U.S. Department of State
1996 International Narcotics Control Strategy Report, March 1997

United States Department of State

Bureau for International Narcotics and Law Enforcement Affairs

FINANCIAL CRIMES AND MONEY LAUNDERING

MULTILATERAL ACTIVITIES

FINANCIAL ACTION TASK FORCE (FATF) YEAR IN REVIEW:

The Financial Action Task Force (FATF) was established by the G-7 Economic Summit in Paris in 1989 to examine measures to combat money laundering worldwide. In April 1990, the FATF issued a report with 40 Recommendations for establishing a framework of comprehensive programs to address money laundering and facilitate greater international cooperation. FATF membership comprises 26 jurisdictions and two regional organizations, representing the world's major financial centers. Member jurisdictions are committed to adopting and implementing the 40 FATF Recommendations and agree to have their implementation progress evaluated by other FATF members.

In 1996, the FATF focused on several major areas in its fight against global money laundering. An experts group met to assess current trends and methods in money laundering, emerging threats, and effective countermeasures. A special segment of the meeting focused on the vulnerabilities in new payment system technologies, sometimes referred to as "cyberpayment" systems. Experts from the financial sector were invited to give presentations and to participate in a discussion of this issue. A public version of the report presenting the conclusions of the experts group meeting is expected to be issued in early 1997.

In 1996, the second round of mutual evaluations was initiated, focusing on the effectiveness of each member's anti-money laundering measures in practice. Six second round mutual evaluations were conducted during 1996, with four planned for 1997.

The United States' Presidency of the FATF was successfully concluded in June 1996 with a number of significant accomplishments. During the U.S. Presidency, the stocktaking review of the 40 Recommendations was completed resulting in the following major changes: Money laundering predicate offenses were extended beyond drug trafficking to include other serious crimes as well. The reporting of suspicious transactions by financial institutions was made mandatory.

Applicable financial recommendations were extended to apply to non-financial businesses. Attention was drawn to the money laundering implications of emerging payment technologies. A new statement of support was included calling for more effective investigative techniques to aid law enforcement in following illicit proceeds from the street to the kingpins of criminal organizations.

In January 1996, the U.S. President of the FATF, former Treasury Under Secretary for Enforcement Ronald K. Noble, chaired the FATF's first-ever Financial Services Forum which included representatives of financial institutions from FATF member nations. The purpose of this meeting was to create a partnership between governments and the financial services industry in instituting global anti-money laundering measures. At the January meeting, discussion focused on changing trends in money laundering, how to best provide feedback to financial institutions, views of the industry on the 40 FATF Recommendations, and implications of new payment technology developments.

For the first time in FATF's history, the organization applied Recommendation 21 to a jurisdiction. On February 1, 1996, a press release was issued condemning the Economic Development Act passed by the Seychelles, legislation which created an environment conducive to money laundering and offered protection to criminals from prosecution, extradition, and seizure of assets. In applying Recommendation 21, the press release called for "financial institutions to give special attention to transactions" originating in the Seychelles,

At the final FATF plenary chaired by the U.S. in June 1996, for the first time, the FATF issued a public edition of its annual "Typologies Report" presenting current trends and methods in money laundering. This was one important result of the Financial Services Forum, where the financial sector requested more feedback and information on current money laundering methods identified by law enforcement.

In July 1996, Director General Fernando Carpentieri of the Italian Ministry of the Treasury assumed the FATF Presidency for the FATF's eighth round of work during 1996-1997.

In September 1996, Recommendation 21 was applied for a second time; this time to Turkey, the only FATF member which had not yet passed anti-money laundering legislation. However, following enactment of Turkey's law on the Prevention of Money Laundering on November 19, 1996, the FATF issued a press release on December 12, 1996, welcoming the new legislation and lifting the application of Recommendation 21 to Turkey. Turkey's prompt enactment of its anti-money laundering law following FATF action attests to the influence of the FATF in bringing about changes needed to counter money laundering throughout the world.

Through its external relations program the FATF continues to encourage non-member countries to adopt and implement the anti-money laundering measures outlined in the 40 Recommendations. During 1996, the FATF conducted a second high-level mission to Russia to further promote anti-money laundering action there. In addition, the FATF co-sponsored a Money Laundering Seminar with the Black Sea Economic Cooperation (BSEC) in April 1996 in Istanbul, Turkey, and co-sponsored a Southern and Eastern African Money Laundering Conference with the Commonwealth Secretariat in October 1996 in Capetown, South Africa.

