Attacking the Profits of Crime: Drugs, Money and Laundering
A Panel Discussion
held at the United Nations, New York, on 10 June 1998
Consultant Editor: Ian Hamilton Fazey
Copyright: United Nations 1998
Introduction (to the transcript), by Professor Pino Arlacchi
Setting the Context: Ten Years on from the 1988 Convention, by Ian Hamilton Fazey, Financial Times, Moderator
The Need for a Global Attack on Money Laundering, by Professor Pino Arlacchi, Under Secretary General, United Nations, Executive Director, Office for Drug Control and Crime Prevention
Financial Havens and Banking Secrecy, by Jack A. Blum, Partner, Nobel Lovins & Lamont; Co-author of "Financial Havens, Banking Secrecy and Money Laundering"
Macro-economic aspects of offshore centres and the importance of money laundering in offshore financial flows, by Dr Vito Tanzi, Director of Fiscal Affairs, International Monetary Fund
Practical and legal obstacles to international judicial cooperation in financial investigations, by Carla Del Ponte, Prosecutor General of the Swiss Confederation
New money laundering threats for emerging economies, by N. K. Singh, Permanent Secretary for Taxation and Revenue Matters, including narcotics, for the Government of India
Offshore financial business and banking regulation, by Timothy B. Donaldson, Chairman of the Bahamas Securities Board
Debate and Discussion
The Twentieth Special Session of the General Assembly of the United Nations took place in New York between June 8th and 10th, 1998 to discuss one subject: illicit drugs. This Special Session proved momentous: it was attended by 22 heads of state, 11 heads of government, 13 deputy prime ministers and 10 foreign ministers. There was unanimity among the 185 Member States to step up the international fight against the illicit drug trade. The General Assembly displayed its determination by adopting a Political Declaration; by agreeing to continue to reduce and interdict supplies; by adopting the first Declaration on the Guiding Principles of Drug Demand Reduction; by pledging to improve international judicial cooperation; by agreeing to better control of sales and shipments of precursors used in the refinement and manufacture of drugs; and by agreeing to increase efforts to counter money laundering.
Never before has there been such a display of collective global political will on these issues.
The following transcript reports the Proceedings of an important event associated with the Special Session. The event comprised a Panel Discussion on money laundering, aptly entitled: Attacking the Profits of Crime: Drugs, Money and Laundering. More than 250 people attended, including parliamentarians, ambassadors, members of delegations to the United Nations, national law officers, representatives of the police and customs, experts and professionals from various anti-money laundering organizations, specialists in financial intelligence, regulators, academics, researchers, journalists and delegates from non-governmental organisations. The Panel itself included some of the most prominent and eminent thinkers in the field. Discussion was frequently profound and debate lively. Good ideas emerged, which deserve consideration by a wider audience.
Professor Pino Arlacchi
Under Secretary General, United Nations
Setting the Context: Ten Years on from the 1988 Convention
Ian Hamilton Fazey
Financial Times, Moderator
Ian Hamilton Fazey, has written for the Financial Times since 1980, when he returned to an award-winning career in journalism after six years as chief executive of two newspaper companies. He was the FT's UK northern correspondent for 10 years and was made an Officer of the Order of the British Empire in 1990 for services to journalism. He has since divided his time between the UK and Austria, where he writes about the UN’s Vienna-based activities, including the United Nations International Drug Control Programme and the Global Programme Against Money Laundering.
The purpose of this event is to consider the subject of money laundering and its impact on the world’s financial systems and financial markets. We shall be looking at the way governments try to regulate these markets and the institutions that drive them, as well as considering what steps may be needed to make life much more difficult for anyone who tries to launder money. We shall be referring at times to a report, Financial Havens, Banking Secrecy and Money Laundering.
Our Panel today is comprised of distinguished and experienced experts, but our aim is to ensure that this meeting will be as much a forum as a series of addresses by Panel members. My job is to assist this process. This is not a gathering of diplomats or politicians - although obviously some are present. I hope everyone will speak freely. We have no terms of reference, or any power to make recommendations, and if we did, no one would be obliged to do anything about it. However, because everyone can say what they think, we have an opportunity to develop a consensus which, given the seniority of some of the people present, would be difficult for those with power to ignore. So we should try to be something more than a "talking shop".
To set the context, it may be useful to recall that it is 10 years since the Member States of the United Nations adopted the Convention on Illicit Traffic in Narcotic Drugs and Psychotropic Substances. This Convention came into force on 13 November 1990, and was a landmark in that it pushed the issue of the proceeds of drug-related crime onto the world agenda. It did so by laying down a series of measures through which Member States of the United Nations would attempt to counter money laundering.
Attacking money laundering attacks the proceeds of crime; it also has the advantage of forcing those who are behind the trade in illicit drugs to fight in the open, on the same ground as the forces of law and order. Moreover, the rules of engagement are the conventions agreed by the international community and the laws enacted by Member States of the United Nations as a result of those conventions. Thus we have the advantage of being able to tilt the playing field in our own favour.
The 1988 Convention requires Member States of the United Nations to make money laundering illegal, to adopt measures to enable the tracing, freezing, seizing and confiscation of the proceeds, to cooperate with other countries in identifying, tracing, freezing and seizing those assets, and – especially important for today*s discussions – to provide for bank, financial or commercial records to be available to investigators, notwithstanding bank secrecy. Countries are supposed to help each other through mutual legal assistance and investigations, through prosecutions and by providing for the attendance of witnesses. They are also urged, though not obliged, to share confiscated proceeds with cooperating countries and international organizations, and to reverse the burden of proof as to the lawfulness of the origins of any proceeds they discover.
However, there are 185 Member States of the United Nations. As at February 1998, a total of 145 of them had become parties to the Convention, so 40 had yet to sign. Moreover, of those who have done so, UN officials estimate that only some 30 of them are implementing anti-money laundering measures substantially compliant with the 1988 Convention. The focus of today*s discussion, therefore, will be to examine why this is so. We shall look at bank secrecy, impediments to investigation, and how to build a wider capacity for worldwide investigation. To start us off, it is my pleasure to introduce Professor Pino Arlacchi, Under Secretary General of the United Nations, and founder of the Global Programme Against Money Laundering.
The Need for a Global Attack on Money Laundering
Professor Pino Arlacchi
Executive Director, Office for Drug Control and Crime Prevention
Professor Pino Arlacchi is an Under Secretary General of the United Nations and head of the United Nations Office at Vienna, where he is also Executive Director of the Office for Drug Control and Crime Prevention. He was a member of the Italian Senate from 1995 to 1997, after serving as a member of the Chamber of Deputies from 1994. During this period he was also elected Vice-President of the Parliamentary Commission on the Mafia. As Professor of Sociology at the University of Sassari, his studies on the Mafia paved the way for anti-Mafia legislation in Italy, as well as bringing him worldwide academic recognition for advances in research and methodology. Since 1992, he has been Honorary President of the Giovanni Falcone Foundation in recognition of his commitment to fighting the Mafia.
The information age which has accompanied globalization has had a profound effect on every facet of society. The impact of this new technology has been nothing short of revolutionary as regards the way in which the world carries on business, simultaneously bringing greater profits, risks and opportunities for fraud.
In the 1990s, international finance has become totally linked to computers. Electronic banking and trading, cashless transactions and computerized clearing have created so-called "megabyte money", which exists on terminals from New York to Tokyo and everywhere in between. With over 700,000 wire transfers a day worth more than $2billion, we consider it is reasonable to estimate that a small percentage - less than 1 per cent - contains laundered funds. However, this probably represents some $300 million every day.
Globalization has turned the international financial system into a money launderer*s dream, and this criminal process siphons away billions of dollars per year from economic growth at a time when the financial health of every country affects the stability of the global marketplace. The leaders of the Group of Eight - the seven largest economies (the United States, Japan, Germany, France, Italy, the United Kingdom and Canada) plus Russia - recognized the new challenge of countering money laundering at their summit in Birmingham in the United Kingdom in May 1998. Emphasis was placed on the expansion of international work and cooperation to combat criminal financial activities.
The publication by the Global Programme Against Money Laundering of Financial Havens, Banking Secrecy and Money Laundering, coinciding with the political endorsement of the G8, is timely, giving us the right information at the right time. It tells us where we stand in the global challenge to counter money laundering. I believe our new Global Programme Against Money Laundering is uniquely equipped to play an important role in making the "three Fs" possible: the finding, freezing and forfeiting of criminally derived income and assets.
Our report estimates that at least $200 billion is laundered every year. As Mr. Fazey has pointed out in the Financial Times, with international trade in drugs valued at more than twice this figure, our estimate is probably a conservative one. Today*s criminals have many options as to where and how they want to make their money appear clean and legal. They can move it to jurisdictions which offer high levels of secrecy or use a variety of financial mechanisms, such as shell companies. They provide an impenetrable layer of protection around the ownership of assets and conceal the origin and destination of goods. We estimate that more than one million anonymous corporations now exist worldwide.
The operational principles of money laundering are a three-stage process which require, first, moving the funds from any direct association with crime; second, disguising the trail to foil pursuit; and third, making the money available to criminals once again while keeping its source secret. The deeper the dirty money goes into the international banking system, the more difficult it is to identify its original source. Financial criminals use legal tricks such as walking accounts, where banking officials have standing instructions to move accounts to another jurisdiction at the first hint of an inquiry by law enforcement officials.
