians (primarily Dutch) to convert currency. Most conversions involved British pounds sterling and Spanish pesetas (from the drug trade in those countries) exchanged for Dutch guilders which were destined for the Netherlands. The special unit successfully identified a terrorist-linked transfer of US$100 million from the Central Bank of Kazakhstan to a Zairian company, via Belgian banks. The limitation on the unit's effectiveness is that Belgian law, like some other European and other jurisdictions, limits money laundering investigations to a narrow list of predicate offenses: drug trafficking, terrorism, and prostitution. As the government puts pressure on the exchange houses, many of which are operated by criminal organizations, there is evidence of criminals diversifying into cash intensive sectors such as jewelry stores, restaurants and hotels. Belgium has asset forfeiture legislation that applies to criminal offenses including money laundering, but does not have a system of sharing the assets with other foreign governments.
Denmark. (Medium) Denmark, which moved into substantial compliance with EU, FATF and UN Convention requirements with its 1993 legislation, is a major financial center but there is little evidence of significant money laundering. The money laundering detected by authorities is not limited to drug funds. Between July 1, 1993 and October 6, 1994, 284 reports from the financial sector dealing with money laundering were received. Those reports indicate that money laundering is transboundary. In 75 percent of the reports, foreign persons or corporations were involved.
Finland. (Low) In May 1994, the Parliament ratified the 1988 UN Convention. Finnish legislation criminalized money laundering to comply with the Convention. While officials believe that little money laundering actually occurs, they also required in 1994 that banks and other financial institutions report cases of suspected money laundering to the National Bureau of Investigation. Seventy-five reports were filed in 1994.
France. (Medium) The French National Assembly is expected to adopt a new law in 1995 which will criminalize money laundering from virtually every criminal offense; current law applies only to narcotics offenses. The asset seizure law is considered one of the strongest in Western Europe and the pending legislation will expand the authority to seize, forfeit and share assets.
France continues to conduct limited undercover work by French police on money laundering cases and cooperates closely with USG and other investigators. France participated in Operation Primero (the French side was dubbed Opertion Marguerita) and resulted in 61 arrests and numerous seizures of bank accounts. This operation was the first long-term undercover investigation under the new French law. US-French cooperation has improved since France recently signed an agreement between TRACFIN, its financial intelligence unit, and FinCEN. TRACFIN reported that there has been a trend toward the increased use of bureaux de change at the retail level in money laundering schemes. There has been a proliferation of small, specialized offices that cater to particular ethnic communities resident in France. TRACFIN's assessment is that narcotics traffickers may have established their own network of bureaux de change for money laundering purposes.
Germany. (High) A major international financial center whose officials recognize that money laundering occurs within its system, Germany demonstrated in 1994 its intention to enforce the strict money laundering laws enacted the year before. In June 1994, a money laundering and drug task force concluded a one year investigation of a family which operated in Munich and Istanbul which resulted in successful investigations in Germany, Turkey, Spain and Italy. The system used the family's money transfer businesses in those cities to process 50 million deutsch marks in suspected drug money. Also, through related surveillance of money couriers, Germany cooperated in international investigations which led to the arrests of heroin dealers in Italy, Spain, Romania, Hungary and Germany. In November, German authorities arrested money launderer Thomes Peter who, with his associate Juan Ocampo, is accused of receiving large sums of drug money from the US and Europe on behalf of Colombian traffickers. Through their front company, Guardian GMBH, they laundered millions of dollars, sending the money back to Colombia. Peter is associated with defendants arrested in New York as part of a DEA/FBI money laundering investigation. The case against Peter is considered a test case for the German money laundering legislation. Also in 1994, Germany enacted legislation that allows the enforcement of criminal forfeiture orders for which appellate remedies have been exhausted; the law applies to drug and non-drug offenses -- but the law does not provide for the prior restraint of assets pending a final forfeiture order.
Gibraltar. (Medium) Gibraltar continues to encourage development of its banking sector, and US officials believe its offshore banking, protected by strict bank secrecy laws, probably attract drug money. Companies in Gibraltar, which has no exchange controls or tax treaties and offers tax-free status to companies which do all of their business outside the area, are assured of complete confidentiality.
Greece. (Medium) At year's end, Greece advised on the drafting of additional anti-money laundering measures, to complement the 1993 acts which criminalized drug and non-drug money laundering; established proof of identity requirements for significant transactions; and enacted an asset forfeiture regimen. The new legislation, which could be enacted in 1995, would create various enforcement mechanisms including a central registry for suspicious transaction reports and authority for police to receive records through court orders. However, other actions to liberalize Greece's financial markets, especially the lifting of foreign exchange controls, may have made the country more vulnerable to money laundering. The government is expected to grant seven new private casino licenses in 1995, doubling the number of casinos. There also are questions about the effectiveness of current laws and the compliance of banks with the reporting requirements. While Greece is nevertheless not currently considered a major financial or money laundering center, it not only has the potential to achieve the latter status, but the government has taken other steps which may be drawing illicit proceeds to Greece. Purchasers of government debt issues are assured of tax free income, and unrestricted conversion of government securities denominated in drachmas into other currencies, if originally purchased with foreign exchange, and, if paid for in cash, no identity requirements. The sale of Greek Treasury obligations now amounts to about US$22.5 billion, or one quarter of Greece's GDP. Not least, there appears to be weak support for money laundering enforcement among Greece's banking community.
Iceland. (No Priority) In 1994 the Government implemented new anti-money laundering laws and identified a money laundering case for the first time. The case is currently under investigation. Iceland has not ratified the 1988 UN Convention.
Ireland (Low) In November 1994, Ireland passed The 1994 Criminal Justice Act which brings Ireland into compliance with the 1988 Vienna Convention and the 1990 Council of Europe Convention on laundering, search, seizure and confiscation of the proceeds of crime. Ireland is not considered an important financial center, however there is continued concern about an increase in drug money laundering activities. In 1994, the Irish National Police sought assistance from US law enforcement (DEA) regarding the offering of loans at unusually low interest rates which may be an attempt to launder drug proceeds.
Italy. (High) A requirement that all transactions over 20 million lire (US$12,500) must be made in traceable instruments, and a new computerized recordkeeping for analyzing the mandatory records submitted by banks and other financial institutions, seem to be having a deterrent effect on money laundering. Financial institutions also are required to identify the person making the transaction and the ultimate beneficiary, using taxpayer identification numbers. These laws are believed to have sparked the creation of more than 30,000 small "finance" companies which can transfer funds to other financial centers.
