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       Jose Franklin Jurado Rodriguez came to the United States from Colombia to study

economics at Harvard University. He learned a trade not found on the Harvard curriculum. Mr.

Jurado learned to launder money.1

       Over a period of three years he laundered over $36 million in drug profits for the late

Colombian drug lord, Jose Santacruz Londono. He did this by wiring the money out of Panama

to financial institutions in Europe. Over the course of three years Mr. Jurado opened more than

100 accounts in 68 banks in nine different countries. He opened these accounts under the names

of Santacruz’s mistresses and other relatives.     He also opened accounts under European-

sounding assumed names.2

       He kept all of his deposits under the $10,000 limits that would trigger scrutiny and set up

front companies in Europe through which he could transfer the freshly laundered money back to

associates in Colombia who invested the money in legitimate businesses owned by Santacruz.3

       His plan went awry when a bank failure in Monaco exposed several accounts that were

linked to him. Even more ironic, the never-ending noise of a money-counting machine in his

house in Luxembourg led to a neighbor filing a complaint with the police, which led to a search


       Mr. Jurado was soon arrested, tried and convicted in Luxembourg in 1990 for money

laundering before being extradited back to the United States.5 Law enforcement officials seized

some $46 million from 140 bank accounts in Panama and Europe.6 In 1996, in a Federal

courtroom in Brooklyn, New York, Mr. Jurado pled guilty to a single count of money laundering

and was sentenced to seven and a half years in prison.7

                                      I.     INTRODUCTION

       Money laundering as we know it today took root in the 1920’s when members of

organized crime needed to find a way to disguise the source of their ill-gotten gain from

bootlegging and other criminal activities.8 Organized crime needed a front that would provide

cover for the vast amounts of cash that passed through their hands. Their solution: launderettes

and car washes – businesses with high cash turnovers.9 The criminal gangs decided to “launder”

the proceeds of their crimes through these supposedly legitimate businesses so that the

authorities would be unable to link them to their criminal activities. Hence, money laundering

was born.

       The modern practice of money laundering was “pioneered” by New York mafia leader,

Meyer Lansky.10 He preferred to launder money through offshore bank accounts in the Bahamas

and Switzerland with Cuba as his major offshore laundering site.11 Fidel Castro’s rise to power in

1959 squeezed the mafia out of Cuba and forced Lansky to move his offshore accounts to the


       From such humble origins the money launderers now try to shield upwards of $590

billion a year from the prying eyes of governments around the world.13 This figure represents

between 2% and 5% of the world’s gross domestic product (GDP) annually.14 The money

represents the proceeds of the illicit drug trade, the profits from illegal arms dealing, funds used

by terrorists and efforts by the wealthy either to shield their income from the local tax authorities

or to protect their income from the ravages of inflation.15

        This paper will focus on four areas of interest: the forms of money laundering, the effects

of money laundering on economic development, the effects of money laundering on international

trade and efforts to combat money laundering. Money laundering schemes take many shapes

and it is important to recognize the various typologies when creating an anti-money laundering

scheme.16 Money laundering has a negative impact on economic development in the developing

world. Capital that could be used to invest in infrastructure and productive activity is diverted

either out of the country or into non-productive activity.17       Money laundering also poses

problems for international trade as the flows of illegal money tend to exaggerate capital flows

and divert money away from legitimate trade and into the underground economy.18

        Money laundering even threatens the international economic system. After the collapse of

the Bretton Woods system in the early seventies, rigid exchange rates pegged to gold were

abandoned and currencies began to float freely in the marketplace.19 This new international

system relied on stability, as currencies ceased to be valued in how much gold they would

purchase, and began to be valued on the basis of how much someone else was willing to pay for

it.20 In order for such a scheme to operate efficiently the market participants must have

confidence in it.21 Financial authorities now had to concern themselves with criminal

involvement in the global financial system. This involvement could lead to instability and wide

swings in currency values as participants were liable to “react more dramatically to rumors and

false statistics.”22

        This new reality became a threat to stability in the developed world and led to an

awareness of the costs of and the need to fight money laundering. In order to be successful at

combating money laundering, governments in the developed world need to coordinate their anti-

money laundering activities and work together to persuade governments of the developing world

to “buy into” the effort.

                            II.    FORMS OF MONEY LAUNDERING

                            A. THE TYPOLOGIES OF MONEY LAUNDERING

       Money laundering activities can be analyzed by organizing them into typologies based on

the actual flow of the money being laundered. Each of these typologies has a different kind of

impact on the country in which the funds originated, as well as on the country in which the funds

were finally deposited. Before analyzing the typologies it is important to understand that money

laundering is not an end unto itself. There is always a reason for the launderer to disguise the

source of his income. That reason is to hide the flow of money from illicit activities.23 In three

of the flows (domestic, returning and outbound) the underlying criminal activity takes place

inside the country.24 In the other flows (inbound and flow-through), the underlying criminal

activity occurs outside the country.25

       First is the domestic flow in which the illegal proceeds are laundered within the

developing country’s economy and either reinvested or spent within that country’s economy.26