While there are many responsible offshore banks, criminals have exploited some that are little more than closets with computers, offering access to the world of international banking. The cardinal rule of successful money laundering is to always approximate as closely as possible legal transactions: making this process more difficult from the outset is the key to effective financial law enforcement. However, it is too easy, and there are too many points of entry, for dirty money to find a way to progress into respectability. Criminals even exploit the banking sector's competition for customers to obtain even more attractive services for their illegal activities. Within the legitimate world of offshore banking, our studies have revealed widespread international abuses of this sector that are not limited to a single region: we now have a global problem that requires the international community*s urgent and immediate attention.
The 1998 United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances was the first international attempt to address the issue of money laundering by making it an internationally recognized crime. It gave law enforcement authorities the right to trace, freeze and confiscate assets. Today, fewer than 40 countries have fully complied with this Convention and other international standards. In the Political Declaration before governments at the Special Session of the General Assembly this week, there is a provision calling for the establishment and strengthening of national money-laundering legislation by the year 2003.
This is a priority for our Global Programme Against Money Laundering. Our experts will provide countries with expertise and assistance in the drafting of effective legislation. But the role of the international community does not end there: it is time to promote greater transparency and oversight of the financial world. We must strengthen cooperative efforts to catch money launderers, and raise our own knowledge about the illegal practices now taking place. We must continue to respect the right to banking privacy, but we cannot tolerate that it should offer immunity to criminals and their money. If we are serious about cracking down on those who are exploiting the complexities of the financial system, we cannot afford to start off two steps behind the criminals. The Global Programme against Money Laundering has a critical role to play in ensuring that international progress is made against money laundering. By monitoring the evolving situation and remaining on guard against criminal exploitation of offshore centres, we can serve as a watchdog for the international community and operate a warning system for the world. An investigator looking for the proceeds of drug crimes needs information within hours, not months or years. The international community must consider improving the current financial law enforcement climate through a combination of cooperation, education and reform. The Global Programme and a number of donor countries have made significant efforts to improve training, but much more remains to be done. An interesting idea put forward in the report is the proposed creation of a graduate training programme on financial criminal investigation. It is a creative proposal, and we should explore it as part of our mission.
The international community could also consider new international agreements that address the issue of financial and banking secrecy head on. The changing priorities of financial law enforcement should be taken into consideration when the international convention against organized transnational crime is considered. I favour a special Protocol to complement the Convention, devoted to countering money laundering and, in particular, to strengthening transparency in financial businesses.
The global fight against large-scale crime and the global drug problem coincides with the need for greater oversight of the global financial order. The infiltration of illegal capital, albeit in modest amounts in terms of today*s gigantic financial markets, may prove a catalyst for a chain reaction whose gravity no one can foresee. By bringing entrepreneurs linked to uncivil society into the legal system, fresh strains of adventurism and anarchy come into play in the market. Their presence has the potential to trigger the explosive world-wide financial breakdown that so many people fear. Several of the largest banking scandals in recent times – the BCCI case, the European Union Bank of Antigua and the Banco Ambrosiano case, to name but a few – were all attributable to illegal financial deals and their use of financial havens with banking secrecy.
The international community needs to erect stronger barriers between the legitimate financial world and the market in dirty capital. Offshore financial systems and archaic banking secrecy clauses can no longer be tolerated as a cover for illegal activities.
Our Global Programme Against Money Laundering is on the cutting edge of promoting fairer access for criminal investigators to the financial records of known drug traffickers and the leaders of organized crime. Along with various regional groups and task forces, we are ready to help bring the international community squarely into the challenge of countering money laundering.
Financial Havens and Banking Secrecy
Jack A. Blum
Partner, Nobel Lovins & Lamont
Co-author of Financial Havens, Banking Secrecy and Money Laundering
Jack A. Blum is a partner in the Washington D.C. law firm of Lobel Novins & Lamont, and is frequently retained by government agencies and private litigants as an expert in complex international money laundering, financial fraud and tax evasion cases. As Special Counsel to the Senate Foreign Relations Committee, he was responsible for the investigation of the Lockheed Aircraft bribes, General Noriega's involvement with drug trafficking, and BCCI. He is currently a senior editor of the journal Crime Law & Social Change. He is one of the four authors of the report Financial Havens, Banking Secrecy and Money Laundering.
In the first place, I would like to acknowledge my three colleagues involved with preparing the report, Financial Havens, Banking Secrecy and Money Laundering: we are equal co-authors and we have one of them with us today, Professor Tom Naylor of McGill University. The other two are Mike Levy, a Professor at the University of Wales in Cardiff, and Phil Williams, of the University of Pittsburgh. We reached a remarkable level of unanimity in our views and conclusions, even though we set out to look at the problem of money laundering from somewhat different perspectives.
When you consider the large amount of money laundered, the small sums retrieved by government agencies, and the small number of people who are arrested for involvement in laundering, it quickly becomes apparent that what we are currently doing is not very effective. It is occasionally effective, and occasionally an under-cover operation will scare off some of the people who have engaged in the process rather openly. But most launderers are getting away with it; so the question is, why?
There are several answers. First, our criminal justice system is based on territory. If something happens in my territory, I have jurisdiction. If it does not, I have to deal with other nation States in order to retrieve information. This system runs completely counter to a world in which jurisdiction has been totally lost because of the computer. Today, money is wherever the computer says it is; a large bank can have a mainframe computer in any given country and move the money from one part of the computer to another part of the computer, and then the money is somewhere else. We live in a world where the notions of criminal jurisdiction with regard to money have been shot: there is nothing left of them. It is of major importance for us to work out what substitutes there are for those notions of jurisdiction. Taking advantage of this situation, some governments actually provide tools for the professionals who hide money. There are a variety of these tools.
The most common of them is the international business corporation, where a government allows people to set up a business with no obvious owner, no need to report to the government, and no obviously responsible officer, director or employee. These corporations need not disclose anything at all. Once incorporated, they then go out into the world and open bank accounts. They become the way in which impunity is achieved. The concept here is that once one of these corporations has been set up, you cannot get behind it; and if you cannot get behind it, there is no way to find out whose money it is processing unless someone confesses and delivers a paper to you.
We believe that this kind of incorporation is an unacceptable extension of the notion of incorporation. Corporations were originally designed to limit liability so that people could do business. They were designed so that people could separate ownership and management. It never was the purpose of incorporation to permit total anonymity in the conduct of affairs, and with that anonymity, impunity. Yet that is where we are today with anonymous corporations. Moreover, many countries have gone into competition to provide the "best" corporate law, the most secret corporations; and this competition – a fight for the lowest possible common denominator – has to end.
A second widely used tool is the trust, the offshore trust. We now have trusts called asset protection trusts, state-of-the-art trusts. With such trusts, you cannot find out who the beneficiary is, or who the grantor of the trust is. The validity of the trust cannot usually be successfully challenged because the courts will not recognize any challenge after a certain period of time, which has usually elapsed before the need for a challenge because apparent. When a trust in one country is married to an international business corporation in another country, we lose all ability to trace funds and assets. This pushes the concept of trust law beyond anything necessary in either common law or civil law jurisdictions.
Other tools are also being used, such as free trade zones, or "brass plate banks", which are banks having nothing other than the title of "bank". They are unregulated, unsupervised, and owners enjoy anonymity. Yet they have become part of the international financial system and provide a gateway for criminal activities. It is our contention that these facilitating institutions have no place in the international business world. Nor is the problem is limited merely to drugs. The largest single utilizers of this kind of facility are tax evaders worldwide. We are told that in many cases it is not evasion but legal avoidance, but if it were legal avoidance, the secrecy arrangements would be unnecessary, because what is taking place would be legal. This problem must be addressed.
We have also looked at secrecy and privacy. I, like everyone else, would like to have my financial affairs kept secret; unfortunately, in today*s world, there is more information about each of us in computers around the world than anyone of us really understands, be it credit card data, bank data or whatever. And despite bank secrecy laws, privacy can be invaded by private individuals in ways most people do not comprehend. Yet the one area where secrecy works is against legitimate government inquiry about criminal activity!
In other words, if someone makes an inquiry of a country, stating that they have probable cause or a warrant and would like their bank information, many countries will refuse to give this and say that it is subject to secrecy. Yet if someone were to steal this bank information from a computer in a third country, that country which is offering secrecy would have no way of finding the perpetrator of the theft or doing anything about it.
Therefore what we have is public secrecy and private publicity, a completely unacceptable situation. The issue of privacy requires international agreement to sort out what it means, who should be protected, and what they should be protected against.
The most important point I would make, however, is that it is intolerable in a globalized economy to have a situation where the rule of law cannot follow financial transactions. We have had global financial frauds on an incredible scale, all of which have involved the movement and concealment of money, and the burying of financial records. As businesses now operate across the globe, we cannot allow this kind of thing to happen, as there is no way of preventing an explosion of financial fraud. It is that explosion of financial fraud and other forms of financial crime that should be a cause for concern to everyone. It is no longer reasonable to say that the offshore business, and the impenetrability that lawyers and accountants have structured for their clients, is simply the way wealthy people do business: the rule of law must follow that money.
Macro-economic aspects of offshore centres and the importance of money laundering in offshore financial flows
Dr Vito Tanzi
Director of Fiscal Affairs, International Monetary Fund
Dr. Vito Tanzi has a Ph.D. in economics from Harvard University. Before joining the International Monetary Fund in 1974, where he is Director of the Fiscal Affairs Department, he was Professor of Economics at the American University. In addition to publishing and editing numerous books, he has been on the faculty of George Washington University and a consultant for the World Bank, the United Nations, the Organization of American States, and the Stanford Research Institute. His major interests are public finance, monetary theory, and macroeconomics, but he has published widely on "the dark side of economics". He was President of the International Institute of Public Finance, 1990 to 1994.
