If you shop with a major bank, chances are that all the
transactions in your account are scrutinized by AML (Anti
Money Laundering) software. Billions of dollars are being
invested in these applications. They are supposed to track
suspicious transfers, deposits, and withdrawals based on
overall statistical patterns. Bank directors, exposed, under
the Patriot Act, to personal liability for money laundering
in their establishments, swear by it as a legal shield and
the holy grail of the on-going war against financial crime
and the finances of terrorism.
Quoted in Wired.com, Neil Katkov of Celent
Communications, pegs future investments in compliance-
related activities and products by American banks alone at
close to $15 billion in the next 3 years (2005-2008). The
United State's Treasury Department's Financial Crimes
Enforcement Network (finCEN) received c. 15 million
reports in each of the years 2003 and 2004.
But this is a drop in the seething ocean of illicit financial
transactions, sometimes egged on and abetted even by the
very Western governments ostensibly dead set against
them.
Israel has always turned a blind eye to the origin of funds
deposited by Jews from South Africa to Russia. In Britain
it is perfectly legal to hide the true ownership of a
company. Underpaid Asian bank clerks on immigrant
work permits in the Gulf states rarely require identity
documents from the mysterious and well-connected
owners of multi-million dollar deposits.
Hawaladars continue plying their paperless and trust-
based trade - the transfer of billions of US dollars around
the world. American and Swiss banks collaborate with
dubious correspondent banks in off shore centres.
Multinationals shift money through tax free territories in
what is euphemistically known as "tax planning". Internet
gambling outfits and casinos serve as fronts for narco-
dollars. British Bureaux de Change launder up to 2.6
billion British pounds annually.
The 500 Euro note makes it much easier to smuggle cash
out of Europe. A French parliamentary committee accused
the City of London of being a money laundering haven in
a 400 page report. Intelligence services cover the tracks of
covert operations by opening accounts in obscure tax
havens, from Cyprus to Nauru. Money laundering, its
venues and techniques, are an integral part of the
economic fabric of the world. Business as usual?
Not really. In retrospect, as far as money laundering goes,
September 11 may be perceived as a watershed as
important as the precipitous collapse of communism in
1989. Both events have forever altered the patterns of the
global flows of illicit capital.
What is Money Laundering?
Strictly speaking, money laundering is the age-old process
of disguising the illegal origin and criminal nature of
funds (obtained in sanctions-busting arms sales,
smuggling, trafficking in humans, organized crime, drug
trafficking, prostitution rings, embezzlement, insider
trading, bribery, and computer fraud) by moving them
untraceably and investing them in legitimate businesses,
securities, or bank deposits. But this narrow definition
masks the fact that the bulk of money laundered is the
result of tax evasion, tax avoidance, and outright tax
fraud, such as the "VAT carousel scheme" in the EU
(moving goods among businesses in various jurisdictions
to capitalize on differences in VAT rates). Tax-related
laundering nets between 10-20 billion US dollars annually
from France and Russia alone. The confluence of criminal
and tax averse funds in money laundering networks serves
to obscure the sources of both.
The Scale of the Problem
According to a 1996 IMF estimate, money laundered
annually amounts to 2-5% of world GDP (between 800
billion and 2 trillion US dollars in today's terms). The
lower figure is considerably larger than an average
European economy, such as Spain's.
The System
It is important to realize that money laundering takes
place within the banking system. Big amounts of cash are
spread among numerous accounts (sometimes in free
economic zones, financial off shore centers, and tax
havens), converted to bearer financial instruments (money
orders, bonds), or placed with trusts and charities. The
money is then transferred to other locations, sometimes as
bogus payments for "goods and services" against fake or
inflated invoices issued by holding companies owned by
lawyers or accountants on behalf of unnamed
beneficiaries. The transferred funds are re-assembled in
their destination and often "shipped" back to the point of
origin under a new identity. The laundered funds are then
invested in the legitimate economy. It is a simple
procedure - yet an effective one. It results in either no
paper trail - or too much of it. The accounts are invariably
liquidated and all traces erased.
Why is It a Problem?
Criminal and tax evading funds are idle and non-
productive. Their injection, however surreptitiously, into
the economy transforms them into a productive (and
cheap) source of capital. Why is this negative?
