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     The Prevention of Money Laundering:
                  A Key Component

                         of the

     Partners for Financial Stability (PFS) Program


                   Dr. Peter Mihályi

               Head of Banking Programs

                   Budapest, Hungary
                       June 2002
                    EAST-WEST MANAGEMENT INSITUTE (EWMI) – PFS Program

                                                 Table of Contents
Introduction: Anti-money laundering efforts in the context of September 11 ............... 3
Section I. ........................................................................................................................ 3
   The origins of money laundering ............................................................................... 3
   The fundamentals of money laundering techniques .................................................. 4
   Hard and soft legal methods fighting money laundering ........................................... 6
   Developments prior to September 11, 2001 .............................................................. 6
   Developments after September 11, 2001 ................................................................... 7
Section II. ....................................................................................................................... 9
   International Organizations involved in the fight against money laundering (in
   alphabetical order, by organization) .......................................................................... 9
      Bank of International Settlements (BIS) ................................................................ 9
      Council of Europe ................................................................................................ 10
      Egmont Group ...................................................................................................... 10
      European Union (EU) ......................................................................................... 11
      International Criminal Police Organization – Interpol (ICPO – Interpol) ........... 12
      International Monetary Fund (IMF) ..................................................................... 12
      International Organisation of Securities Commissions (IOSCO) ........................ 13
      Organisation of Economic Cooperation and Development (OECD) ................... 13
      United Nations (UN) ............................................................................................ 15
      Wolfsberg Group ................................................................................................. 16
Section III..................................................................................................................... 16
   Country-specific examples (in alphabetical order by country) ................................ 16
      Central and Eastern Europe ................................................................................. 16
         Czech Republic ................................................................................................ 16
         Hungary............................................................................................................ 17
         Romania ........................................................................................................... 17
         Russia ............................................................................................................... 18
         Slovenia............................................................................................................ 18
      United States ........................................................................................................ 18
Section IV .................................................................................................................... 19
   Issues ........................................................................................................................ 19
      Definitions............................................................................................................ 19
      “Know your customer” ........................................................................................ 20
      Costs involved in combating money laundering .................................................. 20
      Politicians and money laundering ........................................................................ 21
      Who is the culprit? ............................................................................................... 21
      Money laundering and terrorism .......................................................................... 22
      Off-shore centers and tax havens ......................................................................... 22
      Parallel banking ................................................................................................... 23
      The limits of secrecy ............................................................................................ 24
      The introduction of the euro ................................................................................ 24
More information ......................................................................................................... 24

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Introduction: Anti-money laundering efforts in the context of September 11

In the first eight months of 2001, there was already a sensible growth in public
awareness regarding money laundering. Virtually no day passed without an article in
the world‟s leading financial newspapers (Financial Times, The New York Times, The
Economist) reporting on either new revelations, or new anti-money laundering (AML)
measures. In response to this, the PFS Program decided to start working in this area
already in May, 2001.

Putting a value on money laundering is, by its very nature, a matter of ill-informed
guesswork. The International Monetary Fund (IMF) reckoned in 1998 that the
amount of dirty money being cleaned through the world‟s financial system was USD
0.5–1.5. trillion a year, equivalent to some 1.5-4.5 per cent of the world‟s combined
GDP. Although these figures sound huge, for comparison we should consider that
every major U.S. bank has about USD 1 trillion passes through its internal wires every

Since September 11, 2001 the awareness has reached entirely new dimensions: what
was an economic-financial matter of technical nature has become a political issue
with national security connotations. It is noteworthy that money launderers
themselves have become highly educated in anti money laundering regulatory matters.
Its appears, for example, that the terrorist hijackers behind the September 11 attacks
were coached on obscure points of the U.S. Bank Secrecy Act and the record keeping
duties of financial institutions. At least one of the ringleaders who conducted
transactions demonstrated knowledge of little-known U.S. regulations.

This working paper is intended to summarize recent events and to provide guidance to
specialists interested in pursuing further research.

                                                  Section I

                                 The origins of money laundering1

The term "money laundering" is said to originate from Mafia ownership of
Laundromats in the United States. Gangsters earning huge sums in cash from
extortion, prostitution, gambling and bootleg liquor needed to show a legitimate
source for these earnings. The gangsters chose Laundromats because they were cash
businesses. This was an undoubtedly an advantage to people like Al Capone, who
was prosecuted and convicted in October 1931 for tax evasion.

Linking the term “money laundering” to Al Capone‟s time, however, is probably
linguistically incorrect, though the analogy of the Laundromat is indeed revealing. As
one author noted, "Money laundering is called what it is because that perfectly
describes what takes place - illegal, or dirty, money is put through a cycle of
transactions, or washed, so that it comes out the other end as legal, or clean, money.
In other words, the source of illegally obtained funds is obscured through a
succession of transfers and deals in order that those same funds can eventually be
made to appear as legitimate income.”

    This section is based on information contained in Billy Steel‟s private website.

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On the contrary, it seems that the conviction of Al Capone for tax evasion might have
actually launched money laundering businesses. Another famous American criminal,
Meyer Lansky (affectionately called „the Mob‟s Accountant‟) was particularly
affected by the conviction of Capone for something as obvious as tax evasion.
Determined that the same fate would not befall him, he set about searching for ways
to hide money. Before the year was out he had discovered the benefits of numbered
Swiss Bank Accounts. This appears to be the advent of money laundering.

The term “money laundering” is of fairly recent origin. The first documented
mention in a newspaper is attributed to a report about the Watergate scandal in the
United States in 1973. Since then, the term has been widely accepted and is in
popular usage throughout the world. The crime “money laundering” began to attract
greater interest in the 1980s, particularly within the context of drug trafficking.
However, it is interesting to note that the 1988 Vienna convention on drug trafficking2
still didn‟t use this specific term at all when speaking about the proceeds of drug
production and trading.

                 The fundamentals of money laundering techniques

The simplest method of both stealing and laundering money is to own a bank. The
only problem is cost. In most countries of the world, it is extremely costly to establish
a bank, partly because of the legal requirements pertaining to starting capital strength,
but also due to the high costs required the establish the necessary physical
infrastructure. Table 1 outlines some of the basic methods used in money laundering
by those perpetrators which do not themselves own banks.

                                        Table 1

          Placement                     Layering                            Integration
            Stage                        Stage                                 Stage

Cash paid into bank            Wire transfers abroad (often        False loan repayments or
(sometimes with staff          using shell companies or            forged invoices used as
complicity or mixed with       funds disguised as proceeds         cover for laundered money.
proceeds of legitimate         of legitimate business).

Cash exported.                 Cash deposited in overseas          Complex web of transfers
                               banking system.                     (both domestic and
                                                                   international) makes tracing
                                                                   original source of funds
                                                                   virtually impossible.

Cash used to buy high value    Resale of goods/assets.             Income from property or
goods, property or business                                        legitimate business assets
assets.                                                            appears "clean".

     See      United     Nations      Convention         Against        Illicit   Traffic       in
Narcotic Drugs and Pszchotropic Substances.

10/8/11                                    8:57 PM                                                   4

    Increasingly sophisticated methods – learning a new jargon3

Criminal gangs and terrorist groups often use high-technology global schemes. One
of these methods is called “star-burst.” A deposit of dirty money is made in a bank
with standing instructions to wire it in small, random fragments to hundreds of other
bank accounts around the world. Another trick is the “boomerang.” Money is set on
a long arc around the globe, before returning to the country whence it came. En route,
it travels through “black holes” – i.e. countries that lack the means or the inclination
to investigate banks. The possibility of escaping control is the same if “shell” banks
are used – i.e. banks without physical presence in any country.

