RESOURCE MATERIAL SERIES No. 58
GROUP 1
Chairperson Mr. Sudhir Kumar Awasthi (India)
Co-Chairperson Mr. Dappula P. J. De Livera (Sri Lanka)
Rapporteur Mr. Kevueli Tunidau (Fiji)
Co-Rapporteur Mr. Tatsuo Ueda (Japan)
Members Mr. Phoung Sophy (Cambodia)
Mr. Raymond Porter Aguilar (Costa Rica)
Mr. Ryouichi Chihara (Japan)
Mr. Bader Talib AL-Shaqsi (Oman)
Advisors Prof. Yuichiro Tachi (UNAFEI)
Prof. Shinya Watanabe (UNAFEI)
Prof. Mikiko Kakihara (UNAFEI)
I. INTRODUCTION
Money laundering and those who engage in it have gone global and “pose a serious threat worldwide in terms of national and international security, as well as political, economic, financial and social disruptions.”1 It is a formidable problem for the international community, a new form of geopolitics and one of the most pernicious forms of criminality of which the dimensions have yet to be fully measured and the impact fully determined.2
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1 Zvekic, “International Cooperation and Transnational Organized Crime” (1996) ASIL 537.2 See Report of the Secretary-General, 4 April 1996 at p.4; UN Press Release SOC/CP/179 20 May 1996; UNCPJ Newsletter nos. 30/31, Dec 1995 at p.5
Since money laundering is the processing of the criminal proceeds to conceal their illegal origin, the objective of the launderer is to disguise the illicit origin of the substantial profits generated by the criminal activity so that such profits can be used as if they were derived from a legitimate source.3
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3 Countering Money Laundering: The FATF, The European Union and the Portuguese Experiences -Past and Current Developments, Dr. Gil Galvao -Paper presented at 117 th International Senior Seminar, UNAFEI, Tokyo, at p.1.
It appears to be accepted that there are three phases or stages in the laundering process. The first is the placement, where cash enters the financial system. This is the choke point or the nerve center of the procedure, where the launderer is more vulnerable and the attempt to launder can easily be identified. The second stage is the layering where the money is involved in a number of transactions so that the tracing of the origin of the money is lost. Finally the third stage is integration, where money is mixed with lawful funds or integrated back into the economy, with the appearance of legitimacy. The thrust of this report is on the important first stage.
The United States of America implemented the first national and domestic initiative to counter money laundering.4 It is apparent however that in a time of globalization of financial markets, it is not sufficient to have domestic measures to combat money laundering. It is paramount therefore that action against money laundering and measures to prevent it are universally applied.5
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4 The United States criminalized money laundering on October 27, 1986 by passing the Money Laundering Control Act of 1986.5 See Footnote 3, supra, at p.5.
In 1988, the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (the Vienna Convention) was adopted and the incrimination of money laundering was included in an international treaty for the first time.
A. Financial Action Task Force
The Financial Action Task Force6 (FATF) was founded in 1989 by the G-7 Summit in Paris to examine ways to combat money laundering. It published a report in 1990 with forty Recommendations7 which were to become the standard by which anti-money laundering measures should be judged. In 1996 the recommendations were revised to reflect the changes which have occurred in the money laundering problem. The relevant provisions within the broad ambit of intelligence are recommendations 10-12, 14, 15, 19, 21-25, 28 and 29 respectively.8
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6 The FATF currently consists of 26 countries and two international organizations. Its membership includes the major financial center countries of Europe, North America and Asia. It is a multi-disciplinary body - as is essential in dealing with money laundering - bringing together the policy-making power of legal, financial and law enforcement experts.7 The forty recommendations set out the basic framework for anti-money laundering efforts and they are designed to be of universal application. They cover the criminal justice system and law enforcement, the financial system and its regulation, and international co-operation.
8 For the full text of these recommendations please see appendix 1.
B. Egmont Group of Financial Intelligence Units9 (Egmont Group)
Following the FATF Recommendations several countries put in place legislation to counter money laundering and established their Finance Intelligence Units (FIU). The Egmont Group which comprises of the FIUs’ of the world, defined an FIU as
“A central national agency responsible for receiving (and, as permitted, requesting), analyzing and disseminating to the present authorities, disclosures of financial information(i) concerning suspected proceeds of crime, or(ii) required by national legislation or regulation, in order to counter money laundering.”10
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9 The Egmont Group meetings named after the Egmont-Arenburg palace in Brussels on April 1995, consists of countries that have operational Financial Units. The group currently consists of 53 countries including: Aruba, Australia, Austria, Belgium, Bermuda, Bolivia, Brazil, British Virgin Islands, Bulgaria, Chile, Colombia, Costa Rica, Croatia, Cyprus, Czech Republic, Denmark, Dominican Republic, Estonia, Finland France, Greece, Guernsey, Hong Kong, Hungary, Iceland, Ireland, Isle of Man, Italy, Japan, Jersey, Latvia, Lithuania, Luxembourg, Mexico, Monaco, Netherlands, NL Antilles, New Zealand, Norway, Panama, Paraguay, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, Switzerland, Taiwan, Turkey, United Kingdom, United States, Venezuela.10 This definition was adopted at the plenary meeting of the Egmont Group in Rome in November 1996 and reaffirmed in the Madrid meeting.