While this flow may help to maintain a nation’s foreign currency reserves, the monies very often

are tied up in non-productive activities thereby lowering the amount of capital available for

investment, which puts upward pressure on interest rates and makes it more expensive for

businesses to add productive capacity.27

       Next is the returning flow in which the illegal proceeds are laundered outside the

developing country and then returned for re-integration.28 While these funds are outside the

developing nations the amount of capital available for investment is, again, reduced, thereby

raising borrowing costs and making investment more expensive.29            Furthermore, while these

funds are being laundered outside the country they become part of the host country’s pool of

available investment capital.30 Additionally, these funds may deplete foreign reserves as well as

distort international trade through such practices as “mis-invoicing.”31

       Next is the inbound flow in which illegal funds from abroad are either laundered abroad

or in the developing country before being integrated into the developing country’s economy.32

While this flow does increase the pool of investment capital available in the developing country,

the increased cash flow also provides an incentive for the government to encourage such

behavior, either through developing policies to make it easier to launder money in the country or

by turning a blind eye, or an upturned palm, to the activity.33 Recent practitioners of such

behavior have included Mobuto Sese Seko, the late ruler of Zaire, Ferdinand Marcos, former

President of the Philippines, and Carlos Salinas Gortari, former President of Mexico. This is the

typical flow found in those nations undergoing the process David C. Jordan refers to as

anocratization.34 According to Jordan’s political typologies, an anocratic state is a state that has

formal, but not substantive democracy.35

       Next is the outbound flow, also referred to as capital flight, in which funds, both licit and

illicit, are laundered and then integrated abroad.36 The outbound flow is composed of funds from

those attempting to hide their ill-gotten gain from the legal authorities and those attempting to

shield legally earned money from inflation and taxation. This flow also reduces the available

pool of investment capital in the developing country as well as foreign reserves and forces the

developing nation to look abroad for investment capital.37 As a result these nations suffer from

high inflation, high interest rates and high unemployment.

       The final typology is the flow-through in which funds enter the developing country as

part of the laundering process before being sent abroad.381       The developing nation serves as

nothing more than a weigh station for the funds.39 Governments face the same pressures from

the money launderers as they do in the inbound flow. This flow is found typically in offshore

banking centers.40

                           B. THE PROCESS OF MONEY LAUNDERING

       The money laundering process consists of three phases: placement, layering and

integration.41 During the placement stage, the launderer must convert the form of the funds in

order to disguise the illicit origin of the money. 42 This is done by converting smaller bills to

larger denominations, cashier’s checks, money orders or other negotiable instruments through a

cash-intensive business such as a restaurant, bar, casino or a car wash.43

       Through layering, the money launderer attempts to obscure the link between the money

and the underlying criminal activity through the use of complex financial transactions.44

Oftentimes launderers will create shell companies in countries known for their laxness toward

money laundering.45 Funds will be deposited into a shell company and then the shell company,

through “loan-backs” and “double invoicing” will transfer the money back to the launderer.46

       This method works because it is hard to determine the true owner of shell companies in

some jurisdictions.47 Illicit funds can also be layered through casinos and through the purchase of

big-ticket items.48

       Once the funds have been disguised and their origin obscured, the money launderer can

integrate the funds into the economy through legitimate business investments.49

       These funds are laundered through a variety of means: wire transfers, offshore banks,

exchange houses, virtual casinos, “mis-invoicing” of imports and exports, shell corporations,

currency exchange companies and even by suitcase.50 Each method presents its own challenges

in the effort to eliminate money laundering.

       The Colombian drug cartels have constructed an elaborate system by which they launder

approximately $5 billion dollars a year.51 The black market peso exchange allows the drug lords

to convert dollars into pesos and allows Colombian companies to import goods without paying

taxes on the currency exchange.52 The result is an untraceable commingling of legitimate and

illicit money.

       In the black market, the peso broker purchases dollars from the drug traffickers at a

discount.53 The broker then uses those dollars to buy pesos from legitimate Colombia companies

who wish to import goods from the U.S. Next, the broker helps to negotiate the purchase of the

American goods. The net result is the American companies receive their payment in dollars, the

Colombian companies obtain American imports without having to pay taxes and duties, the drug

lords get untraceable pesos and the peso brokers receive a commission on each transaction.54

       Another popular method of laundering drug money is through money remitters.55 The

money broker in the U.S. creates a licensed money transmission business allowing individuals in

the U.S. to wire money to businesses, friends and relatives in their home countries. The drug

traffickers deliver cash to the remitter who creates a second account to handle the illicit funds.