First, I must stress that I speak in a personal capacity: my views are not the official views of the International Monetary Fund, although I know that the Managing Director of the IMF does endorse them. For some years now, I have been interested in what I call "the dark side of economics" - tax evasion, corruption, underground activities, and so on. Because of this, I wrote a paper on money laundering some four years ago, which was later featured in a cover story of The Economist. Its main points concern how money laundering takes place and why, and it speculates on the implications of money laundering for the international financial system.
Globalization of world markets is creating a situation that in turn gives rise to more and more opportunities for laundering money. I do not want what I have said to be misconstrued as meaning that I am not in favour of globalization; it has many advantages and I support its continuation. But there are implicit aspects of concern which we should try and do something about.
Because of tax evasion, drug trafficking, theft or whatever, some people end up with very large amounts of money. They usually want to invest this money in activities which, over a period of time, appear to be legitimate. Sometimes the investments are domestic, but often they are international. There are even specialists in this field now who help with these investments.
This is creating problems for the international financial system. This system is based on trust. If we have more scandals like BCCI and the European Union Bank of Antigua, this trust will eventually disappear, leading to major difficulties. Moreover, if $200 billion a year is being laundered and if this money is in the hands of criminals who start working together, then links form between criminal institutions, raising the possibility of whole countries being blackmailed.
For example, if I take $20 billion out of a country, this can create a tremendous problem, as well as creating confusion for policy makers. If bad policies are being followed, but money is nevertheless flowing into the country, then that can confuse those who make economic policy. This must be a concern to all of us.
Current measures are useful but will not make much progress in the fight against money laundering. The fight against money laundering is much like fighting a war: one always prepares according to what one learned in past battles, but there are always new tactics coming along. With the proliferation of technology and new instruments within the financial system, more and more opportunities will arise for money laundering.
At some point the United Nations or some international conference should prescribe the minimum regulatory framework a country should have, and give that country a certain period of time – say five years – to adopt it. This could involve the elimination or limitation of banking secrecy to specific cases, and elimination of international business corporations. If a country or territory (we have money laundering not only in countries but in territories as well) does not follow these rules, then eventually penalties would have to be imposed on them. These penalties should take a financial form.
For example, we know that money laundering usually takes place because some people from rich countries invest money in certain tax havens; but the money is not invested in a real sense in those countries. These countries serve merely as a conduit for investment in other places, and through the legal framework which has evolved, the money can be shifted back to various places and can thus escape the attention of authorities.
One remedy which is simple in theory, but not necessarily in practice, is to ensure that any transaction which takes place, or any payments made from, for example, France or Germany, to a particular tax haven or suspected money laundering centre, should be penalized through tax. A tax could be put on any transaction and it would at least make it much more expensive for the money launderers to use such places for laundering purposes. This may be a dream, but I feel that unless we try to move in this direction we are not going to make any progress in the fight against money laundering.
We want to have a world where the playing field is level, which means applying the same regulatory framework everywhere in an effective manner. In theory, a country could introduce a framework but not enforce it. We need, therefore, a level playing field in the sense that the same standards of strict regulation should apply in all countries.
Practical and legal obstacles to international judicial cooperation in financial investigations
Carla Del Ponte
Prosecutor General of the Swiss Confederation
Carla Del Ponte has been the Prosecutor General of the Swiss Confederation since 1994. After a period in private practice in Lugano, Switzerland, she was appointed an investigative judge in 1981. Four years later she became the Prosecutor of the Canton Ticino, in Lugano. She has extensive experience in international financial investigations, as well as in international cooperation against organized crime.
Switzerland has made every effort to prevent its financial marketplace being misused for laundering purposes. Legal instruments to curb money laundering activities on Swiss soil have been created and enacted, particularly over the last ten years. In fact, these instruments, incorporated in both criminal law as well as the law on banking supervision, owe their existence to private initiatives. On 3 August 1990 the first set of measures to combat money laundering was enacted. From then on, money laundering and failure to exercise proper care in financial transactions have been considered statutory offences.
Regarding the exercise of due diligence in financial transactions, persons active in the financial field are subject to pertinent legal provisions: bankers, trustees, investment advisers and corporate lawyers, to name but a few. They are liable to prosecution if they fail to identify a beneficial owner who has not exercised due diligence that could be expected under the circumstances. By criminalizing a lack of due diligence, it is no longer necessary to prove that a financier accepted illegal proceeds knowingly and wilfully. According to current banking practice, it must be proven that the financier failed to verify the identity of the contracting partners.
On 1 August 1994, another set of measures came into effect, dealing with the responsibility of professional asset managers to notify the competent authorities of evidence suggesting possible laundering activities. In other words, they are now explicitly authorized to notify the prosecuting authorities of evidence leading to the conclusion that funds have been derived from a crime. Unlike in the past, such action no longer carries the risk of incurring criminal responsibility for breach of secrecy. Bankers are no longer subject to bankers* discretion; reasonable grounds for suspicion will suffice. They can come forward without violating the bankers* duty of secrecy. As explicitly authorized by law prior to this provision, a banker was free not to notify the competent authorities, but simply had to turn away a prospective client.
Another set of provisions deals with tighter forfeiture regulations relating to organized crime. As a rule, it was necessary to show that the funds of a contracting partner were derived from a crime: only if conclusive proof could be furnished was it necessary to forfeit such funds. Under current law, it is enough to show that the funds in question are at the disposal of a criminal organization or one of its members. Such funds are now forfeited unless the person involved can prove that those funds are not at an organization*s disposal.
You can thus see how the burden of proof has shifted to the defendant. The issue of reversing the burden of proof is receiving attention from the international community; it would be worthwhile considering it on an international scale.
To ensure business conduct is beyond reproach, almost all Swiss banks have contracted with the Swiss Bankers Association to verify, among other things, the identity of contracting partners, and to identify the beneficial owner of funds deposited. These rules, which have been in existence for some time now, are set out in detail in the Swiss banks* code of conduct with regard to the exercise of due diligence. They are binding rules: failure to comply with regulations is liable to a penalty imposed by the bankers* association itself. This agreement makes good sense, because federal penal measures apply to people, but not to institutions. Sanctions imposed by the association affect the banks as such.
The guidelines issued by the Federal Banking Commission in 1991 are now of greater significance than the code of conduct. These guidelines are explicitly directed towards the problem of money laundering, and deal with ways to combat and prevent it. Vested with considerable authority by Swiss bank laws, the Banking Commission established binding guidelines. Persons subject to Swiss bank law find these guidelines a reliable source of advice on how to interpret the statutory provisions on money laundering. The Money Laundering Act became effective on 1 April 1998, and this Act closed an important loophole in the non-bank sector. Thus, rules and measures applicable to banks now also apply to non-bank financial institutions. The Act provides for verification of the contracting partner*s identity; obligation to preserve documents in order to guarantee the paper trail; and the financial intermediary*s duty to exercise due diligence.
A major issue in working out the law on money laundering was the question of whether it should be not only possible but obligatory to notify the authorities of evidence of possible money laundering. Eventually, the duty to notify became law. Pursuant to this provision, financial intermediaries are now obliged to notify authorities under the following conditions, namely, if they are aware of the fact or have sufficient reason to suspect that the funds in question are somehow linked to money-laundering activities; that the funds are the proceeds of criminal activities; or that the funds belong to a criminal organization. Financial intermediaries are then required to freeze dubious funds for five days.
Within the Swiss Penal Code, fiscal offences have never been considered true crimes. Fiscal offences committed as a preparatory act to money laundering are not subject to prosecution; to deposit hot money is therefore not a punishable act. For obvious reasons, this meets with some criticism and there is little one can say in defence of this policy. It is enough to say that in cases of serious fiscal offences, Switzerland gives legal assistance to other jurisdictions. It would, however, be erroneous to believe that all tax dodgers are protected by Swiss banking secrecy. We have to differentiate between two types: tax evasion committed abroad, which is prosecuted by a foreign authority; and criminal tax fraud, which is a statutory offence. When it comes to legal assistance, it is possible to confiscate bank documents and freeze accounts. Admittedly, the entire procedure is quite tedious, because unlike other legislations, Switzerland grants the party concerned a number of ways to contest the freeze. However, in assisting a foreign authority in tax fraud proceedings, it is quite possible to lift banking secrecy.
Another major legal problem lies in telling the difference between proceeds of crime and "hot money" that has been sent out of a country to evade tax. In an attempt to invest their money, tax evaders and criminals proceed in much the same way. They follow the same schemes, offer implausible explanations to justify the source of the money, and are very secretive about the whole process.
So, how are fiduciaries to know which kind of funds they are dealing with? If a prospective client is able to offer a more or less reasonable explanation that, for legitimate fiscal reasons, he or she needs to hide and remove money, and then finds a way to justify this, the fiduciaries will hardly suspect this to be a criminal activity. If at some later point these funds should turn out to be proceeds from a criminal activity, the burden of proof is on the prosecuting authority. They in turn will find it difficult to prove that the fiduciaries should have been aware that they accepted "dirty money" as defined by the Money Laundering Act.