In it’s statement of purpose11 the Egmont Group, among other things, recognized the international nature of money laundering and realized that many governments have both imposed disclosure obligations on financial institutions and designated FIU’s to receive, analyze and disseminate to competent authorities such disclosures of financial information. It is also increase the effectiveness of individual FIUs and contribute to the success of the global fight against money laundering.
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11 Resolved in Madrid on 24 June 1997.
The 18 countries represented in this seminar have different legal stages in combating money laundering and establishment of FIUs. A majority has draft proposals for legislation against money laundering. Countries such as Fiji, South Africa and Tanzania have legislation but short of an independent FIU although in each of these countries suspicious transaction reports (STRs) are either made to the police or the Director of Public Prosecution (DPP) by Financial Institutions and/or by persons conducting a business or who are in charge of a business undertaking.
C. UN Convention against TOC
In November 2000, United Nations Convention against Transnational Organized Crime was adopted by the United Nations General Assembly and it was opened for signature by member states in December 2000. It requires member countries among other things, as follows:
“Article 7, Paragraph 1Each State Party:
(a) Shall institute a comprehensive domestic regulatory and supervisory regime for banks and non-bank financial institutions ... which regime shall emphasize requirements for customer identification, record-keeping and the reporting of suspicious transactions;(b) ... shall consider the establishment of a financial intelligence unit to serve as a national center for the collection, analysis and dissemination of information regarding potential money-laundering.”
D. Techniques of “Placement” of Illicit Funds into the Financial System
We submit that it is important in this report to identify the various techniques money launderers utilize the financial system to launder their money.
1. The Banking Sector
(i) Banks remain an important mechanism for the disposal of criminal proceeds, though there appears to be a recognition by money launderers that obvious techniques such as depositing large sums of cash into bank accounts for subsequent transfer is likely to be reported to law enforcement authorities, and thus extra steps are being taken. The technique of “smurfing” or “structuring” was commonly used - this technique entails making numerous deposits of small amounts below a reporting threshold, usually to a large number of accounts.(ii) Accounts in false names or accounts held in the name of relatives, associates or other persons operating on behalf of the criminal. Other methods used to hide the beneficial owner of the property include the use of shell companies.
(iii) Use of “collection account”. Immigrants from foreign countries would pay many small amounts into one account and the money would then be sent abroad. Often the foreign account would receive payments from a number of apparently unconnected accounts in the source country.
(iv) Use of “payable through accounts”. These are demand deposits account maintained at financial institutions by foreign banks or corporations. The foreign bank funnels all the deposits and cheques of it’s customers into one account that the foreign bank holds at the local bank. The foreign customers have signatory authority to the account as sub-account holders and can conduct normal international banking activities. The payable through accounts pose challenge to “know your customer” policies and STR guidelines.
(v) Loan back arrangements in conjunction with cash smuggling. By this technique, the launderer usually transfers the illegal proceeds to another country, and then deposit the proceeds as a security or guarantee for a bank loan, which is then sent back to the original country. This method not only gives the laundered money the appearance of a genuine loan but also often provides tax advantages.
(vi) Telegraphic transfers, bank drafts, money orders and cashier’s cheques are common instruments for money laundering.
2. Non-Bank Financial Institutions
Banks offer a wide range of financial products and hold the largest share of the financial market and accordingly the services they provide are widely used for money laundering. However, non-bank financial institutions and non-financial businesses are becoming more attractive avenues for introducing ill-gotten gains into regular financial channels as the anti money laundering regulations in the banking sector becomes increasingly effective. The channels used include:
(i) Bureau de change, exchange offices or casa de cambio. They offer a range of services which are attractive to criminals such as:(ii) Exchange services which can be used to buy or sell foreign currencies, as well as consolidating small denomination bank notes into larger ones;
(iii) Exchanging financial instruments such as traveler’s cheques; and
(iv) Telegraphic transfer facilities.
(v) Remittance services.
(vi) Use of hawala, hundi or so called “underground banking”.
3. Non-Financial Businesses or Professions
(i) These include lawyers, accountants, financial advisors, notaries, secretarial companies and other fiduciaries whose services are employed to assist in the disposal of criminal profits.(ii) Casinos and other businesses associated with gambling.
(iii) Purchase and cross border delivery of precious metals such as gold and silver.
