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MONEY LAUNDERING

An Insight into the Dark World of Financial Frauds

MONEY LAUNDERING

An Insight into the Dark World of Financial Frauds

BHURE LAL

SIDDHARTH PUBLICATIONS
10, DSIDC Scheme II, Okhla Industrial Area Phase II New Delhi - 110 020

First Edition: January 2003

Copyright Author

The views expressed in this book are of the author and have nothing to do with the discharge of his official duties.

ISBN : 81-7220-151-6

Price: Rs. 400.00

Published by: Siddharth Publications 10 DSIDC Scheme-II, Okhla Industrial Area Phase-II, New Delhi-110020. Phone: 26388005

Printed at: Arun & Rajive Pvt. Ltd., 10 DSIDC Scheme-II, Okhla Industrial Area Phase-II, New Delhi-110020. Phone: 26388006, 26388007

CONTENTS
Preface 1. 2. 3. 4. 5. 6. 7. 8. 9. What is Money Laundering? History of Money Laundering How is Money Laundered? Corruption at High Places and Money Laundering Money Laundering and Terrorism International Ramifications and Global Trends The Walker Model on Global Money Laundering International Fight Against Money Laundering Magnitude, Macro and Micro Economy Effects of Money Laundering 7 11 20 25 37 50 63 132 143 171 177 184 191 196 206 225

10. Financial Action Task Force 11. Role of Technology 12. Role of Banks 13. The Capital Flight: Means and Effects 14. Hawala 15. Money Laundering Legislation in India

PREFACE
Money laundering has an adverse impact on socioeconomic and political stability of a country and must be nipped in the bud. Governments must adopt measures to dismantle syndicates engaged in money laundering by resorting to aggressive enforcement of law. The enforcing agencies must be adequately armed and trained. Without international cooperation money laundering cannot be controlled. The criminals outsmart the enforcing agencies and deploy a team of experts like chartered accountants, attorneys, bankers, mafia, to disguise their illicit money and masquerade it as legitimate income. These experts charge fee between 10 to 15% of the sum involved. The nexus between white-collared criminals, politicians, enforcing agencies and mafias cannot be ruled out. Bankers play the most prominent role and without their connivance the operation cannot be carried out. Development of new high-tech coupled with wire transfer of funds has further aggravated the difficulties to detect the movement of slush funds. Money laundering is inseparable from large-scale criminal enterprises. It camouflages the dirty, tainted money generated by anti-social, anti-economic activities like drug trafficking, firearms smuggling, international bank and securities frauds, bribery, intellectual property theft, and other specified unlawful activity. Once criminals successfully disguise their illicit proceeds, they then can reinvest them in their criminal organisations, expand their operations, and profit from their crimes. Money laundering is also a problem of global concern.

Money Laundering: An Insight into the Dark World of Financial Frauds

Criminals target foreign jurisdiction with liberal bank secrecy laws and weak anti-money laundering regulatory regimes as they transfer illicit funds through domestic and international financial institutions often with the speed and ease of faceless internet transactions. The international nature of money laundering requires international law enforcement cooperation to successfully investigate and prosecute those that instigate these complex criminal schemes. Money laundering must be combated mainly by penal means and within the framework of international cooperation among judicial and law enforcement authorities. A penal approach should, however, not be the only way to combat money laundering, since the financial system can play a highly effective role. The recommendations of the Council of Europe (1980) and the Basle declaration (1988) are major steps towards preventing the use of the financial system for money laundering. Money laundering is usually carried out in an international context so that the criminal origin of the funds can be better disguised. Measures exclusively adopted at a national level, without taking account of international coordination and cooperation, would have very limited impact. Any community action should take particular account of the recommendations adopted by the Financial Action Task Force on money laundering, set up in July 1989 by the Paris summit of the seven most developed countries. Money laundering occurs not only in relation to the proceeds of drug-related offences but also in relation to the proceeds of other criminal activities (such as organised crime and terrorism). Credit and financial institutions require identification of their customers when entering into business relations or conducting transactions. Banks must not permit any abnormally suspicious movement of slush funds. The

Preface

criminals want to take advantage of anonymity to carry out their criminal activities. Banks must not provide this anonymity. Credit and financial institutions must keep for at least five years copies or references of the identification documents required as well as supporting evidence and records consisting of documents relating to transactions. They should pay special attention to transactions with third countries, which do not apply comparable standards against money laundering. Preventing the financial system from being used for money laundering is a task which cannot be carried out by the authorities responsible for combating this phenomenon without the cooperation of credit and financial institutions. Banking secrecy must be lifted in such cases. Effective supervision of banks and financial institutions both onshore and offshore, proper licensing mechanism for creation of banks and financial institutions, registration of institutions, proper safeguards preventing criminals or their confederates to acquire banks, proper customer identification, ensuring no anonymous or fictitious account, existence of law emphasizing the need to identify the account holder and the real beneficiary, making it obligatory to report suspicious, abnormal movement of funds and maintaining records for five years, sharing of information, arranging training on combating money laundering and doing away with rigid banking secrecy, will help in combating money laundering. Identification of beneficiaries, directors, international exchange of information, reporting suspicious movement of capital, international judicial cooperation will help in preventing money laundering.

(Bhure Lal)

WHAT IS MONEY LAUNDERING?


Money laundering allows crime to pay by permitting criminals to hide and legitimize proceeds derived from illegal activities. According to one recent estimate, worldwide money laundering activity amounts to roughly $1 trillion a year. These illicit funds allow criminals to finance a range of additional criminal activities. Moreover, money laundering abets corruption, distorts economic decision-making, aggravates social ills, and threatens the integrity of financial institutions. Money launderers now have access to the speed and ease of modern electronic finance. Given the staggering volume of this crime, broad international cooperation between law enforcement and regulatory agencies is essential in order to identify the source of illegal proceeds, trace the funds to specific criminal activities, and confiscate criminals financial assets. Money laundering means different things in different places. This is because only proceeds of crime (or criminal conduct) can be laundered. Many countries have restricted the classification of crimes that are regarded as underlying crimes for money laundering purposes such as drug trafficking. In some countries any conduct which, if a person were convicted, would lead to a sentence of imprisonment will be regarded as a predicate crime. The final point here is that in most countries having countermoney laundering laws, a person can be guilty of the offence of laundering the proceeds of someone elses criminal conduct. There are various definitions available which describe the phrase money laundering. The conversion or transfer

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Money Laundering: An Insight into the Dark World of Financial Frauds

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. Powis (1992) asserts that money laundering is the use of money derived from illegal activity by concealing the identity of the individual who obtained the money and converted it to assets that appear to have been derived from the legitimate source. However, probably, the simplest definition is the washing of dirty money to make it appear to be legitimate. Criminals commit three basic types of crime crimes of passion or honour, crimes of violence or vandalism and economic crimes. Ignoring minor vandalism, most crime is economic crime that is this crime is committed to make money. They commit crime for two reasons one is for kicks to prove that they can get away with it; the other is because they think they can make more money from the crime than they can make from the same amount of legitimate endeavour. Simply stated, the process of money laundering basically implies cleansing of money earned through illegal activities like extortion, drug trafficking and gun running etc. The tainted money is projected as clean money through intricate processes of placement, layering and laundering. In Blacks Law of Lexicon the term laundering is referred to as being used to describe investment or other transfer of money flowing from racketeering, drug transactions and other illegal sources into legitimate channels so that its original source cannot be traced. When they make money from crime, criminals use it

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for one of three purposes to invest in another crime, to hide to use later or to spend now. One of the most tried, tested and successful methods of investigating crime is to follow the money. So criminals want to move the money further and faster than investigators can follow it and from time to time they want to put it into a black hole so that investigators simply cannot follow it. Also, investigators who think that someone may have been involved in a crime may start with that persons known finances and work backwards. So, the criminal needs to get the money out of the black hole in such a way that he can explain where he got it. Tax evaders launder money so that they can lie about where money and assets came from in order to evade tax. Or they hide money in bank accounts that they think the revenue authorities think will not be found out sometimes in the names of children or elderly relatives. Or they simply operate outside that part of the economy where records are kept. How often have you been offered a discount for cash, provided you dont want a receipt? According to some estimates, some 80% of property crime, for example, theft, is committed to fund drugs habits. But in financial crime, increasingly, there is no physical representation of the crime. The money is no more than information on a computer screen, or to be more precise it is bits and bytes stored in a computers memory. So, no one handles stolen goods because there is nothing to touch. The result of this is that criminal laws that were framed to address the physical holding of something that had been stolen did not apply (or courts found it did not apply) to non-physical money or other dematerialized assets. There is a phrase often used by those who draw up laws or have to enforce them they say that one way of reducing crime is to take the profit out of crime. This means to identify assets that represent proceeds of crime and to seize them under a Court Order or administrative power.

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Money Laundering: An Insight into the Dark World of Financial Frauds

All this means that if money laundering could be made an unrewarding or as risky as handling stolen goods, then there would be an impact upon financial crime. Financial crime affects everyone. It results in higher costs to businesses, which means a combination of less profits and higher prices to consumers and it means the vulnerable such as the elderly are at risk from frauds such as doorstep frauds. It means shopping on the Internet or even at your local supermarket is more risky because the trader may be fraudster and it means that money flows into the hands of corrupt politicians and businessmen, including those engaged in trafficking in drugs, arms and people. Money laundering also was developed in order to facilitate trade. Nigeria is the money-laundering centre of Africa and that Nigerians around the world are engaged in large-scale crime and laundering. Money laundering techniques are restricted only by the imagination of the criminals and there are a lot of criminals trying to find ways to launder. Who launders money? Criminals launder money. Money launderers are to be found in all walks of life, many acting entirely innocently. However, anyone who helps a criminal to launder the proceeds of his crime is, in most jurisdictions, also a money launderer. This means bankers, lawyers, accountants, car dealers and others are money launderers if they allow their businesses to be used by someone else to launder the proceeds of a crime. Generally, the only defence is that the businessman was unaware of what was happening. This defence will not stand as the burden of proving innocence will be on the defendants. Persons possessing assets out of the proceeds of crime are also money launderers. A girlfriend of a criminal who knows that her boyfriend used proceeds of criminal conduct to buy her a car is a striking example in this regard. So an

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accountant who recommends a tax evasion scheme is himself a money launderer. Tax evaders launder money and hide it in banks numbered and benami accounts. Banks are regarded as safe hiding places for slush funds. How does money laundering help to fight crime? 1. Money laundering is anarchical in nature. Good governance is the death warrant of criminal activity. 2. A close scrutiny of financial transaction records leads not only to the discovery of hidden assets but also unmasks the criminals and their groups. 3. The criminally generated funds can be forfeited. This will hit the criminal hard and break the cycle of criminal activity. The governments should: 1. Make the act of money laundering a crime and enact laws for search, seizure and confiscation of criminally derived assets. 2. They should share information about criminals. 3. Bring the law enforcement and financial authorities together. Money launderers are highly imaginative criminals and circumvent governments counter-measure. A dynamic detection system must be in place. Money laundering is the process by which large amount of illegally obtained money (from drug trafficking, terrorist activity or other serious crimes) is given the appearance of having originated from a legitimate source. If done successfully, it allows the criminals to maintain control over their proceeds and ultimately to provide a legitimate cover for their source of income. Money laundering plays a fundamental role in facilitating the ambitions of the drug trafficker, the terrorist, the organised criminal, the insider dealer, the tax evader as well as many

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Money Laundering: An Insight into the Dark World of Financial Frauds

others who need to avoid the kind of attention from the authorities that sudden wealth brings from illegal activities. By engaging in this type of activity it is hoped to place the proceeds beyond the reach of any assets forfeiture laws. Attacking money laundering attacks the proceeds of crime; it also has the advantage of forcing those who are behind the trade in illicit drugs to fight in the open, on the same ground as the forces of law and order. Money laundering is necessitated by the requirement for criminals, be they drug traffickers, organized criminals, terrorists, arms traffickers, blackmailers, or credit card swindlers, to disguise the origin of their criminal money so that they can use it more easily. 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. These transactions typically fall into three stages: i. Placement, the process of placing, through deposits, wire transfers, or other means, unlawful proceeds into financial institutions. ii. Layering, the process of separating the proceeds of criminal activity from their origin through the use of layers of complex financial transactions iii. Integration, the process of using an apparently legitimate transaction to disguise the illicit proceeds. Through this process the criminal tries to transform the monetary proceeds derived from illicit activities into funds with an apparently legal source. Money laundering is the crime of the 90s. Money laundering is sleight of hand a magic trick for wealth creation the lifeblood of drug dealers, fraudsters, smugglers, arms dealers, terrorists, extortionists and taxevaders. It is also the worlds third largest business. Though a relatively new and in vogue subject, it (money laundering) has in fact been around for centuries. Criminals throughout

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history have had to hide the source of newly acquired wealth in order to escape prosecution for the predicate crime. However, the scale of the problem has escalated out of all proportion. Todays criminals make the Al-Capone and the old Mafia look like small time crooks. Money laundering is one of the major problems facing international economy. Technology has offered a very sophisticated and circuitous means to convert ill-gotten proceeds into legal tender and assets. Measures need to ensure that legislation keeps abreast of technology in order to understand and pick up on any new techniques that professional money launderers may come up with. Money laundering is interlinked with crime. The allurement of huge profits from drug trafficking, international frauds, arms deals, trafficking in human organs, casinos and prostitution will facilitate the offence leading to huge accumulation of wealth, prestige and respectability of those in control of criminal business. Drug trafficking is the largest single generator of illegal proceeds. Robinson (1994) stated that more money is spent worldwide on illicit drugs than on food. The characteristics of organized crime are evident in money laundering. According to Billy Steel these characteristics are as below: It is a group activity, in that it is carried out often by more than one person; It is a criminal activity which is long-term and continuing; It is a criminal activity which is carried out irrespective of national boundaries; It is large-scale; and It generates proceeds, which are often made available for licit use. The serious criminal activity is highly complex and sophisticated. It is operated on a large scale and influences

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Money Laundering: An Insight into the Dark World of Financial Frauds

the legitimate business activity all over the world. A large number of conventions like the FATF have emerged to combat this growing menace. References
1. Ali, A.S., A Gateway for Money Laundering? Financial Liberalisation in Developing and Transnational Economies. Journal of Money Laundering Control, Vol. 1, No. 4. April 1998. Beare, Margaret E. and Stephen Schneider. Tracing of Illicit Funds: Money Laundering in Candada. Ottawa: Ministry of the Solicitor General of Canada, 1990. Bishwajit Battacharyya, Money Laundering, International Conference on Global Drugs Law, 1997. Campbell, A. The High Street solicitor and the proceeds of criminal activity the risks. Journal of Money Laundering Control, Vol. 1, June 1997. Chang, A. and Herscowitz, A. Money Laundering. American Criminal Law Review, Volume 32, No. 27, winter 1995; 499-525. Ehrenfeld, Rachel. Evil Money: Encounters Along the Money Trail. Harper Collins Publishers, New York, 1992. Financial Crimes and Money Laundering. International Narcotics Control Strategy Report, March 1997, Bureau for International Narcotics and Law Enforcement Affairs. Fituni, L.L. Russia: Organised Crime and Money Laundering. Journal of Money Laundering Control, Vol. 1, No. 4, April 1998. Florez, C.P. and Bernadette Boyce. Laundering Organizations. FBI Law Enforcement Bulletin, April 1990; 22-5. Gubbay, A.R. Zimbawe: Report on Money Laundering. Journal of Money Laundering Control, Vol. 1, No. 3, January 1998. Haynes, A. Securitisation, Money Laundering and Fraud. Journal of Money Laundering Control, Vol. 1, No. 2, October 1997. Hinterseer, R.K. An Economic Analysis of Money Laundering. Journal of Money Laundering Control, Vol. 1, No. 2, October 1997. Ian Hamilton Fazey, Setting the Context: Ten Years on from the 1998 Convention. International Monetary Fund. Money Laundering and the International Financial System. Working Paper presented by V. Tanzi, May 1996. Jayasuriya, D.C. Money Laundering: The Role of Legislation in Developing Economies. Journal of Money Laundering Control, Vol. 1, No. 3, January 1998. Knetch, Frederick J. Extraterritorial Jurisdiction and the Federal Money Laundering Offense. Stanford Journal of International Law, Fall 1986; 389-420.

2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.

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17. Levi, M. Pecunia non olet: cleansing the money-launderers from the Temple, Crime, Law and Social Change, Vol. 16, 1991; pp. 217302. 18. Nara Srinivasana and Roderic Underwood, Money Laundering: International Efforts and Recent Development in the Movement of Drug Related Money, International Conference on Global Drugs Law, 1997. 19. Parlour, R (ed). The International Handbook of Money-Laundering. Butterworths, London, 1994. 20. Pino Arlacchi, Global Programmes Against Money Laundering, Attacking the Profits of Crime: Drugs, Money and Laundering, June 1998. 21. Possamai, Mario. Money on the Run. Penguin, Toronto, 1992. 22. Shaap, C.D. Money Laundering: A Public Prosecutor View Point. Journal of Money Laundering Control, Vol. 1, No. 3, January 1998. 23. The US 2001 National Money Laundering Strategy. 24. United Nations. Money Laundering and Associated Issues: The Need for International Cooperation. UN Document E/CN./15/1992/4/ Add.5; 23 March 1992. 25. United States General Accounting Office. Money Laundering: A Framework for Understanding U.S. Efforts Overseas. Washington, DC: May 1995. 26. What is Money Laundering? United Nations Global Programme against Money Laundering. 27. Wiener, J. Money Laundering: Transnational Criminals, Globalisation and the Forces of Redomestication. Journal of Money Laundering Control, Vol. 1, June 1997. 28. William, Phil. Money Laundering. Paper presented at the South African Institute of International Affairs workshop on The Illegal Drug Trade in Southern Africa. 5-6 June 1997. 29. Zeldin, M. Money Laundering. Journal of Money Laundering Control, Vol. 1, No. 4, April 1998.