These funds are then transmitted to a recipient in another country. Even though some of the

transactions will exceed the $10,000 reporting threshold, and even though the remitter will have

to generate the appropriate reports, since the transactions appear to involve individuals wiring

money to businesses and relatives, suspicion is not always aroused.56

       The technique is not foolproof, however. In 1998, three executives of Supermail, Inc., a

U.S. check cashing company, were arrested and charged with money laundering. A federal

grand jury returned a 67-count indictment against the executives, six other employees and the

corporation charging the defendants with conspiracy, money laundering, the evasion of currency

reporting requirements, and criminal forfeiture.57

       The manager of a company store in Reseda, California was approached by undercover

investigators and agreed to launder drug money in exchange for a fee. The manager converted

the cash into company-issued money orders. When the amount of cash became too great, he

contacted employees at other stores to aid him.         Eventually he convinced the company

executives to go along with his plan.58

       The company laundered over $3 million, making Operation Muleshoe one of the largest

sting operations targeting the check cashing industry. The defendants pled guilty and were

sentenced to terms ranging from 46 to 72 months in prison.59

       Money launderers also take advantage of the correspondent banking services U.S. banks

provide for foreign banks.60 Correspondent banking services are provided when one bank allows

another bank to “move funds, exchange currencies, or carry out other financial transaction”

under its (the first bank’s) name.61 Any foreign bank may use the correspondent services

provided by U.S. banks, even if their parent company is not domiciled in the U.S.62

       Correspondent banking tends to lead U.S. banks to enter into relationships with high-risk

foreign banks. These banks can be broken down into three categories:

       (1) shell banks with no physical presence in any country for conducting business

       with their clients, (2) offshore banks with licenses limited to transacting business

       with persons outside the licensing jurisdiction, or (3) banks licensed and regulated

       by jurisdictions with weak anti-money laundering controls…63

       As a result of these practices, several U.S. banks found themselves servicing foreign

banks that had no physical office, had no license to operate in a given jurisdiction, had never

undergone a bank examination or that had used the correspondence account to facilitate crime.64

       The exercise of due diligence would have allowed the U.S. banks to see that they were

providing correspondent services to foreign banks they had never heard of who were handling

the proceeds of Internet casinos, or who were allowing other offshore shell banks to use their

U.S. accounts.65

       Just as the technology behind the internet has created a “world without borders” and has

made it easier for the ordinary consumer to buy, sell and invest, it has also made it easier for the

money launderer to shield his ill-gotten gain from the authorities.66      The sophisticated money

launderer is just a click of the mouse away from accessing a myriad of ways in which to cleanse

his funds.    Unfortunately for those fighting the money launderers, the growth of new

technologies, such as cyber cash, electronic funds transfer and smart cards, is outpacing law

enforcement’s ability to combat money laundering.67

       It is important to make one distinction before going any further. There are two broad

types of money laundering: illicit flight capital and licit flight capital.68 The former refers to the

proceeds of criminal activities while the latter refers to efforts by the wealthy to shield their

money from the risks of interest rates, inflation and the business cycle.69 The former allows drug

dealers, terrorists and illegal arms merchants to perpetuate their criminal operations as well as

depleting treasury funds in the nations of origin, while the former only drains funds from

government coffers.


                              A. EFFECTS ON THE BANKING SYSTEM

         Money laundering’s most direct impact is on the banking systems of the developing

world.      Investors’ willingness to invest their funds in a developing country is directly

proportional to their confidence in that country’s banking system, and confidence in a nation’s

banking system is inversely proportional to the influence of organized crime on that banking


         People that use banks that aid in the laundering process face three risks: (1) an increased

possibility that they will be defrauded by individuals within the bank, (2) an increased possibility

that the bank will become corrupt or come under the control of criminal interests and (3) an

increased possibility the bank may fail as a result of the bank being defrauded.71

         All three risks erode confidence in a nation’s banking system and discourage investment

from both home and abroad. This, in turn, reduces the pool of available investment capital that

makes it more costly to increase productive capacity.72 Additionally, financial institutions that

accept large sums of laundered money face the risk that the money may disappear suddenly via

wire transfers in response to law enforcement operations. These banks may then be faced with

liquidity crises or runs by depositers.73

         The Bank of Commerce and Credit International (BCCI) scandal should serve as a

warning to those who do not believe money laundering has a negative impact on the banking

industry.    BCCI was founded in 1972 in Luxembourg by Aga Hassan Abedi, a Pakistani

banker.74 The original vision for BCCI was a bank that would champion the Third World.75

Laundered money flowed freely into BCCI as those seeking to conceal the trail of their money

took advantage of bank secrecy laws throughout the developing world.76 BCCI lost millions of

dollars on these transactions and had to find a way to cover up those losses.77 The beginning of

the end came on July 5, 1991 when the central banks of seven countries shut down BCCI

operations within their borders.78 It was estimated that BCCI had lost in the neighborhood of $4

to $5 billion since 1984. These losses had been covered up by “false loans and fraudulent

accounting practices.”79

                                B. MACROECONOMIC EFFECTS

       Money laundering not only affects the microeconomy, the decisions of individual

consumers; it also affects the macroeconomy, that is, the economy at large. As the cost of

money laundering is reduced by government complicity or willful blindness, crime rates will rise

and more money will be laundered as the corresponding cost of committing crime decreases.80

The Russian mafia, for example, operates with virtual impunity at home. It is estimated that

80% of the businesses in Russia are controlled by the mafia.81 In addition, the Russian mafia is

involved in drugs, the sex trade, stolen cars, fraud and extortion throughout Europe.82 Swiss

authorities said in 1999 that the Russian mafia had infiltrated 300 Swiss companies.83