A second BSEC/FATF Money Laundering Seminar is planned to be conducted in April 1997 to further promote anti-money laundering measures in the Black Sea region.

In November 1996, an experts group met in Hong Kong to assess money laundering trends and methods specific to the Asia/Pacific region and counteractions indicated. The FATF Asia Secretariat has created an Asia/Pacific Steering Group on Money Laundering to encourage stronger anti-money laundering action in the region through adoption and implementation of the 40 FATF Recommendations. The FATF Asia Secretariat conducted missions to the Philippines, China, and Indonesia during 1996. During 1997, the FATF Asia Secretariat anticipates conducting missions to Viet Nam and Malaysia, as well as follow-up missions to the Philippines and Indonesia.

The FATF continues to coordinate extensively with other international organizations involved in combating money laundering and to mutually foster efforts in this area.

CARIBBEAN FINANCIAL ACTION TASK FORCE (CFATF)

In October 1996, the CFATF adopted a Memorandum of Understanding (MOU) which formalizes the organization by delineating its mission, objectives, and membership requirements. A total of 21 members, including several Central American countries new to the CFATF, signed the MOU and these countries now comprise the membership of the CFATF. Additional countries are expected to sign the MOU in the near future. The five FATF countries which have provided financial and other support to the CFATF since its inception (Canada, France, the Netherlands, United Kingdom, and the United States), are now referred to as Cooperating and Supporting Nations and issued a Joint Statement of Cooperation and Support at the October 1996 CFATF Council Meeting.

During 1996, the first mutual evaluation conducted by the CFATF was completed and the evaluation report was adopted by the CFATF plenary. Several other CFATF mutual evaluations are in process. In addition, the CFATF will conduct its first typologies exercise in February 1997 immediately following a CFATF technical plenary. The typologies exercise will be conducted to assess current trends in money laundering in the region and effective countermeasures. In addition to the FATF, the CFATF also cooperates extensively with other international bodies.

SUMMIT OF THE AMERICAS

At the conclusion of the conference, the ministers in attendance, representing their respective Central Banks and Finance, Justice, and Interior Ministries, endorsed the Buenos Aires Communique. This communique sets forth a series of specific actions that each country commits to undertake in the legal, regulatory and law enforcement areas to establish an effective anti-money laundering program and, thereby, to combat money laundering on a hemispheric basis.

The Ministers who adopted the Communique in Buenos Aires recognized that only the full and effective implementation of each step of the Plan of Action embodied in the coordinated hemispheric response to money laundering can guarantee its success. Therefore, section F.1. of the Communique urged Summit governments to press ahead with the Plan of Action and to submit to ongoing assessments of the implementation of the Communique within the framework of the OAS. The OAS gave one of its specialized bodies, the Inter-American Drug Abuse Control Council (CICAD), a central role in implementing the provisions of the communique.

The CICAD Group of Experts on Money Laundering

The OAS/CICAD Secretariat agreed to a proposal by Chile to reconvene the Group of Experts who developed the OAS model regulations on money laundering to develop a plan of action that will set out the role of CICAD regarding implementation of the communique. The Group of Experts was reconvened and met in Washington, D.C. on June 17-20, 1996. The Group of Experts approved and disseminated a money laundering questionnaire, drafted by the OAS/CICAD Secretariat and based on the ministerial communique as one component of the assessment process. The experts group then agreed to make its expertise available to the Permanent Council Working Group which is studying the feasibility of a hemispheric convention on money laundering.

In addition, the experts also discussed the importance of Financial Intelligence Units, or FlUs, which serve as centers for the collection, analysis, and sharing of all relevant information related to money laundering and agreed that the role of FIUs should be studied in detail at the next meeting. The Group of Experts also discussed the possibility of conducting a typologies exercise, which involves the collation and analysis of money laundering methods, trends and patterns, in order to exchange information and develop countermeasures.

The Group of Experts will meet again this year to: a) analyze the results of the questionnaire; b) develop on-going assessment procedures; c) consider in detail the desirability of establishing FHJs and if so agreed, make a recommendation to amend the OAS Model Regulations on Money Laundering accordingly, d) to discuss development of a typologies exercise.