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HISTORY OF MONEY LAUNDERING


Money laundering is interwoven with the history of trade and banking as it hides money and assets from the state from confiscation and taxation. The money usually results from crime. Its origin is unknown but it has been going on for several thousand years. In Lords of the Rim Sterling Seagrave explains how, in China, merchants some 4000 years before Christ would hide their wealth from rulers who would simply take it off them and banish them. In addition to hiding it, they would move it and invest it in businesses in remote provinces or even outside China. With the passage of time there emerged the offshore industry and tax havens culminating in money laundering and investment abroad and deposits in secret bank accounts. Money laundering has been used to move money resulting from crime, to hide and move it out of the reach of governments including oppressive regimes and despotic leaders. Many minorities like the Jews have taken steps to preserve wealth from rulers, both un-elected and elected, who have targeted them simply because of their beliefs or colour. It is happening even today. The term money laundering is often said to have originated at the time of the infamous American gangsterism that arose originally out of prohibition the banning of alcoholic drinks. Several mechanisms were used to disguise the origins of the large amounts of money generated by the import and sale of alcohol and other rackets such as gambling, some of which were illegal. The term Money Laundering is said to have originated from Mafia ownership of Laundromats in the

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United States. Gangsters there were earning huge sums in cash from extortion, prostitution, gambling and bootlegging. They needed to show a legitimate source for these monies. One of the ways in which they were able to do this was by purchasing outwardly legitimate businesses and to mix their illicit earnings with the legitimate earnings they received from these businesses. These gangsters chose Laundromats because they were cash businesses and this was an undoubted advantage to people like Al Capone who purchased them. Al Capone, however, was prosecuted and convicted in October, 1931 for tax evasion. It was for this that he was sent to prison rather than the predicate crimes that generated his illicit income. He states : 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. Ironically, one of the methods of concealing the source of the money was legal gambling. The major headache that gangsters faced was that the money was in cash, often in small denomination coins. If the coins were put into the bank, questions would be asked. The storage of large amounts of money in low value coins is a storage nightmare. So they created businesses, one of which was slot machines, and another was laundries. It is thus, that the term money laundry was born. The abuse of merchants and others by rulers led them to find ways to hide their wealth, including ways of moving it around without it being identified and confiscated. Money laundering in this sense was prevalent 4000 years before

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Money Laundering: An Insight into the Dark World of Financial Frauds

Christ. Proceeds of criminal conduct are laundered. Many countries have specified the criminal activities regarded as crime for money laundering purposes. It was several thousand years ago that assets often assets with no intrinsic worth but with time increasingly assets that were recognizable and convertible separated money and value. So, gold coins were literally worth their weight in gold and it was immaterial which country issued them the only thing that mattered was the quality and quantity of the gold. Once gold is melted down, it does not lose its value, only its shape. It can be refashioned and having arrived in one place as one thing, it can live there as something else and that need not even be the same amount of gold. Gold remains one of the main noncurrency means of holding money including laundered money. Diamonds are a particular favourite too. There have been instances of holy men carrying laundered funds by concealment. Prohibition and a restriction on gambling made large amounts of cash for those prepared to break the embargoes. The most important fact about that time was that it caused a dramatic increase in financial crime. Money laundering is the process by which criminals give the colour of legality and legitimacy to slush funds. An illusion is created that the money they are spending is genuine, legal money. Financial crime is a crime that gives direct access to the proceeds of the offence. Sanctions busting was a financial crime because for every offence committed, the criminal immediately received cash in his hand. Thus it created an immediate problem over what to do with that money. Opening a cash business was the obvious thing to do and money laundering came handy. Criminals moved into businesses where the cash crop was higher including drugs. They formed law firms, accountancy practices, bought banks, film studios, engineering concerns, even governments. They have always

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used criminal money to fund the education of the children of the more senior members. Money laundering also was developed in order to facilitate trade. Nigeria is the money-laundering centre of Africa and that Nigerians around the world are engaged in large-scale crime and laundering. The criminals create an illusion that the money they are spending is actually theirs. Many countries have restricted the classification of crimes that are regarded as underlying crimes for money laundering purposes. Such as offences relating to drug trafficking are to be regarded as creating dirty money. Some countries will allow a person to be prosecuted for laundering the proceeds of criminal conduct overseas, provided the conduct would have been criminal conduct in both countries. A person can be guilty of the offence of laundering the proceeds of someone elses criminal conduct. Meyer Lansky (affectionately called the Mob 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 is where money laundering would seem to have started and according to Lacey, Lansky was one of the most influential money launderers ever. The use of the Swiss facilities gave Lansky the means to incorporate one of the first real laundering techniques, the use of the loan-back concept, which meant that hitherto illegal money could now be disguised by loans provided by compliant foreign banks which could be declared to the revenue and a tax-deduction obtained into the bargain. Money laundering as an expression is one of fairly recent origin. The original sighting was in newspapers reporting the Watergate scandal in the United States in 1973. The expression first appeared in a judicial or legal

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context in 1982 in America. Since then the term has been widely accepted and is in popular usage throughout the world. Money laundering as a crime attracted interest in the 1980s only, essentially in a drug trafficking context. This formed an increasing awareness of the huge profits generated from this criminal activity and a concern at the massive drug abuse problem in western society which created the impetus for governments to act against the drug dealers by creating legislation that would deprive them of their illicit gains. Governments also recognized that criminal organizations, through the huge profits they earned from drugs, could contaminate and corrupt the structures of the state at all levels. Money laundering is a truly global phenomenon helped by the international financial community, which is a 24 hours a day business. When one financial centre closes business for the day, another one is opening or open for business. As a 1993 UN Report noted: The basic characteristics of the laundering of the proceeds of crime, which to a large extent also mark the operations of organized and transnational crime are its global nature, the flexibility and adaptability of its operations, the use of the latest technological means and professional assistance the ingenuity of its operators and the vast resources at their disposal. References
1. 2. Gilmore, William C. Dirty Money: The evolution of money laundering counter-measures. Council of Europe Press, Strasbourg, 1995. Graycar, A & Grabosky, P. (eds). Money-Laundering in the TwentyFirst Century: Risks and Countermeasures . Australian Institute of Criminology, Canberra, 1996.

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HOW IS MONEY LAUNDERED?


To understand money laundering as it is practised today on a global basis, one has to appreciate money as a commodity. Professional money launderers differ little in this respect from corporate money managers. A corporate money manager enters the money markets of various countries where the corporation will need national currencies during the next year and buys/sells currencies in a constant effort to improve the managers average position at the time of payment. Similarly, money launderers use a bidding system to buy/sell drug proceeds, especially US dollars. Just as a sound investment portfolio will contain stocks, bonds and other monetary instruments, the money brokers vary their holdings. The Cali Cartel, for example, minimizes risk by selling a substantial portion of the drug proceeds it earns from the sale of cocaine in the United States. Mexican traffickers in heroin, cocaine and marijuana do the same, often selling to the same money brokers on behalf of Cali or for their own account. These brokers will convert proceeds for a fee, or, they will buy the proceeds at a discount. Given the high profit margins of the drug trade, discounts of 7-10 per cent or even higher, depending upon risk, are common. At the end of the day, Cali and other trafficking groups may own or control 50 per cent or less of the initial drug proceeds. The textile trade is a typical cover. For example, a South American clothing manufacturer working with Cali obtains a permit to export $20 million in drug proceeds in New York and returns it to Colombia, covered by an export licence.

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Money Laundering: An Insight into the Dark World of Financial Frauds

Supposing Cali Cartel is moving $100 million from the US to Mexico. The bulk of the $100 million will be deposited in Mexican banks, after which a number of schemes can be used. Money will be wire-transferred to accounts in the United States. The Mexican banks will then issue cheques drawn on its US accounts, payable to individuals or corporations. These cheques can be batched for resale in Latin America, or deposited into foreign bank accounts. Enforcement officials believe that as much as $10 billion in Mexican bank drafts is laundered through such schemes each year in Panama alone. While some of the trade is in contraband goods, these certificates of deposit, cheques and other financial instruments have also been used to pay for legitimate shipments. Gold trade in the Aruba Free Zone amounts to more than $200 million a year. The Mexican banks will also issue their own dollardenominated cheques upto a level which they think will not cause inquiries. One recent transfer reportedly involved $78 million which went through a US bank in a single transaction. These transactions are designed to fall outside the scope of Treasury and other reporting. For example, US banking law does not require reports on bank to bank transfers. Transactions in bulk conducted outside traditional foreign exchange venues are probably escaping conventional monitoring systems. Dollar settlements are accomplished through reciprocal balances. For example, a Mexican bank wires $50 million to a bank in New York, which gives the Mexican bank instant credit on the latters New York account because the Mexican bank has simultaneously given the New

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York bank credit for $50 million at the latters Mexican facility. The grey market enables Latin businessmen to buy US goods and services here, or in a free zone like Cologne and pay for it in dollars (or dollars converted to cheques and other monetary instruments) which originated in the US drug market. Financial institutions and gambling operations face the loss of licences and significant financial penalties if they are caught. All financial transactions of US $10,000 and above must be reported, and the Treasury Departments GTO programme attempts to monitor suspicious transactions. In New York, limits of US $750 have been placed on small exchange offices, which have in the past transferred money for the drug cartels. Enormous size of American financial markets and the high volume of transactions make any effort to eradicate this activity impossible. More than anything else, banks and big business are keen to get their hands on the proceeds laundered of organised crime. Apart from the traditional activities of drugs, racketeering, kidnapping, gambling, procuring (women and children), smuggling (alcohol, tobacco, medicines), armed robbery, counterfeiting and bogus invoicing, tax evasion and misappropriation of public funds, new markets are also flourishing. These include smuggling illegal labour and refugees, computer piracy, trafficking in works of art and antiquities, in stolen cars and parts, in protected species and human organs, forgery in arms, toxic and nuclear products, etc. Every country has its criminal underworld. The biggest organisations and the ones that have been active the longest can be found in the hubs of capitalism: the United States (Cosa Nostra), Europe (the Sicilian Mafia) and Asia (the Chinese triads and Japanese yakusas). Others have also emerged over the last few decades, such as the Colombian

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cartels in Latin America and the Russian Mafia. Hundreds of rival groups share the national and international criminal markets. They enter into alliances and subcontracting agreements, tending to break up into small, flexible, mobile units specializing in a market sector or a profitable niche. The standard view of money laundering is that it involves three distinct stages: Placement (putting it in the system), layering (actions to obscure the paper trail), and integration (where illicit money is mingled with licit finance). The placement stage is the most risky for the criminal or money launderer. In the layering stage, an effort is made to ensure that the laundered money is difficult to differentiate from licit funds. This is done by exploiting the frequency, volume or complexity of transactions. Transactions cross several national borders. The money has moved beyond their jurisdiction and might be termed as trans-jurisdictional money. This is a central component of most money laundering schemes. It ensures that illicit money is impossible to differentiate from money obtained through legitimate means, and that integration can, therefore, be achieved. The money launderers tend to seek out areas in which there is a low risk of detection due to weak or ineffective anti-money laundering programmes. Because the objective of money laundering to get the illegal funds back to the individual who generated them launderers usually prefer to move funds through areas with stable financial systems. At the placement stage, the funds are usually processed relatively close to the underlying activity. In the layering phase, the launderer might choose an offshore financial centre, a large regional business centre, or a world banking centre any location that provides an adequate financial or business infrastructure. In the integration phase, launderers might choose to invest laundered funds in still other locations if they were generated in unstable economies or locations offering

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limited investment opportunities. Three Stages in Money Laundering 1. Placement Stage: The first stage is the physical disposal of cash. The launderer introduces his illegal profits into the financial system. This placement is accomplished by depositing the cash in domestic banks or in other types of formal or informal financial institutions. This is done by breaking up large amounts of cash into less conspicuous smaller sums that are then deposited directly into a bank account, or by purchasing a series of monetary instruments (cheques, money orders, etc.). The cash is usually siphoned off across borders for deposit in foreign financial institutions, or used to buy high-value goods, such as artwork, aeroplanes, and precious metals and stones, that can then be resold for payment by cheque or bank transfer. 2. Layering Stage: The second stage in money laundering is known as layering. The launderer engages in a series of conversions or movements of the funds to distance them from their source. The funds might be channelled through the purchase and sale of investment instruments such as bonds, stocks, and travellers cheques or the launderer might simply wire the funds through a series of accounts at various banks across the globe, particularly to those jurisdictions that do not cooperate in anti-money laundering investigations. In some instances, the launderer might disguise the transfer as payments for goods or services, thus giving them a legitimate appearance. A number of rotations to slush funds are given through banks and this complex layers of financial transactions are carried out to divorce the illicit proceeds from their source and mislead the investigating agencies. The high-value goods and monetary instruments are resold and the proceeds are invested in real estate and legitimate businesses, particularly in the leisure and tourism industries. Shell companies (paper companies/bogus

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Money Laundering: An Insight into the Dark World of Financial Frauds

companies) serve as front and are registered in offshore havens. They are a common tool in the layering phase. These companies whose directors are often local attorneys act as nominees to obscure the identity of beneficial owners through restrictive Bank secrecy laws and attorney-client privilege. 3. The Integration Stage: The funds re-enter the legitimate economy. The launderer might choose to invest the funds into real estate, luxury assets, or business ventures. Techniques and Trends Drug trafficking and other criminal organisations have developed a series of highly specialized techniques and methods designed to remove the taint from the money and to place it out of the reach of law enforcement. The conducive conditions are: 1. Multiple entry points in the global financial system. 2. Rapid transmission of funds making the task of investigators difficult. 3. Lack of proper monitoring of movement of huge funds through banks and other financial transactions. 4. Temptation of bribery and corruption in the illicit financial world. 5. Existence of parallel/informal economies outside the control of government. In many cases, money has already been layered and even integrated before it goes into the financial system it is already disguised as licit proceeds of legitimate business. This can be done through import-export schemes in which there is an over-invoicing for the goods, cash-based businesses such as restaurants, casinos, and card clubs. Using 1996 statistics, these percentages would indicate that money laundering ranged between US Dollar (US$) 590 billion and US$ 1.5 trillion. The lower figures is roughly equivalent to the value of the total output of an economy

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the size of Spain. Currency smugglers use a variety of techniques to take money out of the country. However, four main avenues have been identified as being most favoured by the smugglers, viz. air, sea, land and mail. Air Airlines are used for currency smuggling because: i) the smugglers can stay close to their money during the transportation process; ii) destinations can be reached quickly and easily; and iii) pre-planning is kept to a minimum Passengers can smuggle currency concealed on their persons, in hand luggage or in unaccompanied baggage. Colombian economists conservatively estimate that about US $4.5 billion is repatriated annually to Colombia by drug traffickers. It is also known that Colombian traffickers have purchased a fleet of large planes, such as Boeing 727s, Caravels and the Turboprop Lockheed Electra. They use these planes to transport tonnes of cocaine to Mexico, Canada, Portugal and West Africa for sale in the United States and Europe. In September 1992 federal and state authorities performed an outbound currency search of a commercial carriers crew members departing from New York, inbound to Colombia. A flight attendant was stopped and informed of the currency-reporting requirement. She declared a total of $1000. Upon examination of her hand-carried crew bag, a customs inspector found $2,600 in a roll of a toilet paper, $12,400 in an envelope, $20,000 in a wooden box, $1,627 in her wallet, $5,000 in a carry-on garment bag, $40,000 in a box of laundry detergent and $13,300 in her jacket pocket. In total she was carrying $95,541. In October 1996, Mexican authorities found $12 million inside suitcases taken from a private plane that is believed to belong to the CarrilloFuentes drug organization.

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Money Laundering: An Insight into the Dark World of Financial Frauds

Another technique is the concealment of money inside the body itself, for example, in one case, at New York-JFK, a woman swallowed $7,500 in fifteen condoms, and concealed $47,894 in her baggage. Currency smuggling by air can also include air cargo. In one of the largest detected cases inspectors at New YorkJFK found $6,469,024 in 26 sealed metal containers. Land Smuggling currency across land, although lacking in speed and the ability to reach many international destinations, is still a relatively easy way to transport cash. US customs presence tends to be less at outbound stations. Inspections tend to be infrequent as they interfere with the flow of traffic and at times cause massive traffic congestion. Another advantage of land border crossings is that vehicles in which to conceal the currency are easy to obtain. Customs officials have found currency in obvious locations such as seats, trunks, false compartments, dashboards and door panels. Sea Although smuggling by sea can have the advantage of reaching many destinations, it can be, at times, a cumbersome exercise. For example, it may require the use of other parties such as exporters or ship personnel and the smuggler may be physically separated from the currency for long period. At the same time, however, smuggling by sea offers certain advantages. The main advantage is that ship cargo typically involves large containers within which currency is very easy to conceal and difficult to detect. In one inspection, inspectors at New York seaport seized $763,240 that had been concealed beneath the floor of a refrigeration unit in a ship bound for Colombia. They also seized $7,1785,161 from two 20-foot containers loaded with

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dried peas, again on a vessel destined for Colombia. According to US customs this seizure represented approximately one months drug profits. Mail The US postal service and FinCEN (Financial Crimes Enforcement Network) maintain that, although, the extent of mail smuggling cannot be measured, the US mail and private couriers are being used to send currency illegally out of the country. The names on the money orders are left blank. The funds are sold to casas de cambios or money changing houses for cash that will be deposited into a traffickers account. The money orders are then sold and resold through the network of casas and are finally redeemed outside of Colombia. In addition to the increase in currency smuggling the emergence of new payment technologies has presented new challenges. For many years the banking and financial services industry has been developing new methods of cash payments. One of these methods is generally referred to as cyberpayments. A significant feature of the new cyberpayments is that they include a new form of currency. Cyberpayments also comprise other payment components, which emulate current payment systems. For example, already in use are cyber-cheques, cyber-credit and cyberdebit. Cyber-currency, therefore, includes the attributes of conventional currency, which are: a store of value; a medium of exchange; and ease of use. However, it has one very important added feature almost instant electronic transfers from point to point. Cyber-currency is still in the experimental stage. The cash is loaded on a card containing a chip, which can be filled via telephone or bank machine which can be moved from card to card and can be used for purchases of any amount. However, the problem for government and law enforcement agencies is that there is no way to track the

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Money Laundering: An Insight into the Dark World of Financial Frauds

cards transactions because, unlike Visa and MasterCard, there is no registration of the transaction. The inability to trace such funds presents an opportunity for the movement of illicit funds. It is argued that within the next few years cyberpayments will, to some degree, substitute and supplement all current means of payment and a variety of monetary instruments. It is not clear who the major cyber-payment players will be in the next 5 or 10 years, it is inevitable that Cybermoney will originate outside the purview of international central banks, which are largely responsible for traditional monetary regulation. If this situation holds true, the result will have major implications for Governments and law enforcement agencies. The Financial Crimes Enforcement Network (FinCEN) points out that there are no laws that limit the balance of electronic currency that can be loaded into a smart card. This may create a major opportunity for money launderers. In addition, it has not been determined whose tax laws apply to transactions in cyberspace. However, there is general agreement that the issue must be addressed immediately. As mentioned earlier, the cyberpayment industry is still in a developmental stage, nevertheless, having regard to the speed with which the use of electronic money is growing, governments cannot afford to wait until the launderers have exploited the cybersystem. The operational principles of money laundering are a three-stage process which require, first, moving the funds away from any direct association with crime; second, disguising the trail to foil pursuit; and, third, making the money available to criminals once again while keeping its source secret. The deeper the dirty money goes into the international banking system, the more difficult it is to identify its original source. Financial criminals use legal

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tricks such as walking accounts, where banking officials have standing instructions to move accounts to another jurisdiction at the first hint of an inquiry by law enforcement officials. The cardinal rule of successful money laundering is to always approximate as closely as possible legal transactions: making this process more difficult from the outset is the key to effective financial law enforcement. Criminals even exploit the banking sectors competition for customers to obtain even more attractive services for their illegal activities. We must continue to respect the right to banking privacy, but we cannot tolerate that it should offer immunity to criminals and their money. Remain on guard against criminal exploitation of offshore centres. There are also common factors regarding the wide range of methods used by money launderers when they attempt to launder their criminal proceeds. Three common factors identified in laundering operations are: The need to conceal the origin and true ownership of the proceeds; The need to maintain control of the proceeds; The need to change the form of the proceeds in order to shrink the huge volumes of cash generated by the initial criminal activity. The layering and integration stages of money laundering are using more sophisticated money laundering techniques. Cash is now being held in bulk or placed into the financial system through exchange houses and other non-bank financial institutions. Not only is it moved through wire transfers but also through innumerable varieties of licit and illicit financial instruments, including letters of credit, bonds and other securities, and prime bank notes and guarantees, without a parallel increase in the capability of the far-flung elements of the worlds financial system to verify the beneficiaries or authenticity of such instruments.