Italy continues to be cooperative with US enforcement agencies, and took part in Operations Primero and Dinero. (See previous.)
In addition to these operations, which targetted the Cali cocaine cartel and led to a seizure action against an Italian bank whose holdings total US$37 million, the Italian State Police cooperated with US officials in seizing gold and bank accounts related to the Aurea Trading Company in Italy and the Universal Gold Company in Panama. Gold is Italy's second largest industry after tourism and gold purchases are an effective way to integrate drug and other proceeds into the financial system. The anti-money laundering law adopted in 1992 became fully in force in 1994. Italy is considered to be fully in compliance with both EU and FATF recommendations.
Liechtenstein. (Medium-High) As reported to the Offshore Group of Banking Supervisors, the government has criminalized money laundering, enacted an asset forfeiture statute, and issued instructions to banks on mandatory recordkeeping. At year's end, additional legislation was being considered.
Luxembourg. (Medium-High) Asset forfeiture remained the focal point of bilateral relations with the US on money laundering. Luxembourg, which was the first EU country to prosecute a money laundering offense, conducted its first asset forfeiture in 1994. Virtually all of the funds identified in money laundering cases to date have involved funds which entered the international financial system in another country (the US, Panama and the Caribbean are frequent sources) and were transferred. Thus, the US has an interest in much of the drug money that Luxembourg has frozen under its own or US court orders. In 1994, Luxembourg permitted the repatriation of $2.5 million, or about half of a criminal forfeiture judgment obtained by the US in connection with the Salamanca case. Although a Luxembourg court ordered the return of US$7.9 million from the Jurado-Garcia convictions (they were not the account holders), these funds remain frozen because they were identified by the court as drug proceeds (and a claimant would be admitting guilt); the US also has forfeiture requests pending against these funds. There is a long-term interest in the eventual decision by Luxembourg to determine whether its 1992 law applies to civil forfeiture orders. The US has filed a number of civil cases involving tens of millions of dollars on deposit in Luxembourg banks, and criminal forfeiture is impossible or unlikely because the defendant has absconded or died. The first test case may arise out of a civil forfeiture order filed by the US in 1994 against US$47 million in bank accounts in Luxembourg once owned by Jose Rodriguez Gacha.
Netherlands. (High) A new anti-money laundering law went into effect February 1, 1994, mandating that all financial institutions, including money exchanges, credit card companies, insurance and securities firms, and casinos as well as banks, disclose all transactions over 25,000 guilders (US$14,200) or any unusual transactions of lesser amounts which are unusual. The law also strengthened identification requirements for more types of transactions. On January 1, 1995, the Netherlands' 100 foreign currency exchanges came under the supervision of the Central Bank, which has imposed stringent reporting requirements and other regulations on the exchanges, many of which are foreign registered, and have long been suspected of laundering millions of guilders annually. In August 1994, the forfeiture cooperation and asset sharing agreement between the US and the Kingdom of the Netherlands came into force in the Netherlands; ratification by Aruba and the Netherlands Antilles is pending. The Netherlands enacted legislation providing for enforcement of both civil and criminal foreign forfeiture orders.
Amsterdam, a global financial center, is considered a major target for money launderers. Money laundering often involves the drug trade, but substantial sums of illicit proceeds are generated by fraud, including trade fraud. Money laundering proceeds are generally owned by drug cartels or organized crime groups. There is special concern about criminal proceeds flowing into the Netherlands from the Netherlands Antilles and Aruba, concerns which have led those governments (part of the Kingdom of the Netherlands) to adopt reporting requirements for unusual transactions. The US also has deep concerns about these two island governments and has engaged The Hague in discussions on joint actions. There is also concern in the Netherlands about the sharp increase in new accounts opened by Russian citizens; whose accounts are being used to deposit millions of guilders of unknown origin. Dutch banks fear that the bulk of this money consists of criminal proceeds which the Russian "mafiya" is attempting to launder. Some of the funds come to Dutch banks from banks in Eastern Europe, and some of the individual accounts have been opened with passports which later proved to be false.
Norway. (Low) Norway is not a major world financial hub, tax haven or offshore banking center. Money laundering is a criminal offense in Norway and is investigated by a special police unit on economic crime (ecokrim). The laws on asset forfeiture and seizure are adequate and aggressively enforced. Drug related money laundering is thought to be rare, though illicit financial transactions occasionally result from illegal fish or alcohol sales.
Portugal. (Low-Medium) There is concern that entry into the European monetary system has made the Portuguese escudo more attractive to potential money launderers. The Policia Judiciaria has established a special unit to investigate money laundering and enforce the 1993 laws which mandate reporting of suspicious transactions and impose other obligations on the financial system. The principal concern remains Portugal's offshore banking system. Madeira-Azores. (Medium) There continues to be concern that the offshore banking center is used by narcotics traffickers to launder drug proceeds. These autonomous regions have some exemptions from Portuguese law, e.g., the offshore banks report only end-of-day totals, not individual transactions.
Spain. (Medium-High) Spanish financial institutions are increasingly used by drug traffickers, primarily organized crime groups in other countries, to launder proceeds. Banks are the principal medium, and personal accounts, money orders and wire transfers are the usual conduits for proceeds from the sale of heroin, cocaine and cannabis. An unestimated but possibly significant volume of drug proceeds enters the US from Spain, through Spanish financial institutions. In December 1994, the Spanish National Police, cooperating with US agencies on Operation Dinero, executed 14 arrest warrants, and seized drugs and other assets. Operation Dinero featured shell corporations and bank accounts around the world, including Madrid, which were used to launder money via loans, property purchases, currency exchanges and similar devices. Having previously adopted laws to bring it into compliance with the 1988 Convention, FATF and EU policy guidance, Spain in 1995 will consider legislation which will establish procedures for storefront operations and controlled deliveries, and expand asset forfeiture authority to include sharing with other governments.
Sweden. (Low) Sweden is not an important money laundering center, but the government has ratified the 1988 UN Convention and criminalized money laundering, while also implementing the recommendations of FATF.