With the ever-widening range of financial instruments on offer, further laundering
possibilities exist. The derivatives and securities markets seem particularly
susceptible to recycling of organized crime proceeds because the audit trail is so
easily blurred. A broker can very well launder a sum of money through a perfectly
legal transaction, with no need even to make a false entry. All that is necessary is to
assign genuine trading losses to the account in which the illegal funds will be
deposited. For example, it is absolutely legal for a dealer in the financial futures
market to hold two contracts for subsequent offset. By assigning trading gains and
losses to two different accounts, one “regular” and the other to receive the laundered
funds, the dealer can put through a laundering operation on the loss account.

Hedge funds also came under suspicion. The U.S. Securities and Exchange
Commission, the Treasury Department and the Federal Reserve Board are due to
complete a report within a year on how hedge funds should be treated for money
laundering purposes under a provision of the new anti-terrorism legislation. Senators
Jon Corzine and Christopher Dodd were responsible for sponsoring the provision. At
issue, according to a spokesman for Mr. Corzine, is the role of beneficial owners -
investors who place their money in hedge funds anonymously through private banks.
There are estimated to be 6,000 funds managing close to $500bn. There is a risk that
some of those younger funds might be less stringent in their investor checks than the
larger funds. There is also a risk that the identity of a beneficial owner could change
over the life of an investment. 4

Insurance – notably life, property and long-term capitalization bonds – is another
possibility. Launderers generally pay for the insurance with cash and then request
early redemption of the policy or make a claim against their property insurance, thus
obtaining payment in bank money from the insurance company.

As in the case of high-value commodity markets, the gold market is also causing
some concern over the money laundering possibilities it offers. In some instances,
these transactions appeared to reflect attempts to avoid high Value Added Tax (VAT)
rates by making large purchases of gold in countries with low VAT rates and then
exporting the bullion back to the country of origin.

  The information contained in this section is based – inter alia - on the article of an FATF expert,
published in the OECD Observer (May 26, 2000). “Money laundering: staying ahead of the latest
trends.” by Patrick Moulette.    See and a
more extensive, but somewhat outdated 1997-1998 FATF expert study, entitled Report on money
laundering typologies.
    See, Financial Times, October 29, 2001.

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The use of gold for purposes of laundering is often intrinsic to movements of money
through parallel banking circuits, an example being the South Asian
hawala/hundi/fej qian system. This particular system is based on trust. The word
“hawala” means trust in Hindi, fej qian means flying money in Chinese. Historically,
both systems enabled gold to be transferred without being physically moved and
being robbed on the way. Both systems continues to operate in modern times by
moving paper money throughout the world, without being supervised through the
institutions designed for modern Western-type banking systems.

                                      How does hawala work?

A Somali, for example, who wants to send home money from Minneapolis in the US, where there are
more than 50,000 Somali nationals, takes the cash to a local hawala agent, who issues a receipt of
payment. Details of who is to receive the money and the sum is then telephoned, faxed or e-mailed to
another agent in the network and handed over to the recipient. Over time, payments in one direction
will be matched by those in the opposite direction, avoiding the need for cross-border transfers. In
return for the transmission service, the company charges a commission of between two and 10 per cent,
according to the size and nature of the payment. In some cases, the sender doesn‟t receive any receipt
at all, but only a secret code (e.g. a combination of letters and numbers, a low-value banknote torn in
half). Then the recipient in Somalia will be able to receive the money - perhaps in a different
currency – after presenting the secret code to his own hawala agent.

Using the system is more cost effective and less bureaucratic than moving funds
through officially recognized banking systems. Hawala dealers might offer a better
exchange rate than the official one. Moreover, they often arrange for funds to be
delivered to people‟s homes, even in small villages. Given these advantages it is
unlikely that efforts to shut down hawala networks would succeed. Anyone, with a
little money, a few trusted friends and a telephone can execute a hawala transaction.5

                Hard and soft legal methods fighting money laundering

For the analytical purposes it seems appropriate to speak of two major ways of AML
efforts on the international scene. There is a large and growing body of international
treaties specifically aimed at combating money laundering. These treaties are legally
binding for countries which are parties to the agreement. Section II provides a
complete overview of these “hard” legal instruments. Interestingly, the so-called
“soft-law method” has proved to be even more effective in combating money
laundering if and when powerful financial institutions have committed themselves to
enforce the agreed measures and exclude from businesses the non-conforming market

                        Developments prior to September 11, 2001

In the United States, the problem of money laundering was first highlighted in the
recent past by a U.S. Congressional Report in January, 2001. In it, Senate Democrats
criticized some of America‟s biggest banks including Citigroup, J. P. Morgan Chase
for failing to crack down adequately on money laundering undertaken by some
foreign clients.

 The views of two hawala expert, Prof. Tom Naylor, expert in economic crime at McGill University in
Montreal and Nikos Passas from Temple University are quoted in The Economist, 24 November, 2001.

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In continental Europe, the French Parliament published four lengthy monographs
compiled by its special task force, covering money laundering in Liechtenstein
(March 2000), Monaco (June 2000), Switzerland (February 2001) and the UK
(October 2001).       The Swiss study of some 400 pages generated significant
international publicity. The report led to accusations and counter accusations in
which the two countries cited conflicting numbers about the number of money
laundering cases reported, investigated and tried in each country. A similar row was
provoked by the report on the UK, which covered Gibraltar and other territories
controlled by the Crown. According to the French report, only 100 cases during the
1986-1996 period ended with a court procedure and only seven of the accused were
actually sentenced by British courts. (In the same period, Italy initiated 538 cases
and the US authorities launched 2,034 court procedures on money laundering

In the United Kingdom, a report released by the United Kingdom‟s Financial Services
Authority (FSA) in March, 2001, claimed that 23 London banks had allowed some
$1.3 billion to pass through accounts linked to the former military leader of Nigeria,
Gen. Abacha. The same report referred to a sum of $2.9 billion that Slobodan
Milosevic and his entourage were allowed to have slipped through banks in Greece,
Cyprus and Switzerland. During the first half of 2001, other politicians were also
publicly accused with money laundering charges, for example, the former Prime
Minister of the Ukraine, Pavel Lazarenko, currently in prison in the United States.
The charges allege that more than US$100 million in wire transfers of Lazarenko‟s
corruption-derived funds passed through corresponding accounts held at U.S. banks
and securities firm, including Merrill Lynch, Pacific Bank and Hambrecht & Quist, by
European Federal Credit Bank, of Antigua.            The former Peruvian spy chief,
Vladimiro Montesinos was accused with money laundering in Switzerland and am
Israeli bank, the Zurich branch of Bank Leumi was allegedly involved in a number of
illegal transactions. The First International Bank of Israel, a smaller Israeli bank, was
also probed in the affair.6 These developments lead to the introduction of a new risk
concept, involved opening accounts for politically exposed persons (PEPs) and for
persons or companies related to them.

                            Developments after September 11, 2001

On September 18, 2001 the Bush administration released a 76-page document,
entitled “2001 U.S. National Money Laundering Strategy”. This was sheer
coincidence, as the document had been prepared much before the September 11
tragedy. It is noteworthy, however, that this document was released with considerable
delay, because the relevant U.S. laws require the preparation of such a document in
February each year.