36
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Money Laundering: An Insight into the Dark World of Financial Frauds

References
2.

3. 4. 5. 6. 7. 8. 9. 10.

11. 12. 13. 14.

Adler, P. Wheeling and Dealing, (2nd ed), Columbia University Press, New York, 1993. Bosworth-Davis, R. Living with the Law: A Survey of Money Laundering Reporting Officers and their Attitudes towards the Money Laundering Regulations. Journal of Money Laundering Control, Vol.1, No.3, January 1998. Karchmer, Cliff. Illegal Money Laundering A Strategy & Resource Guide for Law Enforcement Agencies. Police Executive Resources, Washington, DC, 1988. Kramer, W. Michael. Investigative Techniques in Complex Financial Crimes. National Institute on Economic Crime, Washington, DC, 1989. Thony, J.-F. Processing Financial Information in Money Laundering Matters: The Financial Intelligence Units. European Journal of Crime, Criminal Law and Criminal Justice, Volume 3, 1996, 257-282. Lintner, Bertil. Washing up: Dirty money takes a tortuous path. Far Eastern Economic Review, Nov. 6, 1997. Naylor, R. Thomas. Bankers, Bagmen and Bandits. Black Rose, New York, 1990. Naylor, R. Thomas. Drug Money, Hot Money, and Debt. European Journal International Affairs, Winter 1989. Powis, Robert. The Money Launderers. Lessons from the Drug Wars How Billions of Illegal Dollars Are Washed Through Banks and Businesses. Probus Publishing, Chicago, 1992. Preston, James E. Casas de Cambio and International and Domestic Money Laundering. Paper presented at the Southwest Border Conference on Casas de Cambio, organized by the Financial Crimes Enforcement Network (FinCEN), United States Department of the Treasury. Arlington, VA, June 25-28, 1990. Robinson, Jeffrey. The Laundrymen. Simon & Schuster Ltd., London, 1994. United States General Accounting Office. Money Laundering: Rapid Growth of Casinos Makes them Vulnerable. Washington, DC: January 1996. Villa, John K. Banking Crimes: Fraud, Money Laundering, and Embezzlement. C. Boardman, New York, 1987. Rider, Dr. Barry A.K. Fei Chien Laundries The Pursuit of Flying Money. Journal of International Planning, August 1992.

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CORRUPTION AT HIGH PLACES AND MONEY LAUNDERING


In February, 1998, the OECDs Financial Action Task Force for money laundering in its Annual Report highlighted the problem in Mexico and stated, One of the most favoured technique continues to be outbound currency smuggling, along with electronic transfers, Mexican bank drafts and the parallel peso exchange market. Corruption remains the chief impediment to Mexicos antilaundering efforts. Where corruption occurs in international business transactions there is a need to tackle it at the source. The providers of funds from capital-exporting countries operate through criminalisation and bribing the authorities. International action is needed because bribes enable criminals to escape conviction for crimes that cause global damage: money laundering, environmental pollution, drug running, terrorism, etc. Corruption often transcends the national frontiers. The Mafias are international networks. Organized crime becomes an intermediary between the Government and the business. Mafiosi elements in some countries serve as negotiators to arrange contracts and kickbacks to corrupt officials. Business people have to play along if they want to obtain the contracts or even avoid physical harm. Advances in finance and technology also contributed to increasing awareness of the global corruption problem. The death of distance described by Frances Cairncross, meant that prices of communication plunged, while speed and quality were increased drastically (Cairncross, 1997).

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Money Laundering: An Insight into the Dark World of Financial Frauds

This was a bonanza for the perpetrators of public malfeasance. It became easier to hide ill-gotten assets, and now the links with organized crime became more transparent to decision-makers. In addition, loosening rules of international finance were twisted to make offshore banks with negligible accounting laws very popular. Moreover, millions of dollars could now be transferred around by a few mouse clicks and a fast modem. The effect of globalization on grand corruption are best summed up by Gadbaw and Richards when they state that, corruption had gone from an issue of ethics and human behavior to one that deals with international economic development. The problem was now on the radar screens of the rest of the world. As many officials started attesting, the issue was now one that could only be solved through international cooperation, which played right into the hands of the United States, which still reminded other countries that it held the higher moral ground. Corruption is often linked to laundering illicit proceeds. Corrupt officials use the same channels and operate in the same manner as the perpetrators of other serious offences. Doing away with bank secrecy is essential to call a halt to money laundering and thus prevent the criminals from enjoying the fruits of illicit activity. All states must enact legislation against money laundering and bribery of foreign officials should be termed as an offence. The state should plug all loopholes to plug money laundering. The role of banking and commercial institutions must be scrutinized to prevent laundering of ill-gotten proceeds. The scrutiny should include tax havens, shell companies and other cover organizations. Money laundering has an impact on the international allocation of resources and the stability of the international financial markets and thus affects the world economy. Money laundering is handmaiden of international

Corruption at High Places and Money Laundering

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corruption. Money laundering and corruption are interrelated. The linkage is clear those who take bribes must find safe havens where they can place their ill-gotten wealth. The bribe givers may themselves be willing to be conduit to place these funds in some far off banks. The banks come handy all over the globe in money laundering. The relation between money laundering and foreign corruption was highlighted in the US National Money Laundering Strategy for 2000. Avoid transactions that may involve the proceeds of foreign official corruption. The importance of such guidance was reinforced by the publication last year of a report by the Swiss Federal Banking Commission. The report detailed how 19 banks that operate in Switzerland handled almost $1 billion funds relating to corruption by the former ruler of Nigeria, General Sani Abacha. The report noted that Abacha case is a clear example of the international dimensions of the issue of the deposit of corruption proceeds in the financial system. The state power and authority is misused by Heads of States, Ministers and top officials for private and pecuniary gain. The skill and magnitude of operations is so vast that it amounts to corruption eruption. High-profile corruption scandals have rocked countries around the world. The breaking down of order in Russia, the financial crisis in Asia, the scandals in Italy, Venezuela and Brazil were the result of mega-scale corruption. According to Council of Europe report on globalisation, it has been pointed out that the possibilities of corruption will increase. Globalisation is the international integration of markets for goods, services and capital that is drawing nations closer to a global economy. The report further says as under: The figures speak for themselves. From the mid-1970s until the beginning of this decade, the level of foreign direct investment has risen from $50 billion to $318 billion (Time

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Money Laundering: An Insight into the Dark World of Financial Frauds

International, 6/22/98). With rising levels of economic interdependence, economic shocks from other countries can now affect politics at home more than ever before. Increasing contact between countries cause leakages that magnify the effects of corruption for the home audience. In effect, these problems can no longer be considered over there. The scope of grand corruption has enlarged with the growing scale of globalisation as well. Fifty years of progress in the area of international trade negotiations have resulted in the widening and deepening of trade rules that have resulted in increased world trade, as well as awareness of further impediments. Distortions in the global economy are noted quickly, and since commerce and procurement were increasingly international, it was evident that grand corruption was cutting into world trade. Countries such as the East Asian economies as well as other LDCs were planning huge development projects and now also ascribed to open procurement rules, creating new opportunities for corruption. (Role of Parliaments in Fighting Corruption). Eigen was a project analyst of World Bank posted at Kenya from 1989-91. He was pained to see widespread corruption and resigned from World Bank to launch Transparency International. Narrating an incident, he says that he evaluated and rejected a project which was environmentally harmful to the society. But he was surprised to know that the same project was approved through the backdoor, driven by an unholy alliance between the suppliers and local decision-makers who received large bribes put into their Swiss Bank accounts. Describing the role of power brokers and middlemen Eigen says, There are too many cases when the initiative for corruption comes from the Northern Middlemen. They are well known. They sit around in the capitals and on the Golf Courses: they offer to get Ministers children into

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Oxford and Harvard. Tiny Rowland admitted as much. During a court battle he said he needed $10 million a year to maintain his relationship with the first families of African countries. Transparency International now aims to publish a separate index to shine the light on countries where bribe-paying corporations base. Well-connected middlemen play an important role in getting a decision in a hurry without going through the rigmarole of the rules and regulations. The cumbersome administrative structure based on rules and regulations also bestow upon bureaucrats and politicians enormous discretion. This outsider the middleman performs the role of a go-between amongst industrialists and bureaucrats, politicians and bureaucrats and between politicians and politicians. Once an agreement is reached the middleman makes a good fortune for himself besides the parties involved. He is an extra-constitutional power centre and subverts the constitution. He is not accountable for his actions. At times, the legal and constitution authorities simply formalise or regularise the decision already taken by extra-legal authorities on extraneous considerations. In the case of corruption at high places there is no identified victim. The entire society is the victim. Immense social harm is done, large amount of money and huge losses occur at the cost of the tax payer. The top levels of political power, financial circles and public persons are the beneficiaries. The profits of the person interested are beyond imagination and losses to society are impossible to estimate. Goods are purchased at prices several times higher than the actual ones. The purchase of completely useless Parachutes for the Czech Army for a price ten times exceeding their value, purchase of computers incompatible with one another (transaction estimated for over 3 billion krones), very expensive modernisation of tanks, purchase

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Money Laundering: An Insight into the Dark World of Financial Frauds

of improperly equipped aircraft (Lidove Noviny 23.03.1999, 26.04.1999, 27.04.1999) are some of the examples of corruption at high places. (Joint Conference on Corruption, Budapest, Hungary, October 29November 6, 1999 Malgorzata Fuszara) George Moody-Stuart in his book The Good Business Guide to Bribery, describes the circumstances of awarding the contract for the Turkwel Gorge dam, in Kenya, to French contractors in 1986 without international competitive bidding. According to the delegate of the EEC to Kenya, the price of $ 270 million was more than double of what would have been expected from competitive bids. The installed price of the turbines was listed as $ 227,000 each against a British consultants estimate of $ 140,000 each. The EEC delegate calculated that the cost of energy from Turkwel would be 2.4 times as much as that from Kiambere on the Tana River. The Kenya Government officials who are involved in the project are fully aware of the disadvantages of the French deal but they nevertheless accepted because of high personal advantage. Grand corruption affects the quality of projects adversely. The bribe-givers often recover their money by compromising the quality of the projects at the cost of serious risks to the people. The acceptors of bribes will have no moral authority to demand quality from their paymasters. It has also been noticed that projects are approved not because the country needs them but because they provide the easiest opportunities to receive bribes. As a consequence uneconomic and inappropriate projects are selected. The confidence of people in the administration gets eroded. As corruption at high levels distorts decisionmaking the reputation of the country suffers and there will be little foreign investment. The international lending institutions will avoid such a country because they also lose confidence. This will result in rising interest rates,

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which will further aggravate economic problem. Corruption at high places is a serious impediment in Africa, Asia and South America. In Nigeria, as also in Pakistan, the best time to make money is during a military regime because the military is never probed. In Pakistan, the investigating agencies cannot initiate any investigation against Army officers. There is an interrelationship between business and politics. The businessmen sponsor political parties and provide them financial support. The politicians in turn take favourable decisions bringing huge profits to the business people who financed them. These webs of interconnection are based not on merit but on extraneous considerations of political funding. Political power may be acquired by means of money. Conversely money may be gained by means of political power. Politicians may sponsor businessmen of suspected integrity not running legal business. Corruption takes place at the stage of creation or implementation of law (J.C. Scott 1989). There is a definite relationship between money power and political power. Corruption at high places causes economic damage. It has been estimated that the African leaders have about $20 billion in Swiss banking system. Edmund Burke wrote about Warren Hastings, British Governor of Bengal, he formed plans and systems of government for the very purpose of accumulating bribes and presents to himself. Winston Churchill found nothing wrong with giving bribes abroad. (Noonan John, Bribes) The investigating agencies, this is a common belief, arrest small fish but let the whales get off scot-free. Former Federal Bureau of Investigation (FBI) Director Louis Freeh talked about the pressure being exerted on Reno (Attorney General) and the Justice Department not to aggressively investigate charges of illegal fund raising

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Money Laundering: An Insight into the Dark World of Financial Frauds

by the Democratic Party. Freehs Memo was not produced before the Chairman Senate Judiciary Committee for more than three years. The story was great because of Al Gore, the ex-Vice President of America. Evidence was being gathered against him in the Buddhist Temple donation case when Reno told the Justice Department to shut this case. Some of the cases of corruption at high places are enumerated below : The Nation (July 31, 1994) Bangkok published a news item about the former Prime Minister of Italy Betteno Craxi who was sentenced to 8 years imprisonment for accepting $7 million in kickbacks. The Clean Hands Inquiry implicated about 80 MPs as well as Secretaries of political parties and ministers on bribery charges by March, 1995. Corruption was a major issue in Italian local governmental elections in 1993. The centre collapsed; parties that have ruled for more than 45 years were almost wiped off the map and this was attributed to the discredit heaped on Italys governing parties by nearly two years of scandal. Felip Gonzales, the Prime Minister of Spain, had to order early elections than scheduled because of parliamentary journalistic and judicial investigations into financial frauds committed by the government. In Belgium two former foreign ministers were investigated for political pay-offs from military contractors and one of them Willy Claes had to lose his post of NATO Secretary-General. The Polish Prime Minister Jozef Olepsy had to resign because of his connections with the KGB. The Colombian President Ernesto Samper ordered investigation into his own campaign financing. In Japan, the governments come and go with startling frequency because of political frauds. In South Korea the two ex-Presidents were prosecuted and sent to jail. Some political executives like President Carlos Salinas of Mexico,

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Presidents of Peru and Venezuela and Italian Prime Minister Giulio Andreotti were investigated for corruption charges. President Joseph Estrada of Philippines was accused of receiving bribes amounting to $8 million from gambling dens. He was impeached. Ex-President of South Korea Roh Tae Woo admitted that he accumulated a personal fortune of US $ 650 million while in office. Dictators like Mobutu Sese Sako who stole hundreds of millions of dollars from the state of Zaire could no longer be tolerated by the people and international organisations. He had to go. A spot of bribery ceased to look like an acceptable means of keeping a useful man on your side. (Economist, 16.1.98) Clinton came under mounting criticism of his pardon of Marc Rich. It was alleged that Richs former wife, Denise, made political contributions and also contributed to the Clinton Library Foundation. This was denied by Clinton although Mary Jo White has undertaken an investigation to determine whether there is any quid pro quo between the pardon and his donations. Clinton admitted procedural lapses in Richs case because of rush of action during his last days in office. The White Water Scandal has received widespread international publicity levelling allegations against former President Clinton and Mrs. Clinton although the allegations remain unsubstantiated. In Bangladesh, former military dictator, General H.M. Ershad, was convicted in a corruption case involving millions of dollars by Bangladesh High Court. The former Philippines first lady, Imelda Marcos, is fighting for the release of frozen and sequesters assets illegally acquired by her husband President Marcos. Alberto Fujimori, President of Peru, was declared unfit by the Congress to hold office on grounds of moral incapacity. A corruption scandal ended his 10-year rule in November 2000.

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Money Laundering: An Insight into the Dark World of Financial Frauds

In Britain, the Tory Chief and Leader of the Opposition, Mr. William Hague claimed that proceeds from his public speaking engagement were going to the William Hague Charitable Trust, the existence of which has been denied by the Tory party leaders. The Hindujas were in the news in Britain for obtaining British passports by contributing a substantial sum for the Millenium Dome. This created uncomfortable situation for Tony Blairs Government. Robert Phillip Hanssan, a veteran FBI agent, was charged by US government for espionage and conspiracy for Moscow in exchange for cash and diamond. He also gave KGB the names of three Russian Intelligence agents working for the United States. The FBI Director, Louis Freeh said, the criminal conduct alleged represents the most traitorous action imaginable against a country governed by the rule of law. The French President, Jacques Chirac is under investigation in the use of kickbacks for personal causes according to the weekly Le Canard Enchain. The President of Russia was alleged to be indulging in money laundering. In Russia corruption is a growing phenomenon after the collapse of controlled Command Economy. A new class of wealthy private capitalists under the patronage of government has emerged in Russia. President Yeltsin of Russia was alleged to be indulging in money laundering. In Ukraine, Prime Minister Lazarenko reportedly made millions of dollars annually through his companys licence to import natural gas and oil. Motorola had to withdraw from Ukraine and cancelled a planned investment of $500 million. The Motorola announced their decision as a sequel to Ukrainian Governments decision to award a licence for mobile phones and Kyiv Star whose owners included an advisor to President Kuchama, a cabinet minister and a private Ukrainian having links with organised crime.