Joint Organization of American States/Inter-American Development Bank Training and Technical Assistance Initiative

Finance Ministers of the Western Hemisphere met in New Orleans on May 18, 1996 to address common challenges to achieve stable and sustainable growth in our countries and to move forward on a program to build more open, transparent and integrated financial markets. Recognizing the threat that money laundering presents to the integrity of financial markets, and economic and political systems, the Finance Ministers reaffirmed the shared commitment to intensified action to combat money laundering. A joint communique was endorsed in which the Finance Ministers reaffirmed their commitment, to combat financial crime as outlined in the Buenos Aires Communique. In addition, the Ministers called on the Inter-American Development Bank, in conjunction with the OAS, to establish a comprehensive training and technical assistance program to support nations in their implementation of commitments in the Buenos Aires communique.

The OAS and Inter-American Development Bank (IDB) agreed to work together on the establishment of a comprehensive training and technical assistance program under their joint Memorandum of Understanding. Shortly afterwards, in parallel to the June 1996 reconvening of the OAS/CICAD Experts Group on Money Laundering, OAS/CICAD presented a pilot project proposal to the IDB.

The objective of the proposal on technical assistance and training is to assist member -countries in their efforts to strengthen their banking supervision, regulation and operational capabilities to control money laundering. The program detailed in the proposal focuses on training and technical assistance to the banking sector. The initial program emphasizes training in the detection of suspicious transactions, the prevention of money laundering through know your customer policies, and adherence to national laws and regulations.

As currently configured, the proposal calls for a pilot training program for five countries, Argentina, Colombia and Uruguay, Costa Rica and Mexico. The program will be funded by IDB, but managed by OAS/CICAD. Training will initially consist of a series of training seminars for banking supervisors and members of banking associations. Once trained, these officials would then initiate training programs for banking employees and other relevant officials. The goal is to help prevent the exploitation of the banking sector by money launderers. The proposal is currently awaiting final IDB approval.

FINANCIAL INTELLIGENCE UNITS AND THE EGMONT GROUP

In April 1996, FinCEN brought together the score of FlUs that already exist, along with several units "under development", at a meeting of the Egmont Group in San Francisco. This third conference of the group was scheduled to follow directly a FinCEN INTERPOL/FOPAC conference on FIIFJS. Holding both of these conferences in proximity to each other and within the Western Hemisphere permitted a number of countries of the region to attend (namely, Argentina, Aruba, the Bahamas, Bolivia, Chile, Colombia, the Dominican Republic, Haiti, Mexico, Panama, Trinidad, Uruguay, and Venezuela) that had not previously had the opportunity to do so. During the conferences, the participants were able to learn about the-concept of the financial intelligence unit and to meet representatives of a variety of these organizations.

Building on these conferences and the momentum started by the Summit of the Americas Ministerial communique on money laundering (signed in Buenos Aires in December 1995), several of these countries subsequently launched serious initiatives in 1996 to establish FlUs. Argentina, Colombia, Mexico, and Panama all sought and received assistance from FinCEN on how best to establish units in those countries. These same countries sent representatives to FinCEN during the year to take part in week-long FIU orientation programs for foreign counterpart agencies.

In 1996, FIUs became operational in Aruba, Panama, and the Netherlands Antilles in the Western Hemisphere. Europe saw FIUs become operational in the Czech Republic and Slovakia, while Poland worked on legislation to create such a unit. Croatia, assisted by the FIU in Slovenia, began developing a unit of its own. Switzerland worked to overcome obstacles posed by its federal system to establish a Swiss FIU by the end of 1997. Greece and Cyprus both have legislation that calls for creation of FIUS; however, by the end of the year had not yet realized their plans. Russia is considering the establishment of an FIU as part of its overall anti-money laundering program, although this measure was not included in the most recent version of the anti-money laundering legislation. Outside the Western Hemisphere and Europe, the Republic of South Africa, with the help of Australia, drafted legislation that will eventually create a unit following the Australian model. In mid-November 1996, the Baltic States signed a declaration in Riga, Latvia, that called for the coordinated establishment of anti-money laundering programs in those three countries. Included in the declaration was the mention of the creation of an FIU as an integral part of the programs. The European Union, the Financial Action Task Force (FATF), and the United Nations Drug Control Policy Office also signed the declaration. Going beyond FATF Recommendation 24, this declaration thus becomes the first truly international instrument to recognize explicitly the need for such a unit as part of an anti-money laundering program.