       In Colombia, the drug lords decided to invest their money in apartment buildings, office

buildings and shopping centers.84 The massive construction in the nation’s largest cities put a

premium on the price of land, pushing rents upward and squeezing out the middle class.85 Drug

money also caused the price of land in the countryside to escalate, keeping land out of the reach

of working class Colombian farmers.86 On the retail side, the drug lords, needing a way of

“cleansing” their money took over electronics stores and car dealerships and drove the honest

competitors out of business since the honest businessmen could not compete with businesses that

had no need to make a profit.87

       The drug money also distorts the agricultural market in Colombia as many small farmers

use part of their land to cultivate opium.88 The nation thus becomes more dependent on outside

sources to supply food to its people.
       Money laundering also presents “potentially devastating” social consequences.              The

ability to launder money allows drug dealers, terrorists, arms dealers and corrupt public officials

to operate freely and expand their criminal activities. As the rate of this criminal activity rises,

the rate of economic growth falls.90

       The reasons for this phenomenon are many. Nations awash in laundered money have a

hard time attracting foreign investment because investors are less willing to risk their money in

an environment where price information is distorted by “insider trading, fraud and

embezzlement.”91 This is the effect described by Gresham’s Law: bad money chases out good.92

Investors tend to put there money into markets in which the currency, the interest rate and

inflation are stable and pull their money from markets in which those factors are not present.

Money launderers tend to be low-rate savers who invest in more speculative ventures. This

movement of investment capital from stable, productive portfolios into risky, less productive

portfolios reduces the level of investment available to sustain economic growth, resulting in

lowered growth rates.93 Other money launderers tend to place their money in “sterile”

investments that shield their funds but do not contribute to the nation’s productivity.94 Since

these laundered assets tend to accumulate rather than flow through the economic system there is

an increased danger of destabilizing international or domestic movements of assets.95

        This misdirection of resources contributes to economic inefficiencies and lowered

economic performance.96 The large scale of the underground economy can thwart developing

nations’ attempts to control the money supply, foreign reserves and interest rates.97 The reward

for such activity is a general economic malaise: as investment capital becomes scarcer, interest

rates rise; as interest rates rise, businesses borrow less; as businesses borrow less, productive

capacity decreases; as productive capacity decreases, unemployment increases.

        The end result is stagflation – a combination of high unemployment, high inflation and

high interest rates.98 This phenomenon is brought about when the level of aggregate supply in the

economy is reduced due to increasing costs of production.           Conventional macroeconomic

policies are unable to resolve the condition as measures to control inflation have the unintended

effect of increasing unemployment, while measures to contain unemployment fuel the

inflationary rise in prices.

        The only viable solution is to increase the pool of investment capital available to

business. However, due to money laundering, and the accompanying corruption, that investment

capital is only available at a premium and those higher rates discourage businesses from

investing and the vicious cycle feeds on itself as productive capacity dries up.

        The abilities of governments to apply economic policy to address this condition are

hampered due to reduced tax revenues. A conservative estimate would show that the US

government loses out on the tax revenue generated by $200 billion of economic activity; the

Colombian government loses out on the revenue generated by approximately $24 billion of

economic activity.99 The effect of such a depletion on a developing country could be devastating.

                        IV. IMPACT ON INTERNATIONAL TRADE

       One way in which money laundering impacts international trade is through the practice of

“mis-invoicing” in which the cost of imports are increased on paper and the cost of exports are

decreased, also artificially, altering the balance of payments.100

       Mis-invoicing is used both by those wishing to launder the proceeds of illegal activity

and those who wish to secret money out of a jurisdiction. Raymond Baker describes the process

as follows,

       a business manager or owner in Venezuela negotiates to purchase machinery from

       a US manufacturer. He requests that the $1 million dollar price be increased by

       10 percent so that upon payment of $1.1 million for the machinery, the extra

       $100,000 is to be deposited into his private bank account in the United States.101

       This transaction allows the businessman to send $100,000 abroad where it will be not

only safe from inflation and interest risk in Venezuela but also untraceable by Venezuelan

authorities attempting to follow the money.

       As money launderers around the world follow this practice the dollar value of imports

into the nations of origin are inflated. At the same time export figures for the destination country

are inflated, too. Thus, the balance of trade of the country of origin is affected negatively.102

This, in turn, negatively affects that nation’s GDP, distorting the measure of that nation’s

output.103 Again, per Mr. Baker,

       Money launderers also manipulate international trade on the export side: an

       exporter of art works in Ukraine can sell her paintings, sculptures, and icons to a

       West European dealer for, … 50 percent less than their negotiated value, with the

       understanding that when payment is made the extra 50 percent will be deposited

       into her German bank account.104

       This practice negatively affects the developing nation’s exports while positively affecting

the developed nation’s imports, leading to the same general affect as described above.

       As the value of a nation’s currency generally moves inversely to that nation’s balance of

trade, mis-invoicing places downward pressure on a nation’s currency, increasing the cost of

imports, which fuels inflation.105 Additionally, the artificially lowered GDP makes investment in

the country of origin less attractive which, when coupled with the reduced pool of domestic

investment capital, puts upward pressure on interest rates, increasing the cost of borrowing and

making it more difficult for businesses to find sources of investment capital.106

       This drying up of investment capital results in decreased output, increased unemployment

and higher inflation.