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All the 20 Commissioners of EEC were charged for corrupt practices in awarding contracts, disbursing subsidies and engaging consultants. They had to resign. All these Commissioners have held very high offices in their respective countries. All the 20 Commissioners of the European Union had to resign because of frauds and corruption in the matter of giving contracts, distributing subsidies, engaging personnel, etc. It has been estimated that European Union lost about a billion dollars because of frauds and fiscal irregularities. One Prime Minister and a few Chief Ministers were convicted for graft in India. A number of Ministers faced corruption charges. Ex-Prime Ministers of Pakistan Mrs. Benazir Bhutto and Nawaz Sharief faced corruption charges. The bank accounts of thousands of politicians were frozen. The Mayor of Beijing was sent to jail as he accepted bribe in dollars. In USA the idea of The House Bank was supported by both Democrats and Republicans. It was set up to facilitate encashment of the cheques of busy Congressmen. It was discovered that the Congressmen were issuing cheques totalling much more than their deposits. If an ordinary person was doing it he would have been subjected to criminal prosecution and fines. But the modern day feudal Lord The Politician is no different from the Kings and Dictators of the past and seems to be immune to the dictates of law. No special privileges should be accorded to them, which the government does not extend to an ordinary citizen. Scallywag magazine published from Britain levelled allegations against Mark Thatcher reported in number 29 March April 1995. The former German Chancellor, Helmut Kohl, is alleged to have accepted secret cash donations for his Christian Democrat Union (CDU) party. This high level influence

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Money Laundering: An Insight into the Dark World of Financial Frauds

peddling has shattered Germanys complacency. The late Nigerian Dictator General Sani Abacha systematically siphoned off funds from the Nigeria Central Bank. His Swiss Bank accounts run into hundreds of millions of dollars in assets. Corruption charges against former Prime Minister Bimyamin Netanyahu were dropped for lack of evidence and the Israels President Ezer Weizman had to resign following criticisms for financial misleading.
Ahmed, A.K.N., What are We Going to Do About Corruption? The Daily Star: Focus, March 01, 1999 prepared by Onirban. 2. Andelman, D. The Drug Money Maze. Foreign Affairs, Volume 73, No. 4. July/August 1994. 3. Bassiouni, M.C., E.G. Lee, M. De Feo, F.A. Keating, III, E. Nadelmann; Discussion. International Drug Trafficking and Money Laundering. American Society of International Law Proceedings, 1988, 444-55. 4. Ehrenstein, Michael David. Tracking Narco-Dollars: The Evolution of a Potent Weapon in the Drug War. University of Miami InterAmerican Law Review, Summer 1990; 637-677. 5. Evans, J. The Proceeds of Crime: Problems of Investigation and Prosecution . Paper presented to the United Nations International Conference on Preventing and Controlling Money Laundering and the Use of the Proceeds of Crime: A Global Approach, Courmayeur Mont Blanc, Italy, 18-20 June 1994. 6. Financial Scandal Threatens to Engulf French Presidency An article levelling allegations against Alain Juppe and Jacques Chirac by Gerard Naville, September 1998. 7. Greasing the Wheels Allegations of High-level International influence peddling have shattered Germanys Complacency. Time Magazine, February 7, 2000. 8. Hagizur Rahman, Corruption in High Places. 9. Needleman, Martin L. New Approaches for Controlling the Narcotics and Money Laundering Trades in the United States. Bryn Mawr, PA, 1988. 10. Organization of American States. Narcotics Money Laundering in the Caribbean Region: A Vulnerability Assessment Coopers & Lybrand, 1994. 11. Pheiffer, Marcel. Financial Investigations and Criminal Money. Journal of Money Laundering Control. Institute of Advanced Legal

References
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Studies. Volume Two, Number One, Summer 1998. 12. Political scandals shake European capitals an item from News and Observers giving brief details of financial scandals involving politicians in several European countries. 13. Smith, Harold E. Transnational Crime: Investigative Responses . University of Illinois, Chicago, 1989. 14. The Growing Threat of International Corruption by Henry Bosch of T.I. Australia. 15. The Paul Van Buitenen Report a suspended official of European Union about the Multi-million Pound Fraud. 16. The White Water Scandal is a part of a much wider Scandal J. Orlin Grabbes Home Page. 17. World Bank, the World Development Report 1997: the State in a Changing World, Oxford University Press, 1997. 18. Yahoo! Search Results for Corruption at High Places. Corruption in High Places http://www.apbnews.com/newscenter/oreilly/2000/05/03/ oreilly0530_01.html Transparency International deeply concerned over arrest of officials who fight corruption in high places. http.//www.transparency.de/documents/press releases/1999/ .html Looking for Corruption in all High Places http.//www.aei.org/oti/oti6367.htm ICR Press reaction. . effective in combating corruption in high places http.//www.gwdg.de/-uwvw/press/dap.htm Conference on Corruption http.//www.coc.ceu.hu/sik.html. CIET corruption, system leakage, transparency in government http.//www.ciet.org./www/image/theme/corruptiontheme.html

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Money Laundering: An Insight into the Dark World of Financial Frauds

MONEY LAUNDERING AND TERRORISM


Terrorism Funding: According to the Monitoring Committee of the Security Council which observes the implementation of the UNSC Resolution Number 1373, terrorists assets and funds worth $ 112 million have been seized/frozen in the aftermath of September 11, 2001. It is estimated that the Al-Queda and its allies in the International Islamic Front (IIF) have about $ 300 million at their disposal. Funds continue to flow and the organisation is engaged in the acts of terror in different parts of the world. Similarly, funds continue to flow from Pakistans ISI to the operatives of Harkat-ul-Mujahideen (HUM), the Harkat-ul-Jehad-alIslamic (HUJI), the Lashkar-e-Toiba (LET) and the Jaish-eMohammad (JEM) to carry out terrorist acts against India. Flow of funds from abroad has considerably increased in Pakistan after September 11, 2001. In Pakistan the Foreign Exchange Reserves have swelled to $ 7.5 billion in December 2002 from $ 1.5 billion in September 2001. Likewise, ISI is channelling more funds to these terrorist organisations. The incentive to ISI operatives to carry out terrorist acts has been doubled. The Pan-Islamic and Pro-Wahabi members of the PAK religious coalition want to step up assistance to Jehadis in Kashmir, Palestine, Chechnya, Myanmar and Southern Philippines. Transaction history of money laundering for funding terrorism is of little predictive use as the accounts are opened for very short duration. Transaction analysis is retrospective and therefore will give little information about

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the purpose of a transaction. This impedes efforts to provision early warning that an account is likely to be used for funding the activities of terrorists. Moreover the amount involved is small which does not fall within the ambit of cash transaction reporting nor suspicious transaction reporting system. Even the enforcing agencies will not be geared into action as they would hardly have any time before terrorist act to respond to a withdrawal of money for terrorist purposes. A great deal of thinking has been done in USA since September 11, 2001 about the ways in which Al-Qaeda and other groups finance their terrorist activity. Investigations have revealed that much of the funding for the September 11 attacks came from Arab Emirates and few other countries. The hijackers had ordinary US bank accounts into which they deposited funds received by wire transfers and other means. After the operation the balance amounts were remitted back to the families of dead hijackers of AlQaeda through the same methods. Terrorists transfer millions of dollars into untraceable accounts. They also finance and smuggle commodities like diamond and gold to avoid seizure abroad. Diamonds can be smuggled across borders without detection. An article was published in the Washington Post on December 30, 2001 quoting a US official as saying, We are beginning to understand how easy it is to move money through commodities like diamond. One thing we are learning is not to ignore the obvious. Our intelligence community must operate at a higher level than these statements indicate. The security of our nation depends on it. The US government has listed more than thirty groups as foreign terrorist organisations. It has now been realized that Narco-Terrorism is a serious threat to the security of a country. The terrorism is funded by drug money. Ultimately it leads to a situation which results in anarchy. A parallel administration is set up to govern and the power

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is exercised by the mafias holding the state to ransom. Narcotics have become the foundation of organised crime and terrorism. Funds beyond imagination are generated. Helicopters, aeroplanes and private armies are deployed to challenge the might of elected governments. Enormous funds are used to bribe and destroy the state machinery. All kinds of illegal activities such as distribution of territory to pickpockets, to extort, flesh trade, bootlegging and the like are effectively controlled by the Narcoterrorists. Cigarette smuggling is another method the terrorists have used to raise funds. In June two men were convicted of running millions of dollars of cigarettes from North Carolina to Michigan and sending some of the proceeds to Hezbollah. In South Asia, the Taliban were engaged in drug and opium smuggling. The value of trade was about dollar four hundred million which was shared between the Taliban and Inter-Services Intelligence (ISI) of Pakistan. It is well known that the Taliban had made Afghanistan a safe haven for international terrorists, particularly Osama bin Laden. They were harbouring terrorists from Islamic countries from all over the world including Egyptians, Algerians, Palestinians and Saudis. Afghanistan was used as a training ground and a base of operations for their worldwide terrorist activities. The Taliban, which controlled most of the territory in Afghanistan, facilitated the operation of training and indoctrination facilities for nonAfghans and provided logistical support and sometimes passports to members of various terrorist organisations. The fundamentalists have established a network of front companies in London/Birmingham/Manchester/Crowley and Leicester operating on behalf of Al-Mujahideen meaning voice/eyes/ears of Muslims. It urges Fifth Column for spread of Islam. Sheikh Omar Baksi Mohammad is the head. These front companies are the source of finance of these organisations.

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BCCI (Bank of Commerce and Credit International) was conduit to transfer funds for narco-terrorism for the fundamentalists to carry out all clandestine activities. It has since failed and closed. It is also a fact that the entire money intended for use in terrorism does not arise out of crime. It may be legal money and people may use it for terrorist purposes as they believe their cause to be genuine. The money may not come to the financial system as dirty money. Money meant for terrorism does not pass through the layering stage between accounts and across borders. It behaves like ordinary money and is almost impossible to identify. This is how the terrorists fund their activities and add new dimensions to the already complex problem, muddying the water further. Laundering money and financing terrorism may have certain common characteristics but they are different activities. The general perception about money laundering is that it originates with a crime but the money used by terrorists may come from legitimate sources. Although it cannot be denied that drugs, kidnappings, bank robberies, extortion and other crimes are also sources of terrorist funding. Charities may be abused to act as conduits for terrorist funding. In the UK and USA after the September 11 attacks Islamic charities have become suspect. These charities are protesting that they are unjustly being accused and this accusation is preventing them from serving the needy they want to help. It is a fact that all the smuggled money does not have to pass through the banking system in Western countries. Organised crime in the Middle East, South Asia and China has operated on informal money transfer networks. This informal banking system provides a safe haven to crooks and terrorists and poses a serious problem for those who try to catch them. The major terrorist operations financed through money laundering and hawala are :

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Money Laundering: An Insight into the Dark World of Financial Frauds

1. The Bombay bomb blasts of 1993 killing a large number of innocent persons. 2. The September 11, 2001 attack on the World Trade Center killing a large number of innocent persons. 3. The October 1, 2001 attack on J&K Assembly in Srinagar. 4. The attack on Indian Parliament on December 13, 2001. 5. The October 12, 2002 attack on nightclubs in the resort island of Bali that killed 192 people, mostly foreign tourists. 6. The October 24, 2002 attack on Moscow theatre by Chechen guerrillas armed with guns, grenades and explosives who held about 600 hostages at gunpoint. There are other terrorist acts also of very serious nature perpetrated by terrorist organisations all over the world. The Islamic fundamental terrorists want to take on their opponents on land, air and sea and destroy them. Osama bin Laden and his terrorist organisation is the moving force behind these terrorist acts. The Al-Qaeda has financed these heinous activities through money laundering, hawala and smuggling of narcotics and diamonds. It has been gathered that Al-Qaeda transferred a sum of $ 73,000 for the Bali massacre. It is believed that Jemaah Islamiyah, an extremist network with alleged AlQaeda ties, is behind the Bali attack, a foiled plot to blow up the US Embassy and other targets in Singapore last year and a string of other bombings in the region. Al-Qaeda the mother of all Islamic terrorist organisations has a sound financial base. Bin Ladens own personal fortune runs in hundreds of millions dollars. Money also comes from sympathetic wealthy Muslims who own assets in global financial centres. They have set up their own companies which can easily camouflage their transfer of money to Al-Qaeda. Al-Qaeda also resorts to kidnappings, smuggling, extortions, drug trafficking and trading in diamonds and precious metals. It is said that the Yemeni honey trade was

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used to raise funds and also serve as a cover for transporting drugs, weapons and operatives for Al-Qaeda. Charities from unsuspecting people and diverting funds to terrorist organisations through donations is also a source of funding. In the United States 30 groups of foreign terrorist organisations have had their financial assets frozen, and funds transferred to them are supposed to be blocked. The Bush administration has called for identifying, tracking and interfering with the flow of money to Al-Qaeda and other terrorist groups as a part of the war on terrorism. So serious is the problem that one of the senators advocated the offence of money laundering to be an offence under the USA Patriot Act. Section 1770 provides a new crime, 18 U.S.C. 2339C, with a 20 year prison term for anyone who provides or collects funds with the intent that such funds be used in full or in part to carry out a terrorist act. The new law does not require that the funds were actually used for such an act. Thus, law enforcement does not have to wait for the terrorist act to be completed. They can move in to cut off funding before the damage is done. More than 145 countries and jurisdictions have such blocking orders in place, and more than $46 million in terrorist-related assets close to half the total assets reported to have been seized have been blocked by countries other than the United States. The Treasury Department has reported a remarkable degree of participation by other counties. But some U.S. officials complain that allies such as Germany and France have not contributed any names to a list of alleged terrorist financiers whose assets the United States wants frozen. Tightening of weak regulations and financial controls are imperative otherwise terrorists could exploit the situation.

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The U.S. government lacks the leadership and political will to impose an effective international crackdown on international terrorist financing as its perception of terrorism differs from place to place. Al-Queda uses most of the money in creating infrastructure and imparting training. Infrastructure includes bribing officials, forging documents, collecting intelligence and maintaining computer and telecommunications capabilities. Arms and explosives have to be paid for, and it takes an ongoing flow of funds to deploy trained individuals for months or years as sleepers in cells located in the United States, Europe, and elsewhere. Terrorist groups also spend money on operations, which can mean paying for anything from flight-school tuition to car rentals to aeroplane tickets to bomb-making ingredients and payments to terrorists and their families. Terrorists and their backers use the global financial system, seeking out financial institutions in places with lax supervision and law enforcement. Al-Qaeda also smuggles precious metals, gems, and large amounts of cash across borders. Around September 11, 2001 the Al-Qaeda terror networks operatives had spent about $ 20 million and bought over the diamond trade in two West African countries to fund their activities. Liberia and Burkina Faso in West Africa allowed to buy and control the diamond trade by the terrorists against a consideration of $ 1 million to harbour their operatives. It uses electronic funds transfers, electronic messaging, and other technology to amass and disperse funds. Another important channel has been hawala networks, an informal international funds-transfer system prevalent in many Muslim societies. Built on trust among dealers, hawaldars conduct financial transactions outside the banking system and often leave no paper trail. Other terrorist groups, including Hamas, Hezbollah,

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and the Irish Republican Army have used similar methods and sometimes the same financial institutions, to move their money around the world. The International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 was signed into law in October 2001. The new law, part of the U.S.A. Patriot Act, enhanced the authority of the President and Treasury Department to curtail terrorist financing. Among other things, the statute restricts transactions involving some foreign jurisdictions linked to terror or money laundering. Terrorist Asset Tracking Center will mobilize the governments full financial expertise. These groups are made up of investigators and analysts from agencies including the Customs Service, the Internal Revenue Service, the Financial Crimes Enforcement Network, the Secret Service, and the FBI. Cooperation between the Treasury and the FBI has led to several investigations, arrests and asset seizures. Strict monitoring of suspect charities, blocking more channels of funding and following through and effective regulatory mechanism ensuring implementation will result in checking the problem. Simultaneously States should try to regulate hawala dealers and other informal payments systems. Investigation of Terrorist financing by various government agencies has been impeded by inter-agency turf battles and an all-too-common unwillingness to share information. The six major UK banks Abbey National, Barclays, HBOS, HSBC, LlyodsTSB and The Royal Bank of Scotland Group have committed themselves to work together to counter money laundering. Countering money laundering is a major contributor to the fight against crime and terrorism. They have issued a joint statement: We confirm our commitment to strong anti-money laundering systems and controls. We acknowledge and

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support the increasing need for a partnership between government, regulators, law enforcement authorities, banks and the general public, both domestically and internationally, to work together to prevent the laundering of the proceeds of serious criminal activity and terrorism financing. We are determined to play a full part in this partnership. Criminality is a requisite element of most money laundering offences. Terrorist funding is not essentially derived from criminal activities. The nature of the offence is also different from money laundering offences. It is a challenge to the worlds financial systems. The Wolfsberg Group of financial institutions comprising leading international banks (ABN Amro N.V., Banco Santander Central Hispano S.A., Bank of TokyoMitsubishi Ltd., Barclays Bank, Citigroup, Credit Suisse Group, Deutsche Bank AG, Goldman Sachs, HSBC, J.P. Morgan Chase, Societe Generale, UBS AG) has issued a statement on the Suppression of the Financing of Terrorism. The statment has identified the necessity of better cooperation between the banks regulatory and law enforcement agencies. The salient features of the statment are : 1. Global cooperation by governments with the financial institutions in the fight against terrorism. 2. They should prevent, detect, share information and refuse access to terrorist organizations. 3. The fight against terrorism must be non-discriminatory. 4. The financial institutions must adhere to the principle of KYC (Know Your Client). This will enable the enforcing agencies to carry out fruitful searches against terrorists. 5. Greater scrutiny of informal banking business or alternative remittance system. 6. Monitoring unusual or suspicious transactions and reporting them to enforcing agencies.

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7. Global sharing of information by countries about terrorists and their organisations. Financial Action Task Force (FATF) in addition to the forty recommendations to combat terrorism has made eight more recommendations to detect, prevent and suppress the financing of terrorism and terrorist acts: 1. Each country should take immediate steps to ratify and to implement fully the 1999 United Nations International Convention for the Suppression of the Financing of Terrorism, particularly United Nations Security Council Resolution 1373. 2. Each country should criminalise the financing of terrorism, terrorist acts and terrorist organisations. Countries should ensure that such offences are designated as money laundering predicate offences. 3. Each country should enact legislation to freeze and confiscate terrorists assets in accordance with the United Nations resolution to prevent and suppress the financing of terrorist acts. 4. The financial institutions must report suspicious transactions related to terrorism to enforcing agencies and other competent authorities. 5. International mutual legal assistance or information exchange, cooperation in investigations must be ensured. 6. Informal money transfer system or value transfer system or network should be licensed. The non-bank financial institutions must be brought under regulatory regime. 7. In case of wire transfers full particulars of the originator (name, address and account number) must be given and the information should be passed through the payment chain. 8. Non-profit organizations which can be abused must be brought within the ambit of laws and regulations. The terrorists can exploit legitimate agencies to act as conduit.