Switzerland. (High) Switzerland in 1994 added to its multiple criminal sanctions against money laundering by criminalizing membership in or support of a criminal organization. The Swiss also changed their laws to permit confiscation of illicitly acquired assets without having to establish the exact linkage between a given asset and a specific crime. In addition, the revised criminal code allows bank employees to report suspicious transactions without penalty for violating bank secrecy. And, to overcome a gap in the coverage of its laws, the Swiss have introduced legislation extending their money laundering laws to non-bank financial institutions, including an obligation to report suspicious transactions. Previous Swiss law was created through close cooperation and consultation with the banking community, and the bankers want to ensure that new measures on non-bank financial institutions conform to banking standards, particularly as regards the agreement on self-regulation. While the banks were critical of making suspicious transaction reports mandatory, the opinion in Bern is that these additional measures will further improve the reputation of Swiss banks and drive drug proceeds elsewhere. In 1995, the Swiss will also consider a proposed law which would create a federal administrative body to fight organized crime. Given the new laws of 1994, Swiss authorities are reportedly pursuing several significant investigations. A question has been raised in connection with offenses which occurred prior to passage of the first anti-money laundering laws in 1990-92. The question occurs in part because of the revelation that a vice director of the Union Bank, the largest Swiss bank, was arrested in Zurich on suspicion of laundering drug proceeds from Colombia totalling US$150 million. However, the funds were deposited some 14 years ago and the account was virtually unused. The Swiss have signed but not yet ratified the 1988 Convention; they object to provisions relating to treatment of addicts.
Turkey. (Medium-High) In October 1994, Turkey introduced but has not yet adopted legislation to ratify and implement the 1988 UN Convention. Although a member of FATF, Turkey does not currently have anti-money laundering laws. However, the belief is that increasingly large amounts of drug proceeds -- Turks are believed to control 70 percent of the heroin trade in Europe -- are being returned to Turkey. Iranian money launderers operate in Istanbul and facilitate movements to and from other European countries.
United Kingdom. (High) The 1993 laws requiring reporting of suspicious transactions and reporting on large cash transactions, broadened to include non-drug-related money laundering, went into effect April 1, 1994. The British also revised their asset forfeiture laws to permit civil actions. As noted elsewhere, the UK cooperated closely with the US on Operation Dinero, arranging for DEA to operate a Class B undercover bank in Anguilla which was the key to its success.
EASTERN EUROPE AND BALKAN STATES
Bulgaria. (Medium) Government officials consider Bulgaria highly vulnerable to money laundering, but have no estimates on volume. Money laundering may involve the illegal conversion of state assets to private hands and other forms of crime, more so than narcotics trafficking. The GOB has not passed laws to criminalize money laundering, but officials are considering ways to comply with the Council of Europe convention on asset confiscation as well as money laundering.
Czech Republic. (Low) Czech ministries collaborated in 1994 on drafting a law to "preclude legalization of proceeds from criminal activities." A meeting was held November 7-8 with officials from FATF to consult on implementation of the various aspects of the proposed legislation, which should be enacted in 1995. The law would cover drug and non-drug proceeds generating crimes, and provide for penalties as well as confiscation of assets. Other provisions would require banks to identify beneficial owners of transactions and require banks to report suspicious transactions to the financial prosecutor. The bill would also create a central data repository and authorize financial crime investigations. Officials believe the republic is used by organized crime groups from the NIS, the former Yugoslavia, as well as the Camorra, Sicilian Mafia and other criminal organizations.
Hungary. (Medium) During 1994, the government took actions to increase prudential supervision of its banking system and, through money laundering laws, to bring it closer to ratifying the 1988 UN Convention (additional legislation is needed). The penal code was amended in May, criminalizing money laundering. Regulations were issued requiring banks to report transactions exceeding US$20,000. Banks are permitted but not required to report suspicious transactions. Hungary is believed to be particularly vulnerable to money laundering by Eastern European drug trafficking and organized crime groups.
Kyrgyzstan. (No priority) Although Kyrgyzstan's banking system is all but inoperable and could only be of limited use to money launderers, there have been recent unsubstantiated reports that foreign entities are looking to or have already established banks in Kyrgyzstan as fronts for money laundering.
Moldova. (No priority) Moldova is too economically underdeveloped to offer attractive potential for money laundering.
Poland. (Medium) On December 31, 1994, a business security act became effective. The act imposes new regulations on economic management practices, and provides penalties for money laundering, loans swindles and creditor frauds. Judicial and trade officials have been quoted as believing that some of Poland's recent economic scandals might not have occurred but for the perpetrators' sense of impunity in the absence of law. To strengthen regulation of its banking sector, the National Bank of Poland (NBP) adopted a moratorium in March 1994 on licensing of new banks. NBP's stated policy is to seek a consolidation among private and cooperative banks through mergers, combined with partial foreign ownership of some banks and financing of others through the stock market. Poland has 15 State-owned banks and approximately 70 private banks wholly owned by Polish nationals, and 1,600 cooperative banks (which offer credit union and savings and loan facilities).
There are three large foreign banks operating in Poland (one US, two Austrian); other countries also are represented. NBP considers four of the state banks to be seriously undercapitalized and almost a fourth of the private banks face liquidation. As the privatization process continues, regulations and privatization agency officials continue to have problems investigating the background of potential investors. Thus, in addition to drug and contraband money moving through Poland, including its banking system, there is concern that criminal organizations may be purchasing established businesses to use as front companies. The enforcement problems found during the 1993 FATF seminar also continue: understaffed police and Customs forces; weak laws; lack of investigative tools; and the strength of the various criminal groups, including Russians, operating in Poland.
Romania (Low) Romania is not only becoming a major transit point for narcotics enroute from Asia to Europe but investigations indicate that Romania is also becoming a money laundering center for Italian, Chinese and South American drug trafficking groups. Romanian enforcement agencies have expressed interest in money laundering investigations training but none of their investigations have resulted in arrests. There are few applicable laws to prevent money laundering.
Russia. (Medium-High) In late 1994, an interagency group led by the Ministry of the Interior and including the Bank of Russia proposed anti-money laundering legislation conforming to the recommendations of the Financial Action Task Force at its meetings in Russia in 1993 and 1994. If adopted by the Duma, the legislation would criminalize money laundering from all serious crime, and penalize organized crime and fraud while requiring financial institutions not only to cooperate with law enforcement but to report on suspicious and other transactions. Money laundering is not currently a crime, and criminal groups, estimated in the thousands, exploit the banks which proliferated in the early 1990's. A critical problem Russia faced in trying to stem the tide of illegal money flowing through its economy was the lack of central bank authority to regulate the system, a problem compounded by the uncontrolled expansion of the financial sector. Russia has more than 3,000 banks, and many of them are front companies for money laundering and/or efforts to buy legitimate businesses. Financial crimes in Russia are related to bank fraud, contraband and arms smuggling, car theft, racketeering, drug trafficking, embezzlement and prostitution. The Interior Ministry believes that organized crime groups not only dominate these activities but also control as many as 40,000 businesses, and, 25 percent of Moscow's banks. The Bank of Russia (central bank) advised FATF in November 1994 that it has begun to close banks which fail to meet the heightened capitalization requirements imposed earlier in the year (until January, a banking license cost about US$100,000 but by 1996 Russia hopes to equal the EU requirement of about US$5 million for a bank's capital requirement). Almost one hundred banks have been closed. Exchange houses, insurance companies and real estate firms have also engaged in money laundering. Asset privatization also has been exploited; crime groups possessing large amounts of cash can launder their proceeds by purchasing formerly state-owned factories, hotels and businesses. Money also is exported illegally through the smuggling of commodities such as oil and metals sold outside of Russia. The use of false contracts to import or export phantom goods is becoming commonplace. Money also is smuggled in bulk. The dollar continues to be a primary currency, although sales of US dollars and other foreign currencies were prohibited in January 1994, to strengthen the ruble.