       The movement of laundered funds also affects the foreign currency reserves of

developing nations which forces them to expend precious capital replenishing their stocks.107

This places downward pressure on the developing nation’s currency which makes it more

expensive to import goods. The underground economy also siphons money away from official

trade tallies and distorts the developing nation’s trade balance.108

       The level of corruption and crime within the developing country also has an affect on its

ability to trade.109 The more endemic crime and corruption within the economy is, the less likely

foreign traders are to do business with the country.110 This de facto embargo restricts the goods a

developing country can import and cuts off access to export markets. The result is a stagnant


       The health of the worldwide economy is tied to the flow of capital from one nation to

another in exchange for goods and services. Money laundering places artificial roadblocks on

this superhighway of trade in the form of “mis-invoicing”, distorting currency reserves and

exchange values, siphoning capital into the underground economy and providing disincentives

for nations to trade with one another.

                         V. COMBATING MONEY LAUNDERING

                                         A. THE FIRST STEPS

       Concerns over the international drug trade, the rise in power of criminal organizations

and the threat this placed on developing nations led to the United Nations’ 1988 Convention

Against Illicit Drug Traffic in Narcotic Drugs and Psychotropic Substances (hereinafter, the

Vienna Convention).111 The focus of the Vienna Convention was to “enhance law enforcement

effectiveness” in the fight against illicit drugs.112 To accomplish this task the Vienna Convention

recognized that law enforcement authorities should go after those who “direct, finance, manage

and profit from the criminal networks” even if they never handled the drugs.113 The Vienna

Convention also required signatories to make money laundering itself a criminal offense.114

       The Vienna Convention went into effect on November 11, 2000, after it had been ratified

by twenty nations.115 As of March 1997, 136 nations had ratified the Vienna Convention.116

       Also in 1998, The Basle Committee on Banking Regulations and Supervisory Practices

(hereinafter, the Basle Committee) issued their Statement on Prevention of Criminal Use of the

Banking System for the Purpose of Money Laundering (hereinafter, the Statement).117 The

Statement was designed to ensure that banks are not participants in the money laundering

system.118 The Basle Committee encouraged bankers to (1) know their customers by making

“reasonable efforts” to determine their true identity, (2) comply with national laws and

regulations, (3) co-operate with local law enforcement agencies when money laundering is

suspected and (4) to adopt policies consistent with the Statement.119

                            B. THE FINANCIAL ACTION TASK FORCE

       The Financial Action Task Force (FATF) was created by the G-7 summit held in Paris in

1989.120 The G-7 heads of state, recognizing the danger that money laundering posed to the

banking and financial systems of the developed world, created the FATF from the G-7 nations,

the European Commission and eight other countries.121 The mandate of the FATF was:

       to assess the results of co-operation already undertaken in order to prevent the

       utilization of the banking system and financial institutions for purpose of money

       laundering, and to consider additional preventative efforts in this field, including

       the adaptation of the legal and regulatory systems so as to enhance multilateral

       judicial assistance.122

   The FATF expanded from 16 to 28 members in 1991 and 1992.123 It is currently made up of

representatives of 29 nations, the European Commission and Gulf Co-operation Council.124

There are also several international bodies, including organizations in the Caribbean, Africa and

South America, which have observer status with the FATF.125

                                 C. THE FORTY RECOMMENDATIONS

       In 1990, the FATF, representing the developed nations of the world, produced Forty

Recommendations for fighting money laundering and promoting good financial governance.126

These recommendations run the gamut from “know your customer” procedures to insurance

settlements to government actions.

       The first chapter of the Forty Recommendations outlines the general framework of the

FATF’s mission. They urge nations to ratify and implement the Vienna Convention;127 to make

certain that bank secrecy laws do not frustrate the implementation of the Forty

Recommendations;128 and to work together to investigate and prosecute money launderers and

extradite them when possible.129

       The second chapter describes the role of national legal systems in combating money

laundering. The FATF urges nations to adopt laws criminalizing money laundering, particularly

when drug related activities are the underlying offense130 and to hold corporations, not just their

employees, criminally liable for such activities.131

       The FATF also urges nations to adopt measures to allow the state “to confiscate property

laundered, proceeds from, instrumentalities used in or intended for use in the commission of any

money laundering offense….”132        The Forty Recommendations also call on nations to use

monetary and civil penalties to void contracts that are entered into by parties to hide the proceeds

of money laundering.133

       The goal of the Forty Recommendations is to hold all parties who participate knowingly

in money laundering activities criminally and civilly liable for their actions, allowing nations to

prosecute not only the ones disguising the source of their ill-gotten gain, but also those who offer

their services in cleaning the dirty money.