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Money Laundering: An Insight into the Dark World of Financial Frauds

The recently concluded (November 23, 2002) G-20 Finance Ministers and Central Bank Governors Meeting issued a joint communique stressing the need to combat the financing of terrorism and other abuses of the financial system. When we last met in Ottawa, Canada, in November 2001, we resolved to deny terrorists and their associates access to, or use of, our financial systems. While that meeting was shadowed by the events of September 11, 2001, today the recent tragic events in Bali and Moscow reinforce our resolve to combat terrorism and those that would fund it. To this end, we reviewed the progress made in implementing our Action Plan, including the freezing of terrorist assets, implementation of international standards, exchange of information, provision of technical assistance, and reporting on our actions. We also agreed to continue our efforts to eliminate other abuses of the financial systems, particularly money laundering. We pledged to carry forward our work in this regard, through support of the activities of International Financial Institutions (IFIs) and other relevant international fora, and through appropriate domestic actions. We will review progress on these matters at our next meeting. Money laundering has always been about concealing the true source of the proceeds of the organised crime. Money laundering and terrorist financing have so many things in common by nature both are secretive financial activities on a global scale. The financing of terrorism is different from money laundering pattern. Criminals have to find a way to launder their slush funds but terrorist financing includes both legal as well as illegal source of funds. After September 11, 2001 there has been a great demand for comprehensive and bold strategy to prevent financing of terrorist acts. A comprehensive set of recommendations has been made by FATF to prevent terrorist financing. The strategy includes to declare terrorst

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financing a criminal act, seizure of assets, international cooperation and global information sharing. Effective measure against terrorist financing can be achieved through a combination of bold legislation and effective implementation. The measure should cover all kinds of criminal activity from credit card fraud, armed robbery and the abuse of legally registered groups such as charity organizations or relief organizations to raise funds from innocent persons. The FATF has been supported by United Nations in its efforts against terrorist financing. The perception of terrorism must be the same all over the world. It must not change with place and people. Regarding an attack on World Trade Center as terrorist act and not the same while the Indian Parliament was attacked will create confusion and also affect the will to fight terrorism adversely. Strong bonds of international cooperation and global intelligence sharing are the prerequisite to curb this menace otherwise its hydra-head cannot be crushed. References
1. 2. 3. 4. 5. 6. 7. 8. 9. Ajayi, O. and Ososami S. Nigeria: on the Trail of a Spectre Destabilisation of Developing and Transitional Economies. Journal of Money Laundering Control, Vol. 1, No. 4, April 1998. Al-Qaeda linked to Diamond Trade, The Hindu, December 30, 2002. An Assessment of the Tools Needed to Fight the Financing of Terrorism, November 20, 2002 by Patrick Leahy, Senate Judiciary Committee. Chechen Wolves Kill in Moscow, The Asian Age, October 25, 2002. Financial Action Task Force on Money Laundering, Special Recommendations on Terrorist Financing. Gafisuds Action Plan against the Financing of Terrorism. Internal Security: Dangers of Narco-Terrorism by Major Sudhir Sawant (Retd.) MP. Joint Communique issued by G-20 Finance Ministers and Central Bank Governors, November 23, 2002, New Delhi. Levi, Michael. Evaluating the New Policing: Attacking the Money Trail of Organized Crime. The Australian and New Zealand Journal of Criminology. Vol. 30, 1997, pp 1-25.

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10. Observer. FATF initiatives to combat terrorist financing by Clarie Lo, President, FATF, June 26, 2002 11. Ridley, N. Bulgaria: Major Problems Caused by Illicit Money Transfer are Met with Grim Determination. Journal of Money Laundering Control, Vol. 1, No. 4, April 1998. 12. Sheptycki, J. Policing the trans-national state, British Journal of Criminology, Vol. 35(4), 1995; pp 613-35. 13. The Money: Drying Up the Funds for Terror. US Council on Foreign Relations. 14. The principles of commitment by six major UK banks. 15. The Suppression of the Financing of Terrorism, Wolfsberg Statement

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INTERNATIONAL RAMIFICATIONS AND GLOBAL TRENDS


1. Although money laundering is impossible to measure with precision, it is estimated that US $ 300 billion to US $ 500 billion in proceeds from serious crime (not tax evasion) is laundered each year. Measures in major financial markets to detect and prosecute laundering are driving it towards less developed markets linked to the global financial system. 2. Less developed markets linked to the global system are more prone to money laundering. 3. Money laundering could criminalize the financial system and undermine development efforts in emerging markets. 4. The proceeds of crime are run through the financial system to disguise their illegal origins and make them appear to be legitimate funds. Most often money laundering is associated with organized crime that generates significant proceeds, such as extortion, drug trafficking, arms smuggling and white-collar crime. Money laundering is not confined only to worlds major financial markets offshore banking centres but also poses a serious threat to any country integrated into the international financial system. They become increasingly viable targets for money laundering activity. New emerging financial markets and economies are highly vulnerable targets of money laundering activities. Emerging markets are attractive destinations in the eventuality of tightening enforcement of regulations in financial markets and offshore financial centres. The perpetrators of the crime have a tendency to shift their activities to markets with loose

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arrangements for detecting and recording placement of cash. Money laundering is a problem not only in the worlds major financial markets and offshore centres. Any country integrated into the international financial system is at risk. As emerging states open their economies and financial sectors, they become increasingly viable targets for money laundering activity. Increased efforts by authorities in the major financial markets and in many offshore financial centres to combat this activity provide further incentive for launderers to shift activities to emerging markets. There is evidence, for example, of increasing cross-border cash shipments to markets with loose arrangements for detecting and recording the placement of cash in the financial system and of growing investment by organized crime groups in real estate and business in emerging markets. The global economy could be of help in this regard. Not only has it made the move of dirty money easier, but it is also subjecting countries and regions to unimaginable international investor scrutiny. Investment will no longer go to corrupt countries with the exception perhaps of some corrupt tax havens at least not in amounts sufficient to enable them to grow as fast as noncorrupt economies. When a dictator puts millions of dollars in secret number bank accounts, drug money is laundered or a business executive skims profits it affects the lives of millions of people. Many governments, global businesses, international organizations are now taking cognizance of money laundering. The UN General Assembly has adopted an International Code of Conduct for Public Officials and a Declaration Against Corruption. In 1997, the OECD Countries adopted the Convention on Combating the Bribery on Foreign Public Officials on the lines of USA. Michel Camdessus, the IMF Managing Director said,

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the estimate of present scale of money laundering transactions are almost beyond imagination 2 to 5 per cent of global GDP. The criminals easily extend their lawless trade in crisisridden societies easily. They plough their ill-gotten gains back into the economic and financial system always aspiring for fresh capital without caring for its origin. Offshore financial centres in the form of banking and tax havens, become police and legal havens giving protection to such movements of tainted money. The world disappears. The territorial control of countries is done away with, sovereignty ceases to exist because each country has a well-defined territory. It is possible that the governments of the industrialised nations may be affected directly by the loss of resources. But governments interests are not affected directly, as they stand to gain much more than what they stand to lose. Laws are enacted in a manner to provide safety routes to the criminals so that they manage to escape the legal requirements of other countries. The Mafias manage through accounting tricks or invoice manipulations to smuggle out or expatriate their ill-gotten wealth because of the presence of the black holes in the laws with the complicity of their own countrys governments. The declarations of heads of states and governments come to naught because no-one is willing to raise the key issues. The results of the battle against money laundering, corruption, fraud and international trafficking are derisory. They represent only a tiny fraction of a lawlessness that is exploding everywhere. International crime amounts to hundreds of billions of dollars every year, all of it quietly recycled in the formal economic and financial systems without anyone really worrying about it. Unhindered global flow of dirty capital has created an exclusive growth of an outlaw financial market. The origin of this capital movement is the serious crime. Governments

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lack will to wage war on the rapidly expanding banking and tax havens. They often give zero tolerance calls against petty crime and unemployment and seem to be doing nothing against the big money crimes. Financial crime is becoming less visible. It involves big scandals, companies, banks, political parties, leaders, crime, cartel, mafias etc. The three major players in the game are : Governments; Transnational Corporations; Mafias. They carry out a business: The financial crime and the market rule of supply and demand are operational. The situation can be set right by effective governance. Business complicity, political connivance result in largescale organised crime, money laundering and recycling the proceeds of criminal activities. The criminals need the protection of concerned governments and ineffective regulatory authorities to consolidate and improve their profits, crush their rivals and finance their illicit operations. The politicians intervene keeping in view the quantum of funds they receive to keep themselves in power. Three factors have facilitated the functioning of crime capital. Since after 1980s there has been complete liberalisation of capital movements without any hindrance. The second factor has been the revolution in communication technologies moving the money at the speed of light and the third factor has been more reliability of tax havens specialising in the tolerance of financial crime. In economic war competition, quality and marketing seem to be losing ground. The winner is not always the one who believes in the best product or the best service at the best price. The situation is like a feudal combat where if you want to win the economic war, anything becomes acceptable irrespective of quality. In the words of Christian de Brie, in his Crime, the Worlds Biggest Free Enterprise, the arsenal is well supplied with weapons; restrictive

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practices, cartels, abuse of dominant position, dumping, forced sales, insider dealing and speculation, takeovers and dismembering of competitors, fraudulent balance sheets, rigging of accounts and transfer prices, the use of offshore subsidiaries and shell companies to avoid and evade tax, embezzlement of public funds, bogus contracts, corruption and blackhanders, unjust enrichment and abuse of corporate assets, surveillance and spying, blackmail and betrayal, disregard for regulations on employment rights and trade union freedoms, health and safety, social security, pollution and the environment. All these activities in one way or the other give rise to slush funds and thus money laundering. Because such funds breach one or the other law of the land, such activities are very prominent in sectors like, arms, oil, public works, civil aviation, air, rail and sea transport, telecommunications, banking and insurance, chemicals and food, etc. They result in massive misappropriation of funds, which disappear from bonafide accounts only to resurface in some tax havens. It has been described as, an incredible blunder, the full extent of which will never be known. This will not be possible without the power of the state and international and regional organisations. In return the perpetrators of the crime finance the parties election campaigns, promote political personalities and senior officials and the lobbyists who are close to every decision-making authority and whose brief is to help them make the right choices to corrupt them. The most notorious crime cartels are: Cosa Nostra (America), Sicilian mafia (Europe), the Chinese triads and Japanese Yakusas (Asia). The newly emerging cartels are the Colombian Cartel in Latin America, the Russian Mafias and the Indian-Pakistan Mafia Dawood group. These groups share the national and international crime markets. They enter into alliances all over the world and enter into agreements in the field of their specialization. Their range of activity extends from blackleg trade unions, strike

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breakers, private police, death squads, money launderers and drug traffickers. The Yakusas of Japan take care of recalcitrant shareholders, intermediaries and overinquisitive investigators, businessmen, bankers, politicians and judges. They portray a picture that they committed suicide. Whereas the fact: they are murdered. Instances have been reported where a victim died because he shot himself twice in the head, drowned fully clothed in a puddle or in the bath, slipped under a bus or into a bat of concrete or acid, fallen naked from their yatch into the sea under their bodyguards very eyes, disappeared on a flight or car journey. According to Christian de Brie, the worlds gross criminal product exceeds far above $1000 billion a year i.e., nearly 20% of the world trade. The annual profits from drug trafficking (Cannabis, Cocaine, Heroin) are estimated between $300-500 billion. In addition, there is a mushrooming synthetic drug trade accounting for between 8 to 10% of the world trade. Computer piracy has a turnover in excess of $200 billion, counterfeit goods $100 billion, European Community budget fraud $10-15 billion, animal smuggling $20 billion. After allowing for overheads (production and suppliers, intermediaries and corruption, investment expenditure, management costs, losses from seizures and crackdown) amounting to roughly 50% of turnover, that still leaves annual profits of $500 billion. The problem is how to manage this fabulous wealth. The crime syndicate comes handy to launder all this money and recycle it through legal channels. This is done at a cost, which is about 1/3rd, or $150 billion shared between banking networks and intermediaries: lawyers, brokers and trust managers. It is estimated that over $350 billion are laundered and reinvested annually i.e. $1 billion a day. The multinational criminal organisations go for the highest gains: hedge funds, infiltrating the bubble of

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financial speculations, emerging markets, property, new technologies. They fund and corrupt the political parties and leaders and in return get protection from them. This is precisely the service the holders of political or bureaucratic offices render in exchange for financial assistance. Police and the courts set up to deal with financial crime while not effecting the systems operations create an illusion. Everything stays the same. This is evident from the fact that there has been failure for last over 30 years of international war against drug trafficking. The same fate awaits the fight against money laundering and corruption. A large number of conventions like G-7 Summit (Paris) in 1989, UN Resolutions, OECD Resolutions, IMF Resolutions and the Bank for International Settlement (BIS) and the European Union have taken place without making any significant dent to solve the problem. The system of financial crime has not been shaken. Tax havens are places of refuge for financial crime. Expecting good conduct from them is like hoping from the Mafia to provide security to victims. There is no permanent international cooperation to share information regarding criminals and negotiations are highly time-consuming. In America, the secret services under the guidance of the state have moved into economic warfare with the coming to an end of cold war. These services include, according to Le Canard Enchaine, (3rd November 1999), Lockheed, Boeing, IBM, General Motors, Exxon, General Electric and Texaco. The money launderers are venturing into new area where they excel such as high technology, which leads them to growth in an international environment. The officials are bribed to make ambiguous laws and the law enforcement officials are paid to look the other way. The economic assistance programmes initiated by the World Bank, the International Monetary Fund, European

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Union and the United States are failing. Despite the investment of hundreds of millions of dollars of assistance, the endemic criminalization and organised crime are subverting economic reform. In recent years, the activities of transnational criminal organisations and drug traffickers have grown more extensive. Drug trafficking and organised crime lead to generation of huge profits. Criminal enterprises are concerned with making money and if their proceeds are removed, the incentives to continue their criminal activities will also disappear. In these circumstances the business itself could ultimately collapse. Money laundering can have positive multiplier benefits in some economies, it also makes macro-economic management more difficult, facilitates the accumulation of criminal capital that can be used to infiltrate licit business, encourages corruption, and creates vested interests in the continued activities of criminal organisations. The process of establishing a global anti-money laundering regime that began with the anti-money laundering provisions of the 1988 United Nations convention on drug trafficking has developed considerable momentum. This was evident in the International Narcotics Control Strategy Report issued by the United States Department of State in March 1996. In short, going after the money has become a high priority struggle against drug trafficking and organised crime. It is seen in some quarters as offering more effective base to attack criminal organisations than the traditional emphasis on interdiction of their products or arrests of the leadership. The global financial system provides many more opportunities than law enforcement can ever hope to forestall or block. Consequently, law enforcement is playing a game of catch-up that it is almost certainly destined to lose.

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Developments such as smart cards and cyber-money will facilitate money laundering activities and provide new opportunities for money transfers that are difficult if not impossible for government authorities to monitor and detect. The criminal groups will find ways to circumvent new restrictions and display the kind of ingenuity that is difficult to counter. Money laundering ensures a continued flow of capital that enables criminal organisations to buy protection through corruption of government officials and members of law enforcement. Criminal organisations are both vigorous and innovative in ensuring that the profits from their illegal enterprises are transformed into usable assets. The consequence is that money laundering provides one of the most important junctures between what Alex Schmid has termed the upper world and the under world. Money laundering is one of the major ways in which criminal organisations penetrate the licit economy and often involves co-option of supposedly reputable members of society such as bankers and lawyers. Allowing money laundering to go unchallenged, therefore, would have a corrosive impact on the integrity of financial institutions. The profits of criminal organisations are tainted by their illicit source, vulnerable to seizure by law enforcement. They cannot be used to the extent that they are associated directly with criminal activities. The criminals want to hide the source of their profits, to ensure that the money is safe from seizure by law enforcement and to use those profits anonymously. They extend their criminal activities, to protect themselves through corruption and bribery to infiltrate licit business and commerce, or simply to acquire property and other assets.

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Money laundering is not only turning black money into green. The definition offered by US custom includes several crucial dimensions of the process. According to this definition money laundering is the process whereby proceeds, reasonably believed to have been derived from criminal activity are transported, transferred, transformed, converted, or intermingled with legitimate funds, for the purpose of concealing or disguising the true nature, source, disposition, movement or ownership of those proceeds. The goal of the money laundering process is to make funds derived from, or associated with illicit activity appear legitimate. Money laundering helps to hide source and ownership of money, avoid tax regulations. The most fundamental objective of money laundering is to put the assets obtained through criminal activity beyond the reach of law enforcers. As a matter of fact money laundering takes place the moment money is transferred from those locations where it is vulnerable to seizure to areas where it is safe. In countries like Russia, it can involve movement outside the home country combined with conversion into a more stable currency. In this connection, banks in Cyprus have become a very important recipient of money from Russian criminal organisations. Security of the funds is ensured as advocated by Neyer Lansky who is often described as the godfather of modern money laundering. The most fundamental aspect of money laundering is to move funds offshore away from the gaze of enforcement and tax authorities so that they are not able to seize the profit of illegal enterprises. In practice, therefore, there is no distinction between clean and dirty money. Simply by transferring money from one jurisdiction to another the money is de facto made legitimate even if it is not de jure. In a safe haven for the transnational criminal organisation whether it is a home base with weak or acquiescent government or an offshore

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banking country that places a premium on bank secrecy rather than transparency all money, by definition, is clean. Case studies in money laundering in which law enforcement has uncovered money laundering schemes : Operation Dinero Operation Dinero was a joint law enforcement operation involving the Drug Enforcement Administration, the Internal Revenue Service, the Immigration and Naturalisation Service and the Federal Bureau of Investigation. Law enforcement agencies in Italy, Spain, Canada and Britain participated. It was directed against the Cali Cartel. The operation resulted in 88 arrests, the seizure of about 9 tonnes of cocaine and over $50 million in cash and property. The key to success was the DEA establishment and operation of an offshore bank in anguilla that appeared willing to launder money for drug traffickers. The bank, which had increasingly been used by traffickers, was hired to sell a Reynolds, a Rubens and a Picasso for members of the Cali group. These acquisitions of art and antiques were used as a means of money laundering. The operation revealed a money laundering network that included Mexico, Southen California and Colombia; a scheme involving money movements between New York, Canada and Colombia; links between the Cali Cartel and the Pasquale Locatelli organisation which was active in France, Romania, Spain, Greece, Italy and Canada; and the activities of the Sebera organisation in Italy which laundered money using three super markets and a car rental business.

