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

WHAT WE NEED TO DO

In an electronic world in which the banking system operates through chain-linked computers 24 hours a day, there must be increased emphasis upon thorough vetting of personal, company and financial institution accounts at the bank of origin, wherever in the world it is located. There is no substitute for a thoroughly applied know-your-customer policy, especially as applied to those placing currency into the system and converting it to an account susceptible to immediate transfer outside the jurisdiction.

Considerable attention must be focused on establishing international standards, on obtaining agreements to exchange information, establishing linkages for cooperative investigations, and on overcoming political resistance in various key countries to ensure such cooperation.

Governments need laws which: establish corporate criminal liability for bank and non-bank financial institutions; apply to all manner of financial transactions not limited to cash at the teller's window; apply reporting and anti-money laundering laws to a long list of predicate offenses not limited to drug trafficking; criminalize investments in legitimate industry if the proceeds were derived from illegal acts; and enable the sharing of financial and corporate ownership information with law enforcement agencies and judicial authorities.

But governments also need strategies, end-games which project change and progress along the same continuum as the changes in both financial system procedures and the methods criminals develop to exploit them--strategies which focus on specific governments and specific financial systems.

Over time, a number of actions can be seen as needed on a continuing basis to keep pace with the dynamics of money laundering in a high-tech world. Continuous action is needed on each category in 1996, and for the foreseeable future.

1. Constant Monitoring of Money Laundering Patterns, Trends, Typologies. More sophisticated techniques, involving both bank and non-bank financial institutions, in a wider array of traditional and non-traditional financial center countries, have complicated identification, tracing and investigation. Information exchanges have been improving, but critical gaps in know-how must be closed in tandem with improved cooperation. There is a high priority need to share data, even critical intelligence. The pervasive corruption in some systems remains a barrier to information sharing.

2. Analysis of Money Management Practices. We need improved information from more countries on what factors influence traffickers and their money managers to use particular systems in specific countries, to keep reserves in cash vs other monetary instruments, to invest rather than park funds. Interviews of arrested drug money managers are producing detailed profiles of money management schemes. The best data so far applies to the cocaine trade, but we need to develop the same level of knowledge about heroin and marijuana syndicates.

3. Analysis of Non-Drug Related Money Laundering and Other Financial Crimes. Traffickers seldom invent new methods or practices of handling and investing money. In general, they rely on techniques perfected by corporations and individuals to shelter proceeds from taxation or to avoid strict currency controls. Terrorists, arms dealers, and other criminals, similarly rely on standard measures used to shelter funds from taxation by legitimate enterprises. We need to identify the parallels between drug money laundering and financial crimes of every description and achieve an equal capability to investigate and prosecute such crimes. A number of governments are willing to impose new restrictions on drug-related financial crimes, but hesitate to apply such strictures to other forms of financial crime.

4. Equating Economic Power with Political Clout. The increasing concentrations of wealth among criminal groups in a number of jurisdictions is a concern, not only because of possible impacts on investments, real estate values, legitimate commerce and government integrity, but also because these organizations have the wealth to make large campaign contributions to candidates who in turn agree to assist the criminals. We need to assess the national security and political implications of these shifts and accumulations of wealth for all financial centers where such wealth is being concentrated. Illicit funds and corrupt officials represent a continuing threat to democracy in literally every region of the world.

5. Eliminating Systemic Weaknesses. We need banks to maintain the same kinds of records on clients which are also financial institutions, as they do for other customers, and to report suspicious transactions by such clients when the same financial institutions are named repeatedly in investigation after investigation. Some currently available but underutilized mechanisms include revocation of licenses, changes in ownership and management, levying of fines, and prosecution. But, perhaps the most intrinsic weakness is the lack of qualified personnel, not only in government regulatory agencies but also within many banking system, who are trained, not just in implementing and managing such oversight systems, but, in handling today's complex monetary transactions. The stepped-up training reported on in recent international meetings is encouraging but more must be done.

6. Assessing The Trafficker as Entrepreneur. We need to explore the extent to which criminal organizations are penetrating legitimate financial and other businesses, using their vast resources to gain control and to influence economic, financial and business decisions. More data, and systematic analysis are needed on the role played by the trafficker and money launderer in foreign exchange markets, including their use of and creation of gray markets. There is good reason to question the overt as well as covert ownership of banks and financial institutions in many parts of the world.