U.S. President George W. Bush signed an executive order on September 24, 2001
according to which foreign nations and financial institutions that refuse to stop
serving as conduits and launderers for the financing of terrorist activities now run the
risk of being cut off from access to the U.S. financial markets. The US Office of
Foreign Assets Controls (OFAC) published a list of those identified in the order.

    Financial Times, November 15, 2001.

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At the time, much of the international news media had focused on the part of the order
that freezes the assets and transactions of 27 persons and organizations tied to
terrorism, 10 of which the U.S. had listed in prior similar actions. Unmentioned in
most reports is the major significance of the president's order, which mandates the
Secretary of the Treasury to prepare for deployment, and to deploy "as may be
necessary," all the authority and economic power of the U.S. government against non-
cooperative countries and financial institutions.

On October 5, 2001 German Finance Minister Hans Eichel unveiled an unprecedented
package of measures to combat terrorist funding, including the creation of a central
register of all bank accounts. The register, to be collated by the federal bank
supervisory agency, will list the name, date and place of birth of all account holders,
as well as the date when the account was opened. Minister Eichel also fleshed out
proposals for a new financial intelligence unit in the Federal Finance Ministry to
combat money laundering. The new bank register comes on top of measures, already
under consideration in a draft law unveiled last month, to improve the competitiveness
of Germany's financial markets and clamp down on abuse.

On October 16, 2001 the EU member states signed a protocol to a May 2000
convention on mutual assistance in criminal matters that will allow greater exchange
of information among member states on banking records, accounts and transactions

On October 24, 2001 the US Treasury Department stepped up its efforts to track down
and disrupt terrorist financial networks, announcing a new investigative team that will
target charities, non-governmental organizations and underground remittance systems
used by al-Qaeda. The new team, called Operation Green Quest, will include
prosecutors from the Justice Department and investigators from a number of financial
agencies, including the Internal Revenue Service, the Customs Service and the
Federal Bureau of Investigation.

On October 26, 2001 US President Bush signed the USA Patriot Act into law7. The
Act is a fundamental review of existing counter-money laundering legislation, with
most of the provisions entering into force on 25 December, 2001. Perhaps the most
important element of the law is that it broadens significantly the definition of
“financial institutions” required to comply with strict “know you customer”
requirements (e.g. dealers in precious metals, stones, or jewels, travel agencies,
telegraph companies, businesses engaged in vehicle sales, real estate closings and
settlements and casinos). In addition, the limit of reporting obligation was halved
from USD 10,000 to 5,000.

On November 16-18, 2001 at the annual meeting of finance ministers of IMF member
countries, an ambitious goal of February 1, 2002 was agreed upon for governments to
implement tough measures to combat terrorist financing.           This deadline was
important because Governments had been already previously committed under a
United Nations resolution to take action to clamp down on money laundering by
terrorists, but until now no timetable had been established for implementation. The
finance ministers also called on governments to identify gaps in their anti-money
laundering regimes through voluntary questionnaires issued under the IMF's annual

 The full title of the Act is Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism. Its popular title refers to this acronym.

10/8/11                                      8:57 PM                                             8

"Article Four" surveillance of its member countries. They pledged technical assistance
and aid where necessary to help poorer countries complete such programs.

On November 19, 2001 the European Union approved the so-called Second Directive
on money laundering. After many years of preparation, this was a major political
achievement, but the new regulation will not enter into force for at least 18 months
after the above mentioned date.

By the summer of 2002, sentiments have changed significantly. It turned out that
choking off the money that funds terrorism is more difficult that anticipated.
According to a UN official8, there was no sign that the flow of funds to the al-Qaeda
terrorist organization has ceased.            The various measures approved by the
international community have not been implemented by the deadlines. It became
also clear, that the identification of terrorist organizations and individuals involved in
terrorism is also a difficult technical job. The reliability of published list, for
example, has been questions, as it became known that Arabic names had been
misspelt, basic identifying details, such as place and date of birth, were left out, etc.

                                                 Section II

    International Organizations involved in the fight against money laundering (in
                        alphabetical order, by organization)

Bank of International Settlements (BIS)

On October 4, 2001 the Basel Committee on Banking Supervision issued a new set of
guidance to banks and banking supervisors on customer due diligence processes.
Customer due diligence for banks establishes minimum standards for the development
of appropriate practices in this area.

           The Basel Committee on Banking Supervision is a committee of banking supervisory
           authorities established by the central bank Governors of the Group of Ten countries in 1975. It
           consists of senior representatives of bank supervisory authorities and central banks from
           Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain,
           Sweden, Switzerland, the United Kingdom and the United States. It usually meets at the Bank
           for International Settlements in Basel, where its permanent Secretariat is located.

Customer due diligence for banks was prepared by the Working Group on Cross-
border Banking, a joint working group of the Basel Committee and the Offshore
Group of Banking Supervisors.

           The Offshore Group of Banking Supervisors was established in 1980 as a forum for
           supervisory cooperation between the banking supervisors in offshore financial centers. Five
           members of the Group (from Bermuda, the Cayman Islands, Guernsey, Jersey and Singapore)
           participate in the Working Group on Cross-border Banking

The Basel Committee's previous guidance on customer due diligence and anti-money
laundering efforts is contained in three papers:

          The prevention of criminal use of the banking system for the purpose of
           money-laundering, issued in 1988, lays down several basic principles,

    Quoted in The Economist, June 1, 2002. p. 73.

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          encouraging banks to identify customers, refuse suspicious transactions and
          cooperate with law enforcement agencies.
         The 1997 Core Principles for Effective Banking Supervision state that, as part
          of a sound internal control environment, banks should have adequate policies,
          practices and procedures in place that "promote high ethical and professional
          standards in the financial sector and prevent the bank from being used,
          intentionally or unintentionally, by criminal elements". In addition,
          supervisors are encouraged to adopt the relevant recommendations of the
          FATF relating to customer identification and record-keeping, reporting
          suspicious transactions, and measures to deal with countries with insufficient
          or no anti-money laundering measures.
         The 1999 Core Principles Methodology further elaborates the Core Principles
          by listing a number of essential and additional criteria.

The Financial Stability Forum (FSF), first convened by the G-7 within organizational
framework of the BIS in April 1999, has also included considerable interest in the
question of money laundering. Quite accidentally, the FSF held its sixth meeting on
September 6 and 7 in London, just a few days before September 11. The work on
offshore financial centers (OFC) was among the topics, though not as a priority.
According to Andrew Crockett, general manager of the BIS and chairman of the FSF,
member-countries called on those centers to meet international standards. The FSF
called on its own members to increase technical assistance to OFCs in order to speed
compliance with international standards. The FSF also welcomed the establishment by
the Basel Committee of a contact group of OFC banking supervisors.