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La Mina The La Mina operation involved 2 jewellery companies, Andonian Brothers and Ropex Corp. Money was successfully laundered running into hundreds of millions of dollars ostensibly obtained from gold and jewellery business in New York, Los Angeles and Houston. The cash was deposited in a variety of accounts and then wired to Latin America under the guise of legitimate business by fictitious operators. The cover for the operation was provided by fictitious jewellery sales and also by what were presented as a series of gold purchases from Uruguay. In some instances lead bars painted in gold were actually imported; in others the transactions were simply on paper. In 1985 the US Commerce Department had no records of any Uruguayan gold trade with the United States. Yet by 1988, US Commerce Department statistics indicated that Uruguay had become the second largest exporter of gold to the United States even though the country had no operating gold reserves. The Well Fargo Bank in Los Angeles reported to the FBI that the Andonian Brothers were making cash deposits on a much larger scale than most jewellery businesses. An air shipment from New York to Ropex Corp in Los Angeles described as gold scrap was broken open to reveal large bundles of cash. Bausch and Lomb Bausch and Lomb, the large pharmaceutical company, was indulging in dubious payment practices. Bausch and Lomb established Lamex, a new Latin American export unit, near the Miami airport. The division grew rapidly and had sales of nearly $25 million.

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Some of the income that was generated was of suspicious origin. Latin American and Caribbean customers would arrive with up to $50,000 in cash to pay for RayBan sunglasses; and in 1990 Lamex reportedly received $5.6 million 23% of its total sales in cash, cash equivalents, and third-party checks. Money was thus laundered.

The Bicycle Club A marijuana trafficker called Ben Kramer transferred his drug proceeds through a bank in Liechtenstein to another offshore institution. In partnership with a California business ran a gambling club known as the Bicycle Club. This club was used for laundering and was eventually seized by the authorities. A sum of $10 million of marijuana trafficking proceeds was laundered through the partnership. The Spence Money Laundering Network in New York It was a fascinating money laundering technique uncovered in New York in 1994. It involved a network of 24 people including the honorary consul-general for Bulgaria, a New York city police officer, 2 lawyers, a stockbroker, an assistant bank manager in Citibank, 2 rabbis, a firefighter and 2 bankers in Zurich. A law firm provided the overall guidance for the laundering. A trucking business and a beer distributorship were used as cover. The Bulgarian diplomat, the firefighter and the rabbi acted as couriers picking up drug trafficking proceeds in hotel rooms and parking lots, while money was also transported by Federal Express to a New York trucking business.

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The two lawyers subsequently placed the money into bank accounts with the assistance of a Citibank assistant manager. Drug traffickers then wired the money to banks in Europe including a private bank in Switzerland, the two bankers ensured that it was remitted to accounts designated. During 1993 and 1994 a sum between $70 million to $100 million was laundered by the group. In all these cases, the laundering process was uncovered, but not before significant amounts of money had been washed. The cases reveal ingenuity and the kinds of techniques used to launder money. Major Trends in Money Laundering Money laundering involves a constant struggle between the launderers who seek the paths of least resistance and lowest risk and governments and law enforcement authorities who seek to detect, disrupt, and prevent the completion of the laundering cycle. As a result, the money laundering industry is both innovative and highly dynamic. Launderers constantly seek new ways to circumvent regulation and minimize the likelihood that the funds from drug trafficking and other illicit enterprises will be subject to seizure. There are constant efforts to expand the repertoire of available and effective option. Uncovered methods are also used again in different locations or with slight modifications. The Employment of Specialists As criminal activities have become more extensive and the profits from drug trafficking and other criminal enterprises have increased, there has been recognition that laundering activities require specialists. With the advent of the Internet and other technological advances, monies can be quickly transferred around the

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globe, providing further opportunities to engage in the placement and layering of illicitly gained funds. There is a growing concern that criminals are increasingly enlisting the services of unethical lawyers, accountants and other professionals to help them discover and manipulate new money laundering opportunities afforded by the new technologies. These specialists can be found within the ranks of the criminal organisations themselves. There has been a growing recognition of the need to employ or co-opt specialists who operate in the licit financial and legal worlds, who can provide other financial services, and who represent what Bosworh-Davies and Saltmarsh describe as an emerging criminal class. As the International Narcotics Control Strategy Report noted, an increasing number of drug trafficking organizations do not directly manage the laundering or conversion of their proceeds, but rely predominantly on professional money brokers. Such brokers are increasingly crafting effective schemes to evade normal monitoring, detection and reporting devices. The traffickers pay hefty commissions that can range from around 6 or 7 per cent of the money laundered to over 20 per cent. This is deemed worth it because it reduces the risks both to the money and to the criminals themselves. Specialists are an additional buffer between the criminal and law enforcement. In some cases, they also accept liability in the event the money is seized. In treating money as a commodity, professional money launderers differ little from corporate money managers. Movement of Bulk Cash Considerable amounts of money are still moved through bulk cash. The weight and size of large amounts of paper money poses problems but has not prevented the proceeds of drug deals being smuggled back to Mexico or Colombia

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in household goods such as washing machines or stereos or in general merchandise. On April 17, 1995, for example, police at Benito Juarez international airport discovered 6.2 million dollars in small bills stuffed inside air-conditioners. Reno International, a firm in Springfield, New Jersey was set up specifically to produce large fibreglass rolls with special compartments in which up to $700,000 in cash could be secreted. Indeed, according to the New York Times, drug traffickers have shipped cash to Colombia in everything from used cars and dolls to television sets and refrigerated containers of bull semen. In October 1995 Mexican soldiers seized over 12 million dollars brought in from the United States by plane. Free Trade Zones and Trade The questionable nature of free trade zones and the opportunity that free trade zones everywhere create helps in concealing illegitimate money. The way this works is fairly straightforward. Criminal money is used to pay for goods that are shipped to a free trade zone, and subsequently shipped on to a country where legitimate bank accounts are wanted. Inward and outward shipments must be completely transparent. This is a very important issue as, increasingly, laundered money is following trade goods. The implementation of free trade agreements and regional contracts, creating trading and economic zones that transcend national borders could increase the use of international trade as a mechanism for laundering proceeds of criminal enterprises. The impact of the liberalization of border and other customs controls, liberalized banking procedures within these zones, and freedom of access within the zones creates additional potential risks for the future. i. In other cases, goods are purchased within free trade

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ii. iii. iv. v.

vi.

zones such as those in Panama and Aruba and subsequently imported into the United States where they are sold at or below market prices. The loss on the goods cuts slightly into the profits but is a price worth paying for proceeds that appear to be completely legitimate. The Colombian drug cartels moved into trade using a variety of import-export schemes and front companies. A simple way to do this is through over-invoicing for products, thereby providing an apparently legitimate reason for the movement of funds. The cartel, however, exploited trade on a massive scale and has helped turn the United States balance of trade with Colombia from deficit to surplus. As the New York time noted: In the new schemes, cartel intermediaries typically contact companies in Colombia that import goods from the United States. The intermediaries offer to pay for the imported goods with dollars that go to the American exporters. In turn, the importers pay intermediaries an equivalent amount inside Colombia for participating in the scheme, the importers pay intermediaries slightly less than the true exchange rate. The difficulty for United States law enforcement is that the laundering operations are cloaked within what appear to be legitimate business, with legitimate inventories, sales and customers. Reportedly, among the firms that inadvertently sold goods to Cali front companies were General Electric, Microsoft, Apple computer, and General Motors. In fact atleast 105 American companies unknowingly accepted drug money for their products. The United States has responded to this by intensified efforts to identify the Colombian drug traffickers front

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companies, and in 1995 President Clinton signed an order invoking the International Emergency Economic Powers Act to freeze the assets of these Colombian companies. Use of Cash Business i. Cash business such as restaurants and food delivery establishments have long provided excellent fronts for money laundering and will continue to do so. ii. Much the same is true of casinos. iii. Recent trends have included the growth of river boat gambling and the spread of Indian tribal casinos, and with 48 states now permitting legal gambling the amount of cash taken in casinos has increased from 117 billion dollars in 1984 to 407 billion dollars in 1994. iv. The spread of legal gambling continues to provide new opportunities for launderers. This is particularly the case with California card clubs which, according to some reports, have become fronts for money laundering by Asian criminal organisations. v. They can exchange cash for chips without keeping records. Unlike Los Vegas, where you bet against the house in California, you gamble against the other people at the tables. In other words, there are opportunities for very large cash transactions that do not leave a paper trail. It is perhaps not surprising, therefore, that card rooms have increased enormously in popularity accounting for $8.475 billion of the $13.9 billion legally wagered in California in 1994. vi. In Aruba, money is frequently laundered through casinos. You take a big pile of money, you buy some chips and go to play a bit, winning or losing does not matter. Then you take the chips back in

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exchange you get a bearer cheque from the bank in United States. The amount that is ready for you is called casino winning. No one ever looks in the books to see where that laundered money comes form let alone the amounts concerned. The opportunities are enormous. They are becoming even greater with the proliferation of casinos in the countries of the former Soviet Union. Casinos, in many cases, are not subject to any serious oversight or external scrutiny. Use of Electronic Transfers i. Organised crime and drug trafficking groups pose a threat to the global financial infrastructure. ii. The criminals are interested in exploiting this system rather than disrupt it. iii. As Joel Kurtzman has noted, the development of megabyte money i.e. money in the form of symbols on computer screen makes it possible to move funds almost anywhere in the world with speed and ease. iv. The electronic transfer mechanisms are operated by the Society for Worldwide Interbank Financial Telecommunications System (SWIFT) and the domestic euivalents of the US clearing systems operated by the Federal Reserve (Fedwire) and the Clearing House Interbank Payments System (CHIPS). Efforts are made to ensure the transactions include information about both senders and recipients of funds. v. The difficulty is that the system includes not only banks but stock exchanges and other financial institutions, has many points of access, and allows anonymous trading, thereby making it possible to move money rapidly and easily, and to obscure the origin and ownership of money. Megabyte money, while it does leave a trail, is difficult to track and to

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control. And once the money is in the system, the capacity to move it freely and easily makes it difficult for law enforcement to catch. The exploitation of Offshore banking Originally offshore centres were quite literally islands, hence the expression. Today, the term is used rather more loosely for financial centres, which operate within a low tax regime; this enables international transfers of money to take place with a great deal of facility and with no hindrance to capital flows. i. The development of the offshore banking sector has made it difficult to prevent money laundering. ii. As Helmut Schmidt once observed, central banks did not see that they were losing their grip over the markets when they allowed commercial banks to establish offshore affiliates. iii. Governments regard it as synonymous with enhanced competitiveness. iv. Competitiveness is deemed inconsistent with tight monitoring and control, and offshore banks and corporations attract funds largely because they promise both anonymity and the possibility of tax avoidance, and in some cases, tax evasion. v. The Cayman Islands, the Netherlands Antilles, Aruba, and Cyprus are all examples of offshore banking havens that have been used or continued to be used by criminal organisations for laundering the proceeds from their illicit activities. vi. Such centres offer attractive opportunities for the transfer and secretion of funds in places where they are relatively safe from identification and seizure by law enforcement. vii. Offshore corporations are created simply to launder and hide money. Some of the OFCs offer the ability to form and manage

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confidentiality of a variety of international business companies (IBCs) and exempt companies, trusts, investment funds and insurance companies, many with nominee directors, nominee office-holders and nominee shareholders. When combined with the use of bearer shares and mini-trusts (the latter are instruments used to further insulate the beneficial owner while bridging the ownership and management of the corporate entity) IBCs can present impenetrable barriers to law enforcement. A combination of IBCs, mini-trusts and bearer shares make it nearly impossible for competent authorities to generate paper trails or to identify beneficial owners of companies, while they simultaneously protect engaging in serious financial crime from civil or criminal prosecution. The use of new financial instruments i. There has been a massive increase in the number of transactions that have accompanied the move from an investment economy to a transaction economy. ii. Susan Stranger has termed the phenomenon casino capitalism. iii. The increased volume of global financial business has not been matched by the development of regulatory measures. When financial centres get a bad name, it is because of some of the things that go wrong there, of which the European Union Bank of Antigua was one case. The collapse of the Savings and Investment Bank of the Isle of Man, a bank originally set up for the sole purpose of lending money to its own directors with which to buy companies on the London Stock Exchange. iv. The increase in the number of monetary instruments, the increased number of financial transactions such as futures and derivatives that are not necessarily linked directly to real products, new banking methods such as correspondent banking, and the

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v.

vi.

vii.

viii.

use of representative offices and foreign branches, all make control even more difficult. Money can be moved not only through wire transfers, but also through innumerable varieties of licit and illicit financial instruments, including letters of credit, bonds and other securities, prime bank notes and guarantees. The new instruments make monitoring virtually impossible and undermine efforts to identify the beneficiaries. The 1996 FATF report, for example, noted that an emerging technique is the use of single issue premium bonds of one sort or another. Launderers purchase these products and then redeem them at a discount, the balance becoming available to the launderer in the form of a sanitized cheque from an insurance company. Insurance brokers are not yet required to report suspicious transactions. The services and products provided by the securities industry, including (1) the efficient transfer of funds between accounts and to other financial institutions, (2) the ability to conduct international transactions (3) the liquidity of securities, do provide opportunities for money launderers to obscure and move illicit funds. Securities industry is susceptible to money laundering, especially at the layering stage. The industry is international. Brokerage firms are often international. They transact an enormous volume of business by wire transfer through multiple jurisdictions. In addition, the securities markets are highly liquid. Purchases and sales can be made and settlements consummated within a short period of time. Securities brokers operate in a competitive environment. Competition does not take the form of global prices but of regulations. They may be tempted to disregard the source of

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ix. x.

xi. xii.

xiii. xiv.

xv.

client funds. Some countries allow brokerage firms to maintain securities accounts as nominees or trustees for persons whose identities are concealed. Securities can be purchased or sold, or securities accounts manipulated to cleanse criminal profits through a series of transactions, often using shell companies, limited partnerships and front companies to mask the identities of the real partners in interest. New banking practices are something that can also be exploited for money laundering. The State Departments 1996 International Narcotics Control Strategy Report noted with concern the new banking practices, such as direct access banking which permits customers to process transactions directly through their accounts or provided by the bank. This system limits the ability of the bank to monitor accounts activity. Beneficial owners of funds can now manipulate the identity of the ultimate recipient of the funds without a review by bank officers. To create accounts within accounts or even to provide quasi banking services to off-lined customers in a kind of bank within a bank. These new bank services can limit the utility of systems in place which allow information about both the originator and the recipient to travel with the electronic funds transfer. Correspondent banking places more emphasis on vetoing transactions at the bank of origin. Many of the banks of origin are in countries where little attention is paid to prevention or control of money laundering. Identify banks that may be vulnerable to money laundering and to examine those banks using agency

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experts and specialized procedures. Some of those examinations focused on foreign correspondent banking. Banks are selected for such examinations based on, among other things, their location in highintensity drug trafficking or money laundering areas, low enforcement leads, excessive currency flows, significant private banking activities, suspicious activity reporting and large currency transaction reporting patterns, and funds transfers or account relationships with drug source or stringent bank secrecy countries. xvi. Know your customer policy is totally lacking. xvii. Bryan Burrough has noted: To truly defeat money launderers, banks must know not only their own customers by no means an easy task but their customers, customers and in many cases their customers, customers, customers. xviii. The inexperience of regulators and law enforcement in dealing with financial crimes, the desire for foreign investment or joint ventures, as well as the growth of organised crime in transition countries make them prime targets for money laundering. xix. Organised crime has infiltrated the banking system as in Russia. It is estimated that criminals control between 40 to 80% of banks there. They have links with criminal organisations in Italy as well as Colombian drug traffickers. The Russian banking system is vulnerable not only to domestic money laundering but also to international schemes. Money launderers adopt an a la carte or mix and match approach to money laundering. The initiative to decide where money enters the global financial system, where intermingling of licit and illicit funds is to be done, lies with the launderer. Money laundering opportunities can be limited only by the ingenuity and imagination of perpetrators. The acquisition and sale of property through

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a series of transactions will make it extremely difficult to follow the money trail. Technology is being increasingly used by law enforcement agencies against the launderers. The balance of technological development will be in favour of the criminals, who want to obscure the source, ownership and movement of money developments in smart cards that are one facet of this development. Another is the growing use of the World Wide Web for financial transactions. Something that is likely to increase exponentially during the next few years. Although there are divergent views on the implications of electronic or cyber-money but certainly it adds to the repertoire of options available to money launderers. As commerce develops on the web the opportunities for anonymous financial transactions are likely to increase significantly. The movement of cyber-money is likely to prove more difficult to monitor than conventional transactions. As cyber-money and smart cards become more readily available, they are likely to be exploited to the full by criminal organisations for money laundering. This was particularly evident in the March 1996 INCSR which noted that chip-based electronic cyber-payments are emerging very rapidly. Cyber-payments may soon become an addition to the major means of payments currency, cheques, credit cards, debit cards and automated clearing-house transfers that are currently used to make purchases. A significant feature of the new cyber-payments is that they include a new form of currency, a cybercurrency that is engineered to be an electronic emulation of paper currency. Cyber-currency includes the attributes of conventional currency: a store of value, a medium of exchange, and provide anonymity and ease of use. There are added features: transfer velocity (almost instant electronic transfers from point to point) and substitution

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of electrons for paper currency and other physical means of payments. The 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 $5 billion annually to Colombia. The BMPE is a system that converts and launders illicit drug proceeds from dollars to Colombian pesos. For example, dealers sell Colombian drugs in the US in return for US dollars. The dealers thereafter sell the US currency to a Colombian black market peso brokers agent in the United States. In return for the dealers US currency deposit, the BMPE agent deposits the agreed-upon equivalent of Colombian pesos into the cartels bank account in Colombia. At this point, the cartel has successfully converted its drug dollars into pesos, and the Colombian broker and his agent now assume the risk for integrating the drug dollars into the US banking system. The broker funnels the money into financial markets by selling the dollars to Colombian importers, who then purchase US goods that are often smuggled into Colombia to avoid taxes and customs duties. The BMPE functions when peso brokers are able to facilitate the purchase of US manufactured trade goods with illicit proceeds. A major step towards dismantling the BMPE is to restrict these transactions so that they cannot occur. BMPE is a unique and complex scheme that utilizes legitimate United States companies to facilitate the transfer of drug proceeds from the US where the profits are generated, to Colombia, where the cartel owners reside. Evidence exists that legitimate US companies knowingly have sold goods to individuals and businesses involved in BMPE operations. Successful investigations should target all facets of the scheme, to include the drug dealer, the peso broker, money service businesses, and US individuals