Ukraine. (Low) Ukraine is not attractive as a tax haven or offshore banking center because of the weakness of the national currency and the state of the banking system. What money laundering that does occur in Ukraine is found in Crimea which has become a haven for Russian banks and therefore a money laundering center for Russian criminal enterprises. Capital flight is a problem for Ukrainian officials. Ukraine is a party to the UN 1988 Convention but has not passed the laws preventing money laundering and establishing asset seizure provision necessary for ratification.
Estonia. (Low) Estonia is considered to have the more serious money laundering problem in this region, primarily because of the presence of organized crime groups from Russia and elsewhere but it has not yet developed countermeasures. Latvia. (Low) Latvia has the potential to be a money laundering center because of its lack of proper banking regulation and its large number of banks. Lithuania. (Low) The banking industry is not yet subject to controls applied in Europe, and drug trafficking continues, but there is not a major money laundering problem.
Cyprus. (Medium) Cypriot officials are concerned that the success of the offshore banking center has made it vulnerable to international money laundering activities, particularly by the Russian mafia, and other organized crime groups. Cyprus has more than 15,000 offshore companies from many parts of the world, 1,000 of which are Russian. The Central Bank monitors monetary activities to deter money laundering. Cypriot law allows for the confiscation of drug-related profits; however, the government does not compile statistics on seizure amounts. In September, the Cyprus police force organized a task force of financial investigators and Central Bank officials to identify suspicious banking transactions and accounts. In December, the Central Bank issued regulations extending bank compliance officers' responsibilities to include anti-money laundering procedures. The Central Bank advised domestic and offshore banks to implement a "know your customer" policy; it also conducted a survey of large cash transactions at 16 offshore banks. Offshore banks are also being established in Turkish Cyprus, which presents itself as a "paradise" for banks. Turkish officials are concerned that Turkish Cyprus will attract illicit funds; since branches of the offshore banks can be opened in mainland Turkey, there is potential for money flowing through Cyprus to be repatriated to Turkey.
Egypt. (Low-Medium) Egypt was downgraded from Medium in 1994. It is not a major Middle East financial center nor a significant factor in the region's money laundering. Still, the ability to hold numbered accounts gives Egypt a potential worth watching.
The Gulf States. While Cyprus, Israel and Lebanon have become more significant as current or potential money laundering centers, traditional financial centers in the Middle East continue to be factors in the movement of illicit proceeds from drug and non-drug related crime. The United Arab Emirates (Medium-High) is both an important offshore banking center and tax haven, it is the most significant factor in money laundering through the Gulf States, if not the Middle East itself. Illicit proceeds are primarily moved through Dubai's banks and gold markets. Kuwait (Medium) has experienced financial scandals as it rebuilds its economy, and has high potential for money laundering, but Kuwait has not ratified the 1988 UN Convention, the only Gulf State failing to do so. Bahrain (Medium) remains a principal offshore banking center in the Middle East, its open economy is believed to have been penetrated by money launderers over a period of several years to move drug and non-drug-related illicit proceeds, taking advantage of the well-established links to European banking centers. At the other end of the spectrum, Oman, Qatar and Saudi Arabia are ranked No Priority; the indication is that none of these countries is a money laundering center, from the drug or non-drug perspective.
Iran. (Low) Iran is not considered an efficient base for money laundering due to its limited international financial capabilities, but, its priority has been raised to Low because of suspicions of Iranian involvement in financial crimes.
Iraq. (Low) As a result of the Persian Gulf War and related sanctions, Iraq has had neither the infrastructure nor the ability to facilitate money laundering operations, but as its banking sector improves, so have suspicions of Iraqi engagement in various kinds of financial crimes. The priority has been raised to Low for 1995.
Israel. (Medium) Israel continues to increase in significance from a money laundering perspective, although it is not yet considered a major international money laundering center. The presence of several international banks, strict bank secrecy laws, no limits on currency coming into or out of the country, and no taxation on foreign-owned accounts create an atmosphere conducive to money laundering. Recently, Russian criminals have been noticed using Israel to launder illicit proceeds, reportedly arriving at Israeli banks with suitcases stuffed with money. Also, Israeli organized crime groups launder funds generated at home and abroad. There are Israeli members of various money laundering syndicates with operations in the US. Money laundering is a crime, not limited to drug offenses. Few cases of drug money laundering have been prosecuted. Israel recently ratified a dual taxation treaty with the US which grants US tax authorities limited access to bank account data. Also, in November 1994, negotiations began on a mutual legal assistance treaty.
Jordan. (No Priority) Government officials believe there is no money laundering in Jordan. Consequently, there are no laws on money laundering or compliance mandates on banks if it were to become a problem. The drug trade is based on cash, handled by Bedouin tribesmen, which would not facilitate border monitoring or tracing transactions.
Lebanon. (Medium) A draft anti-money laundering bill, which Parliament is said to be considering, was prepared by officials from the Justice and Interior Ministries, the Central Bank and the Lebanese Bankers Association. The draft proposes jail sentences of no less than 10 years hard labor and a fine of one billion Lebanese pounds (US$608,000) for "people regularly involved in laundering money or who use facilities provided by a certain job to carry out this crime." The penalty increases to 15 years imprisonment if the convicted person is a member of a criminal organization. First-time offenders would receive sentences of no less than five years hard labor and a fine of 500 million Lebanese pounds (US$304,000). The laws would reportedly permit Lebanon to accept the 1988 UN Convention, but high-level officials have said repeatedly that the government will maintain its strict bank secrecy laws. The proceeds from the continuing trade in heroin and other drugs moved through Cyprus during the civil war but Lebanese banks are recovering and could resume their role as major money brokers and money launderers in the Middle East. Lebanese traffickers operate throughout the US, and have invested in real estate but also in businesses which act as fronts for laundering and moving money. Lebanese drug money also enters Lebanon through several African nations with loose banking regulations; money is wired from bank to bank and then converted to hard currency before being brought into Lebanon. Nigerian drug money also flows into Lebanon. The volume of US dollars from all sources (Lebanon is rebuilding its once vigorous commercial trading sector) moving through Lebanon is so high that the bank clearing facility asked the Federal Reserve to let it burn bulk cash rather than return it to New York (denied).