A successful fight against money laundering largely depends upon the cooperation of the foreign authority in whose jurisdiction a preparatory act of money laundering has been committed. But a strong case is needed: what good will it do to seize capital assets on suspicion of money laundering, only to have to give them back later because of lack of evidence? It follows that for major money laundering proceeds to be successfully uncovered, Swiss authorities depend on foreign authorities notifying them that drug money or kickbacks have been channeled through to Switzerland. It would be even more efficient if information were provided to us directly and informally. The Swiss authorities would then have a sound basis from which to proceed. What it takes for successful criminal proceedings is a concrete suspicion of a crime committed abroad, whose proceeds have been transferred to Switzerland. This is essential for the successful prosecution of such offences.
A Roman Emperor once said, "money doesn't stink". Of course, the context in which he uttered those words was a slightly different one, but criminals today take advantage of the fact that even dirty money does not stink! All the measures mentioned above are aimed at one thing: combatting money laundering and possibly preventing the Swiss financial services from being misused by criminals. Of course, these measures will have a negative effect on a few Swiss financial institutions; some clients will choose to take their business elsewhere. But on the whole, Switzerland benefits much more from a rigorous legal policy that takes a rigid stance on criminal money. After all, the criticism that Switzerland accepts and protects the funds of criminal subjects for selfish reasons is hardly beneficial to our reputation.
International cooperation in criminal matters should not be obstructed by banking secrecy. Since April 1998, Swiss legislation has provided effective instruments to combat money laundering and, in addition, the law on legal assistance in criminal matters has been revised. Thus national legislation is not necessarily an obstacle to international cooperation.
In conclusion, may I assure you that Switzerland is well equipped and ready to fight money laundering at the international level. But combatting money laundering must not be a solo effort; international cooperation should be more than just a cliché. What it needs is concerted action on the part of all states.
New money laundering threats for emerging economies
N. K. Singh
Permanent Secretary for Taxation and Revenue Matters, including narcotics, for the Government of India
N. K. Singh is Permanent Secretary for Taxation and Revenue Matters, including narcotics, for the Government of India. As part of the preparations for the UN General Assembly Special Session on Drugs, he was Vice-Chairman and Rapporteur of the 1998 session of the Commission on Narcotic Drugs, sitting as the Preparatory Body for the Special Session, in Vienna. He played similar roles at the Special Session’s Committee of the Whole.
My broad theme will consider new money-laundering threats to emerging markets. What is new about emerging markets? I think it would be fair to conclude that most emerging markets are in the phase of deregulation. Deregulation of markets and liberalization of various kinds taking place in emerging markets creates opportunities and also creates risks. Sometimes the opportunities are greater than the risks, but there are times when the risks are high and the opportunities are far fewer. There are four important dimensions in which money laundering directly impinges on the deregulation process, which is a normal process which most emerging markets adopt.
First, most emerging markets move away from a regime of exchange control into progressive deregulation in the area of foreign exchange control. Initially, they move towards greater current account convertibility, and several of them then begin to embrace full capital account convertibility. This provides a great opportunity, and a threat for money laundering to occur as emerging markets gradually relax their exchange control regime, embracing a regime of greater and greater convertibility of the capital account. There are problems associated with this, and what kind of measures therefore need to be taken is an issue of which policy makers in emerging markets need to be increasingly aware.
The second dimension is one in which most emerging markets gradually begin to privatize public monopolies. Privatization of public monopolies has ceased to be a non-contentious process. In many economies which are gradually privatizing their public monopolies, the scope for money laundering has been seen to be dramatically enhanced. What kind of legislative or other framework is therefore necessary for the emerging markets in order that, in the process of privatizing public monopolies, the risk of money laundering can be minimized? We need to be more aware of the type of instruments and the legal framework which will facilitate liberalization to proceed.
So to the third dimension: consistent with the World Trade Organization’s regulations and framework, direct export subsidies have been phased out in most emerging markets. However, many of them have various kinds of export-fostering regimes. Several of them relate to the area of "fiscalization". Emerging markets, must be wary that such export-fostering regimes do not provide an alibi for money laundering. There are many examples where emerging markets, in trying to replace explicit export subsidy regimes with export-fostering tax regimes, also begin to foster money laundering. What kind of instruments are required to resolve this type of problem?
Fourthly, most emerging markets reform the financial system; these financial systems thus become increasingly deregulated. Concomitant symmetrical reform also takes place in capital markets, which in turn become increasingly integrated into larger capital markets, and begin to address the problems of global flows. There are, therefore, problems associated with reforms of financial systems and integration of capital markets. Coupled with this are rapid technological changes, which integrate markets and foster movement of money and currency at dramatic speed.
What changes are needed for emerging markets to cope with these dynamics of technology? I am not thinking here of money laundering alone, but of the whole gamut of issues in which technological changes can be introduced into a system that is beginning to deregulate its financial markets, and increasingly increase capital flows into a larger global arena.
In my opinion, these are four dimensions though which emerging markets face new threats from money launderers. Their breadth means that the issue of money laundering cannot be tackled in an isolated sense. It must be tackled simultaneously with issues concerning the judicial process, international cooperation on investigations and extradition treaties, and the whole enabling legislative framework which will allow not merely emerging markets, but emerging markets acting in tandem with the rest of the world, to minimize the consequences of liberalization, maximize the opportunities, and deal with the attendant risks.
Offshore financial business and banking regulation
Timothy B. Donaldson
Chairman of the Bahamas Securities Board
Timothy B. Donaldson is Chairman of the Bahamas Securities Board. He is a former Ambassador of the Commonwealth of the Bahamas to the United States and has held several positions in private banks in the Bahamas. In 1974 became the first Governor of the Central Bank of the Bahamas after independence.
The geography of the Bahamas demonstrates why there are problems with drug trafficking and drug addiction. We are a nation of islands, a commonwealth some 700 miles out down in the Atlantic Ocean, stretching from the latitude of West Palm Beach, Florida, in the north, down to Hispañola in the south, and we comprise some 700 islands. This is almost an invitation to drug smugglers, and without us actually inviting them, they invited themselves early in the 1970s, which was when our problems as a transit country began. We have been vigilant in terms of trying to combat both the movement of illicit drugs through the Bahamas, destined for the United States, and in terms of looking at our banking structure, because we are and have for the past 50 years been an offshore financial centre. As a regulator from an offshore banking centre, I shall say something about what goes on in a well-regulated centre.
We started our whole regime of regulation as far back as 1983. In 1983 the Central Bank of the Bahamas prohibited cash deposits exceeding US$5,000, or the equivalent in any other foreign currency, into any commercial bank without the bank reporting that transaction to the Central Bank of the Bahamas.
In cooperation with all of the commercial banks, the Central Bank wrote a Code of Conduct, which has three main pillars. The first is to enhance the reputation of the Bahamas as an international financial centre; the second is to prevent the banks and trust companies in the Bahamas from being used for criminal purposes; and the third is to adhere to the principles of banking confidentiality as embodied in Bahamian legislation.
All of these have been accepted by all banks operating in the Bahamas. In addition, the banks have assumed further responsibilities: they cooperate absolutely with the Central Bank in terms of meeting those requirements which the Central Bank has set out. They outrightly reject the involvement of customers in criminal activity, including drug trafficking, bribery, misappropriation of funds, embezzlement, extortion and so on. The key to this is the element that is so important to us: know your customer. This requires members of the banking community to take all reasonable measures to determine the identity and the beneficial owners of account holders of the bank. This includes, first, taking a copy of one*s passport, together with the photograph in it so that there is identification that the person who opens the account is the person who he or she says they are. The second is to obtain references for those persons.
Any violation of these codes will exact severe sanctions from the Central Bank, including revocation of a bank*s licence where this is warranted. Furthermore, the statement of principles as regards the abuse of financial systems are fully supported by the Bahamas.
In 1987 the Bahamas enacted tough legislation against drug-trafficking offences. We passed a law entitled, "The Tracing and Forfeiture of Proceeds of Drug Trafficking Act", commonly referred to as the Dangerous Drugs Act. This provides for a whole range of sanctions against those persons who engage in the illegal practice of trafficking in drugs. It also covers investigation, matters of confiscation, reporting of suspicious transactions, and a whole array of subjects which we feel have put us in the vanguard of regulation.
The Bahamas also negotiated a treaty with the United States in 1987, called the Mutual Legal Assistance Treaty. This was an attempt to increase the cooperation with the United States against money laundering and its related activities. Similar treaties were signed with the United Kingdom and Canada in 1988 and 1990 respectively. The Bahamas has under active consideration the conclusion of similar agreements with other interested countries, including the Council of Europe. In addition, countries which have not signed the treaties have available to them the legal process by using letters rogatory. This process enables requests to be made by those governments for assistance by our courts to provide details of a particular account held in the Bahamas where the situation described so warrants.
I am pleased to note that the Bahamas was the first country to ratify the 1998 United Nations Convention on Illicit Traffic in Narcotic Drugs and Psychotropic Substances. We have passed all the enabling legislation which arose from this Convention. The Bahamas has also supported the work of the financial task force, and has endorsed its 40 recommendations for implementation at ministerial level through the 1992 Kingston Declaration on Money Laundering.
We have, over the years, demonstrated that we are a responsible citizen of the world and we do not want money launderers or drug traffickers in our territory. In 1996, we passed the most recent Act, which is commonly referred to as the Money Laundering Act. This has wide implications for everyone: for the first time we drew together various laws and embodied them in one piece of legislation. There are many consequences for persons who are found guilty of various crimes as defined under this Act.
