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Introduction In 1999, money laundering exploded onto the front pages of the world's newspapers. In August, news headlines claimed that $15 billion in funds from Russia might have been laundered through banks in New York. Newspapers have continued to follow this story. In September 1999, U.S. Treasury Secretary Summers testified before the House Banking Committee on this issue, placing international money laundering directly into the spotlight. The investigation continues and indictments of a former bank official, two other individuals and the three companies have been filed. As the 2000 INCSR goes to press, guilty pleas from two of the individuals and the three companies have been entered. The large movements of money out of Russia and through American banks continue to focus the attention of the world on the problem of money laundering. Around the globe, there were both positive and negative developments in this field. September marked the release of the Administration's National Money Laundering Strategy for 1999. This Strategy, prepared pursuant to the Money Laundering and Financial Crimes Strategy Act of 1998, highlighted the federal government's effort to address the problem of money laundering on a coordinated and comprehensive level. One of the four major goals of the Strategy is to strengthen international cooperation to disrupt the global flow of illicit money, and there are a number of action items in the Strategy that specifically address international money laundering. Another major money laundering development in 1999 was the issuance of financial advisories concerning Antigua and Barbuda by the United States and the United Kingdom in April. The issuance of these advisories demonstrated that the United States and other nations will take tough, concrete action against governments that do not seriously address the problem of money laundering and do not adequately supervise financial institutions within their jurisdictions. The U.S. advisory, which advised financial institutions to give "enhanced scrutiny to all financial transactions routed into or out of Antigua and Barbuda," was issued because of negative changes in Antigua and Barbuda's anti-money laundering laws. These changes threatened to "create a 'haven' whose existence will undermine international efforts of the United States and other nations to counter money laundering and other criminal activity." Issuance of these advisories is part of a coordinated campaign to identify and engage, and if necessary isolate, those jurisdictions that are not adequately addressing the problem of money laundering and to induce them into fulfilling their responsibilities as members of the international community. For example, the National Money Laundering Strategy has as one of its objectives that the United States should "apply increasing pressure to jurisdictions where lax controls invite money laundering." Action items included under this objective include a mandate to consider unilateral action where appropriate, including the issuance of bank advisories. There is also multilateral support for stronger measures against non-compliant jurisdictions. The Financial Action Task Force has embarked upon an initiative to consider steps to be taken regarding countries and territories (including among FATF members) that fail to provide effective international administrative and judicial cooperation in money laundering cases. The first step in this process was to develop criteria for defining the non-cooperative countries and territories. The second step is to identify the jurisdictions that meet these criteria. The third step will be to agree upon the necessary international action to encourage compliance by the identified non-cooperative jurisdictions. The FATF is well underway on this initiative. Further, the FATF has already issued a press release expressing its concern about Austria, a FATF member, with respect to its failure to eliminate the anonymous passbook savings accounts that are available in Austria. Austria must begin to eliminate these accounts or face suspension of its FATF membership in June 2000. The FATF's willingness to take action against one of its members indicates that it will not shrink from fully pursuing this initiative. In 1999, FATF agreed to expand its membership and invited three new countries to join as observers. These strategically important countries are Argentina, Brazil and Mexico. Full membership will be extended to each country once they satisfy FATF membership requirements. Also during 1999, the Financial Stability Forum was created by the G-7 Finance Ministers to enhance international cooperation and coordination in the area of financial market supervision and surveillance. The Forum met for the first time in April and agreed to focus initially on three issues: the implications of highly leveraged institutions, the offshore financial services sector and short-term capital flows. This focus benefits efforts being undertaken in other various international initiatives to combat global money laundering and financial crime. Any investigation of money laundering in the United States that involves the proceeds of a crime committed in a foreign country requires evidence that would establish the commission of the crime in the foreign country. Consequently, a successful money laundering prosecution in the United States requires the assistance and cooperation of the jurisdiction where the proceeds were generated. Such cooperation, in turn, requires that the countries involved have good working relationships between law enforcement agencies and have laws that allow and facilitate the exchange of information and evidence. Without such cooperation, it is difficult to investigate and prosecute international movements of money. Several bills to promote anti-money laundering cooperation have been introduced recently in the United States Congress. Finally, it should be noted that two international crime conventions are also seeking to strengthen the international efforts against money laundering. In December 1999, the United Nations General Assembly adopted the International Convention for the Suppression of Terrorist Financing. This Convention requires States Parties to criminalize the providing or collecting of funds with the intent or knowledge that they are to be used to conduct certain terrorist activity. The Convention also contains important advances in the area of mutual legal assistance, including a provision that States Parties may not refuse a request for mutual legal assistance on the ground of bank secrecy. In addition, a new UN