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and businesses, where appropriate. Law enforcement agencies know from undercover work and experience in money laundering investigations that money launderers generally receive a percentage of the funds laundered. Some evidence suggests that the cost of laundering money currently ranges from 8% to 20% of principal. If law enforcements efforts to combat money laundering are successful, the criminal marketplace should reflect that success as professional money launderers demand higher rates of commission. Thus, one way to determine the effectiveness of anti-money laundering efforts is whether the cost of laundering money is increasing. Law enforcement cannot limit its fight against money laundering to domestic efforts. Money launderers know that illegitimate funds can escape detection and forfeiture more easily when dispersed from country to country. Computer technology has provided the means to transfer funds quickly, easily, and silently, and offshore banks are increasingly accessible, offering tax havens and secrecy in exchange for small service fees. Money launderers also take advantage of the laws and protections of foreign states to escape investigation and prosecution. Various nation-states have critical deficiencies in their anti-money laundering regimes: they have not enacted laws that prohibit money laundering; the District Office does not aggressively enforce existing anti-money laundering legislation; or they fail to cooperate internationally to investigate and prosecute money launderers at large. To successfully investigate and prosecute persons involved in complex, transnational money laundering schemes, law enforcement agencies must work in close coordination with their foreign counterparts. For example, in the early 1990s, the DEA, IRS-CI and the FBI were engaged in Operation Dinero, a multi-facet undercover investigation that focused on the drug money laundering

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operations of the Cali cartels. US law enforcement, in conjunction with agencies in Canada, the United Kingdom, Spain, and Italy, seized significant amount in cash and other property, nine tons of cocaine, and arrested 116 people as a result of the investigation. During operation Green Ice, which also targeted the financial infrastructure of the Cali drug cartel, British and Canadian Law enforcement authorities assisted US Customs, DEA, and IRS-CI in conducting the criminal money laundering and drug investigation. Law enforcement authorities from Italy, Colombia, Spain, Costa Rica, and the Cayman Islands also participated. As a result of the investigation, law enforcement officials seized approximately $66 million in US currency and property, nearly 14,000 pounds of cocaine, 16 pounds of heroin, and arrested over 250 people. Money laundering is a menace hurting the economies of most of the developing countries. International money laundering means unaccounted transfer of cross-border funds. The twin aspects of money laundering are generation of unaccounted funds, and cross-border transfer thereof in circumvention of monetary control legislation. That such ill-gotten funds are often used for subversive and other unlawful activities is hardly in dispute. When credit and financial institutions are used to launder proceeds from criminal activities the soundness and stability of the institution concerned and confidence in the financial system as a whole could be seriously jeopardized, thereby losing the trust of the people. In order to facilitate their criminal activities, launderers could try to take advantage of the freedom of capital movement and freedom to supply financial services, which the integrated financial area involves. Money laundering has an evident influence on the rise of organised crime in general and drug trafficking in particular. Combating money laundering is one of the most effective means of opposing this form of

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criminal activity. Some of the components in the money laundering operations associated with drug market are: Bureaux de change and remittance houses Mexican bank drafts Car dealers Along the US-Mexico border, bureaux de change provides various financial services such as wire transfers and exchange between US dollars and Mexican pesos. Remittance houses are similar operations, and may also provide services such as cellular telephones and pagers. Mexican bank drafts, which are bearer instruments, (i.e. payable to the bearer) were developed by Mexican banks to assist in the facilitation of trade between the United States and Mexico. They have come to be used as a money laundering instrument because of their liquidity and lack of a paper trail. Typically, money launderers will transport bulk currency from the United States into Mexico and deposit it into a Mexican bank. They will then ask for a draft in dollars, which is then transported back into the United States and deposited into a bank there, effectively laundering the cash that was transported into Mexico. Auto dealers (along with other businesses such as jewellers) are required to report cash transactions in excess of $10,000. This law is difficult to enforce, and money launderers exploit this, using the automobile as an instrument to facilitate the laundering of money. A money launderer can visit a dealership and purchase a car for cash. In large US cities, there is a large market for automobiles (especially luxury or sport models), so the launderer can easily resell the car. The launderer will insist on a certified cheque (or some similar instrument) for payment. This, like the Mexican bank draft can then be deposited into a bank, circumventing cash transaction reporting requirements. The bureaux de change and remittance houses along

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the US-Mexico border perform some of the same informal financial services offered by hawaladars. Mexican bank drafts and automobiles serve as alternative instruments in money laundering along the USMexico border. In hawala, gold is often the alternative monetary instrument of choice. Even though automobiles are bulkier than gold, the market for them may be larger and is certainly much less regulated. What has happened is that a bad situation has become worse. Due to the involvement of so many factors outside a countrys borders, internal measures are most likely inadequate. These problems, which have become global in scope, will require similar global solutions. The components of an effective anti-money laundering programme are anti-money laundering legislation, training of law enforcement, judicial and financial sector personnel on the nature and implementation of this legislation and agreements to facilitate international co-operation on the investigation and prosecution of financial crimes cases. In the light of recent international money laundering regulations, drug traffickers and organized criminals are discovering new money laundering techniques in order to avoid detection and criminal sanctions. Some of these techniques are sophisticated however many are extremely simple. Nevertheless, the days of putting money into Swiss Bank accounts are disappearing. Even high profile people such as former South Korean President Roh Tae Woo, and former Mexican President Carlos Salinas are finding out that their positions and financial networks are not enough to keep their dishonest earnings from being found. In recent years there has been a growing awareness in the fight against the laundering of money which has been derived from criminal activity, especially those monies derived from drug trafficking. In the past, traditional law enforcement method concentrated on establishing evidence to link a suspect to a crime. This practice resulted in

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investigators concentrating solely on the recovery of stolen property and paying little or no attention to the wider proceeds of the crimes such as large bank accounts, expensive houses, expensive education for children and other items of high value a successful criminal could flaunt or conceal. One form of structuring is smurfing, in which individuals recruited by the traffickers run from bank to bank and deposit just under the legal reporting requirement. However, this method is cumbersome and not without substantial risk. Therefore, to solve this problem currency smuggling has become a preferred option by money launderers. Wire transfers have caused many problems for investigators trying to follow money trails. The fact that more than 700,000 mostly legitimate wire transfers occur daily in the United States, moving about $3 trillion, highlights the difficulty faced by investigators. When drug cash has been repatriated, after smuggling abroad, its origin is extremely difficult to detect. Even if detected, differences in national laws, regulations and enforcement practices seriously impair the investigations of law enforcement agencies. It is estimated that the sale of illegal drugs, in the USA, generates more than $100 billion annually. Because most drug transactions are small, drug traffickers must contend with a large volume of small-denomination bills. This equates to over 75 imperial tons being smuggled each year out of the United States, which suggests that placement of cash is a major problem faced by those who do not want to operate through the national banking networks. Nevertheless, the same governments and law enforcement agencies have begun to realize the power of financial investigations. Drug trafficking is ultimately a cash business and drug traffickers must find ways to legitimize such cash. Money laundering is the only way through

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which they can do that. Attacking the financial base of any organization will have a direct impact on its ability to do business, this principle also holds true for the illegal drug industry. If legislation and enforcement is to be effective, agencies must continue to strengthen international partnerships and maintain strong ties with counterparts in the financial centres of the world. Unregulated countries must be urged to pass effective counter-money laundering and forfeiture laws. To tackle this problem, international customs agencies need to make a concerted effort to train personnel who will specialize in inspecting outbound passengers and currency. Coupled with training, the use of specially trained dogs to detect concealed currency and the use of specialized X-ray vans may be some of the immediate changes needed to combat currency smuggling. In the area of Cyber-payments, there is ongoing debate as to how to define a bank. Governments need to introduce laws that will include depository and non-depository institutions and all providers of financial services so that all currency operators whether paper or cyber will be bound by national and international currency reporting laws. These chip-based electronic cyber-payments systems are emerging very rapidly. A significant feature of the new cyber-payments systems is that some systems are being engineered to be an electronic emulation of paper currency. Cyber-payments facilitate transfer of financial value i.e., digital currency, e-money. The transactions can occur via the internet or through use of smart cards which contain a microchip, which store value on the card. Cyber-payment camouflages the identity of the parties, and provides immediate, convenient and secured means to transfer financial value. It is a potential anonymous method of international movement of slush funds. It is

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attractive to money laundering because of efficiency, speed and anonymity. Law enforcement becomes difficult. There is lack of information to detect illegal activity. The traditional investigative techniques are of no use. The question of international jurisdiction will be another problem. New payment technologies will be a serious threat to financial stability in future. Morris-Cotterill How Not To Be a Money Launderer, 1996 describes the Internet as being one of the greatest opportunities for laundering because of the total lack of traceable transactions. The use of encryption software will further make transactions totally secure. The Internet will allow cross-border movements of capital to take place. The money-laundering managers take advantage of these new technologies to circumvent any legislation on other traditional laundering techniques. In MONDEX, each card has a pre-set limit, set by the issuing banks. Banks can issue cards to private parties with unlimited power. No record of these private parties is maintained. Even card to card transactions can be made. This system facilitates money laundering. The international dimension of money laundering was evident in a study of Canadian money laundering police files. They revealed that over 80 per cent of all laundering schemes had an international dimension. More recently Operation Green Ice (1992) showed the essentially transnational nature of modern money laundering. International banking continues to evolve both in terms of the worldwide connections among banks, as well as the increasing sophistication of banking methods. The constant challenge is to ensure that every bank can account for its customers, that every government has laws, which ensure the prosecution of financial crimes, and that every society sets a moral and ethical standard for the conduct of commerce.

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Many important financial centres have now adopted legislation to curb drug-related money laundering, and the number of governments, which have ratified the 1988 UN Convention continued to increase. But, the race between criminals seeking new venues and oversight bodies seeking more widespread compliance still goes to the crooks. In 1987, when the first INCSR money laundering chapter was published, the priority concern was with twelve leading financial centres including the United States, United Kingdom, France, Germany, Italy, Switzerland, Hong Kong, Singapore, Panama, the Bahamas, the Cayman Islands, and Colombia. When FATF was founded in September 1989, the belief was that major relief could be achieved through a congruence of laws and policies among 15 major industrialized countries: the US, UK, Germany, France, Italy, Canada, Japan, Netherlands, Australia, Switzerland, Luxembourg, Spain, Sweden, Belgium and Austria. By 1991, FATF had expanded to include all 24 members of the Organization for Economic Cooperation and Development, as well as Hong Kong and Singapore. The 1988 INCSR noted that Cyprus, for example, was not a priority, while Mexico was treated marginally, Russia was still the heartland of the Soviet empire, and Israel, Turkey, Aruba, the Netherlands Antilles, Antigua and others did not appear on most money laundering maps. Yet, Russia, Turkey and the Netherlands Antilles were raised to High Priority in 1996, where Mexico and Aruba remain continuing concerns; Israel and Antigua are Medium-High priority and Cyprus has been raised to High Priority in 1997. There is also a substantial question whether the actions of this decade are adequate, given recent developments in money laundering practices, the upswing in non-drug financial crimes, and the need to adapt to new technologies used in banking, as well as extending laws to include nonbank financial institutions.

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Organized crime groups are increasing. A factor in major money laundering schemes and the multiple sources of their proceeds compounds the difficulty of linking the monetary transactions to a unique predicate offence like drug trafficking. Moreover criminal organizations have distinct patterns of operation which vary from one part of the globe to the next. In its 1997 public report on typologies, the FATF noted that organized crime continues to be responsible for a large proportion of the illegal funds entering financial systems. FATF said organized crime groups in Italy, Japan, Colombia, Russia and Eastern Europe, Nigeria and the Far East (among others) were involved in a wide range of criminal activities, including drug trafficking, loan sharking, illegal gambling, fraud, embezzlement, extortion, prostitution, corruption, illegal trafficking in arms and human beings, organized motor car theft and other crimes. FATF also cited a trend in some countries where criminals who were once only engaged in drug trafficking were either broadening their activities to include other proceeds-generating criminal activities or had switched to other financial crimes carrying lower penalties. Money laundering has none of the drama associated with a robbery or any of the fear that violent crime imprints upon peoples psyche and yet, money laundering can only take place after a predicate crime (such as a robbery or housebreaking or drug dealing) has taken place. It is the lack of information about money laundering that is available to the person on the street, which makes it an invisible problem and hence difficult to tackle. The infiltration of illegal capital may prove a catalyst for a chain reaction whose gravity no one can foresee. By bringing entrepreneurs linked to uncivil society into the legal system, fresh strains of adventurism and anarchy come into play in the market. Their presence has the potential to trigger the explosive worldwide financial

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breakdown that so many people fear. Several of the largest banking scandals in recent times the BCCI case, the European Union Bank of Antigua and the Banco Ambrosiano case, to name but a few were all attributable to illegal financial deals and their use of financial havens with banking secrecy. Offshore financial system and archaic banking secrecy clauses can no longer be tolerated as a cover for illegal activities. Because of tax evasion, drug trafficking, theft or whatever, some people end up with very large amounts of money. They usually want to invest this money in activities which, over a period of time, appear to be legitimate. Sometimes the investments are domestic, but often they are international. There are even specialists in this field now who help with these investments. The fight against money laundering is much like fighting a war; one always prepares according to what one learned in past battles, but there are always new tactics coming along. With the proliferation of technology and new instruments within the financial system, more and more opportunities will arise for money laundering. Some people from rich countries invest money in certain tax havens. The money is not invested in a real sense in those countries. These countries serve merely as a conduit for investment in other places, and through the legal framework, which has evolved, the money can be shifted back to various places and can thus escape the attention of authorities. The moral principle is that criminals should not be allowed to profit from their crimes. Reputable financial service sector is the best way of attracting the right kind of business and ensuring that the sector has a good future. With the advent of international drug smuggling there has been the concomitant problem of money laundering.

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Many Caribbean jurisdictions are vulnerable to both drugs and money laundering. Jewish or a dissident German in 1938, could not take out any money out of Germany via any form of banking, because it would have been illegal. There are many currency transfers which are legitimate and moral, but possibly illegal. In the UK legislation has been enacted to counter this crime. For example, confiscation and money laundering provisions are contained in the Drug Trafficking Offences Act 1986 (DTOA), in the Criminal Justice Act 1988 and the Criminal Justice (International Cooperation) Act 1990. These provisions focus particularly on drug trafficking extension of money laundering to cover all crime proceeds. Other challenges include counterfeiting of currencies and other monetary instruments, especially bonds; the boom in contraband smuggling; the buying of banks and other financial institutions by suspected criminal groups; the resort by criminals to the use of smaller, less-monitored banks; and the sophisticated use of such new phenomenon as direct access and pass through banking, and electronic cash systems. There is continuing concern, given that financial crimes and money laundering are occurring with varying degrees of regularity in more than 125 jurisdictions, that some governments still have not criminalized all forms of money laundering. Some have not given sufficient regulatory authority to central banks and other institutions; many do not have adequate data systems to monitor trends and methods used in their territories; and many have not made adequate legal enactments. Too many affected or vulnerable governments have not criminalized all forms of money laundering and financial crime, nor given sufficient authority to banking regulatory bodies. There is need for an intensified education and persuasion effort by the worlds major financial institutions and organizations, some of which have been allies in the

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fight against money laundering, to ensure a higher level of compliance on a global basis. Too many governments continue to place limitations on money laundering countermeasures, particularly the requirement that the offence of money laundering must be predicated upon conviction for a drug trafficking offence. Too many governments still refuse to share information about financial transactions with other governments to facilitate multinational money laundering investigations. There is need for enhanced bilateral and multilateral international communications to inform governments and financial systems in some systematic and ongoing way about the methods and typologies of drug and non-drug related money laundering and financial crime. The electronic highway now links banks and non-bank financial institutions (NBFIs) worldwide to facilitate expanding world trade and financial services, placing evergreater priority on banks of origin to establish the identity of beneficial owners and their sources of funds. There are few controls on electronic transfers, and, compounding the problem, the bank or non-bank of origin is increasingly based outside major financial centres in jurisdictions, which do not adequately control money laundering and other financial crimes. Narcotics money laundering has adopted the invoicing schemes used by contraband smugglers and are similarly manipulating commercial trade practices to move and convert illegal proceeds. The vast proceeds generated by both types of crime magnify the need for control mechanisms to address non-drug-related financial crimes. There is an emerging concern about new banking practices, such as direct access banking which permits customers to process transactions directly through their accounts by computer operating software provided by the bank. This system limits the banks ability to monitor account activity, such as of joint accounts and pass-through

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banking schemes which have been a traditional method of layering. Beneficial owners of funds can now manipulate the identity of the ultimate recipient of the funds without the review by bank officers. Pass-through banking by itself poses myriad problems for regulators, by creating the ability of depositors unilaterally to create accounts within accounts, or even to provide quasi-banking services to offline customers in a kind of bank within a bank. These new bank services can limit the utility of systems in place to have both originator and recipient information travel with the electronic funds transfer. The concern about the concentration of economic power in drug cartels and other criminal organizations, and its potential translation into political power now embraces the Caribbean, Europe, the Middle East and Asia as well as the Americas. Professional money laundering specialists sell high quality services, contacts, experience and knowledge of money movements, supported by the latest electronic technology, to any trafficker or other criminal willing to pay their lucrative fees. This practice continues to make enforcement more difficult, especially through the commingling of licit and illicit funds from many sources and the worldwide dispersion of funds, far from the predicate crime scene. Non-bank financial systems are still unevenly regulated in most parts of the world, especially the placement stage for cash. The US, which is taking a leadership role in monitoring financial transactions through non-bank financial institutions, is still drafting the regulations that would subject them to federal regulation. Non-bank financial institutions include a wide variety of exchange houses, cheque cashing service, insurers, mortgagers, brokers, importers, exporters and other trading companies, gold and precious metal dealers, casinos, express delivery services and other money movers of varying degrees of

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sophistication and capability. Even less regulated is the underground banking systems, like the chop houses of the Orient, and the hundi and hawala systems of Europe, South Asia and the Middle East. Asset forfeiture laws have not kept pace with antimoney laundering investigative authority, much less with traffickers wide-ranging schemes. There is a conspicuous gap between the number of institutions and accounts identified by government investigations with money laundering and the authority of many governments to seize and forfeit drug and money laundering proceeds. Many banking systems remain obliged to inform account holders that the government is investigating them and may seize their accounts, providing criminals the opportunity to move assets and leave town. There is an urgent need to prescribe corporate as well as individual sanctions, including actions against financial institutions that repeatedly fail to take prudent measures to prevent their institutions from being used to launder money. There is need for continuous fine-tuning of bilateral and multilateral strategies, which define responsibilities and objectives on a country-by-country basis, and set specific goals for cooperating with the varying money laundering and money transit countries. Reports from government after government demonstrate that the adoption of mandatory controls has not caused decline in legitimate deposits or resulted in threats from traffickers. Prudential supervision of many domestic banking systems has improved with respect to money laundering, but foreign branch offices, subsidiaries and other foreign operations continue to figure prominently in drug and other money laundering and financial crime. There is a particular need for major international banks to ensure those governments and regulatory agencies in all jurisdictions