Syria. (Low) Syria is not considered an important regional financial center, nor a significant money laundering center. Although possible, the absence of private banks and harsh penalties for illegal currency dealings limit money laundering which, in any event, is easier to carry out in neighboring Lebanon.
Afghanistan. (Low) Afghanistan is not a major money laundering center, despite its opium production, although drug proceeds are used by warring factions to buy arms and supplies. Payment for drugs from Afghanistan is usually made in US dollars, German marks, or gold. Afghan traffickers reportedly purchase weapons in northern Pakistan or Iran with their drug proceeds, or smuggle hard currency and commodities back into Afghanistan. Major traffickers keep their money in foreign banks; the UAE is a favorite financial center. Afghan traffickers operating in the US, particularly the NY-NJ area, typically launder their proceeds for return home through underground channels and business fronts, such as restaurants, food stores and import-export companies. Afghan nationals (both Sikhs and Muslims) have been identified by Indian authorities as being couriers for drug money transported throughout South Asia.
Bangladesh. (No priority) Bangladesh is not considered a significant money laundering threat, due to its inadequate financial system. However, it may be a major transhipment point for Southeast and Southwest Asian heroin, and officials attending FATF seminars expressed concern about financial flows from this trade entering their system and declared their interest in adopting preventive measures.
India. (Medium-High) A major drug source and transhipment center, India also is a significant money laundering and money movement concern. As in 1993, the government continues to be effective in its effort to reduce currency flows through the underground hawalla system, but drug traffickers, arms smugglers and other criminals continue to use this traditional remittance system to return illicit proceeds to India from all parts of the world, including the US. A new policy on imports has not eliminated the flow of gold into India, a long-time venue for money laundering. Invoice manipulation also is used to conceal money movements, usually through front companies based in Hong Kong, Singapore or the Middle East. Indian criminals evade their government's currency restrictions by opening accounts in Nepalese banks, and transferring the money into accounts in India, or transporting monetary instruments back to India. Some Indian traffickers also are known to have channeled money to Nepal and transferred it to Hong Kong, Singapore and Switzerland. India has criminalized money laundering and adopted other controls, but, as the foregoing indicates, enforcement is largely ineffective. However, in late 1994, Indian officials uncovered a drug money movement scheme which employed Afghan nationals as money couriers. The couriers carried the money from Pakistan and India to Dubai, where they purchased gold, or deposited the proceeds, estimated in the millions of dollars, into Dubai bank accounts for eventual transfer into accounts in India.
Nepal. (Low-Medium) Firm estimates are not available to measure money laundering related to the Asian heroin trade, but reports continue of drug and perhaps contraband proceeds moving across Nepal's border with India, and also of exchanges with Thailand, Hong Kong, Singapore and other financial centers. The government has taken no action to criminalize money laundering, and its banking and foreign exchange regulations were not designed to control money laundering.
Pakistan. (Medium-High) The government has adopted an ordinance criminalizing drug-related money laundering and providing for the forfeiture of assets derived from money laundering. US and Pakistani officials are hopeful the ordinance will improve legal action against drug trafficking and money laundering. While the underground hundi system continues to be used to remit drug proceeds, especially from Europe, measures taken by Pakistan to liberalize its economy have seemingly lessened the use of the hundi but also resulted in attracting black market money, much of it drug proceeds, into the legitimate economy. Millions of US dollars have poured into Pakistan since the removal of foreign exchange controls; while this increased Pakistan's foreign exchange reserves, it is believed that much of this inflow came from illicit activities such as tax evasion, smuggling and drug trafficking. In addition to liberalizing foreign currency and gold exchanges, and permitting the use of bearer bonds, all of which are vulnerable to manipulation by money launderers, Pakistan allows residents to hold foreign currency accounts at home and abroad. They can freely transfer, receive and convert foreign currency through Pakistani banks, which are under no obligation to report or maintain records on large currency transactions. Banks are being privatized, including some which are suspected of involvement in money laundering. Invoice manipulation also is a common method of moving illicit funds into Pakistan. Goods shipped from Pakistan to the US are overvalued to cover large money transfers to Pakistan from US drug sales; in some instances, no goods are actually shipped. Advance payment schemes involving phony invoices also are used. Gold smuggling is another widely used mechanism to transfer drug money. Money laundering in Pakistan occurs in both the bank and non-bank financial systems. Banks secrecy can be lifted in criminal cases; banks are required to report suspicious transactions, compliance is poor, but there are no controls on movements of currency over Pakistan's borders. Exchange houses offer banking services, particularly in rural areas; in one location favored by drug traffickers, some exchange houses refused to handle transactions of less than US$1,000. Draft laws would improve Pakistan's authority to seize all assets related to narcotics trafficking, including bank accounts.
Sri Lanka. (Low-Medium) Draft legislation amending the dangerous drugs ordnance to include specific anti-money laundering provisions will be considered by the Parliament in 1995. Criminal transactions such as drug trafficking are not protected by current bank secrecy laws.
Burma (Myanmar). (Medium) Despite its preeminent status as an opium and heroin producer, Burma is not considered a major drug money laundering center. Due to its nonconvertible currency, primitive banking system and Byzantine regulations governing the use of more stable foreign currencies, Burma traffickers tend to deposit their drug proceeds in Thai or Chinese banks. With the slow liberalization of the Burmese banking system, however, there are some signs that traffickers may be looking more favorably to investing their trafficking profits in-country. In early November the Burmese government declared a tax amnesty on any money deposited into government banks before March 31, 1995, without any need to account for the monies' origins. This move was an attempt by the governmant to encourage more Burmese to use the formal banking system (a step it also has taken before). However, it could also facilitate the laundering of drug trafficking revenues. The Burmese government adopted money laundering and asset seizure statues in 1993 but there have been few known seizures of drug-related assets or legal actions taken against suspected drug money laundering in Burma. Burmese officials note that they have few personnel trained in this area and that the development of such cases often takes years in the United States. The government of Burma expects that it will be bringing such cases to trial in the next two to three years. The UNDCP-organized study tour of Australia for Burmese counternarcotics officials in November represented a first step in addressing the training needs of Burmese police and judicial officials. These laws, even if enforced, would not deter other forms of money laundering, e.g., overstating income or declaring a business unprofitable to disguise the movement of drug and other proceeds. Corruption at lower levels also contributes to money laundering.