In recent legislation, various entities of the Government have been designated as institutions which are responsible for making sure that the Money Laundering Act is strictly enforced. The first is the Central Bank, which issued all the commercial banks with a comprehensive set of guidelines which were tailored along the lines of those guidelines which the Bank of England has issued to banks in the United Kingdom. These set out an entire array of actions which the commercial banks are duty bound to carry out. It makes it a crime for a bank not to have procedures in place to combat money laundering. Each bank has to nominate at least one bank employee whose specific job it is to make sure the bank complies with all the regulations laid down under the Act.
This Act has only been in force for just under two years, but we have already made some interesting discoveries about it. We have been able to identify some 14 or 15 cases; these people have been prosecuted and we have recovered sums of money from them. A number of cases are currently also under investigation. The Securities Board also issues stringent guidelines, as one of the compliance organizations. The Registrar of Insurance Companies also issues guidelines to cover the insurance companies. What we have tried to do is to look at the entire financial regime, and to ask ourselves, what are those institutions or vehicles which the money launderer may wish to use? We then try to set in place those procedures which we feel are most likely to be effective in identifying and bringing to justice those persons endeavouring to use the Bahamas for these illicit purposes.
One thing I find extremely disappointing is that for many years we had in the Bahamas balloon-borne radars which detected low-flying aeroplanes; for some unknown reason, the United States decided to remove these balloons. I happen to have been the Ambassador in Washington at the time and gave my Government*s objections to the removal of these balloons on the grounds that it was more likely than not that it would increase the amount of drug trafficking through the Bahamas. Sad to say that our prophecy came true, because once the balloons came down, the drug traffickers felt that it was open season again and we noticed a resurgence of drug trafficking through the Bahamas.
Fortunately, we have a very good relationship with the United States authorities. They ride on our coastguard ships, and vice versa; we have semi-annual meetings with their authorities to discuss the problems we have. The major part of the discussion usually centres around the current status of court cases relating to the whole question of drug trafficking, and highlights those problems experienced by both countries in terms of trying to deal with drug trafficking and money laundering.
However, the problem of regulating and trying to keep up with these criminal elements is a very difficult one. It seems that every time we pass another regulation, the criminals are one step ahead of us. We must be prepared to update our laws and to cooperate - and by cooperate I mean cooperate as equals. Coming from a small country, as I do, cooperation is sometimes seen as a one-way street. It is good to be a "little brother", but I happen to be a little brother in my family and so I also know what it is like to have a big brother sitting on top of you. We need to respect one another*s sovereignty and begin to treat every country as an equal. None of us want to see their country used and abused by criminal elements.
As a small country, the Bahamas spends a tremendous percentage of its resources per capita in this whole exercise. We do not produce drugs, but we just happen to be located right on the United States* doorstep. We have invested these resources willingly because we recognize our obligations as part of the world community, and I can pledge on behalf of the Bahamas that we will continue to do so. We are proud that we are an offshore banking centre; we know that we are well regulated and have done everything that the international community has asked us to do and will continue to do so. I pledge that in this ongoing fight, the Bahamas will stay in the vanguard of all the matters which we have been discussing here.
Debate and Discussion
Ian Hamilton Fazey
Financial Times, Moderator
Ian Hamilton Fazey: In order to assist discussion, the panellists have been joined on the podium by Jean-François Thony, chief of the new Global Programme against Money Laundering, which the United Nations has set up in Vienna. It is important to point out that he is not a career international civil servant: Mr Thony was a French judge before he joined the United Nations and, indeed, remains one, because French judges stay judges all their lives. He has worked as a prosecutor in the fields of drugs and money laundering and, therefore, has specialized knowledge of the issues associated with them.
It is also important to ensure we are all talking about the same thing, so I have been quite sensibly asked by one of the Ambassadors present to clarify exactly what is meant by an offshore financial centre and whether they all have to be islands, by definition. Part of the answer is that, originally, offshore centres were quite literally islands, hence the expression. Today, the term is used rather more loosely for financial centres which operate within a low tax regime; this enables international transfers of money to take place with a great deal of facility and with no hindrance to capital flows. They are, therefore, important to the smooth working of the international financial system: it is essential to bear this in mind when considering international policy towards them.
As our first speaker from the floor, I think it would be appropriate to start with Professor Tom Naylor, who is a co-author with Jack Blum of the report, Financial Havens, Banking Secrecy and Money Laundering.
Professor Tom Naylor: Many of the topics discussed here are somewhat contentious and, as one of the authors of the report, I am going to rise to the challenge that the Moderator gave us of treating this as a fairly informal forum in which we can speak frankly.
All members of the group that put together the report were fully agreed on the fundamental moral principle. Jack Blum was right: we had a very high if not an exceptional degree of consensus. The moral principle is that criminals should not be allowed to profit from their crimes. But in addition to that there is a practical issue involved in this attack on money laundering: is an attack on the money trail an effective way of actually curbing or restricting the growth of crime? And there, to be frank, the evidence is not so clear. We all agree on the moral principle, but not all of us are convinced that putting so much of our resources into actually following the money trail is necessarily the best use of those resources.
It has never been proven that it is truly effective; it has never been proven that the costs to society do not end up exceeding the benefits society gains from that kind of approach to crime control; and it has never been proven that the distribution of the costs is fair across the international community. In many cases small countries, which are more victims than anything else, may find themselves paying a disproportionately high share of the costs.
The reason for that disproportion is, to be perfectly frank, because we do not know that much about illegal markets. Economists and business historians have spent a tremendous amount of time studying legal markets, but we know very little about how illegal markets operate. That was one of the problems we had in trying to formulate our recommendations. Not only do we know so little about how they operate, but neither do we know how big they are.
Dr. Tanzi has produced the most effective, comprehensive and sensible investigation I have ever seen on the potential sums involved in money laundering. But he, as an economist (as I am myself), filled his report with all kinds of qualifications. Unfortunately, those qualifications have all been stripped away when the numbers get out into the public domain, and these numbers then take on a certain life of their own. Rather like the number of US$500 billion for the extent of the world drug trade: we quite frankly do not know whether that is accurate. It could be more, it could be less; I rather suspect it is a good deal less.
Thus we know that we are facing a serious problem, but we do not know if we are facing a tremendous crisis. And if there is a crisis, is it a drug money crisis, a general criminal money crisis, or is it more of a fiscal crisis? I would, therefore, like to make a few comments on the methodologies involved.
In our report, we attempted to bring new methodologies to bear on the problem of financial transparency and the search for illegal money flows, because we realized that current methods just do not work. They are crude; they impose a regulatory burden out of all proportion to their effectiveness; they raise certain human rights and privacy issues; they create problems of police corruption when asset forfeitures are involved as a tool for financing law enforcement. There are many problems, and they simply do not work. Those who get caught are either the incompetent people, or those snared in police "sting" operations that by definition are fairly rare. We have no way of measuring what the overall impact is: you cannot simply take the number of people arrested and the amount seized, unless you know how many people have been engaged in the act and what the total amounts flowing through the system are - and we have no way of knowing that.
Instead, our group focused on the infrastructure of finance and commerce, in order to try and find a way of making all these transactions much more transparent. We are looking at the fundamentals of infrastructure rather than to use the "cops and robbers" approach to it.
Finally, I have to dissent from one member of the Panel. I do not feel comfortable with the notion of reversing the burden of proof in these cases. If we are going to tar someone as a criminal, I think it behooves us to prove that this person is a criminal beyond all reasonable doubt, and I find it frankly impossible to prove that someone's money is criminal and not simultaneously make that person a criminal. This is why I personally prefer a fiscal approach to this problem, rather than a specific criminological approach. To me, what countries should be doing is greatly strengthening their fiscal regimes, and using their tax laws as a generalized approach to the problem of illegal money flows, rather than following an approach that has not worked that well: focusing on increasing the regulations, defining an offence called money laundering in increasingly narrow terms.
Ian Hamilton Fazey: Our next speaker is Mr. Patrick Moulette, who is Executive Secretary of the Financial Action Task Force.
Patrick Moulette: On behalf of the Financial Action Task Force (FATF), I greatly appreciate the opportunity to speak here in the forum of the United Nations General Assembly. It gives me an excellent opportunity to briefly outline the role played by the FATF in the international fight against money laundering. The FATF, which was established at the G7 Summit in 1989, has issued and subsequently updated 40 recommendations which cover legal financial regulatory law enforcement and international action which governments should take to combat money laundering. These recommendations have become an internationally accepted benchmark in this area. All these standards have improved greatly over the past few years, particularly in the FATF's membership. The challenge for us now is to bring in new standards which are truly global in nature. This is why the ministers of the FATF recently endorsed a five-year plan to foster the establishment of a world-wide anti-money laundering network, based on two elements. The first is an adequate expansion of the FATF membership, and secondly, the development of FATF regional bodies such as the Caribbean FATF and the Asia Pacific Group on Money Laundering.
It goes without saying that these FATFs involve close cooperation with all relevant international organizations, and in particular with the United Nations Office for Drug Control and Crime Prevention.
This strategy was welcomed and endorsed at the political level by a meeting of ministers of the FATF, by a meeting of ministers of the OECD, and also by the G8 Summit in Birmingham. The G8 Summit also asked us to address the issue of offshore financial centres. In this respect I welcome the report which was given to us this morning. We hope that we will be able to work together in this area in the coming months. Finally, I would like to state again that the international nature of money laundering means that we must tackle this problem together. It is only through international cooperation that we can meet the challenge to build a strong alliance against organized crime.
Ian Hamilton Fazey: I now call Nan Donnells of FINCEN, the US Treasury Department*s Financial Crimes Enforcement Network.