Because it corrupts government officials, banks and their
officers, contaminates legal sectors of the economy,
crowds out legitimate and foreign capital, makes money
supply unpredictable and uncontrollable, and increases
cross-border capital movements, thereby enhancing the
volatility of exchange rates.
A multilateral, co-ordinated, effort (exchange of
information, uniform laws, extra-territorial legal powers)
is required to counter the international dimensions of
money laundering. Many countries opt in because money
laundering has also become a domestic political and
economic concern. The United Nations, the Bank for
International Settlements, the OECD's FATF (Financial
Action Task Force), the EU, the Council of Europe, the
Organisation of American States, all published anti-
money laundering standards. Regional groupings were
formed (or are being established) in the Caribbean, Asia,
Europe, southern Africa, western Africa, and Latin
America.
Money Laundering in the Wake of the September 11
Attacks
Regulation
The least important trend is the tightening of financial
regulations and the establishment or enhancement of
compulsory (as opposed to industry or voluntary)
regulatory and enforcement agencies.
New legislation in the US which amounts to extending the
powers of the CIA domestically and of the DOJ extra-
territorially, was rather xenophobically described by a
DOJ official, Michael Chertoff, as intended to "make sure
the American banking system does not become a haven
for foreign corrupt leaders or other kinds of foreign
organized criminals".
Privacy and bank secrecy laws have been watered down.
Collaboration with off shore "shell" banks has been
banned. Business with clients of correspondent banks was
curtailed. Banks were effectively transformed into law
enforcement agencies, responsible to verify both the
identities of their (foreign) clients and the source and
origin of their funds. Cash transactions were partly
criminalized. And the securities and currency trading
industry, insurance companies, and money transfer
services are subjected to growing scrutiny as a conduit for
"dirty cash".
Still, such legislation is highly ineffective. The American
Bankers' Association puts the cost of compliance with the
laxer anti-money-laundering laws in force in 1998 at 10
billion US dollars - or more than 10 million US dollars per
obtained conviction. Even when the system does work,
critical alerts drown in the torrent of reports mandated by
the regulations. One bank actually reported a suspicious
transaction in the account of one of the September 11
hijackers - only to be ignored.
The Treasury Department established Operation Green
Quest, an investigative team charged with monitoring
charities, NGO's, credit card fraud, cash smuggling,
counterfeiting, and the Hawala networks. This is not
without precedent. Previous teams tackled drug money,
the biggest money laundering venue ever, BCCI (Bank of
Credit and Commerce International), and ... Al Capone.
The more veteran, New-York based, El-Dorado anti
money laundering Task Force (established in 1992) will
lend a hand and share information.
More than 150 countries promised to co-operate with the
US in its fight against the financing of terrorism - 81 of
which (including the Bahamas, Argentina, Kuwait,
Indonesia, Pakistan, Switzerland, and the EU) actually
froze assets of suspicious individuals, suspected charities,
and dubious firms, or passed new anti money laundering
laws and stricter regulations (the Philippines, the UK,
Germany).
A EU directive now forces lawyers to disclose
incriminating information about their clients' money
laundering activities. Pakistan initiated a "loyalty
scheme", awarding expatriates who prefer official bank
channels to the much maligned (but cheaper and more
efficient) Hawala, with extra baggage allowance and
special treatment in airports.
The magnitude of this international collaboration is
unprecedented. But this burst of solidarity may yet fade.
China, for instance, refuses to chime in. As a result, the
statement issued by APEC in November 2001 on
measures to stem the finances of terrorism was lukewarm
at best. And, protestations of close collaboration to the
contrary, Saudi Arabia has done nothing to combat money
laundering "Islamic charities" (of which it is proud) on its
territory.
Still, a universal code is emerging, based on the work of
the OECD's FATF (Financial Action Task Force) since
1989 (its famous "40 recommendations") and on the
relevant UN conventions. All countries are expected by
the West, on pain of possible sanctions, to adopt a
uniform legal platform (including reporting on suspicious
transactions and freezing assets) and to apply it to all
types of financial intermediaries, not only to banks. This
is likely to result in...
The Decline of off Shore Financial Centres and Tax
Havens
By far the most important outcome of this new-fangled
juridical homogeneity is the acceleration of the decline of
off shore financial and banking centres and tax havens.