       A sizable number of recommendations are attempts to regulate the interaction between

the banker, or employee of any other financial institution, and the customer. These procedures

are known collectively as the “Know Your Customer” requirements. The thrust of these

recommendations is to break the wall of anonymity between bankers and clients that has allowed

money launderers to operate freely around the world.134 Indeed, many banks, and other financial

institutions, market themselves on the level of anonymity they provide for customers.135

       The FATF recommends that financial institutions cease the practice of opening

anonymous accounts and take reasonable steps to learn the true identity of their customers.136

This may be as simple as checking an ID upon the opening of an account and as complex as

determining the owner of a web of off-shore companies.137 Financial institutions are also urged to

keep records on their customers and to take steps to prevent money launderers from taking

advantage of new technologies that make it easier to act with anonymity.138

       The FATF proposes that nations immunize bank officers from civil or criminal liability

for breach of any covenant not to disclose information, thus allowing bank officials to forward

their suspicions to the competent authorities.139 Officials are urged to report any suspicious

transactions that have no apparent economic or financial benefit to the competent authorities.140

The Forty Recommendations also ask financial institutions to implement auditing systems to

detect money laundering activity.141

       Those combating money laundering are greatly concerned about transactions with nations

that have either insufficient anti-money laundering laws or no laws at all. Financial institutions

are asked to apply these recommendations to subsidiary companies doing business in nations that

do not enforce anti-money laundering laws.142 Officials of such institutions are asked to notify

competent authorities should local laws not permit these proposals to be implemented.143 The

FATF asks that financial institutions pay special attention to customers, both individual and

corporate, from such nations.144

        In order to combat money laundering further, nations are asked to take steps to restrict the

physical movement of money by implementing safeguards to prevent the physical cross-border

transportation of money,145 implementing reporting requirements for currency transactions146 and

increasing the number of non-cash financial alternatives (i.e. checks, debit cards and book entry

recording of securities).147 Regulators must also look into the possibility of abuse by shell

corporations and determine whether additional measures are needed to prevent the money

launderers from using these structures for their benefit.148

        Regulators, and other competent authorities, are asked further to ensure that financial

institutions and law enforcement authorities have the necessary tools and programs to combat

money laundering.149 This is to be accomplished by lending expertise to bank and law

enforcement officials when needed,150 regulating other professions that deal primarily in cash,151

establishing guidelines that will help financial institutions identify suspicious behavior152 and

preventing the money launderers, or those associated with them, from gaining ownership of

financial institutions.153

        The last chapter of the Forty Recommendations advocates measures to strengthen

international cooperation in the fight against money laundering. Governments are asked to

record aggregate flows of currency both in and out of the country and to make the information

available both to the International Monetary Fund and to the Bank of International

Settlements.154 Such information would allow authorities, both domestic and international, to

identify unusual currency flows that might be indicative of money laundering activity.

        The FATF envisions international law enforcement agencies, such as INTERPOL and the

World Customs Organization, participating in the fight against money laundering by gathering

and distributing information to competent authorities regarding the latest developments in money

laundering techniques, allowing domestic authorities to implement policies to prevent such


        One of the more problematic recommendations is to facilitate the exchange of

information regarding transactions among nations. Such communications would have to abide

by domestic and international laws regarding privacy and data protection.156 It would force

policymakers to balance the need for transparency with the privacy rights of bank customers.

        The FATF also seeks cooperation between and among nations in confiscation of assets

and extradition of money launderers. To accomplish this, the Forty Recommendations seeks to

dispel the notion that the willingness of nations to provide mutual legal assistance is hampered

by differing standards among those nations.157

        Nations are encouraged to enter into bilateral and multilateral agreements to provide

mutual assistance in combating money laundering.158 In so doing, nations are encouraged to

ratify and implement international conventions on money laundering, such as the 1990 Council

of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from


        The Forty Recommendations call for cooperative investigations among various nations’

competent authorities in combating money launderers, particularly by “controlled delivery” of

assets “known or suspected to be the proceeds of crime.”160 The FATF envisions mutual

assistance in such compulsory measures as the production of documents, the search of persons

and premises and the seizure and obtaining of evidence to assist in the prosecution of suspected

money launderers.161

        Nations are encouraged to respond expeditiously to the requests of other nations to

“identify, seize and confiscate” the proceeds of money laundering or the underlying crimes. The

Forty Recommendations also state that provisions should be made for the possible sharing of

confiscated assets between and among the nations involved.162 This would necessitate

mechanisms to determine the best venue for prosecuting suspected money launderers when the

crime is subject to prosecution in more than one country,163 as well as procedures for the

extradition of suspected money launderers.164 This would require the criminalization of money

laundering by all nations.165

        The FATF has also “named and shamed” those nations who continue to promote money

laundering either by explicit action or by exercising willful blindness.166 Advocates of this policy

claim that it puts pressure on nations to adopt anti-money laundering programs and cooperate in

the global fight to halt money laundering. Critics, on the other hand, point to the policy as

evidence of an anti-developing nation bias on the part of policy makers.167 It is debatable

whether such a policy encourages cooperation or stubbornness.

        The criteria for being placed on the “name and shame” list include inadequate regulation

and supervision of financial institutions, inadequate rules for the creation of financial institutions,

inadequate customer identification, excessive secrecy provisions, lack of transaction reporting

systems, inadequate legal requirements for the registration of businesses, lack of identification of

the actual owners of businesses, obstacles to international cooperation by administrative or

judicial authorities, lack of resources in the public and private sectors, and an absence of a

financial intelligence unit.168

        The most controversial criterion is the lack of resources in the public and private sectors.