Nan Donnels: I would firstly like to commend the work of the United Nations Office for Drug control and Crime Prevention and its efforts to foster the fight against money laundering. In particular, the Global Programme against Money Laundering and its component initiatives are welcomed by FINCEN in order to enhance international cooperation and to provide anti-money laundering training and technical assistance. We look forward to working with UNDCP in the implementation of these initiatives.
We are very concerned about the use of offshore financial centres for money-laundering and for other financial crimes. One area that we would like to mention as a mechanism that can be used to help in the fight against money laundering is financial intelligence units. FINCEN is the United States Financial Intelligence Unit: these are governmental bodies that are national central bodies set up to collect, analyse and disseminate money-laundering related information, such as suspicious transaction reports and other reporting by financial institutions or individuals concerning the movement of money and financial transactions in general.
In addition, these entities can and do rapidly and informally share law enforcement information and support of national and multilateral investigations. This was one of the points brought out by Mr. Blum: investigators need information and they need it quickly in order to conduct their investigations effectively and successfully. Financial intelligence units are very new: there are only about 28 of them around the world, but their numbers are growing. We encourage jurisdictions to establish these units where they have not yet done so, and we are willing to provide assistance to governments in setting up such units, or in further developing them where they already exist. We believe that FIUs are a key to the fight against money laundering.
I would also like to commend the work of the Financial Action Task Force, the Caribbean Financial Action Task Force and the newly created Asia Pacific Group on Money Laundering. Each of these entities also has been studying the problem of money laundering through offshore financial centres. We consider a major problem in this respect to be how to prevent and detect money laundering without damaging legitimate international finance and commerce. These are difficult issues, and the study currently being undertaken by the United Nations and other international organizations will be very valuable in producing recommendations and ways to deal with this problem.
We have begun to work with some international financial institutions; this is very encouraging, and I would like to see further efforts in this respect as well. I agree with the speakers so far that international cooperation is vital, and we need to continue to work together to fight the problem of money laundering, and the opportunities that globalization has created for money launderers and others who engage in financial crime.
Ian Hamilton Fazey: I would like to call someone from an offshore centre. I know we have with us Michael Wavell, who is a deputy in the Jersey Parliament. I should point out that this is the original Jersey, and not Jersey as it is understood in New York - Jersey in the Channel Islands.
Michael Wavell: The name Jersey and New Jersey is not the only similarity that we have as to our relationship: in the words of Oscar Wilde and George Bernard Shaw, Britain and America are two great nations divided by a common language! However, as far as taking action against drugs is concerned and against those who pursue their evil trade to drug trafficking, we definitely speak the same strong language. That language is one of civilized communities throughout the world, and it means that whatever translation is used, no hospitality, no assistance and no help will be given to those who engage in this evil practice, either directly on our streets, near our colleges and school playgrounds, or from a distance by using our banks and other financial institutions to launder their proceeds.
We are allies fighting a war that is perpetrated by drug barons. That war is as insidious, wicked and destructive as any war we have fought in the past. The United States is using its resources to fight this menace, and for that we are grateful. I hope we can demonstrate that we, too, are eager to use our forces and resources. While America has the wherewithal to destroy poppies in the field, what Jersey lacks in resources in this respect is more than made up for by our resolve to ensure that those using the island*s finance industries do so for legitimate purposes only.
Our legislation now provides for normal commercial confidentiality to be stripped away at any suggestion of criminal activity. We are selective in the nature of those institutions allowed to practise in the island; indeed, we were one of the very few locations to refuse BCCI consent to establish itself on our island.
Drug trafficking and money laundering are international businesses involving billions of dollars. As a leading offshore finance centre, Jersey would be naive and foolish not to recognize its special attractiveness to those who profit from the trade, and not to take steps to protect itself and its reputation.
The Jersey authorities have repeatedly made it clear that they wish the island to be an international finance centre of the highest repute. In pursuance of that objective, they have also made clear their commitment to prevent, deter and punish crime of all kinds. To that end we have used an armoury of laws, regulations and enforcement policies similar to those of the United Kingdom, together with modern systems designed to maximize the chances of detection, prosecution and confiscation. The Jersey authorities and financial businesses of the island clearly believe that a reputable financial service sector is the best way of attracting the right kind of business and ensuring that the sector has a good future. We are aware of the threat that money launderers pose to the island*s reputation, and have made a commitment to putting effective anti-money laundering measures in place. These were matters which were set out when the Jersey authorities approached FATF to evaluate it.
The island is fulfilling its obligation to cooperate; last year we received a cheque of $1.5 million from the United States in recognition of assistance given in tracking down seized assets. These funds are ploughed back into our fight to cooperate in action against the drugs menace. More importantly, we would like this to be seen internationally: we are cooperating, we want to cooperate, and we want people to know that the doors of Jersey are firmly closed to money launderers. That being said, no bank anywhere in the world can put its hand on its heart and vow that every penny on its books has come from the purest of sources. What they can and must do is to cooperate to ensure that everything is done by commercial, judicial and legislative bodies working in harmony to minimize the threat.
During my current visit to New York, I have been very pleased hand over papers from the island of Jersey to the New York District Attorney. This evidence related to a case being investigated jointly between us. I confirmed that the island is and will be cooperating in the future. The message to the world is that Jersey is not the kind of place knowingly to tolerate and abuse its laws and expertise to the detriment of others.
Ian Hamilton Fazey: To provide another perspective, I call the Secretary-General of the World Customs Organization, James Shaver.
James Shaver: The World Customs Organization (WCO) is very pleased to be part of this forum; we feel it is a very important one. We are concerned that many countries have not yet taken the legislative or regulatory actions to empower their law enforcement entities, especially customs, to interdict, investigate and prosecute money-laundering offences. Countries must take action to empower their law enforcement entities. We heard from the Panel that some 30 countries are now so equipped. Actually, we know of some 10 or less that are truly active in this, and thus much remains to be done. Mr. Arlacchi talked about training: the good news is that the WCO has developed and used training modules in English, French and Spanish that are available to all 146 of our member countries. While they tend to be on customs investigation and identification, they are equally important for other law enforcement agencies to use, and they are available. We are very anxious to help; we are actively working with the UNDCP, Interpol and our member countries to put an end to this insidious crime. Perhaps there is need for more discussions, but we feel that there is really need for more action.
Ian Hamilton Fazey: I think Jack Blum would like to respond?
Jack Blum: One of the points we have made in the report is the questionable nature of free trade zones and the opportunity that free trade zones everywhere create for concealing illegitimate money. The way this works is fairly straightforward. Criminal money is used to pay for goods that are shipped to a free trade zone, and subsequently shipped on to a country where legitimate bank accounts are wanted. We concluded that free trade zones may have a purpose, but if that purpose is to be served then those inward and outward shipments must be completely transparent. If nothing illegal is afoot, there is no reason for there to be no record or access to the record. We feel this is a very important issue as, increasingly, laundered money is following trade goods.
Ian Hamilton Fazey: Our first contribution from a developing country comes from His Excellency Mauricio de Maria y Campos, former Director-General of the United Nations Industrial Development Organization, and now Ambassador-at-Large for Mexico.
Mauricio de Maria y Campos: I am a diplomat now, but I was formerly a banker. I would say that when you are a banker and you are providing a service to the community, what is important is the problem of linking the financial resources to the illegal act. I was very interested in the report and some of the comments made by Mr. Blum and Professor Naylor, as these reflect what was discussed recently in a symposium of international experts, which was held in Stockholm and sponsored by the Governments of Sweden, Portugal and Mexico. Experts stressed the lack of information on how the drug market operates in economic terms at bank, retail and distribution levels, as well as at the production level.
What is important is that according to certain studies and estimates, cocaine which is available in Bogota or La Paz can be 60 or 70 times more expensive once it is retailed in London or New York. Therefore, a good percentage of the profits are made in the consumer countries. The statement which impressed me was that we know so little about what is happening in the final markets, and this is an important area for future research as it is the fundamental source of the problem. We know the issue is a complex one, but I feel that in the future great attention should be paid to what is happening on the financial markets where the majority of the profits are to be found.
I think it is important to make this diagnosis; if we want to take effective measures then it is essential to know what elements make up the equation. We know from public policy that, as has been said here and mentioned in the report, sometimes the bureaucracy that is created through very complex mechanisms and reporting requirements does not fulfil its purpose if the original diagnosis is not correct. I would therefore like to press this point. This aspect requires not only good analysis but also international cooperation at all levels, a point which has already been highlighted here.
Finally, I would like to express my appreciation of the report Financial Havens, Banking Secrecy and Money Laundering. It contains some excellent case studies. I have one further recommendation, which is that among those people carrying out the research, perhaps more people from developing countries could be invited. I have nothing against any of the authors, who have produced an excellent report, but I think it would be interesting to have contributions from people from developing countries. I think that the presence here of Mr. Donaldson and Mr. Singh has already demonstrated that discussion can be greatly enriched by such contributions. Developing countries may be able to introduce topics of concern which have thus far not been tackled.
Ian Hamilton Fazey: I am sure this point will be particularly heeded by Professor Arlacchi and Jean-François Thony in their future activities. In the same spirit, perhaps I could now give the floor to the Honourable David Simmons, Attorney General of Barbados, and President of the Caribbean Financial Action Task Force.