Council of Europe

The Council of Europe adopted a Convention, as early as in 1990, under the title:
Council of Europe Convention no. 141 on Laundering, Search, Seizure and
Confiscation of the Proceeds from Crime. It is also noteworthy that in June 1999, the
Council already published county reports on this particular subject which already
mentioned the shortcomings of many East European countries in combating money-

The Council of Europe has also established the "Select Committee of Experts on the
Evaluation of Anti-Money Laundering Measures" This is a regional expert body
affiliated with the Financial Action Task Force (FATF) which is conducting mutual
evaluations concerning the effectiveness of the anti-money laundering regimes of its
22 members: Albania, Andorra, Bulgaria, Croatia, Cyprus, Czech Republic, Estonia,
Georgia, Hungary, Latvia, Liechtenstein, Lithuania, Malta, Moldova, Poland,
Romania, Russian Federation, San Marino, Slovakia, Slovenia, "The Former
Yugoslav Republic of Macedonia", Ukraine. It has thus far published two progress

Egmont Group

Since 1995, financial intelligence units (FIUSs) of different countries began working
together in an informal organization known as the Egmont Group of Financial
Intelligence Units (named for the venue of the first meeting in the Egmont-Arenberg
Palace in Brussels). The goal of the group is to provide a forum for FIUs to improve
support to their respective national anti-money laundering programs. This support

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includes expanding and systematizing the exchange of financial intelligence,
improving expertise and capabilities of the personnel of such organizations, and
fostering better communication among FIUs through the application of new

A document entitled Statement of Purpose of the Egmont Group of FIUs forms the
basis for the work of the Egmont Group.. As of end-2001, the group had 58
members, its administration is located in the Hague (Netherlands). An Information
Paper prepared by the Egmont Group provides additional details on its work and the
function of FIUs. The Group‟s most recent meeting was held in Monaco on June 7,
2002 with representatives of 78 countries.9

European Union (EU)

The 1991 EU Council Directive (91/308/EEC) – now called the “first” directive -
provided a basis for Member States' efforts to prevent criminal money entering the
financial system. The directive was considered a crucial part of the campaign against
drugs trafficking and organized crime in general. For many years, the Directive
served as a reference at the world level for other countries' measures to counter money
laundering. The cornerstone of the Directive was the obligation on credit and financial
institutions (including 'bureaux de change') to require identification of all their
customers when beginning a business relationship (particularly the opening of an
account or offering safe-deposit facilities), when a single transaction or linked
transactions exceed ECU 15,000 or when they suspect laundering (even where the
transaction is below the threshold).         All Member States except Austria have
implemented the Directive in full.

The Commission, in consultation with the Member States, considered amendments to
the Directive in the following areas:

        The need for a wider prohibition of money laundering. The first directive only
         obliges Member States to combat the laundering of the proceeds of drugs
         trafficking. In fact nearly all the Member States have already extended their
         legislation to cover the proceeds of a wider range of serious crimes including
         terrorism, trafficking in armaments, human beings, antiquities or human
         organs, prostitution, fraud, illegal gaming, kidnapping, blackmail and robbery.
        The extension of the obligations of the Directive (e.g. customer identification
         and the reporting of suspicious transactions) to certain vulnerable non-
         financial activities and professions, where there is a serious risk of laundering.
         The Commission is looking for example at casinos, auditors, real estate agents
         and the legal professions when carrying out financial transactions on behalf of
         their clients.
        The need for improved co-operation between the Financial Intelligence Units
         (FIUs) set up by Member States to receive and process the suspicious
         transaction reports. Currently, FIUs in Austria, Denmark, Finland, Germany,
         Ireland and Luxembourg are prevented by their legal status from exchanging
         information with some of their counterparts in other Member States. Improved
         cooperation could contribute to increasing the relatively limited numbers of

  Reporting on this secret meeting on its front page, the Financial Times (June 10, 2002) has chosen a
telling title: Foot-dragging over terror funds.

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          prosecutions, convictions and asset seizures based on suspicious transaction

The original deadline for the new Directive was the end of 1998. The initial
Commission proposal was not approved by the European Parliament, but a
compromise text10 has now been agreed upon. This was approved by the European
Council on November 19, 2001, but will not enter into force for at least 18 months
after this date.

International Criminal Police Organization – Interpol (ICPO – Interpol)

During the past twenty years, the ICPO-Interpol General Assembly has passed a
number of resolutions calling on member countries to concentrate their investigative
resources in identifying, tracing and seizing the assets of criminal enterprises.

These resolutions have also called on member countries to increase the exchange of
information in this field and encourage governments to adopt laws and regulations
that would allow access, by police, to financial records of criminal organizations and
the confiscation of proceeds gained by criminal activity. (Resolutions
AGN/55/RES/18, 1986 - AGN/56/RES/11, 1987 - AGN/60/RES/4, 1991 -
AGN/66/RES/15,17 and 18, 1997)

FOPAC is a French abbreviation for “Fonds Provenant d‟Activites Criminelles.”a
specialized branch created in 1983 by the ICPO-Interpol General Assembly in
Cannes, within the Police Division of ICPO-Interpol General Secretariat, to deal with
all the offenses relating to money laundering. (Resolutions AGN/52/RES/2, 1983 and
AGN/57/RES/8, 1988: abrogated by AGN/66/RES/17, 1997).

The FOPAC Bulletin shares trends and key investigations with member countries.
The Bulletin is edited two to three times each year and provided to member NBC‟s
and other organizations as approved. This document has a standing within the
community of those dealing with money laundering program as being unique in that it
shares real information. Members of FOPAC collect, edit and create the bulletin as
well as coordinate its production and dissemination.

International Monetary Fund (IMF)

In combating money laundering the IMF‟s role is limited. The main instrument for
reviewing financial systems – the Financial Sector Assessment Program – is voluntary
both in participation and in publication of results, with fewer than 30 countries
participating this year. A separate program to look specifically at offshore financial
centers is also voluntary, and only two – Cyprus and Panama – have been published
so far.

  Directive 2001/97/EC of the European Parliament and of the Council of 4 December 2001 amending
Council Directive 91/308/EEC on prevention of the use of the financial system for the purpose of
money laundering

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International Organisation of Securities Commissions (IOSCO)

The Madrid based professional association launched its own campaign in October
1992 by releasing a short, seven point resolution of its Presidents‟ Committee.

Organisation of Economic Cooperation and Development (OECD)

The Financial Action Task (FATF), already mentioned above was established in 1989
by the G-7. FATF is a small organization with a staff of 5. Members of FATF include
29 countries and jurisdictions, as well as two regional associations (the European
Commission and the Gulf Co-operation Council). By now, virtually all OECD
countries have passed some piece of legislation, most of which are directly available
from the FATF website. It is noteworthy, however, that none of the transition
economies have so far joined officially FATF, not even the four OECD member
countries (the Czech Republic, Hungary, Poland and Slovakia).

In 1990, the lessons emanating from the experience of FATF were summarized in 40
recommendations, a set of guidelines that are now periodically revised.11 In April
2001, the IMF and the World Bank recognized this document, as the accepted
international money-laundering standard.       To deal with "current threats" and
"reasonably foreseeable future developments," the FATF, on May 31, 2002 said it
would undertake the most drastic revision of its 40 Recommendations. The
organization has identified areas ripe for change, such as customer identification
procedures, corporate financing instruments and non-financial businesses.

In June 2000, FATF published for the first time a blacklist of 15 non-cooperating
countries and territories (NCCTs), as part of the organizations name and shame
campaign. The inclusion of Israel on the list attracted serious media attention. The
other countries were: the Bahamas, the Cayman Islands, the Cook Islands, the
Dominican Republic, Liechtenstein, Lebanon, the Marshall Islands, Nauru12, Nigeria,
Niue, Panama, the Philippines, Russia, St. Kitts and Nevis as well as Saint Vincent
and the Grenadines. The FATF report shone the spotlight on these countries to
promote intense future scrutiny. This list was updated in February and June 2001
and 2002, respectively.