The fourth meeting of the Egmont Group also took place in November 1996 in Rome. With over thirty countries in attendance, along with four international organizations, the Egmont Group seemed to move one step closer to becoming the primary framework for cooperation among FlUs. The conference came to an agreement on the definition of an FIU, a definition that will likely facilitate the establishment of new units by setting a minimum standard for such a unit. FinCEN played a key role in developing this definition and furthered the effort to increase communication by presenting a prototype secure web site for use by the FIU members of Egmont. The "Egmont Secure Web" was accepted by the group and will become operational in the first half of 1997.

FinCEN continued working with the INTERPOL Proceeds of Crime Group (FOPAC) on an analytical project to assess the money laundering situation in the countries of Eastern Europe and the former Soviet Union. In 1996, FinCEN and FOPAC representatives visited four countries, including Belarus, Ukraine, Czech Republic, and Slovakia. In at least one case (Latvia), the draft report produced as part of this project caused the subject country to take significant action toward modifying and improving its inadequate system of anti-money laundering measures.

ENFORCEMENT: Significant Cases

Hawala Banking Scheme. Two Indian nationals pled guilty to the structuring of thirty-nine separate transactions totaling nearly $5 million, through corporate accounts utilizing the "Hawala" or underground banking system. In addition, one defendant pled guilty to Conspiracy to launder at least $100,000 in currency from narcotic sales. The defendants were sentenced to 37 and 21 months in prison respectively, fined $125,000 each, and ordered to forfeit $135,772 to the government. The foundation of the Hawala system is a worldwide extended family that consists of extensive Indian and Pakistani networks spread throughout Europe and the Middle East as well as South Asia. Historically used as a foreign worker remittance system, the system has been used in recent times to evade taxes, circumvent currency exchange restrictions, and to launder monies from illegal business.

The case originated with a tip from a local bank which indicated that a number of suspicious currency deposits were being made into two corporate accounts. The investigation revealed that the two defendants had been utilizing a number of personal bank accounts to move currency. However, they had recently switched over to corporate accounts after banking authorities had questioned their banking activity. The defendants would transfer monies between the United States and India without regard to the source of the funds. The unique aspect of the case was the method in which funds were transferred to India. Monies were given to the defendants in increments greater than $10,000. These funds would then "structured" into their bank accounts in amounts less than $10,000. A facsimile would be transmitted to India bearing the names and addresses of the persons in India who were to receive the monies. Their respective counterparts in India would then arrange the delivery of the requisite amount of rupees to the designated individuals. On occasion the defendants would periodically wire transfer the deposited monies to one of any number of accounts located in Hong Kong, or Singapore. Once these transfers were made, individuals would travel from India to Hong Kong or Singapore, withdraw the funds in currency, and purchase gold. The gold was smuggled back into India where it would be sold on the black market for a substantial profit.

The Milkman. A major marijuana trafficker and seventeen other co-defendants pled guilty to narcotic and money laundering offenses in a case concluded in 1996. The major trafficker, nicknamed "lechero" or "the milkman" because he also delivered milk, as well as bundles of marijuana to his customers. The operation expanded to the point the "milkman" was transporting tons of marijuana; he admitted distributing more than 200,000 pounds of marijuana, which was transported via trailers, using produce and aluminum cans to cover the illicit cargo. The marijuana was obtained from sources in Colombia and Mexico.

The trafficker is now cooperating with US authorities, and provided information leading to the identification of the Mexican supplier, who maintained an extensive network of bank accounts in the US and Mexico. The supplier also owned a Mexican currency exchange house, used to launder drug proceeds. The Mexican supplier and eight other defendants were indicted for importing more than 100,000 pounds of marijuana and 2.5 tons of cocaine into the United States. The supplier was also indicted on charges of laundering approximately $12 million in narcotic proceeds; he pled guilty to both trafficking and money laundering charges, and was sentenced to 240 months in prison.