Convention against Transnational Organized Crime is being negotiated for General Assembly adoption in 2000. This Convention is expected to contain provisions to criminalize the laundering of proceeds beyond drug proceeds and to enhance anti-money laundering regulations, enforcement and cooperation worldwide. Over the past year, it is encouraging that while anti-money laundering jurisdictions and organizations have been marshaling their forces, new colleagues have joined their ranks. Positive developments on this front include major initiatives in Eastern and Southern Africa, South America and the Asia-Pacific region. Each of these initiatives strengthens the global anti-money laundering community. Why We Must Combat Money Laundering People who commit crimes need to disguise the origin of their criminal money so that they can use it more easily. This fact is the basis for all money laundering, whether that of the drug trafficker, organized criminal, terrorist, arms trafficker, blackmailer, or credit card swindler. Money laundering generally involves a series of multiple transactions used to disguise the source of financial assets so that those assets may be used without compromising the criminals who are seeking to use the funds. Through money laundering, the criminal tries to transform the monetary proceeds derived from illicit activities into funds with an apparently legal source. Money laundering has devastating social consequences and is a threat to national security because it provides the fuel for drug dealers, terrorists, illegal arms dealers, corrupt public officials and other criminals to operate and expand their criminal enterprises. In doing so, criminals manipulate financial systems in the United States and abroad. Unchecked, money laundering can erode the integrity of a nation's financial institutions. Due to the high integration of capital markets, money laundering can also negatively affect national and global interest rates as launderers reinvest funds where their schemes are less likely to be detected, rather than where rates of return are higher because of sound economic principles. Organized financial crime is assuming an increasingly significant role in money laundering that threatens the safety and security of peoples, states and democratic institutions. Moreover, our ability to conduct foreign policy and to promote our economic security and prosperity is hindered by these threats to our democratic and free-market partners. In recent years, crime has become increasingly international in scope, and the financial aspects of crime have become more complex, due to rapid advances in technology and the globalization of the financial services industry. Modern financial systems permit criminals to order the transfer of millions of dollars instantly though personal computers and satellite dishes. Money is laundered through currency exchange houses, stock brokerage houses, gold dealers, casinos, automobile dealerships, insurance companies, and trading companies. Private banking facilities, offshore banking, shell corporations, free trade zones, wire systems, and trade financing all have the ability to mask illegal activities. The criminal's choice of money laundering vehicles is limited only by his or her creativity. Ultimately, this laundered money flows into global financial systems where it can undermine national economies and currencies. Money laundering is thus not only a law enforcement problem but a serious national and international security threat as well. There is now worldwide recognition that we must deal firmly and effectively with increasingly elusive, well-financed and technologically adept criminals who are determined to use every means available to subvert the financial systems that are the cornerstone of legitimate international commerce. Global events over the past year involving offshore financial centers and new cyber money laundering trends point to the necessity of promptly addressing this growing threat. Money launderers also negatively impact jurisdictions by reducing tax revenues through underground economies, competing unfairly with legitimate businesses, damaging financial systems, and disrupting economic development. Money laundering is now being viewed as a central dilemma in dealing with all forms of international organized crime because financial gain means power. Fighting money launderers not only reduces financial crime; it also deprives criminals and terrorists of the means to commit other serious crimes. The United States and other nations are victims of tax evasion schemes that use various financial centers around the world and their bank secrecy laws to hide money from tax authorities, thus undermining legitimate tax collection. Financial centers that have strong bank secrecy laws and weak corporate formation regulations, and that do not cooperate in tax inquiries from foreign governments, are found worldwide. These financial centers, known as "tax havens," thrive in providing sanctuary for the deposit of monies from individuals and businesses that evade the payment of taxes in their home jurisdictions and to keep the money they have deposited from the knowledge of tax authorities. Billions of funds on which tax is properly due (marks, lira, pounds, et cetera) are held on deposit in these tax havens. It makes no difference whether the funds on which tax is due emanate from illegal activity or revenue earned legally. Tax evasion and money laundering are activities that are aided by financial centers that have strong bank secrecy laws and a policy of non-cooperation with foreign tax or law enforcement authorities. Offshore Financial Centers (OFCs) Recent events of the past few years have led to a marked increase in 1999 in the efforts of the international financial community to identify and eliminate deficiencies in regulatory systems that may have the potential to threaten global financial stability. Simultaneously, the international financial community has been examining jurisdictions engaged in cross-border transactions to determine the extent to which individual jurisdictions adhere to standards and norms designed to thwart money laundering, tax evasion and other transnational financial crimes. No sector in the global financial system is undergoing more intense scrutiny than the offshore financial services sector. Nearly sixty jurisdictions, scattered around the globe, comprise this constantly expanding sector (see offshore chart in this chapter.) A recent study found that by the end of 1997, the share of cross-border assets held in the offshore sector ($4.8 trillion) accounted for more than half all cross-border