The June 2001 report, entitled “Review to Identify Non-Cooperative Countries or
Territories: Increasing the Worldwide Effectiveness of Anti-Money Laundering
Measures” singled out Hungary among the transition countries as “non-
cooperative”13, while some other countries and territories were taken off from the
blacklist and the Ukraine was included. The Czech Republic and Slovakia were also

  The last published update is from 1996. The new update is expected to come out in the first half of
   Nauru is a small island in the Pacific Ocean, where more than 400 banks are operating. In 1998, this
tiny island was used to channel USD 70 bn out of the crisis ridden Russian economy.
   The FATF strongly criticized the overall reliability of the Hungarian system and specifically named
two weak points – the 2 million anonymous savings deposit books and the lacking information about
beneficial ownership. In response to this measure, the Hungarian Parliament hastily modified the 1994
law in December, 2001, hoping that the February 2002 FATF plenary will take off the country from the
black list. While, the progress made was indeed acknowledged, Hungary was not taken off from the
list at the February meeting, but only at the June 2002 meeting.

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criticized in the report for not having adequate safeguards, but were not blacklisted as
NCCT. The blacklist itself is compiled by the FATF staff on the basis of a 25 point
check-list. If a country is found “guilty” in more than one point it is automatically
labeled “non-cooperative”, or “partially non-cooperative” depending on the number of
shortcomings. As the ultima ratio, the FATF member countries can go as far as
excluding any non-cooperative country from the international network of banking
finance. Although this extremely strong weapon has not been applied so far to
anyone, the mere existence of this treat shows how powerful are the so-called “soft

On 29-30 October, 2001 the FATF held an extraordinary Plenary in Washington, D.C.
The main results of the meeting were the decision to expand the organization‟s
mission to include the fight against terrorism and eight Special Recommendations on
Terrorist Financing which commit members:

     1.   Take immediate steps to ratify and implement the relevant United Nations instruments.
     2.   Criminalize the financing of terrorism, terrorist acts and terrorist organizations.
     3.   Freeze and confiscate terrorist assets.
     4.   Report suspicious transactions linked to terrorism.
     5.   Provide the widest possible range of assistance to other countries‟ law enforcement and
          regulatory authorities for terrorist financing investigations.
     6.   Impose anti-money laundering requirements on alternative remittance systems.
     7.   Strengthen customer identification measures in international and domestic wire transfers.
     8.   Ensure that entities, in particular non-profit organisations, cannot be misused to finance

The progress in the implementation of the Special Recommendation was first
reviewed at the FATF Plenary Meeting in Hong Kong, China in the framework of a
global Forum to counter the financing of terrorism on February 1, 2002. Although of
NCCT list was reviewed too, no new decisions were made.

Corporate entities - corporations, trusts, foundations and partnerships - are often
misused for money laundering, bribery and corruption, shielding assets from creditors,
tax evasion, self-dealing, market fraud and other illicit activities. The veil of secrecy
they provide in some jurisdictions may also facilitate the flow of funds to terrorist
organisations. A new OECD publication, Behind the Corporate Veil: Using Corporate
Entities for Illicit Purposes, urges governments to combat such misuse by acting to
ensure the availability of information about ownership and control.

Behind the Corporate Veil concludes that the types of corporate entities that are
most frequently misused are those that provide the greatest degree of anonymity to
their beneficial owners. In response, the OECD calls on governments and other
relevant authorities to ensure they are able to obtain information on the beneficial
ownership and control of corporate entities and, where appropriate, to share this
information with law enforcement authorities domestically and internationally.

Specifically, the OECD recommends that governments should consider taking action

    Require up-front disclosure of beneficial ownership and control information to the
     authorities upon the formation of the corporate vehicle;

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   Oblige intermediaries involved in the formation and management of corporate
    vehicles (such as company formation agents, trust companies, lawyers, trustees,
    and other professionals) to maintain such information;
   Develop the appropriate law enforcement infrastructure to enable them to launch
    investigations into beneficial ownership and control when illicit activity is

United Nations (UN)

One of the early instruments of the United Nations is a document entitled, Political
Declaration and Action Plan against Money Laundering, adopted at the Twentieth
Special Session of the UN General Assembly on 10 June 1998. A more recent one is,
the 1999 International Convention for the Suppression of the Financing of Terrorism.
Quite interestingly, several member countries have, so far, failed to ratify this latter
document, including some European Union member countries. After September 11,
the EU has explicitly requested its member countries to speed up the ratification
process. The are all binding legal instruments for all signatories.

The Global Program against Money Laundering (GPML) is the key instrument of the
United Nations Office of Drug Control and Crime Prevention (ODCCP). Since 1996,
GPML also coordinates the International Money Laundering Information Network
(ImoLIN) on behalf of the UN, the OECD, the Council of Europe, Interpol, the
Commonwealth Secretariat and the Asia Pacific Group on Money Laundering.
Information on IMoLIN is freely available to all Internet users, with the exception of
AMLID, which is a secure database. The key features of the IMoLIN system are:

        the Anti-Money Laundering International Database (AMLID), a compendium
         of analyses of anti-money laundering laws and regulations, including two
         general classes of money laundering control measures (domestic laws and
         international cooperation) as well as information about national contacts and
         authorities. AMLID is a secure, multi-lingual database and is an important
         reference tool for law enforcement officers involved in cross-jurisdictional
        the reference section that contains details of the UN's latest research, a
         bibliography, and abstracts of the best new research from other sources;
        a click-on map that takes users to regional lists of national legislation, together
         with links to the websites of related regional organizations and financial
         intelligence units (FIU)s. Eventually, this section will contain the full text of
         all national anti-money laundering legislation throughout the world;
        the full text of the United Nations model legislation on money laundering for
         common law and civil law systems;
        a calendar of events that lists current training events and conferences at the
         national, regional and international level; and
        the links section that takes users to other relevant sites concerned with the
         fight against money laundering.

The United Nations adopted a declaration against money laundering on June 10, 1998
at the 20th Special Session of the UN General Assembly.

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                  EAST-WEST MANAGEMENT INSITUTE (EWMI) – PFS Program

Wolfsberg Group

Perhaps the most important pre-September 11 international AML effort traces back its
origins to October 2000, when leading international private banks formed the
Wolfsberg Group.14 This is a good example of the “soft-law method”.

The twelve founding members, headed by UBS of Switzerland agreed on an 11 point
set of global AML guidelines.       In the preparation of the document, the banks
collaborated with a team from Transparency International, a Berlin-based non-
governmental organization, dedicated to increasing government accountability an
curbing both international and national corruption. The 12 founding members of the
Group are (in alphabetical order):

ABN Amro N.V. , Banco Santander Central Hispano, S.A., Bank of Tokyo-
Mitsubishi, Ltd., Barclays Bank, Citigroup, Credit Suisse Group, Deutsche Bank AG
Goldman Sachs, HSBC, J.P. Morgan Chase, Société Générale, UBS AG

Since its foundation, the Wolfsberg Group had two publicly announced meetings on
October 5, 2001 and January 9-11, 2002.

                                                Section III

               Country-specific examples (in alphabetical order by country)

Central and Eastern Europe

Although the Central and Easter European countries are not members of the
FATF, they nevertheless have undertaken efforts to combat money laundering. The
Baltic countries were among the early starters. The so-called Riga Declaration on the
fight against money laundering was accepted on November 14, 1996.