China. (Medium) Anti-money laundering legislation, which Chinese officials had indicated to FATF would be passed in April 1994, failed to materialize. Chinese officials attending the seminar in Kuala Lumpur in November 1994, hosted by FATF and the Commonwealth Secretariat, however, expressed determination to adopt modern legislation that would meet FATF and other standards. Officials of the People's Republic of China continue to believe that their prohibitions on concealing assets and laws against fraud would cover money laundering offenses, but nevertheless indicate they will seek legislation which effectively criminalizes money laundering. They also are interested in asset forfeiture legislation similar to the US. China has no currency transportation laws; travellers can bring unlimited sums into China as long as the money is declared. One person reportedly brought US$2million into China in lots of $500,000 on four trips. China has seen an increase in foreign investors interested in establishing holding companies and drug traffickers are believed to be taking advantage of these investment opportunities.
China's financial services system continues to expand, with more banks, bank branches and holding companies, which theoretically makes the Chinese financial market easier for criminals to penetrate, in the absence of effective countermeasures.
Hong Kong. (High) Hong Kong is a major international financial center used by drug traffickers to launder proceeds through the banking and non-banking systems. In addition to using the 177 international banks and 200 finance companies, traffickers move operating funds and profits between Hong Kong and other Asian countries through the underground remittance system. The territory also is considered an important tax haven and offshore banking center. While drug money laundering is dominated by local heroin trafficking groups, other groups trading in cocaine and cannabis also launder funds. Much of the money laundering involves US dollars. Money laundering involves more than processing drug proceeds; organized crime groups are engaged in loan sharking, prostitution, the black market, and drugs, and commingle their proceeds, which are often invested in import/export businesses, trading companies and other legitimate outlets. Banking laws require that suspicious transactions be reported, but compliance was initially quite low in terms of number of transactions reported. Subsequently, the government, in cooperation with the Association of Banks and the Hong Kong Monetary Authority, began a comprehensive education program for bank employees. As a result, the number of cases of suspicious transactions reported rose from 38 in September 1994 to 71 in November, more than double the cases reported in November 1993. The banking industry has generally been cooperative with HK police on money laundering investigations, but the bankers have successfully resisted requirements to maintain records of large currency transactions, and there are no currency controls. 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 vulnerability of the Hong Kong financial system, which it admittedly shares with other major financial centers containing hundreds of banks and tens of thousands of customers engaged in extensive commercial and financial trading (much of it by wire) is being illustrated in the ongoing trial of two businessmen who were associated with drug trafficker and money launderer Law Kin Man. The anticipation is that testimony will reveal not only how Law transferred millions of US dollars through accounts in Hong Kong, the US, Singapore, Australia and other countries, but also how he used the Bank of Credit and Commerce International in Hong Kong. In 1994, following his extradition from Hong Kong, Law plead guilty to heroin trafficking.
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) Japan has insisted in several fora that it will not amend its laws to criminalize non-drug-related money laundering, the only FATF member to cast such an outright refusal. Despite Japanese denials, USG officials continue to believe that narcotics and other money laundering is a more serious problem in Japan 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 from Colombia and the US to Japan. 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. Foreign exchange control laws require a license to transport more than five million yen out of Japan, but no license is required and there are no limits on the transfer of foreign currencies.
Korea. (Medium) Korea continues to liberalize its economy and foreign banks continue to enjoy less regulation than their domestic counterparts (depositors are not subject to ROK audit), but, despite reports that Colombians and Nigerians are carrying thousands of US dollars into Korea (even declaring it upon entry), the ROK has not yet criminalized money laundering or adopted other anti-money laundering measures. The most recent liberalization measures permit banks to sell gold and make capital investments in the leasing industry. Individuals will now be able to purchase foreign currencies, up to US$50,000 per day; individuals can actually hold more than US$50,000 but must declare any holdings above that level. Despite evidence that drug trafficking by Nigerian and Thai smugglers has increased, and the presence of Nigerian and Colombian travellers who are suspected of drug trafficking, there are no estimates on how much the proceeds of these drug purchases enters the Korean banking system.
Macau. (Medium) Despite suspicions of foreign enforcement authorities, Macau officials continue to believe money laundering activity does not occur there, notwithstanding its liberal banking laws, its flourishing casino industry, lack of currency controls, and strict bank secrecy. Macau now permits offshore banks to operate, free of taxes. Macau has taken action to more closely regulate its banks through the Financial Systems Act, which compels the 23 banks and other financial institutions to record the identity of persons making significant transactions. Banks have to cooperate with police on investigations and allow access to confidential information necessary to combat criminal acts. Moreover, any institution which accepts funds over the US$12,500 limit will be committing a criminal offense. These requirements were established 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 permits wire transfers but not to casinos. Macau is a Special Territory of Portugal but will become a Special Administrative Region of China in 1999.
North Korea. (No Priority) As a tightly controlled police state, North Korea is not accessible to drug money laundering groups; however, government officials posted abroad have been implicated in financial crimes. In June, six North Koreans affiliated with government trading companies in Macao were arrested with US$600,000 in high-quality, counterfeit US$100 bills. There is no hard information that the operation in Macao was directed by the government. However, one arrestee had a diplomatic passport, and North Korea has been involved in at least one other instance of counterfeiting (a 1982 case against Gold Star Bank's branch in Vienna.)
Taiwan. (Medium) The Ministry of Justice has drafted a money laundering control act, which the Taiwanese indicated at FATF's seminar in Kuala Lumpur would be in substantial compliance with FATF recommendations, but there has been no timetable set for legislative consideration. 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. (Low) Cambodia has become a money laundering concern during the past year, and is moved up in the 1995 INCSR rankings from to a "Low Priority." In 1994, Cambodia's Finance Minister and the Deputy Governor of the Cambodian National Bank stated that money laundering is becoming a significant problem throughout the banking system which has seen approximately 30 new banks opened in the past three years. Some recently opened banks are owned/operated by known money remitters who own/operate remittance/laundering syndicates elsewhere in Southeast Asia. Cambodia has under consideration a draft law on drug control which incorporates anti-money laundering provisions.