II. METHODS OF OBTAINING INTELLIGENCE
A. STR System
The objective of an STR system is to facilitate the detection of illicit proceeds of crime as it enters the financial system via the financial institutions, i.e. at the placement stage of the money laundering process. This is the “choke point” where money laundering is most vulnerable. It is important therefore that a legal checks and balance system is put in place to
(i) legally recognize the STR system domestically in compliance with the FATF recommendations;(ii) exert obligatory compliance by financial institutions to the STR provisions;
(iii) sanction non-compliance by financial institutions of the legal STR obligations; and
(iv) safeguard the integrity of the financial system.12
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12 A typical example is the BCCI (The Bank of Credit and Commerce International) case. Unlike any ordinary bank, BCCI was from its earliest days made up of multiplying layers of entities, related to one another through an impenetrable series of holding companies, affiliates, subsidiaries, banks-within- banks, insider dealings and nominee relationships. By fracturing corporate structure, record keeping, regulatory review, and audits, the complex BCCI family of entities was able to evade ordinary legal restrictions on the movement of capital and goods as a matter of daily practice and routine. Thus it becomes an ideal mechanism for facilitating illicit activity by others, including many governments’ officials whose laws BCCI was breaking.BCCI’s criminality included fraud by BCCI and BCCI customers involving billions of dollars; money laundering in Europe, Africa, Asia, and the for example, use of shell corporations. Americas; BCCI’s bribery of officials in most of those locations; support of terrorism, arms trafficking, and the sale of nuclear technologies; management of prostitution; the commission and facilitation of income tax evasion, smuggling, and illegal immigration; illicit purchases of banks and real estate and a panoply of financial crimes limited only by the imagination of its officers and customers. It is important to note also that among BCCI’s principal mechanisms (techniques) for committing crimes are that which we noted at item 1.4 above.
This requires a methodical and practical approach to the form of STR relevant to suit a given situation in each jurisdiction. For instance, the form of STR expected from a financial institution would vary from a law or accountant firm due to the nature of the transactions peculiar to them. In this report we propose to examine the STR of financial institutions and briefly the FIU of Japan and a comparative glimpse of Hong Kong13 and the United States as well.
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13 See Appendix 4 for the guidelines issued by the Monetary Authority of Hong Kong to financial institutions for the prevention of money laundering.
1. The Japanese STR System14 and FIU
In 1992, the STR system was first introduced into Japanese legislation by the enactment of the Anti-Drug Special Law. Subsequent to this, the Anti-Organized Crime Law was enacted in year 2000 which introduced a comprehensive STR system. The scope of predicate offence of money laundering was expanded to almost all organized crimes. Based on the law, the Japan Financial Intelligence Office (JAFIO) was established in the Financial Services Agency (FSA) as the Japanese Financial Intelligence Unit.
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14 See Appendix 2 & 3 for the standard form of STRs by financial institutions and the full text of a typical STR in Japan.
At present, depository institutions (banks), insurance companies, securities brokers and other non-bank financial institutions are covered in the STR system. However, non-financial institutions or other relevant professionals (so called gatekeepers) are not covered. Compliance by financial institutions is mandatory but no legal sanction is provided for non-disclosure of STRs.
B. Better quality STRs vis a vis Know Your Customer Policy and Rules
In order to facilitate better quality and reliable suspicious transaction reports banks and other financial institutions should know their customers.
What does that mean?
(i) Making every reasonable effort to determine the true identity and beneficial ownership of the accounts.(ii) Knowing the source of the funds.
(iii) Knowi ng the nat ure of the customers business.
(iv) Knowing what constitute reasonable account activity.
Why are bankers concerned?
(i) Can they simply take people at face value?(ii) Who are they dealing with?
(iii) Where do they come from?
(iv) How do we prove this information accurate?
(v) Where are we dealing with them?
(vi) Why should we bother?
Why cannot they simply take people at face value?
Unfortunately, quite a lot of people are not honest. The net result could be a bad debt or fraud. More importantly being involved with criminals puts their reputation at risk.
Who are they dealing with?
The customer tells the banks who they are. It would be necessary to obtain evidence of identity-reliable-circumstantial- hearsay?
The customer gives and an address. Is it correct?
Verification would be necessary. How?
What if the customer:
(i) Is a foreigner?(ii) A child?
(iii) Wife?
(iv) Housebound?
Where are we dealing with them?
Traditionally, a customer would be seen in person.
In the world of:
(i) Postal banking(ii) Electronic banking
(iii) Telephone banking
(iv) Internet banking
What would be the situation?
Why should they bother?
To protect profits, reputation, obey the law and be the good citizens.
What are the implications for the authorities?
(i) The need to recognize that in a very few countries there is a completely reliable identification system.(ii) The need to recognize that remote identification is here to stay.
(iii) The need to keep ahead of the counterfeitor.
(iv) Accept that there will be instances that identification cannot be proved absolutely.