Czech Republic

Preparation of the new law began in 1993 under the auspices of the Ministry of
Justice. As a result, a specialized office at the Ministry of Finance was created, the
Financial Analytical Unit (FAU). At present, this office is responsible for receiving
and evaluating reports on unusual financial transactions. The FAU has an obligation
to report any suspicious cases to the specialized police service of the Ministry of the
Interior for further investigation. The Czech Parliament approved Act No. 61/96 Col.
on February 15, 1996 with full validity commencing on January 1, 1997. The Act
views the proceeds of money laundering very widely. According to the law, attempts
at legalization processes shall be understood to mean actions intended to conceal the
illicit origin of proceeds in order to create the impression that they constitute income
obtained in conformity with the law.

The legislation covers a wide number of companies and firms in the Czech Republic,
and uses the term "financial institutions," meaning banks, investment funds and
companies, pension funds, insurance companies, gambling firms and casinos and real-

     The group carries the name of a Swiss resort village.

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estate companies. All financial institutions in the Czech Republic are obliged to
identify clients in all cases of commercial transactions exceeding the amount of CZK
500,000. Also, all unusual transactions should be reported to the Ministry of Finance's

In connection with the identification of customers and clients it is necessary to
mention the obligation for commercial banks in the Czech Republic, according to the
Act on Banks No. 21/92 Col., §37, to identify customers in financial transactions
exceeding the amount CZK 100,000.

The system of employed sanctions confirms the importance of the new law
concerning certain measures against attempted legalization of profits originating from
criminal activity. The Ministry of Finance is authorized to exact fines of up to CZK 2
million, and, in the case of repeated violation of the Act, fines of up to CZK 10
million. In highly serious cases, the license or permission for commercial activity of a
financial institution can be withdrawn.

According to the new anti-money laundering act, any financial institution having
more than 3 employees must create an effective internal system of principles for
practical fulfillment of identification and reporting obligations. An important fact is
also the obligation that all information concerning identification has to be stored for at
least 10 years.


Hungary enacted its law in 199415. Since then, banks have filed almost 6,000
announcements with the Hungarian police. Criminal investigations were initiated in
several hundred cases, but only 2 cases reached the courts by November 2001. In
once case already, the charge was finally dropped. In response to be listed among
the non-cooperative countries by the FATF, Hungary quickly passed the necessary
amendments to the 1994 law and other relevant legal instruments16 and issued new
bylaws in late 2001 and early 2002.17


There was no anti-money laundering law before 1999. Recognizing its vulnerability
internally and the need to fight money laundering on an international level, the central
policy objective of the Romanian authorities has been to create a legal framework to
fight money laundering.

     Act XXIV of 1994 on the Prevention and Impeding Money Laundering.
  E.g. one of the shortcomings of the previous Hungarian legislation concerned the possibility to open
anonymous saving deposit accounts in the form of pass books. The modalities of this instrument were
regulated by a 1989 Law-Decree. Other details were regulated in the 1959 Civil Code.
  See e.g. Act No. LXXXIII of 2001 on Combating Terrorism, on Tightening up the Provisions on the
Impeding of Money Laundering and on the Ordering of Restrictive Measures; Government Decree
299/2001(XII. 27.) on the Implementation of Act XXIV of 1994 on Prevention and Impeding of Money
Laundering; Summary of regulatory measures in connection with the new Hungarian Anti-Money
Laundering law (as at 25 January, 2002)

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To this end Law 21/99, Law on the prevention and punishment of laundering
money, came into effect on 22 April 1999.18

The law regulates the prevention and punishment of activities concerned with the
laundering money.

According to the law by the laundering money shall be understood deeds provided
under art. 23, if they had been committed through the agency of the juristic or natural
persons mentioned under art. 8. The law created the National Office for the
Prevention and Control of Money Laundering as a specialist body with legal
personality, subordinated to the Government. The National Office for the Prevention
and Control of Money Laundering in Romania discovered during the year 2000, 140
cases of money laundering through the banking system. The total sum of the
transactions represents approximately 2,5 millions dollars but this is not representative
for the phenomenon.


President Putin signed the first law on this issue in August, 2001. 19 Interestingly,
Panamanian experts assisted in the drafting of this legislation which entered into force
in February, 2002. The new limit of reporting obligation was set at R 600,000 (cca.
USD 20,000). Russia decided to create a new Center for Financial Monitoring with
more than 150 employees and an initial US$1 million budget. However, it would be
misleading to assume that prior to this law Russia didn‟t do anything to prevent
money laundering. (For a detailed analysis on various central bank regulations, see
the excellent study of Robinson – Burger,)


In 1995, Slovenia set up a specialized institution, the Office for Money Laundering
Prevention, under the auspices of the Ministry of Finance.

United States

The US passed the world‟s first law explicitly directed at money laundering. The
Money Laundering Control Act of 1986, part of the Anti-Drug Abuse Act of 1986,
made money laundering a federal crime. It created three new criminal offenses for
money laundering activities by, through, or to a financial institution. These offenses

         Knowingly helping launder money from criminal activity.

         Knowingly engaging (including by being willfully blind) in a transaction of
          more than $10,000 that involves property from criminal activity.

         Structuring transactions to avoid Bank Secrecy Act (BSA) reporting.

    The entire law (only in Romanian language) can be found at the following site address:
   Deputy Finance Minister Yuri Lvov was quoted in Financial Times, August 9, 2001.

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         The penalties for those offenses include imprisonment for a maximum of 20
          years, fines up to $500,000 or two times the amount laundered, and forfeiture
          of assets.

The daily work of fighting money laundering is in the hands of the Financial Crimes
Enforcement Network (FinCEN). In 2000, FinCEN received and processed 12
million Currency Transaction Reports (CTRs) – registering transactions above
US$10,00020 – and 125,000 Suspicious Activity Reports (SARs).

                                                 Section IV


„Money laundering is the process by which the proceeds of crime are converted into
assets which appear to have a legitimate origin, so that they can be retained
permanently or recycled to fund further crimes.”   This is the definition, currently
proposed by the UK financial regulatory authority, FSA in its Consultation Paper,
published in April, 2000.

“The conversion or transfer of property, knowing that such property is derived from
serious crime, for the purpose of concealing or disguising the illicit origin of the
property or of assisting any person who is involved in committing such an offence or
offences to evade the legal consequences of his action, and the concealment or
disguise of the true nature, source, location, disposition, movement, rights with
respect to, or ownership of property, knowing that such property is derived from
serious crime.” This is the definition of the 1990 EU directive.

A concise working definition was adopted by the Interpol General Secretariat
Assembly in 1995, which defines money laundering as: “Any act or attempted act to
conceal or disguise the identity of illegally obtained proceeds so that they appear to
have originated from legitimate sources.”

Although these definitions are rather complex, they do not resolve all queries. What
is the crime behind money laundering? Legislators may find it relatively easy to
agree to fight against revenues made from illegal drug making21, firearms smuggling,
racketeering, fraud or bribery. But it is intrinsically more difficult to organize action
against revenues originating, say, from Internet gambling, Ponzi schemes22,
   In fact, 30% of these reports are superfluous, since the law provides numerous exemptions, including
– inter alia – transactions of qualified business customers. However, it also happened that important
criminal transactions were duly reported, but remained unnoticed in this huge pile of information. E.g.
investigations related to the September 11 attack found out that when Mohammed Atta, thought to be
the leader of the 19 hijackers, opened a bank account in Southern Florida in Njune 2000, a wire transfer
of USD 69,985 from the Gulf three months later prompted SunTrust Bank to make a suspicious
transaction report to FinCen. (See, Financial Times, 29 November, 2001.)
   The so-called Black Market Peso Exchange (BMPE) is the largest money laundering system in the
Western Hemisphere. Colombian narcotics traffickers are the primary users of BMPE, repatriating up
to US$5 billion annually to Colombia.
  In July, 2001 the Bank of Bermuda agreed to pay US$ 67.5 million to a class of 2,500 investors, who
lost US$ 300 million in a Ponzi scheme. Later it turned out that the bank helped the scheme‟s
operators to market their “product” and then participated in laundering the proceeds.
(, August 2, 2001.)