Indonesia. (Low) Although Indonesia is not considered a significant money laundering country at present, US officials consider it quite vulnerable, and the "Far Eastern Economic Review," a highly-respected periodical, has criticized the "vague accountability" system of state-run banks. The government is considering additional legislation to cover money laundering, conspiracy and asset forfeiture.
Laos. (Low) Laos is not currently considered a major financial center, its commercial banking system is in the early stages of development, and there is no evidence of significant money laundering. However, the Laotian government expressed interest in developing money laundering legislation. In 1994, Laotian banking officials attended a money laundering symposium conducted by FATF in Malaysia. In October 1994, it was reported that a suspected Thai drug trafficker was planning to build a casino complex in the Phu Luang Zone in Pakse District, Champassak Province. The province will permit tourists and investors to travel freely between Laos and Thailand. This would increase Thai investment in the region.
Malaysia. (Medium) While there is evidence that some financial institutions, especially in Penang, may be laundering drug proceeds, Malaysia is more of a concern for its potential as a future money laundering center than for its current status. Malaysia is becoming a more important regional financial center and will attract funds from an ever-wider market. The Minister of Law said, at the FATF seminar in Kuala Lumpur in November, the government is especially concerned about the kinds of funds which its offshore facility in Labuan will attract. While still not the financial center once envisioned by Malaysia, the Labuan facility had 373 offshore companies in 1994, including 40 offshore banks. The goal is for Labuan to become a full-fledged offshore financial center by January 1996, offering a wide range of financial services, low or minimal taxation, and minimal government regulation. The indicated tax rates are competitive with other Asian centers: three percent on declared profits by offshore companies; no taxes on investments and other non-trading activities, nor on interest and royalties. Offshore banks can undertake any foreign exchange transaction, including forward and spot purchases and sales, currency swaps with non-residents and resident banks, and remittances to and from Malaysia for non-residents. Apart from banking, Labuan offers trust and fund management, offshore insurance business, investment holding companies and other multinational activities.
Singapore. (High) Legislation which conforms banking rules with the 1992 Drug Trafficking Act became effective in October 1994 and Singapore has begun investigations of money laundering. The Monetary Authority of Singapore (MAS) announced at the January 1995 meeting of FATF that Singapore will broaden the new law to cover non-drug related money laundering. The MAS also advised that Singapore will open negotiations in 1995 with the US, which will become the first government to be designated under the new law for the exchange of financial information related to criminal transactions.
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, banks are 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 if 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. US 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. US officials believe that with the increased exploitation of the myriad money remittance shops, many with international connections, Singapore has become a country of choice for some Asian traffickers who hope to take advantage of Singapore's highly developed and very prosperous financial sector. The belief that drug and other money is laundered through both the banking 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 the legal and administrative machinery are in place and, penalties are severe, bankers can be held personally liable in money laundering cases, and Singapore has enacted a tough asset seizure law, but this 1992 law on asset forfeiture has also not been tested.
Thailand. (High) Thai officials express optimism that their long-awaited anti-money laundering legislation will be presented to their parliament in May 1995. The expectation is that the final draft will be limited in scope to drug-related money laundering. However, Thai officials seem sensitive to the multiple factors which create their money laundering situation -- drug trafficking, arms and commodities smuggling, gambling, prostitution, counterfeiting and other illegal activities, all abetted by strict bank secrecy laws which inhibit investigations and by the wide availability of the informal, underground banking system. Thus, some Thai officials indicate that the money laundering law will eventually be broadened to include illicit proceeds from a variety of serious crimes. The law, which will include reporting requirements on the financial industry, should move Thailand into position to ratify the 1988 UN Convention. Thailand also needs to improve its asset forfeiture procedure; 84 cases have been brought under its 1992 law but none have been concluded. In one of the most significant cases involving Thailand, the US indicted a member of the Thai parliament, Thanong Siripreechapong, in May 1994 and charged him on three counts of operating a continuing criminal enterprise, including the smuggling of multi-ton loads of marijuana into the US. The US has requested extradition.
Vietnam. (Low) Vietnamese nationals are active in money laundering in other countries, such as Australia and the US, but money laundering in Vietnam itself has not been significant to date. That situation could change; several foreign commercial banks have expressed interest in opening offices in Hanoi; more than 30 non-Japanese banks operate offices and branches in Ho Chi Minh City, where Japanese banks will also be operating in the near future. 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) Long recognized as a leader in the Asian and Pacific regions for its innovations in financial reporting and the enforcement of its very comprehensive anti-money laundering laws, Australia is being challenged to stay ahead of changes in money laundering practices and practitioners. Chinese, Japanese, Colombian, and US drug traffickers have used Australia as a transit country for both drugs and money, and the National Crime Authority believes cocaine trafficking is increasing, which could be matched by intensified efforts to move cocaine proceeds through Australia. Ethnic Chinese also operate in "triad" groups in Australia, and utilize branches of the Asian underground banking system to process criminal proceeds. Japanese "yakuza" and Vietnamese gold smugglers also are active in Australia.
The Philippines. (Medium) There are strong indications that international drug trafficking syndicates, some from as far away as Europe and South America, have begun to use the Philippines to launder drug money. There is ample opportunity: money laundering is not a criminal offense and strict bank secrecy laws inhibit possible money laundering investigations. USG agencies remain concerned that the actual level of money laundering has been obscured by the high level of corruption in business circles. The US and the Republic of the Philippines signed a Mutual Legal Assistance Treaty on November 13, 1994, and also an extradition treaty, both of which must be ratified by the respective Senates. US officials hope that ratification of the treaties will create pressure to pass money laundering and asset forfeiture laws. Reporting of money laundering would increase and would 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 signed but has not ratified the 1988 UN Convention and 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.
Adding to its arsenal of financial transaction regulations, asset forfeiture and seizure laws, and extensive criminal investigation authority, Australia pioneered an electronic system for monitoring all telegraphic and other wire transfers into or out of the country's banks. This system enables Australia to match data on significant and/or suspicious transactions, with currency declarations filed upon entering/leaving the country, and any related wire transfers. Among other benefits realized, this new system was instrumental in identifying a money laundering transaction involving Chinese nationals. 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 requires reporting of suspicious transactions.
Also in 1994, Australia created a fund of A$2 million to support an Asian Secretariat for the Financial Action Task Force which will assist South, East and Asian-Pacific nations in adopting and implementing FATF recommendations.