Information provided by the supplier led to the investigation of a Hidalgo County, Texas, sheriff, who was alleged to have provided high-level narcotics traffickers with special treatment while they were incarcerated. After bribing jail employees to provide favors, the Mexican supplier was paying the sheriff a fee of $5,000 per month and $1,000 for every visit by his family or girlfriend. The sheriff, who also received sports cars, watches and a flat-bed trailer, was given about $200,000 total, part of which was used to construct a pavilion on the sheriff's cattle ranch. The sheriff and three other personnel were indicted on charges of racketeering, bribery, money laundering and other charges, and, found guilty, the sheriff was sentenced to 84 months in prison and fined $20,000, in addition to paying a judgment of $151,000 on the racketeering conviction.

Radio Station Owners Convicted of Drug and Money Laundering Charges. Two owners of a Tucson Spanish-language radio station were convicted of conspiracy to sell marijuana and laundering drug money, and, on January 16, 1996, were sentenced in Federal Court to terms ranging from 192 to 300 months in prison. The Tucson jury further determined that the father and son should forfeit their interest in a real estate parcel, and $500,000 laundered through the radio station's bank account. The two were also ordered to forfeit $3.13 million and $1.45 million respectively in narcotics proceeds. In addition, they were sentenced to terms of incarceration of 300 months and 192 months in prison respectively. The conviction resulted from a joint investigative effort which involved agents of IRS Criminal Investigation Division, US Customs Service, FBI, as well as state and local law enforcement agencies. The investigation, which was initiated in 1992, disclosed that the owners were major suppliers of marijuana to the Columbus, Ohio area. Estimates are that sales exceeded 12,000 pounds of marijuana valued at over $5.6 million. Analysis of the radio station's bank account revealed the owners to have deposited $750,000 into the accounts in cash and cashiers checks.

The three week trial began on May 16, 1995. During the course of the trial employees of the radio station testified that the owners would bring in large sums of cash, at least once a month. The employees were directed to purchase cashiers checks in amounts under $10,000. The cashiers checks would then be deposited in the radio stations bank accounts. An Accountant testified that he had personally prepared and filed income tax returns with the Secretary de Hacienda (Mexican Tax Authorities) on behalf of the radio station owners. These statements were made in an effort to show that the large sums of cash received by the owners were proceeds of legitimate economic activity in Mexico on which taxes had already been paid. The accountant further testified that bank records were records that came from his files and were authentic. A representative of the Mexican Secretary de Hacienda was called to testify and refute the accountant's testimony. The Mexican official testified that no documents had been prepared and filed by the accountant on behalf of the station owners. The official also found the Hacienda tax stamps to be fraudulent, and the bank records were not authentic. The accountant was ordered arrested following his testimony. The accountant was indicted and later found guilty on seven counts of false declarations. He is currently awaiting sentencing.

Retired Bank Executive Convicted of Money Laundering. A Detroit jury convicted a retired bank executive and his son on money laundering and drug charges, and, on November 8, 1996, they were sentenced to 186 months and 54 months respectively. In addition, the bank executive was ordered to forfeit his home valued at $400,000 and $2.0 million in cash. This was a joint investigation which included DEA and IRS Criminal Investigation Division agents.

The case involved a Jamaican cocaine, heroin, and money laundering organization based in Detroit, Michigan. The principal defendant had been employed as a bank executive at the Gulf Bank of Kuwait at their New York City branch. Between the years 1984 and 1992 the bank executive, while acting in that capacity is believed to have laundered approximately $7.0 million. The moneys were deposited into secret bank accounts located in the Cayman Islands, and Kuwait. Both defendants are awaiting sentencing.

In 1993, a cooperating individual assisted law enforcement officials in arranging a money laundering 'sting" operation with the bank executive. An undercover agent posing as a narcotics dealer needed to move $3.0 million in cash out of the country. During the course of several undercover meetings the defendants agreed to transfer monies abroad in increments of $100,000. Assurances were made by the defendants that the transfers would be kept secret. In addition, the defendant offered to sell his home to undercover agents for $425,000 in cash. He also offered to sell his Rolls Royce automobile for $199,000 in cash.

In April, 1994 undercover agents made a delivery of $100,000 in cash to the defendant. The defendant arranged the deposit of the funds into a Michigan bank account of his automobile export corporation. Automobiles were purchased with the monies and shipped to the country of Kuwait. The Kuwait customers were instructed to wire transfer their payments to Barclays Bank in London, England. Once the balance was over $90,000 the defendant gave the undercover agent a power of attorney over the account.