7. Analyzing the Impact of Money Laundering on National Governments and Economies. The interplay between political and structural factors in a country upon its receptivity to money laundering, and that of money laundering on the political life and economic life of the jurisdiction, need to be better understood. Among the questions that need to be analyzed are the extent to which structural macro-economic factors such as commodity deflation, sustained high levels of unemployment, and recession have in making a country susceptible to becoming a money laundering haven. At the sectoral level, we need to determine the influence of black markets on legitimate enterprises. At the institutional level, we need to identify the major factors that may influence bankers and other financial managers in some jurisdictions to be more likely to accept money they have reason to believe is tainted. As we better identify where money laundering is most likely to have a macro-economic or political impact, we need to evaluate the potential effectiveness of economic countermeasures. These could include limiting or excluding access to the global financial system of entities or states identified as major problems.

8. Regulating Exchange Houses and Remittance Systems. There is ample evidence that the various "hundi, hawala, and chop" remittance systems, so essential to economic life in the Middle East, South and East Asia, are being used by drug traffickers, just like the "cambios" of Latin America, and non-bank institutions of all kinds in the Western financial community. They serve vital functions for key sectors of many economies. Systems for regulating them to discourage their use to launder the proceeds of crime are essential, but will fail unless they take into account the very informality that makes them effective and desirable.

9. Concentrating Efforts for Maximum Effectiveness. Enforcement operations have proven we can disrupt cartel operations. But these organizations are resilient and recover quickly. We need to develop more effective strategies for disruption in order to achieve the destabilization of criminal organizations.

10. Pursuing A Continuously Evolving Strategy. For much of the last decade, concerned governments operated under a strategy which involved a handful of key countries whose cooperation was essential and/or which were drug money laundering centers. But the traffickers have changed tactics and moved to new locales. Banks are but one portal. They also use securities brokers, insurance companies, import and export companies. Every means the worlds of business and finance have to offer, linked by wireless and facsimile transmissions, are today used by traffickers and the managers of their illicit proceeds. Financial regulation, supervision and enforcement needs to expand both to cover transactions that transcend national boundaries and to cover the widening array of types of financial service businesses. There is a need for a more comprehensive threat assessment; e.g., just how real is the threat that money brokers will increase their manipulation of second and third-tier banking systems?

11. The United Nations Drug Control Program (UNDCP) should intensify its efforts to ensure that all significant financial center countries are implementing fully the anti-money laundering and asset forfeiture provisions of the 1988 UN Convention. As an immediate priority, UNDCP should focus on securing ratification by the significant financial center governments which have not yet ratified the Convention.

12. The Financial Action Task Force, working with the Offshore Group of Banking Supervisors and other relevant organizations, should continue to focus attention on offshore banking. FATF has been quite effective in reaching out to this group; a majority of offshore banking centers are either members of FATF or the Caribbean FATF, or, have participated in FATF/CFATF seminars which provided guidance on adopting/implementing FATF and UN guidance. The agreement in Paris in February 1997 to undertake compatible mutual evaluations of these constituencies should be given a high priority for early implementation. More analysis is needed of the methods used to move money through offshore banks, and OGBS should be supported in efforts to include as many offshore banking centers as possible within its membership, and, a parallel effort to evaluate progress by its members.

13. The adoption by governments of information standards, such as those recommended by FATF and the SWIFT banking information network is a welcome if not yet universal step. Many more governments need to cooperate in adopting regulations to help curb the misuse of electronic transfer and payment mechanisms to launder illicit funds.

14. Governments and banking systems alike must be more vigilant in efforts to detect counterfeit currency and other monetary instruments. The schemes involving counterfeit bonds and other securities, usually as collateral, suggest there is the need for an international clearinghouse to assist banking and financial systems outside the major centers in determining the authenticity of offered documents.

15. Governments and banking systems must exert greater efforts to identify and prevent a wide range of financial crimes, not just drug and non-drug money laundering, but also financial frauds, such as prime bank guarantees. Again, the history of such frauds suggests a need for a clearinghouse which can assist financial houses in identifying customers and authenticating documents.

16. Consolidated supervision of the international banking system must become a reality for the global financial community. The recent steps proposed by the Basle Committee are encouraging, and FATF, the Council of Europe, the European Union, UNDCP and key financial center governments should make every effort to see that as many barriers are lowered as possible before the world's banking supervisors meet again in October, 1988.