This is taken by critics of the FATF to be an attack on so-called tax havens.169

        The Forty Recommendations have received criticism from parts of the developing world

for seeming to be more interested in preserving the existing international financial structure for

the benefit of the developed world.170    These critics point to offshore banking as the answer

some developing nations have found to their development problems.171 Customers flock to these

banks because of the anonymity they are promised.172 Proponents of offshore banking contend

that not everyone who utilizes offshore banks is laundering the proceeds of illegal activity.173

Some are taking advantage of the anonymity to shield income from domestic tax authorities.174

Defenders of offshore banking point out that while tax evasion may be a criminal offense, it is

different in kind from the offenses underlying money laundering.175


                                    (1) Efforts of the FATF

        Alongside its so-called “name and shame” campaign, the FATF has targeted nations that

fail to join its global effort to fight money laundering. In October 2002, the FATF threatened

punitive action against Nigeria for its failure to implement banking transparency laws in an effort

to halt money laundering.176 In addition to its call for sanctions against Nigeria for failure to

comply with the Forty Recommendations, The FATF has also threatened Ukraine with sanctions

and has blacklisted another nine countries with lax anti-money laundering laws.177 Nigeria

presents a different picture from the tax havens of the Caribbean and South Pacific as, unlike

those nations, Nigeria produces dirty money that is then sent abroad to be laundered.178

       In response to the September 11, 2001 terrorist attacks in the United States, the FATF

announced its intention to widen the scope of its mission from beyond fighting money laundering

to fighting terrorist financing.179 In so doing; the FATF issued eight Special Recommendations

on Terrorist Financing.180

         These Special Recommendations call on member states to (1) ratify and implement all

relevant United Nations’ instruments, (2) criminalize terrorist financing, (3) confiscate terrorist

assets, (4) report suspicious transactions linked to terrorism, (5) assist other countries in their

investigations of terrorist financing, (6) impose anti-money laundering requirements on informal

money transfer systems, (7) strengthen “Know Your Customer” requirements and (8) ensure that

non-profit entities cannot be used to finance terrorism.181

                                (2) Efforts of the United Nations

         The United Nations is involved in the fight against money laundering through its efforts

to halt the international illicit drug trade and the market for illicit arms sales.182 The Vienna

Convention called for nations to take measures to stop the spread of drugs throughout society by

making it harder for the traffickers to hide their illicit profits and by encouraging law

enforcement to arrest not only those that trafficked in drugs but also those that laundered their


         The Basle Committee looked at ways in which banks could protect themselves from the

money launderers.      The most effective method found is transparency in banking, when

transactions are not cloaked in layers of secrecy it becomes harder to disguise the proceeds of

criminal activity. When it becomes harder to disguise the proceeds, part of the incentive of

carrying out such criminal activity is taken away.

         The UN, through its Office of Drug Control and Crime Prevention, has also implemented

its Global Program Against Money Laundering (hereinafter, the Global Program) which aims to

help member states introduce effective anti-money laundering legislation.183 The Global Program

also seeks to develop anti-money laundering tools and mechanisms that member nations can use

in their eradication efforts.184 Member states can receive aid in policy development and in

increasing public awareness of the harmful effects of money laundering.185

       The Global Program serves as a repository of expertise and research data on money

laundering and techniques for combating it.186 The Global Program also coordinates the

International Money Laundering Information Network.187

       Such efforts are important as the developing world has a larger say in the UN that it does

in the FATF.188

       The United States and the European Union have also enacted various measures to combat

the money launderers. Among the measures undertaken by the United States are the 2001

Money Laundering Act, the USA PATRIOT Act and the 2001 National Money Laundering

Strategy. The European Union enacted a Council Directive creating a gatekeeping function to

stop money laundering activity.189

                                        (3) U.S. Efforts

       In the aftermath of the events of September 11, 2001, the United States Congress passed

new anti-money laundering legislation aimed specifically at terrorist financing.190 On October

26, 2001 the International Money Laundering Abatement and Anti-Terrorist Financing Act

(hereinafter, the 2001 Act) was passed as Title III of the Uniting and Strengthening America by

Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (USA PATRIOT

Act).191 The purpose of the 2001 Act was to expand enforcement of existing anti-money

laundering measures over transactions and institutions that were not previously included in the


        The 2001 Act required banks to perform greater due diligence both when forming new

relationships and conducting transactions with existing customers or other banks.193 It also

expanded the list of institutions required to file currency transaction reports, broadened federal

authority to obtain information from foreign banking records and allowed the federal government

to seize the assets of terrorists and those involved in terrorist financing.194

        These measures were more than sufficient to meet threats to the international financial

system, but there were those that questioned whether they would be strong enough to protect the

safety of the United States and other nations.195

        One area of concern that remains for the U.S. is the ability for immigrants to use informal

money transfer systems to send money back home to their families.196 One such method

currently used to transfer money informally is the hawala money transfer.197 This informal

network has been used by members of al Qaeda and other terrorist groups to fund international

terrorist acts.198 To transfer money from one part of the world to another using hawala, the

person wishing to send the money will contact a transmitter who will accept the money and then

call an associate in another part of the world who will contact another associate in the other city.