The distinction between off-shore and on-shore will
vanish. Of the FATF's "name and shame" blacklist of 19
"black holes" (poorly regulated territories, including
Israel, Indonesia, and Russia) - 11 have substantially
revamped their banking laws and financial regulators.
Coupled with the tightening of US, UK, and EU laws and
the wider interpretation of money laundering to include
political corruption, bribery, and embezzlement - this
would make life a lot more difficult for venal politicians
and major tax evaders. The likes of Sani Abacha (late
President of Nigeria), Ferdinand Marcos (late President of
the Philippines), Vladimiro Montesinos (former, now
standing trial, chief of the intelligence services of Peru),
or Raul Salinas (the brother of Mexico's President) -
would have found it impossible to loot their countries to
the same disgraceful extent in today's financial
environment. And Osama bin Laden would not have been
able to wire funds to US accounts from the Sudanese Al
Shamal Bank, the "correspondent" of 33 American banks.
Quo Vadis, Money Laundering?
Crime is resilient and fast adapting to new realities.
Organized crime is in the process of establishing an
alternative banking system, only tangentially connected to
the West's, in the fringes, and by proxy. This is done by
purchasing defunct banks or banking licences in territories
with lax regulation, cash economies, corrupt politicians,
no tax collection, but reasonable infrastructure.
The countries of Eastern Europe - Yugoslavia
(Montenegro and Serbia), Macedonia, Ukraine, Moldova,
Belarus, Albania, to mention a few - are natural targets. In
some cases, organized crime is so all-pervasive and local
politicians so corrupt that the distinction between criminal
and politician is spurious.
Gradually, money laundering rings move their operations
to these new, accommodating territories. The laundered
funds are used to purchase assets in intentionally botched
privatizations, real estate, existing businesses, and to
finance trading operations. The wasteland that is Eastern
Europe craves private capital and no questions are asked
by investor and recipient alike.
The next frontier is cyberspace. Internet banking, Internet
gambling, day trading, foreign exchange cyber
transactions, e-cash, e-commerce, fictitious invoicing of
the launderer's genuine credit cards - hold the promise of
the future. Impossible to track and monitor, ex-territorial,
totally digital, amenable to identity theft and fake
identities - this is the ideal vehicle for money launderers.
This nascent platform is way too small to accommodate
the enormous amounts of cash laundered daily - but in ten
years time, it may. The problem is likely to be
exacerbated by the introduction of smart cards, electronic
purses, and payment-enabled mobile phones.
In its "Report on Money Laundering Typologies"
(February 2001) the FATF was able to document concrete
and suspected abuses of online banking, Internet casinos,
and web-based financial services. It is difficult to identify
a customer and to get to know it in cyberspace, was the
alarming conclusion. It is equally complicated to establish
jurisdiction.
Many capable professionals - stockbrokers, lawyers,
accountants, traders, insurance brokers, real estate agents,
sellers of high value items such as gold, diamonds, and art
- are employed or co-opted by money laundering
operations. Money launderers are likely to make increased
use of global, around the clock, trading in foreign
currencies and derivatives. These provide instantaneous
transfer of funds and no audit trail.
The underlying securities involved are susceptible to
market manipulation and fraud. Complex insurance
policies (with the "wrong" beneficiaries), and the
securitization of receivables, leasing contracts, mortgages,
and low grade bonds are already used in money
laundering schemes. In general, money laundering goes
well with risk arbitraging financial instruments.
Trust-based, globe-spanning, money transfer systems
based on authentication codes and generations of
commercial relationships cemented in honour and blood -
are another wave of the future. The Hawala and Chinese
networks in Asia, the Black Market Peso Exchange
(BMPE) in Latin America, other evolving courier systems
in Eastern Europe (mainly in Russia, Ukraine, and
Albania) and in Western Europe (mainly in France and
Spain).
In conjunction with encrypted e-mail and web
anonymizers, these networks are virtually impenetrable.
As emigration increases, diasporas established, and
transport and telecommunications become ubiquitous,
"ethnic banking" along the tradition of the Lombards and
the Jews in medieval Europe may become the the
preferred venue of money laundering. September 11 may
have retarded world civilization in more than one way.