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                  EAST-WEST MANAGEMENT INSITUTE (EWMI) – PFS Program

intellectual property theft or simply against untaxed revenues of any kind. The
revision of the 1991 EU recommendation extends the definition of crime so much that
it now includes frauds pertaining to EU funds or support grants. In many countries,
money laundering is a “tag-along” count, added to an indictment charging the
defendant with the underlying offense that generated the illicit funds.

In some countries, depositing the revenues of illegal activities on a bank account
doesn‟t constitute a criminal act in itself. One can argue, for example, that depositing
and than withdrawing money from a bank account doesn‟t make the money clean or
the revenue taxed. In fact, depositing and withdrawing money from a bank account –
even if this is an anonymous bank account – do not differ much from an alternative
way of protecting money, say hiding in a mattress.

“Know your customer”

One approach for banks to identify money laundering is the “Know Your Customer”
(KYC) principle. An obvious problem of this approach is that some customers may
not wish to be known in a close fashion by their bank. The current EU regulation
drew the line of identification at Euro 15,000. In other words, transactions beyond
this limit require customer identification in a large area of the financial world.
Where the line between fighting crime and protecting customers‟ privacy is going to
be debated for many years. In the US, this issue goes directly into the heart of the
U.S. Constitution: the Fourth Amendment declares that individuals have the right to
be free from government criminal investigations without reasonable and specific
evidence of wrongdoing.

Costs involved in combating money laundering

The costs of searching for money laundering offenders are huge because you have to
find a pin in an astronomically huge pile of hay. Technological developments
(internet banking, mobile banking, electronic cash) make it harder and even more
costly for banks to know their customers, because these technologies aim at reducing
transactions costs at the detriment of customer identification and automatic
transaction recording. According to one report, for example, a Mondex smart card in
use in Europe allows money to be transferred without leaving any electronic trail

If, however, the transaction is recorded and the information is stored, artificial
intelligence (AI) software and other automated routines can help big organizations to
identify suspect transactions. According to a newspaper report23, the leading provider
of such software is Searchspace, a company founded by academics at London‟s
University College. It has developed systems for the London Stock Exchange to curb
insider dealing by detecting out-of-the-ordinary transactions by investors. Rather than
carrying out random spot checks used to combat drug abuse in sport, the software
monitors every transaction and looks at it in the context of what that customer
normally does and what similar people do. In any case, the use of AI is not a new
development. The U.S. Congress, Office of Technology Assessment (OTA)
published such a report, as early as 1995.

     John Willman: How to avoid the dirty money, in Financial Times, 19 April, 2001.

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Money laundering at the professional level, of course, has its own costs, too. Law
enforcement agencies in the US believe that the cost of laundering money currently
ranges from 8-20% of principal.        If the combat against this type of crime is
successful, these costs are expected to rise. Hence, the changes in costs can be used
as a proxy to measure the effectiveness of anti money laundering policies.

Politicians and money laundering

Another weak point, mentioned above regarding the actions of the Milosevic clan, is
the treatment of financial transactions for or on behalf of elected political leaders.
Recently, the U.S. Treasury Department announced voluntary guidelines for US banks
aimed at preventing „corrupt” foreign political leaders from sheltering their money in
US accounts. In practice, however, the definition of “corrupt” foreign politicians
remains as obscure as it was before.

In a more general sense, legitimacy often resides in the eyes of the beholder. What
may be illegal in once country represents a moral victory in another. Countries
operating repressive political systems usually operate very restrictive currency and/or
tax regulations, too. This may drive legitimate business people, as well as political
opponents of the given dictatorial regime to work on the fringes of the law. In
France, e.g. the term money laundering (blanchiment) means something very serious
and specific, related to drug-trafficking and organized crime, whereas in legal terms it
includes tax evasion or other minor crimes.24

Who is the culprit?

Another problem is to identify the culprit.    In some countries, money launderers
cannot be persecuted and punished for this type of crime, if they are already punished
for the criminal offence, where the dirty money comes from. (The principle applied
here is that no one may penalized twice for the same offence.) Another approach to
this problem is based on the differentiation between the owner of the laundered
money and the person acting as money launderer. In Hungary, for example, money
laundering means by definition the “laundering” of other people‟s money only. In the
US, by contrast, tax fraud automatically triggers an accusation of money laundering
accusation as well. In some jurisprudence, money laundering as a criminal act can be
committed only by individuals, but not by corporatized business entities.

Because of these difficulties, law enforcement agencies have difficulties to prove
accusations of money laundering, unless one of the culprits is willing to cooperate.
(A recent example of this possibility is the case of a former US investment banker
with Deutsche Bank.      He pleaded guilty on August 28, 2001 as a part of an
agreement. In return for acknowledging his assistance to Egyptian and Pakistani
money launderers, the banker will be released from other charges. The two money
launderers are accused of attempting to launder US$2 million in cash offered by
undercover government agents as proceeds from the sale of a Stringer missile and
other arms.)

  On the complexity of such misunderstanding hurting seriously the prominent representatives of the
business sector in France, see “Dirty money, stained reputation”, in Financial Times, January, 25,

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Money laundering and terrorism

Since September 11, it has become a common place to link money laundering with
terrorist financing. But this is often incorrect. As Mr Richard Spillenkothen, Director
of the Division of Banking Supervision and Regulation of the Federal Reserve System
has recently stated before a US House Committee "(T)errorist financing activities are
unlike traditional money laundering in a very significant respect. Money used to
finance terrorism does not always originate from criminal sources. Rather, it may be
money derived from legitimate sources that is then used to support crimes.
Developing programs that will help identify such funds before they can be used for
their horrific purposes is a daunting task."

Off-shore centers and tax havens

For all the recent focus on big banks in established financial centers, banks and
companies registered in offshore centers are still the main targets of anti-money-
laundering efforts. As of 1998, there were around 4,000 offshore banks licensed by
nearly 60 offshore jurisdictions. They control an estimated US$5 trillion in assets.

                                               Table 2

                                Offshore banks world wide

          Region                   Distribution            Well-known      and      less    known
                                       (%)                 examples
Caribbean      and      Latin           44
Europe                                    28               Yugoslav Republic of Montenegro
                                                           (banking license can be bought
                                                           through the Internet for US$9,999).
                                                           Campione in the Cantone of Ticino
Asia                                      18
Middle East and Africa                    10
Total                                    100

Source: The Economist, April 14, 2001; Internet.

However, offshore centers and corresponding bank accounts registered there are not
necessarily crime spots by definition. In reality, there is a natural continuum of
banking registration rigor, starting from the most controlled mechanisms to the most
liberal ones. It is simply not true that rules outside of the “offshore” world and a few
mini-states (like Andorra, Cyprus or Monaco) are uniformly strict. Notable examples
are full-size, well institutionalized countries like Austria or Switzerland, but also US
states such as Delaware, Nebraska, Nevada, Utah or Wyoming.