Once the recipient of the money contacts the associate they exchange a code and money is

exchanged. No record of the transaction exists.199

        These networks will remain viable conduits for money laundering as long as the United

States concentrates on the formal financial system in its anti-money laundering efforts.200

        Even before September 11, however, the United States planned to plug the holes in its

existing anti-money laundering efforts through the 2001 U.S. National Money Laundering

Strategy.201 The strategy contained five goals to which any legislation should aim to achieve.202

       The first goal was to focus U.S. law enforcement efforts on the “prosecution of major

money laundering organizations.”203 Objectives included increased use of civil asset forfeiture

laws and greater intra- and inter-agency coordination and cooperation in operations.204

       The second goal called on the government to create methods by which to measure the

effectiveness of anti-money laundering efforts.205 The third goal was to use both public and

private efforts, as well as regulatory efforts, to combat money laundering.206 To accomplish this

goal, financial institutions were to play a larger role in the fight by strengthening reporting


       The fourth goal was to foster greater cooperation between federal, state and local law

enforcement officials in the fight against money laundering.208 The fifth, and final, goal was to

increase international cooperation in the fight by strengthening international institutions, such as

the FATF, as well as by providing technical assistance to other nations involved in anti-money

laundering efforts.209

       Many of these goals and objectives found their way in The 2001 Act, albeit with a focus

more toward the fight against terrorist financing.210

                                   (4) European Union Efforts

       The European Union and the Commonwealth Countries decided to create a “gatekeeper”

function for attorneys and notaries in their efforts to fight money laundering.211 These initiatives

require attorneys to keep records on their clients and report any suspicious activities to the

appropriate authorities.212 Member nations would be free to determine what constituted

“substantial proceeds” from illegal activities as well as to determine appropriate criminal

penalties for both the money launderers and their attorneys.213

       Such measures could create problems for U.S. attorneys assisting clients in international

matters as the attorney-client privilege would prevent the disclosure of these discussions.214 The

only exception would be if the attorney was aware that his client intended to violate the law.215

       Reporting requirements such as these have been enforced in the United Kingdom, in one

form or another, since the passage of the Prevention of Terrorism Act in 1989.216 Banking

officials are likewise held to a higher standard in the UK for they are required to report not only

actual money laundering activity but also suspected money laundering activity.217

       The same reporting requirements apply to attorneys and bankers in Canada.218

       These efforts alone, however, will not be enough to stop money laundering. By being

flexible and allowing the developing world to experiment with various strategies for combating

money laundering, the nations of the developed world can create a situation in which the nations

of the developing world “buy into” the idea and become full partners in the fight against money


                                        VI. CONCLUSION

       The money laundering trade has grown from a nickel and dime operation in the 1920’s

into a multi-billion dollar a year industry.219 The current state of affairs did not develop overnight

and it will take time to combat the trade effectively. It also did not develop by itself. Money

laundering is not so much an activity as it is a multi-billion dollar a year industry made up of

petty criminals, criminal organizations, bankers and government officials around the world. In

order to combat the money launderers it is necessary to look at the practice in its larger context.

       One must avoid the temptation to look at money laundering as an end unto itself. It is

easy to forget the criminal activity that underlies the need to launder money. The drug

traffickers, terrorists, illegal arms dealers and corrupt government officials play havoc with a

nation’s economic, as well as social, health. Measures that make it harder to launder the funds of

illegal activity make it more difficult for the criminals to hide the proceeds of their crime. This,

in turn, makes it easier for law enforcement to trace the flow of funds, tie them to the criminal

organizations and track down the criminals.

       In implementing these measures, however, policymakers must look to balance the need

for transparency in financial transactions against the privacy rights of bank customers.

       It is essential to realize the negative effects of money laundering on economic

development and international trade. These capital flows do not foster economic development

and do not serve to benefit the nation as a whole. In fact, the outward flows of capital drain a

nation’s hard currency reserves and make it more expensive to import goods and services.

Additionally, the shortage of available currency forces governments to borrow funds

domestically and from abroad putting upward pressure on interest rates and making it more

expensive, if not cost-prohibitive, for businesses to invest in productive activity. The mis-

invoicing of goods has the same effect as a nation’s balance of trade is distorted by artificially

inflated imports and deflated exports. Unemployment, shortages of goods and inflation are the

result. Without an eye to the “big picture” those fighting the money launderers will not be


       As the developing world weighs the short-term benefits of pools of illicit cash with the

long-term effects on the health of their national economies, the pressure will build to halt the

criminals and the policies that have allowed them to prosper.

       Efforts to fight the money launderers must be the cooperative efforts of both the

developed and the developing worlds.220 Otherwise it is easier to drive a wedge among nations

by portraying the struggle as a ploy by the developed world to protect their hold on international

markets. Only by creating a scenario in which it is in everyone’s best interest to combat money

laundering will the fight be successful.


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