assets held globally.1 It is not only the sheer volume of cross-border assets held by the offshore financial centers that has riveted the attention of the world's regulators, supervisors, law enforcement organizations and international financial institutions. While the OFCs serve many legitimate functions in international commerce and financial planning,2 some of the products and services provided by the OFCs when combined with certain aspects of the regulatory and legal regimes within the sector can be used for criminal purposes. In particular, the lack of transparency that characterizes the offshore sector has acted as a powerful magnet to governments, groups and individuals desirous of hiding their financial activity from public scrutiny. Although there is little consensus regarding the exact definition of an offshore financial center, certain characteristics distinguish traditional onshore financial centers from those termed "offshore." Unlike the onshore jurisdictions, the vast majority of OFC jurisdictions restrict access to their OFC financial services and products to non-residents. Further, many OFCs conduct financial transactions only in currencies other than the local currency. OFC jurisdictions also differ from onshore jurisdictions in their regulatory regimes and legal frameworks. In general, OFC jurisdictions lack the stringent banking regulatory and supervisory regimes found in developed onshore jurisdictions. In many OFC jurisdictions, banks are not required to adhere to a wide range of regulations normally imposed on onshore banks. Formation of a bank is more easily accomplished in OFC jurisdictions; in some, a bank can be formed and registered and its ownership placed in the hands of nominee directors via the Internet. However formed, there are few, if any, disclosure requirements. Bank transactions frequently are free of exchange and interest rate restrictions, minimal or no capital reserve requirements are required, and transactions are mostly tax-free. Some 4,000 banks are thought to have been licensed and registered in the offshore sector by December 1998.3 How many are merely "brass plate banks" is not known. Other non-bank financial industries, such as the insurance and securities industries are subject to even less, if any, regulation than is the banking industry in the offshore sector. While there are well-regulated OFC jurisdictions, a principal attraction of the sector itself is the existence of legislative frameworks that, to varying degrees, are designed to provide anonymity, to promote regulatory and supervisory arbitrage, and to provide mitigation or evasion of home-jurisdiction tax regimes.5 Even OFC jurisdictions with well-regulated banking systems normally provide loosely regulated non-bank financial services, such as the insurance and securities industries. Common to the sector are the confidential formation and management of a variety of international business companies (IBCs) 5 and exempt companies, trusts, investment funds and insurance companies, replete with nominee directors, nominee officeholders and nominee shareholders. While all these services or products are legitimate in and of themselves, it is the skillful use of these products, combined with the loose regulation and enhanced secrecy of the OFC jurisdictions that attract those intent on criminal behavior. Additionally, many of the OFC jurisdictions also provide bearer shares for corporations and banks, in addition to specific forms of trusts designed to protect individual assets as well as to provide anonymity to the beneficial owners of corporate entities. This lack of transparency, coupled with a concomitant reluctance or refusal of many OFC jurisdictions to cooperate with regulators and law enforcement officials from other jurisdictions, attracts those with illegitimate purposes. Drug traffickers, terrorists, money launderers, tax evaders and other criminals have found the OFCs a particularly inviting venue in which to conduct and conceal their nefarious activities. ________________1 Luca Errico and Alberto Musalem, Working Paper of the International Monetary Fund, "Offshore Banking: An Analysis of Micro-and Macro-Prudential Issues," 1999, p.10. 2 OFCs maintain that their carefully crafted laws and regulations provide beneficial business and financial planning options for their clients, including but not limited to: sophisticated trade financing, estate planning for high net worth individuals, tax mitigation for individuals and corporations, avoidance of exchange controls, liability containment for ships and airplanes, sophisticated insurance management options, investment opportunities that transcend home jurisdiction marketing regulations, preservation of assets, investment of overnight funds, and freedom from certain home jurisdiction regulatory requirements. 3 UNODCCP, Working Paper of the United Nations Office for Drug Control and Crime Prevention " The UN Offshore Forum," January 2000, p.6. Forty-four percent of all offshore banks are thought to be located in the Caribbean and Latin America, 29% in Europe, 19% in Asia and the Pacific and 10% in Africa and the Middle East. 4 The United Kingdom, Japan and the United States provide for the registration and operation of non-resident banks and corporations. However, they are normally excluded from analyses of offshore jurisdictions for reasons relating to the transparency of their stringently regulated regimes and their open access to law enforcement authorities which differentiate them from OFCs discussed in this analysis. In macro-economic terms, they are described as "primary OFCs," having advanced settlement and payment systems and operating in liquid regional markets where both the source and use of funds are available. These characteristics also distinguish them from the OFCs discussed herein. (Economic description derived from Errico and Musalem, p.12.) Improper Use of OFCs The opacity of the offshore sector appeals to sovereign states as well. A 1999 working paper of the International Monetary Fund (IMF) concluded that OFCs played a contributory role in the recent financial crises in Asia and Latin America by providing a hiding place for losses of loans from the international financial institutions. In 1997, Malaysia hid some $10 billion in losses in its OFC. Thailand, between 1993-1996, disguised poor lending decisions by "rolling over" its losses into its offshore sector. In the 1995 banking crisis in Argentina, $3-$4 billion of depositor and creditor losses were incurred due to the failure of Argentina's offshore banks operating in the OFCs in t


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