David Simmons: I would like to make a few general comments on the report Financial Havens, Banking Secrecy and Money Laundering. The report does seek to locate a number of Caribbean countries used as tax havens. It is true that some of our countries are "no tax" and others, like Barbados, are "low tax". Levels of regulation and legislation in the various countries of the Caribbean do differ significantly from country to country, some being more rigid than others. But it should be borne in mind that the proliferation of financial centres in the Caribbean which attract offshore business has been the result of a conscious policy on the part of Caribbean Governments to diversify their economies, particularly away from sugar in some cases, and from bananas in others. They have used the experience of other countries, such as Jersey and Singapore, to show that it is indeed possible for small island jurisdictions to become offshore financial centres and to conduct clean and legitimate business.
However, with the advent of international drug smuggling there has been the concomitant problem of money laundering. Many Caribbean jurisdictions are vulnerable to both drugs and money laundering. It was in recognition of that vulnerability that the Caribbean Financial Action Task Force came into being with the Kingston Declaration of 1990. So far 19 recommendations have been promulgated by the CFATF to add to the 40 of the FATF.
I think the authors of the report should be aware that since the advent of the CFATF, there has been a significant improvement in the quality of service offered in many of the jurisdictions of the Caribbean. There was a time when the Cayman Islands had a reputation for doing all kinds of business, and in fact attracted some of the worst types of business, but a conscious effort has been made on the part of the Cayman Islands' administration to modernize and upgrade their administrative, regulatory and legislative functions to the point where it is safe to say that the formerly bad reputation the Cayman Islands has now more or less disappeared. Today, the Cayman Islands are gaining for themselves a better reputation for "cleanliness", due in large part to the support given to them by the CFATF.
The Task Force offers assistance to well over 30 countries in the region, all of whom have subscribed to a Memorandum of Understanding. We assist each other by self-assessment exercises, mutual evaluation exercises and regular meetings, two or three times a year, looking in particular at typologies in order to sensitize the region to the vagaries of money laundering, and to the manoeuvres of the launderers. In addition we hold bi-annual, biennial plenary meetings, and a ministerial council meeting, which is usually held in December.
Even though many of our jurisdictions have found it necessary as an economic necessity to diversify their economies into the area of offshore financial business, and to add another link to our services sector, my message is that in the Caribbean we are diligently and seriously working to improve the quality of regulation. Over the last five years, due to activities undertaken by the CFATF, we have done extremely well in this direction. I am confident that since we are intensifying our activities in the Task Force, some of the stigma that attaches to certain of our jurisdictions will disappear within a reasonably short space of time.
In conclusion, one of the major initiatives of the CFATF this year, together with UNDCP, has been to hold a judicial symposium in Barbados in order to sensitize the judges of the region to this new type of criminology, namely money laundering. In addition, we hope to establish at the University of the West Indies campus in Barbados a project sponsored by UNDCP, the CFATF, and with great assistance from the Government of the United States, a school of continuing studies at which we will train all personnel who need to interact at the various levels in the area of money laundering. This will be a three-year project which should truly sensitize the region and train and equip its people to deal with this problem.
Wrenford Ferrance: I am the head of the Office of the National Drug and Money Laundering Policy in Antigua. The Government of Antigua and Barbuda is grateful to UNDCP and welcomes the initiative they have taken in connection with the problem before us.
Antigua and Barbuda has been fighting the problem of drug trafficking and money laundering for some time. We are committed to continuing this fight, as is witnessed by the number of treaties we have signed with various countries, including the United Kingdom and the United States. Our Money Laundering Prevention Act has been lauded as one of the best ever produced. However, for some reason – either perceived or real – Antigua has always been daubed as the leper of the region in that we are accused of corruption, money laundering, and of making it too easy for gangsters and crooks to operate in our jurisdiction.
This perception has led to what we consider as some very irresponsible journalism. I am extremely pleased to see that our moderator is of the journalists' fraternity, and I hope he will use this opportunity in chairing this meeting to encourage his contemporaries to report in a more balanced way. Rather than writing of rumours, and innuendos and publishing unsubstantiated reports, they should try to get the other side of the story as well.
I was particularly pleased to hear Mr de Maria y Campos suggest that, as concerns the report before us, some of the developing countries, especially those involved in offshore business services, should be targeted and asked to take part in the research and preparation of this kind of document. The report refers to the case of the European Union Bank of Antigua. From our point of view, that has been a total disaster and was a situation which should never have happened. However, we have used it as a learning experience and, as a result, our regulations have been thoroughly strengthened and we now have one of the strictest due diligence requirements of anywhere in the region. Since August 1997, we have had no applications whatsoever to open any offshore banks in Antigua because they cannot meet our requirements. We have received enquiries from both individuals and groups; once they see the type of investigation which they must comply with, they have backed off.
I have studied the report before us and I have one or two comments concerning the European Union bank case. I have never been known to be a diplomat: one statement is not only offensive, but is untrue, and there are one or two other points I would like to raise. Turning to Page 60 of the report, three-quarters of the way down its says the US Federal Reserve system in a restricted memo said it had been advised by the Bank of England that Mr Alexandr Konanykhine had visited Antigua in 1995 and - and this is the offensive part to which I alluded - had met government officials to request their cooperation in keeping Menatep’s ownership of the European Union Bank confidential. If the authors of this report would be kind enough to supply the Government of Antigua with proof of that statement, including the names of the government officials, I would be most grateful. If not, then we would respectfully request that this statement is removed from the document.
On Page 63, it says that just prior to the collapse, the Office of National Drugs and Money Laundering Policy issued a fraud warning dealing with the abscondment of the funds. All this was not only too little too late, but might even have been a factor in encouraging the bank owners to abscond with the deposits. Let me assure you that while all this was going on, the people who were supposed to have absconded with the funds were incarcerated by US government officials. Upon their release, that was when the funds disappeared. At no time was the Government of Antigua ever notified that these people had been under arrest for any reason. Had we been informed, we could have taken appropriate preventive measures, but it is too late now and the damage has already been done.
Those are the points I wanted to raise.
I would also point out that Antigua and Barbuda is a member of the CFATF. In March this year we underwent our mutual evaluation exercise, the report of which should be available shortly and will be circulated to all concerned.
Ian Hamilton Fazey: Thank you. The aim is not to get involved in any sort of slanging match here over some very specific aspects of the report. Mr Blum has indicated to me that he and Professor Naylor will be happy to discuss this with you afterwards.
As concerns your reference to journalists, we do actually try to write what we perceive to be the truth and do not knowingly mislead our readers. Also, responsible journalists and editors always try to ensure that reporting is balanced and fair. However, I have to say that when financial centres get a bad name, it is because of some of the things that go wrong there, of which the European Union Bank of Antigua was one case. I myself spent ten years on one story, covering the aftermath of the collapse of the Savings and Investment Bank of the Isle of Man, a bank originally set up for the sole purpose of lending money to its own directors with which to buy companies on the London Stock Exchange! When these stories happen, we have a duty to cover them; we try to do so as accurately and professionally as we are able. On that note, it is appropriate, therefore, that I call as our next speaker Ian Williams, who is Vice-President of the United Nations Correspondents’ Association.
Ian Williams: I would like to pick up on and amplify some of the points raised by Professor Naylor. One of the problems which arises in the occasional hysteria of the drug war is the question of civil liberties and freedom in a general sense. Looking through this report and listening to the speakers, I concur with Professor Naylor's remarks about the reversal of the presumption of innocence. There is another underlying presumption here which disturbs me considerably, and this is of the legitimacy and morality of Governments. I would like to suggest that, for example, if I had been Jewish or a dissident German in 1938, some of the things proposed to counter money laundering might have stopped me getting money out of Germany via any form of banking, because it would have been illegal. There are many currency transfers which are legitimate and moral, but possibly illegal. As a journalist, I myself and colleagues have been involved in getting money through to journalists who are writing under repressive regimes: there are also dissident groups across the world which have been financed by illegal currency transfers.
So there is an element here of quis custodet ipsus custodes: who looks after the police here? When a repressive government decides to go after someone's money trail, all they have to do is to claim that it is connected with a drug transaction. Is there any way to check this, to make sure that under the guise of the drug war, repressive activities by governments are not condoned and carried out? Because if so, what will happen is that repressive governments will be able to enlist the world community as an accomplice.
Conversely, many governments have financed their entry into power by similar transactions in the past; are we now going to allow them to pull the ladder up after themselves? It is a point of wry history that one of the most prominent political families in the United States built its political fortunes and money through smuggling illicit substances across the Canadian border, during Prohibition. We do not want the position of people who have gained power by this means now pulling the ladder up on other people who are trying to remove them, possibly for reasons of morality and legitimacy. So I really would like to see the civil liberty aspects of this taken into account, to see whether the people on the Panel do have some way of examining the legitimacy of requests for tracking drug-trafficking money.
Jack Blum: We are concerned with these civil liberties issues. The report does discuss the problem of political exceptions for requests for information. The same issue arises in extradition treaties and mutual legal assistance treaties. We do not always acquiesce to requests where there are basic human rights issues at stake. Moreover, requests for data, extradition and cooperation all have to come through court systems where they can be challenged. They can be challenged both in the country where the request is being made, and in the requesting country - a fact which tends to be overlooked. I would therefore put to you this question: let us look at all the money that has been stolen all over the world by former Heads of State, such as Mbuto and Marcos, money that has never been recovered. We have committees of parliaments and governments around the world sometimes looking for the wealth of entire nations, which has been stolen. It is time to stop playing games, and to get on with the business of finding the money and bringing about true developments. We cannot tolerate an infrastructure that permits this kind of theft, and we do not need statistics to follow these cases. The Philippines has been looking for Marcos*s money for some ten years: how much of it has it found?