            In the State of Delaware, for example, companies can be registered in few minutes, but no
            records are kept concerning the name of owners or board members. As a result, half of
            the top 500 US industrial companies and 40% of US firms listed on the New York Stock
            Exchange (NYSE) are actually registered in State of Delaware, where not only the
            information requirements are minimal, but so are the taxes, as well. (For many years,
            businesses registered in Delaware were allowed to hide the name of directors, but this

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              privilege has been given up recently.) The state of Nevada earned its popularity among
              business investors for not having a contractual obligation towards the US tax authority to
              exchange information. The State of Utah and Wyoming have become popular, because
              these are the only US states, where companies with limited liabilities (LLC) can also be

The intrinsic link between the advantages offered by tax havens and the secrecy
regarding the underlying financial transactions imply a further complication. The
efforts of the OECD, for example, towards international harmonization of tax rates
and tax systems have such a two-fold objective. “The idea is to go after the secrecy
that allows tax avoidance and money laundering”, saids Mr. D. Johnston, the OECD‟s
Secretary-General. Already in 2000, 35 countries and territories were included on the
OECD‟s first blacklist of uncooperative tax havens. Prior to September 11, 2001 the
Bush administration had a different interpretation of the work done in the OECD and
give some weight to the competition argument, according to which many countries
have no other competitive advantage than this. As it was to be expected, after
September 11, the US has also become more critical to tax havens. As a result, 26
countries and territories have given commitments to lift the veil of secrecy
surrounding their tax and regulatory systems and henceforth dropped from the list.
The 2002 edition of the blacklist contained only 7 countries and territories (Andorra,
Liberia, Liechtenstein, Marshall Islands, Monaco, Nauru and Vanatu).

On the other hand, poorer countries whose export earnings depend on offshore
financial activity generally object to the international financial institutions pursuing a
stricter policy. They argue – inter alia – that if banking secrecy led to instability, the
Swiss economy would have collapsed long ago, and much criminal and terrorist
money circulates through the financial centers of G7 countries – a point difficult to

Banks and other large financial institutions are relatively easy to monitor for
compliance with anti money laundering registration in general, and the application of
the “know your customers” principal in particular. It is much more difficult, and in
fact virtually impossible to enforce these regulations on small street money changers,
the so called bureaux de changes. First, there are thousands of such small shops.
Second, the advantage of these small money changes is the possibility to exchange
currencies in a quick and simple fashion, without spending time presenting
passports/official identification and obtaining an official receipt. Nonetheless, after
the events of September 11, 2001 the U.K. Chancellor of the Exchequer proposed a
new regime of Customs supervision of bureaux de change from November 12, 2001.
This regime could cost the industry up to £4.25million in compliance costs.
Government officials estimate £4billion a year leaves the country via the bureaux, 65
per cent of it for illegal purposes.

In the US, U.S. Treasury officials have pointed to concerns, for instance, with the
roughly 160,000 "money service" businesses in the US, which offer currency
exchange but also, check-cashing and wire transfers.

Parallel banking

The parallel banking industry works outside the regulatory and supervisory regime.
In countries where a license is required for a particular activity and the conduct of the

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activity is a crime, parallel bankers are by definition criminals. There are many, many
money transmitters who operate out of sight of the law, even where required to
license. They operate, often, within a close knit community, often using lines of
communication built up all over the world over a period of decades - or in some cases
millennia. As noted earlier above, some of the money transfer mechanisms (the chop,
hawalla, etc.) which form the basis of parallel banking were developed to enable the
movement of value without the movement of money.

The limits of secrecy

The use of information pertaining to money laundering is also more complicated
than it might appear at first sight. The ongoing debate in the EU revolves around two
related issues:

     1. Are national governments entitled to use incriminating information obtained
        from anti-money laundering measures in other procedures?

     2. Can it be required from lawyers to report on the money laundering activities of
        their own clients? If the answer is yes, should this line of reasoning extended
        to public notaries, auditors, tax advisors, real estate managers, asset managers,
        auctioneers, gold and diamond dealers, or casino employees, as well?

The European Parliament rejected the first proposal, yet kept the other above-
mentioned professions on the hook by requiring them to identify their clients and
report suspected money laundering cases.

The introduction of the euro

The introduction of the Euro in 12 countries of the EU is another source of risk.
Preventive measures have been taken to forestall all attempts at money laundering.
But the experts fear that the surge in exchange transactions during the period of
changeover to the euro may swamp the personnel of financial institutions and make
them more likely to miss or disregard indications of laundering. This could have been
the case during the period from January to June 2002, when Euro coins and banknotes
replaced national legal tenders.25

More information

A wealth of useful information may be obtained from the following sources:

         National Criminal Justice Reference Service - International Papers (Web site
          of the US Department of Justice with much useful documentation on
          transnational crime

  Two influential German economists, for example, presented a scientific paper arguing that in the run-
up period a large volume of illegally held Deutsche Marks was poured on the currency markets. Most
of this money was held outside of Germany in east and southeast Europe. The conversion of an
estimated Euro 46 bn equivalent was considered big enough to exert a downward pressure on the Euro
vis-à-vis the US dollar. (See: Hans-Werner Sinn – Frank Westermann: “The Deutschmark in Eastern
Europe, Black Money and the Euro: On the Size of the Effect”, CES-Ifo Forum, 2001.

10/8/11                                           8:57 PM                                                 24

      - the web site of Alert Global Media Inc (free
          registration required to access resources and e-mail alerts). This is the web
          site of a publisher of money laundering materials. There is a strong US bias
          in the materials but the site is useful.
         Billy's Money Laundering Information Website - materials prepared by Billy
          Steel with a UK perspective.
         The Fraud Hotline - A site to encourage "whistleblowers" to report fraud or
          malpractice in institutions which subscribe to the service under the protection
          of the Public Interest Disclosure Act 1998.
         The Money Laundering Compliance Web Site - web site of Silkscreen
          Limited - a UK firm imvolved with training for the financial services
         Swiss Money Laundering Control Authority - Official Site in French,
          German, Italian and some English.
         World Money Laundering Report.             This newsletter, covering money
          laundering related news worldwide, is produced by Vortex Centrum Ltd., a
          consulting firm specialized in producing banking software to combat money
         The US-based Heritage Foundation, compiling information – inter alia – on
          American congressional effort to strengthen international cooperation in this
          subject matter.
         The American Bar Association and the American Bankers Association have
          regular annual seminars on the subject of money laundering. The 12th Annual
          Money Laundering Enforcement Seminar took place in June 2001. Several of
          the documents and presentations were subsequently published on the Internet.
         The Global Policy Forum was established in December 1993 to monitor
          global policy making at the United Nations. It is based in New York and has
          consultative status at the UN as an non-governmental organization (NGO).
         A Swiss law firm, Micheloud & Co. operates a website focusing
          predominantly on Swiss anti-money laundering news and the legal/practical
          consequences of opening a Swiss bank account.
         A UK law Firm of Michael Robinson, specialized – inter alia – on terrorism
          and AML issues.
         A former UK bank employee, Billy Steel maintains his own private anti-
          money laundering website.
         The Carter Center in the United States maintains LACP Transparency Project,
          where a detailed chronology regarding US and other international policy
          initiatives can be found.

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