New Zealand. (Low) No action was taken during 1994 to pass laws which would comply with the UN Convention, and their possible enactment in 1995 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. The government is testing the asset forfeiture legislation passed in 1992 through its first seizure, valued at NZ$400,000.
Vanuatu. (Low-Medium) There is no evidence of significant money laundering through the more than 100 banks despite the attraction of strict bank secrecy and a lack of foreign exchange controls. Vanuatu is a sophisticated offshore banking center with connections to Thailand, Hong Kong, England and France.
Other Pacific. (No Priority) Other Pacific island nations were reviewed (see list below) but are not significant from a money laundering perspective. However, the indication that advance fee schemes are being proposed in the Cook Islands serves as a warning that the region should be examined again for non-routine, non-drug related financial crimes.
Benin. (No priority) Although Benin is not considered an important financial center in the region, several private banks have opened and the banking system is considered well regulated and stable. Benin has no legislation which outlaws money laundering.
Cote d'Ivoire. (Low-Medium) Cote d'Ivoire has a growing financial sector, however it is not currently a significant money laundering center. It is a transit and conversion point for narcotics money, and it is assumed that some money laundering takes place. Money laundering is a criminal offense. Banks are required to maintain records and report on large currency transactions. There are no asset sharing agreements between the GOCI and other countries. Money laundering controls do not apply to non-bank financial institutions.
Kenya. (Low) Kenya is not considered a significant money laundering center but there is growing concern about avenues for narcotics-related laundering in Kenya's casino industry and in the country's coastal resorts. In August 1994, the Government of Kenya implemented the provisions of the 1988 Vienna Convention by enacting the Narcotic Drugs and Psychotropic Substances Control Act. The legislation was comprehensive. It established procedures for seizing and freezing assets for drug-related activity. The legislation also made provisions for arrangements between the Government of Kenya, Kenyan financial institutions, and foreign governments regarding the exchange of bank transaction records. Recently, the Central Bank of Kenya instructed commercial banks to be more vigilant against the growing incidence of money laundering. The government of Kenya has recently relaxed its foreign currency regulations to allow the export of up to US$500,000 without the need for approval of the Central Bank of Kenya or Kenya Customs. This has caused an upsurge in large cash transactions in the Kenya banking system. The Central Bank of Kenya has urged banks to enact "know your customer" measures and to query large transactions. So far, no arrests have been made, primarily because the transactors are politically connected.
Morocco. (Medium) The potential for money laundering could increase if Morocco creates an offshore banking center, which is being discussed. There are continuing concerns in Southern Europe about drug-related and other illicit proceeds crossing the Mediterranean into Morocco, where the funds are dispatched to banks in the UK and elsewhere.
Nigeria. (High) While still enduring international notoriety for the involvement of Nigerians in a variety of credit card and other scams, Nigeria continues to be of concern because heroin and other drug trafficking generates proceeds, which are remitted to Nigeria for laundering through its banks, non-bank financial institutions and exchange houses. Money laundering primarily involves Nigerian nationals, and proceeds are generally owned by Nigerian criminal organizations. Nigeria is considered a safe haven in particular for those traffickers and money launderers who have very strong West African political and banking bonafides. Corruption is prevalent throughout Nigeria and West Africa. The government has made token attempts to consolidate all foreign currency imports at the Central Bank but enforcement guidelines and direction are weak or non-existent. The US dollar is the principal currency laundered. There are no limits on the amount of foreign currency which can be moved into or out of the country, and the travellers' declaration requirement is not enforced. Nigeria adopted laws pursuant to its ratification of the 1988 UN Convention but enforcement is lax. A requirement on banks to report large cash transactions has been ignored, and Nigeria lacks an effective bank oversight system.
Senegal. (No priority) Senegal continues to be utilized as a transit point for illicit drug trafficking between Asia and Europe and the Americas. As part of its anti-narcotics effort, Senegal has proposed the creation of an inter-governmental council to better coordinate the drug enforcement policies of the African nations. Senegal has ratified the UN 1988 Convention, which contains specific anti-money laundering provisions. There has been speculation that narcotics money has been invested in some of Senegal's coastal tourist resorts.
South Africa. (Low) The country's relatively sophisticated financial sector has great money laundering potential, probably enhanced by its reemergence into the world economy, and major transportation links. South African law enforcement agencies have neither the skills nor the dedicated manpower to counter the expanded drug threat effectively at this time.
Sudan. (No priority) Sudan is one of the poorest countries in Africa. The economic situation is characterized by low growth, rampant inflation, a costly civil war, severe balance of payments deficit, insurmountable foreign debt, and a critical shortage of foreign currency. These problems, combined with tight government control over the banking system, make Sudan an unlikely haven for significant money laundering operations.
Togo. (No priority) Togo is not a major financial center nor a significant money laundering center. Togo is a signatory to the 1988 convention.
Tunisia. (No priority) Tunisia is not an important regional financial center. It is also not a tax haven or a major offshore banking center. Although the Tunisian government made the Tunisian dinar covertible for current account purposes in spring 1994, restrictions remain on capital account transfers. The small size of Tunisia's banking sector would make attempts to launder sizable amounts of drug money conspicuous. There is a money laundering provision in the 1992 anti-narcotics law. There have been no arrests and/or prosecutions for money laundering in Tunisia. Tunisia is a signatory to the 1988 UN Convention.
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.
NO REPORTS. The following governments were reviewed but reports are not provided in the 1995 money laundering chapter, either because there was no action of significance in 1994 to report or the financial center was of such a low or no priority as not to occasion a report:
Albania, Algeria, Angola, Azerbaijan, Bermuda, Bosnia, Botswana, Burkina Faso, Burundi, Cameroon, Cape Verde, Central African Republic, Chad, Channel Islands, Comorros, Congo, Cook Islands, Croatia, Djibouti, El Salvador, Equitorial Guinea, Eritrea, Ethiopia, Fiji, Gabon, Gambia, Ghana, Guinea, Guinea-Bissau, Guyana, Kiribati, Lesotho, Liberia, Libya, Malawi, Maldives, Malta, Mali, Marshall Isl, Mauritania, Mauritius, Micronesia, Monaco, Mozambique, Namibia, Nauru, Niger, No Marianas, Rwanda, Seychelles, Solomon Isl, Somalia, Swaziland, Tajikistan, Tanzania, Turkmenistan, Tuvalu, Uganda, W Sahara, W Samoa, Yemen, Zaire, Zambia, and Zimbabwe.
[END OF 1995 INTERNATIONAL NARCOTICS CONTROL STRATEGY REPORT]
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