Eva Richards: (Guyana): Nothing has been said so far about witness protection programmes. In the Caribbean, a very integral part of any effective programme in terms of crime and money laundering must include having effective witness protection programmes in place. Any lack of such a programme is an impediment. Are there plans to implement this kind of programme?
Ian Hamilton Fazey: This an appropriate point to bring in Jean-François Thony, the head of the Global Programme Against Money Laundering.
Jean-François Thony: It is obvious that the development of witness protection programmes is the key to efficient and successful financial investigations, and also to criminal investigations into drug trafficking. Witnesses and even judges are becoming more and more the targets of criminal organizations, and if we want to carry these investigations through to a successful conclusion, protection must be offered to those who may need it. Italy provides an excellent example of successful legislation in the area of witness protection. Other countries, but rather too few, have also developed such programmes, but this an area on which the legal advisory programme of UNDCP is currently working.
Professor Tom Naylor: I wanted to address the concerns of the representatives of the Cayman Islands and Antigua and Barbuda. When preparing our report we were well aware that many of the established financial havens have considerably improved their standards of due diligence. Our main concern was the spread of financial havens; they are proliferating at a rather rapid rate, and the new ones entering the field tend to be somewhat loose, because this is an area where competition does not take the form of slashing prices. It takes the form of slashing regulations.
So the problem is partly the proliferation of new havens, and also the fact that the offshore business is shrinking. That means that competition is more vociferous, and that gives the new havens a particularly strong incentive to try and break in and attract precisely the kind of money which is fleeing some of the older ones which, by virtue of being well established (which the Cayman Islands is), can drive that money out without seriously damaging their own position.
I would also point out that laws per se are not the issue. Excellent laws can exist, but it is their enforcement that is the critical issue and on that front, the record is not necessarily so good. Finally, in the report we called specifically for a kind of financial crop substitution programme, that is, instead of the world community simply telling those countries that rely on the financial services industry not to do it any more, the world community should offer them some concrete alternative in the financial services field rather than to compete for the supply of dirty money.
Bill Cartwright: I am President of the Center for Alcohol and Drug Research and Education, an NGO based in the United States. There was one part of the report which I believe was not mentioned: the equally insidious effect of brokering of second passports. I have The Economist in front of me, and there is an entire page from corporations in countries such as Antigua, Belize, Jersey and the Isle of Man who are attempting to broker second passport citizenships, clearly in an effort to allow people to evade what is I presume legal entanglements as well as taxation in their own home countries. I would like to ask both Mr. Fazey and Mr. Blum to comment on this issue, as well as to speculate as to the willingness and the ability of the United Kingdom to control some of the more conspicuous havens.
Jack Blum: There are a number of countries in the business of selling economic citizenship. Some are available on the Internet and will tell you that they will change your name, as well as give you a new passport. This is not helpful to the international community in its efforts to control financial crime, and we believe that this is something which needs to be stopped. It is inappropriate and is a misuse of the sovereign status of States. There should be international agreement on this subject.
Ian Hamilton Fazey: The report makes it very clear that there is no purpose to many international business corporations: some of them are used merely to launder money. But others are used for all kinds of other nefarious activities. As a journalist, I have often tracked companies through to certain financial centres, where you run into a brick wall because you cannot find out who owns the company. This was particularly true of the Cayman Islands, for instance, at the time of the Barlow Clowes affair in the United Kingdom in the 1980s, where a particular fraudster took £100million-worth of deposits, most of which disappeared. I tracked some of his interests to the Cayman Islands. There was no way of finding out who else was involved and what those companies did. Transparency of ownership of corporations is an important issue, as then we would be in a position to track down who is doing what, and why. I am sure this is one of the issues which will be addressed by various countries with control over the regulation of financial centres when they consider what to do with the report. I think now that the Director of Public Prosecutions for Barbados wishes to say something. Mr Leacock?
Charles Leacock: I would like to look at the issue of securities firms. The report does much work on the regulations that should be put in place for the banking sector. But in my view, it does not adequately address the activities of the non-banking financial sector.
Jack Blum: This issue of securities firms is very important. In my view, a bank in today's electronic world is any institution which owns an encrypted switch. That could be a securities firm, a money transfer operation, an insurance company, or any multinational operation that has the ability to transfer accounts confidentially and internally: all are in a position to easily move laundered funds. The international community will thus have to go far beyond the question of merely regulating banks if it is to gain control of this issue. It will become more acutely problematic as we get into Internet providers who then decide they would like to be in the business of transferring funds from one location to another. These issues have not yet been properly addressed in national legislation, even in the countries that are most sophisticated in regulating their financial institutions. This is an important problem, and one which requires international attention and international discussion.
Ian Hamilton Fazey: For regional balance, could we hear from Rick McDonell of the Asia Pacific Group on Money Laundering?
Rick McDonell: I do not intend to go into detail on the Asia Pacific Group, other than to tell you that it is a new organization with 16 member countries, and a membership which is likely to increase. It stretches from South and South-East Asia to the South Pacific. Its function is essentially to introduce agreed international best practice standards against money laundering, and to have an appropriate legislative package in order to do so. Progress among member countries is also assessed, in particular as concerns identification and assessment of current money-laundering methods in the region.
It has been difficult in the Asia Pacific region to obtain acceptance for the above methods, but this is now on the threshold of being accomplished. Until now there has been a lack of ownership of international standards. Mention was made earlier of building infrastructure to improve transparency, and in the Asia Pacific region there is now greater acceptance of the need for transparency in terms of financial crime, and money-laundering in particular. The costs of not having such an infrastructure are better recognized, and its benefits are now being appreciated.
A couple of points are particularly pertinent to the Asia Pacific region. There are in the region large drug-producing areas which in turn generate a high level of proceeds of crime, as well as significant financial crime. In terms of the region as a whole, there are large parallel economies throughout it. This is important in terms of money laundering in two respects. The first is that many economies are cash-based, and this is not an easy method of transaction by which to introduce appropriate regulation. The second is that there is a long history of financial transactions outside the normal banking system, in particular the use of alternative remittance services or dealers. These provide little or no financial audit trail, and there is virtually no regulation of them. This represents another, if not entirely unique, aspect which is particularly relevant to the Asia Pacific region.
As has already been mentioned, there are an increasing number of offshore financial centres, especially in the small island States in the South Pacific. In this connection I would add that as concerns the acceptance of anti-money-laundering standards and a regulatory regime in some of these small island States, they have very low revenue bases from which to draw.
They are, therefore, constantly looking for means by which to simply survive. In some cases there may be good reason to suggest that there are ulterior motives for allowing offshore financial centres to exist, but the revenue question is a valid one in many places. When the question is put to these centres as to why they do not already have measures in place, the answer is often that either they do not have the resources or the expertise, but would introduce measures if they did have them.
I think this is one lesson we should take note of in terms of putting in place practical measures to help countries which do not have the necessary resources to implement these standards. In particular, the question of due diligence should be addressed. Many offshore centres, especially in small island States, have problems in conducting assessments of potential international business companies or offshore banking licence applicants. In many instances they do not have the data upon which to make due diligence checks. I would, therefore, suggest that there is a need for comprehensive cooperation in relation to those agencies and groups outside the South Pacific, in order to put in a place a means by which appropriate due diligence can be accomplished. In conclusion, in general terms there is now an acceptance across the region of the benefits of anti-money-laundering measures, and we look to the expanded Asia Pacific Group on Money laundering to try to bring these measures into play.
Ian Hamilton Fazey: Jean-François Thony wishes to make a short statement on behalf of the Global Programme on Money Laundering.
Jean-François Thony: When we decided to study the issue of offshore financial centres, our intention was not to "put the finger" on specific States. We merely wanted to address an issue which has not received enough attention to date, that of a policy on money laundering. Most of the attention of policy makers has been directed towards the issue of ensuring transparency at the banking level. Now that this system has been put into place, we felt it was time to turn to the issue of ensuring transparency in the financial world in order to make some progress in the fight against money laundering.
Once again I would like to make it clear that it was and is not our intention to point a finger or put the blame on specific States. We have tried to exclude any subjective comments on individual States from the report. We respect the legitimate character of the attractive financial services offered by offshore financial centres, but a fact which has emerged is that today, most international money-laundering schemes transit through financial havens. This fact must be dealt with; it will then be up to the international community and to the Member States of the United Nations to decide what priority should be given to this issue, and to decide what action should be taken. But we felt it was our duty to draw attention to the way in which money launderers make use of these facilities.
Ian Hamilton Fazey: We have had a very useful discussion; many subjects have been covered and it is quite clear that a fair amount of consensus has emerged among the international community represented here that something must be done about the issue of money laundering and how to combat it. Certain points have emerged about which there has been no dissent. The question of anonymous international business corporations is one that the international community must look into very closely, as well as revisiting the topics of bank secrecy, financial penalties on places that allow money laundering, and a common approach towards the international regulatory framework. I think what Mrs. Del Ponte said was quite meaningful in that people cannot do anything about something which they do not know about: therefore, this whole question of information exchange, cooperation, and intelligence sharing is critical.
However, most people here should take especial heed of what James Shaver said. His estimate was not even the pessimistic one which I referred to in my opening remarks, that only some 30 countries had anti-money-laundering procedures in place in compliance with the 1988 Convention. Mr Shaver’s estimate is that there are 10 or even fewer countries really active in this field. This is a sobering thought, and one that it behooves all of us to go away now and think about very carefully.
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