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they serve are enforcing the same high standards as home jurisdiction and governments. There is a need for countries that cooperate on money laundering investigations and prosecutions to share forfeited proceeds so as to reflect equitably their respective contributions. A finders keepers approach is unfair and fails to provide an incentive for multinational efforts. Money laundering has devastating social consequences and is a threat to national security. It provides the fuel for drug dealers, terrorists, illegal arms dealers, corrupt public officials and other criminals to operate and expand their criminal enterprises. 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, in addition to facilitating legitimate commerce, permit criminals to order the transfer of millions of dollars instantly, using personal computers and satellite dishes. The criminals choice of money laundering vehicles is limited only by his or her creativity. 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. INTERNATIONAL BUSINESS COMPANIES (IBCs) OFCs maintain that their carefully crafted laws and regulations provide beneficial business and financial planning options for their clients. These include, but are 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 aeroplanes; sophisticated insurance management options; investment

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opportunities that transcend home country marketing regulations; preservation of assets; investment of overnight funds; and freedom from certain home country regulatory requirements. The Errico and Musalem 1999 working paper of the International Monetary Fund (IMF) concluded that the OFCs of Uruguay, Malaysia and Thailand contributed to the financial crises of Latin America and Asia by providing a hiding place for losses from loans of the international financial institutions. Another recent study demonstrates how the Russian Central Bank used an IBC formed in the Jersey OFC to mislead the IMF into thinking that Russias currency reserves were higher than they actually were. Drug traffickers, terrorists, money launderers, tax evaders and other criminals have found the OFCs particularly inviting venue in which to conduct and conceal their activities. Errico and Musalem analyze the role of the OFCs in the Asian and Latin American crises. The Pricewaterhouse Coopers Report to VV Gerashenko, Central Bank of Russia, re:FIMACO, August 1999, commissioned by the IMF, leads to the conclusion that the Russian Central Bank used FIMACO (the Jersey registered IBC) to anonymously purchase Russian government debt. ECONOMIC CITIZENSHIP Other practices found in some OFCs cause problems for law enforcement. One such practice, well advertised on the internet, is the selling of economic citizenship a practice that enables individuals suspected of committing crimes to purchase citizenship in an OFC jurisdiction that does not have an extradition agreement with the purchasers original home country. Currently five Caribbean Basin OFCs are actively selling economic citizenships: Belize, Dominica, Grenada, St. Kitts/Nevis and St.Vincent and the Grenadines. In the Pacific region,

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economic citizenships are for sale in Nauru. INTERNET GAMING Internet gaming executed via the use of credit cards and offshore banks represents yet another powerful vehicle for criminals to launder funds from illicit sources as well as to evade taxes. By the end of December, 2000, Antigua and Barbuda, for example, reportedly had licensed more than 80 Internet gaming websites at a cost of $75,000$85,000 for sports betting and $100,000 for a virtual casino. The Market for Gold and other Precious Metals Gold has always remained a key medium of exchange, immune to changing global fortunes unlike the currencies, which depend upon political and economic conditions. Gold is known to play a significant role in international money laundering. Gold, just like certain currencies (e.g., the US dollar, Swiss franc, and British pound, the Euro) is a nearly universal commodity for international commerce. Gold serves as both a commodity and, to a lesser extent, a medium of exchange in money laundering conducted in Latin America, the United States, Europe and Asia. In this cycle, for example, gold bullion makes its way to Italy via Swiss brokers. There it is made into jewellery, much of which is then shipped to Latin America. In Latin America, this jewellery (or the raw gold from which it was made) then becomes one, if not the most important, of the commodities in the black market peso exchange. In a recent case, United States law enforcement authorities identified a money laundering system that makes use of the legitimate gold trade to launder money through black market currency exchanges. In this system, gold jewellery is sold in the Panama Colon Free Trade Zone to Colombians (who are allegedly hoarding gold against the devaluation of the peso). The jewellery is smuggled into Colombia through the city of Bucaramanga. The

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jewellery is then melted and formed to resemble gold from mines, fabricated into pigment and then shipped to the US for refining. (The pigment fabrication stage is important because the Colombian government will pay a 4.5 per cent export tax credit on the exported goods). The gold pigment arrives in the US but is instead entered as bullion, which does not qualify for the export credit. The gold is refined and sold in the US and then smuggled back to South America. The resulting loss to the Colombian government is estimated to be over $20 million. A variant of this scheme has the refined gold being exported to Switzerland for sale to Italian jewellery manufacturers for delivery to Panama. In all cases, it is believed that the same gold is being recycled throughout each step of the scheme. Structured Postal Money Orders Alien Smuggling Proceeds An anti-smuggling task force consisting of US Postal Inspectors and special agents from the Immigration and Naturalization Service and Internal Revenue Service executed a federal warrant at the Bank of America in New York City to seize the contents on account (totalling roughly $230,000) maintained by an international exchange firm located in the United Arab Emirates. The investigation indicated that the account contained alien smuggling proceeds, in the form of structured companys account to members of alien smuggling organizations in India and, as reimbursement for smuggling fees, to relatives in India who helped in the operation. Structured Postal Money Orders Illicit Drug Proceeds A multi-agency task force consisting of US Postal Inspectors from the North Jersey/Caribbean Division and special agents from the Internal Revenue Service, Federal Bureau of Investigation and US Customs Service arrested

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nine members of a narcotics and money laundering ring known as the Dussan Organization. The ring operated in Northern New Jersey, New York and Colombia and was charged with money laundering and structuring transactions to avoid currency transaction reporting requirements. Members of the group allegedly structured postal and commercial money orders at various post offices and convenience stores in New Jersey and New York, and used express mail services to send the money orders to various businesses in the United States and South America. It is estimated that the ring laundered at least $3 million in illegal proceeds. Casinos The funds are cashed out by the client or moved to other accounts with minimal or no gaming activity. Variations on this theme involved an initial deposit by wire or bank cashiers cheque, but then the funds would be wired out to another account. The funds were then stored for a period of time in a casino safety deposit box or held in the form of safekeeping markers, and then cashed out. In several instances the client was observed transferring chips to other individuals to cash out, as well as cashing out a greater amount than held on deposit. USA enacted Money Laundering and Financial Crimes Strategy Act of 1998. The 2000 Strategy is organized to achieve the following goals: To strengthen domestic enforcement in order to disrupt the flow of illegal money To enhance regulatory and cooperative public-private efforts to prevent money laundering To strengthen international cooperation in order to disrupt the global flow of illicit money. Conducive situations for money laundering as enumerated by US Department of State are as follows: Failure to criminalize money laundering for all serious

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or limiting the offence to narrow predicates. Rigid bank secrecy rules that obstruct law enforcement investigations or that prohibit or inhibit large value and/or suspicious or unusual transaction reporting by both banks and non-bank financial institutions. Lack of inadequate know your client requirements to open accounts or conduct financial transactions, including the permitted use of anonymous, nominee, numbered or trustee accounts. No requirements to disclose the beneficial owner of an account or the true beneficiary of a transaction. Lack of effective monitoring of cross-border currency movements. No reporting requirements for large cash transactions. No requirement to maintain financial records over a specific period of time. No mandatory requirements to report suspicious transactions or a pattern of inconsistent reporting under a voluntary system, lack of uniform guidelines for identifying suspicious transactions. Use of bearer monetary instruments. Well-established non-bank financial systems, especially where regulation, supervision, and monitoring are absent. Patterns of evasion of exchange controls by legitimate businesses. Ease of incorporation, especially where ownership can be held through nominees or bearer shares, or where off-the-shelf corporations can be acquired. No central reporting unit for receiving, analyzing and disseminating to the competent authorities information on large value suspicious or unusual financial transactions that might identify possible money laundering activity. Lack of weak bank regulatory controls, or failure to adhere to the Basle Principles for International Banking

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Supervision, especially in jurisdictions where the monetary or bank supervisory authority is understaffed, underskilled or uncommitted. Well-established offshore financial centres or tax-haven banking systems, especially jurisdictions where such banks and accounts can be readily established with minimal background investigations. Extensive foreign banking operations, especially where there is significant wire transfer activity or multiple branches of foreign banks, or limited audit authority over foreign-owned banks or institutions. Limited asset seizure or confiscation authority. Limited narcotics, money laundering and financial crime enforcement and lack of trained investigators or regulators. Jurisdictions with free trade zones where there is little government presence or other supervisory authority. Patterns of official corruption or a laissez-faire attitude towards the business and banking communities. Jurisdictions where the US dollar is readily accepted especially jurisdictions where banks and other financial institutions allow dollar deposits. Well-established access to international bullion trading centres in New York, Istanbul, Zurich, Dubai and Mumbai. A jurisdiction where there is significant trade in or export of gems, particularly diamonds. Jurisdictions with large parallel of black market economies. Limited or no ability to share financial information with foreign law enforcement authorities. Parallel economy is a major factor in money laundering in a number of countries including: Myanmar, Dominican Republic, Poland, Colombia, Hong Kong, Mexico, Nigeria, Panama, Russia, Thailand, Venezuela, Pakistan, India and the United States (the fungible economy which operates

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on both sides of the border with Mexico). Parallel economies are considered a minor factor in the money laundering situation in: Bolivia, Chile, China, Ecuador, Greece, Guatemala, Hungary, Korea, Kuwait, Lebanon, Macau, Taiwan, Italy, Netherlands, Turkey, United Kingdom, Argentina, Brazil, Costa Rica, Cyprus, Japan, Paraguay, Uruguay, Cote dIvoire, and St.Vincent and the Grenadines. Parallel economies were not considered a significant money-laundering factor in the other governments in the High, Medium-High, Medium and Low-Medium categories. New areas Now, new trafficking routes in Africa and in the lower regions of the old Soviet regime pose the concern whether traffickers will soon take advantage of the minimally regulated systems along these routes. An ever-lengthening list of Low Priority governments include several which were of no concern as recently as two years ago. Moreover, too many priority financial centres have still not adopted needed legislation or ratified the Convention (the latter include Aruba, Colombia, Mexico, Netherlands Antilles, Nigeria, Singapore, Thailand, Turkey and Venezuela). There is also a substantial question whether the drug traffickingoriented money laundering laws which many governments adopted in the earlier part of this decade are adequate, given recent developments in money laundering practices, the upswing in non-drug financial crimes, and the need to adapt to new technologies used in banking, as well as extending laws to include non-bank financial institutions. Conditions which facilitate Money Laundering International Narcotics Control Strategy Report, March 1997 lists following situations which facilitate money laundering: Any financial system can be penetrated. Every country

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and territory has the potential of becoming a moneylaundering centre. 1. Failure to criminalize money laundering from all serious crime or limiting the offence to narrow predicates, such as conviction of a drug trafficking offence. 2. Rigid bank secrecy that cannot be penetrated for authorized law enforcement investigations. 3. No identification requirements to conduct financial transactions, or widespread or protected use of anonymous, nominee, numbered or trustee accounts. 4. No requirement of disclosure of the beneficial owner of an account or the true beneficiary of a transaction. 5. Lack of effective monitoring of currency movements. 6. No recording requirements for large cash transactions. 7. No mandatory requirement for reporting suspicious transactions. 8. Use of monetary instruments payable to bearers. 9. Well-established non-bank financial systems, especially where regulation and monitoring are lax. 10. Patterns of evasion of exchange controls by nominally legitimate business. 11. Ease of incorporation, especially where ownership can be held through nominees or bearer shares, or where off-the-shelf corporations can be acquired. 12. Limited or weak bank regulatory controls, underskilled, uncommitted, understaffed banking system. 13. Well-established offshore or tax haven banking systems, especially countries where such banks and accounts can be readily established with minimal background investigations. 14. Extensive foreign banking operations, wire transfers or multiple branches of the foreign banks, or limited audit authority over foreign-owned banks or institutions. 15. Limited asset seizure or confiscation capability. 16. Limited narcotics and money laundering enforcement and investigative capabilities.

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17. Countries with free trade zones where there is little government presence or other oversight authority. 18. Patterns of official corruption or a laissez-faire attitude toward the business and banking communities. 19. Countries where the dollar is readily acceptable, especially countries where banks and other financial institutions allow dollar deposits. 20. Well-established access to international bullion trading centres in New York, Istanbul, Zurich, Dubai and Bombay. 21. A country where there is a significant trade in or export of gems, particularly diamonds. Country Reports Afghanistan has no formal credit institutions, and its financial institutions are rudimentary. Afghanistan is not considered a centre for money laundering. However, Afghanistan does play a key role in the heroin trade. The proceeds of heroin trafficking generally are laundered in other countries, or through the hawala alternative remittance system. Albania is at significant risk to money laundering because it is a transit country for trafficking in narcotics. Albania criminalized all forms of money laundering through Article 287 of the Albanian Criminal Code of 1995. The legislation would also require financial institutions to report to the anti-money laundering agency all transactions that exceed approximately US $10,000. In December 2000, Albania signed the UN Convention against Transnational Organized Crime. Algeria is not a financial centre, and currently there is no available information suggesting that money laundering is a significant problem there. However, the Algerian government has not enacted anti-money laundering legislation nor does it have in place any procedures such as a suspicious transaction reporting system to detect

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money laundering. Money laundering does not appear to be a significant problem in Angola because of its poorly developed financial sector. However, Angola does not have in place a set of comprehensive laws, regulations, and other procedures to detect money laundering and financial crime. Angolas counter-narcotics laws criminalize money laundering related to drug trafficking. In December 2000, Angola signed the UN Convention against Transnational Organized Crime. Angola has a small but growing offshore financial sector that renders it vulnerable to money laundering. As with the other United Kingdom Caribbean Overseas Territories, Angola underwent a thorough evaluation of its financial regulations in 2000, co-sponsored by the local and British governments. Angolas domestic financial sector includes four domestic banks and 17 insurance companies. The Eastern Caribbean Central Bank (ECCB) supervises Angolas four domestic banks. The offshore sector includes two banks, one captive insurance company and approximately 2000 international business companies (IBCs) and 43 trusts. IBCs may be registered using bearer shares that conceal the identity of the beneficial owner of these entities. The Money Laundering Reporting Authority Act (MLRA) 2000 requires persons involved in the provision of financial services to report any suspicious transactions derived from drugs or crime conduct. Antigua and Barbuda remain vulnerable to money laundering because of their offshore financial sector and internet gaming industry. The 1998 amendments that had given the International Financial Sector Regulatory Authority (IFSRA) responsibility to market and regulate the offshore sector, as well as to allow members of the IFSRA Board of Directors to maintain ties to the offshore industry. In December 2000 the GOAB issued a statutory

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Instrument, which has the force of law, requiring banks to establish the true identities of account holders and to verify the nature of an account holders business, source of funds and beneficiaries. Money laundering organizations appear to be directing large cash deposits into new building and land development projects. In December 1993, Aruba criminalized money laundering related to both narcotics and non-drug offences. Despite these legislative changes, money laundering fostered by the casinos, offshore banking, the Aruba Free Zone, and resort industries appears to be flourishing. Although having a money laundering law for two years, the Arubans have not prosecuted any money launderers. Recognizing the potential risks and possibilities of exploitation, the Antiguan Government has now clearly signalled its intention to reduce Antiguas vulnerability and put in place the necessary legislation and personnel to monitor the offshore sector. Until the passage in December 1996 of the Money Laundering (Prevention) Act and the accompanying decisions to suspend licences, the offshore banking sector in Antigua had been largely unregulated. Strict bank secrecy laws have protected the confidentiality of depositors, except in cases of violation of Antiguan laws, which include drug cases. Antiguas new anti-money laundering legislation criminalizes money laundering beyond drug trafficking and related offences; imposes customer identification. Steps have been taken to modernize and expand Antiguas criminal code with respect to money laundering and narcotics. A Districts Court in Boston had passed forfeiture order for $7.5 million in 1994 against John E.Fitzgerald, a convicted racketeer and drug money launderer. Instead of enforcing the forfeiture order, the Antiguan government

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appears to have obtained the funds from Swiss American Bank where the funds were in deposit. The funds were then transferred directly into the national treasury. Repeated requests for explanations and documents have gone unanswered. According to the Solicitor General, drug-related and other criminal money laundering in Canada takes place in banks and deposit-taking institutions, currency exchange houses, front companies, real estate transactions and gold shops. Banks are the most commonly used means of laundering and moving drug money because of branches located in traditional tax haven countries in the Caribbean. Currently exchange houses, particularly ones located near the US border, are suspected of moving large amounts of drug money between the US and Canada. Commonly, US dollars are smuggled to and from the US and Canada, where they are deposited into local accounts to be wire transferred to third countries. Canada has seized record amounts of currency in recent years, actual forfeitures are negligible by comparison because Canadian law requires proof of a direct link between seized property or currency and specific drug transactions. The United Kingdoms Caribbean Dependent Territories (CDT) consist of Anguilla, the British Virgin Islands, Cayman Islands, Montserrat and Turks and Caicos. Banking industry in the Cayman Islands is worth $5 trillion mutual funds industry. An estimated $1 trillion or 20% of fund activity is through offshore funds. This is one of the major offshore banking centres in the world. The Cayman Islands, with easy access of a large offshore financial community to shell banking companies, continues to be the most attractive of the CDTs for persons wanting to launder illicit money from drug trafficking or other criminal activity. Money laundering remains a corollary of the cocaine

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trade in Colombia. A 1995 law makes money laundering a crime. Enforcement of law is lax, although money laundering is a crime. Until the needed laws are implemented, Colombia remains one of the most important drug money laundering centre in the world. The anti-money laundering regime is largely illusory; on paper, it appears to attack the problem from a regulatory, investigative and prosecutorial perspective but the reality is that there have been few or no actual anti-money laundering enforcement actions undertaken by Colombia. Cyprus is a high-risk area for money laundering. The money laundering of most concern is not related primarily to narcotics; narcotics-related money laundering has been a crime in Cyprus since 1992. Once only a locale where Middle East groups of various persuasions met and sometimes exchanged funds, Cyprus today is receiver and conduit for funds generated by an array of crimes, in particular funds controlled by Russian mafia and other criminals. Cyprus has also been a conduit for moving funds in violation of United Nations sanctions. Russian mafia figures have been linked to business activity in Cyprus. There were more than 22,000 offshore companies registered in Cyprus; East Europeans own the majority of these, with 2,000 being registered by Russians. Ownership of offshore companies can remain anonymous. They are used to launder money. Russians have established about 3,000 offshore companies in Cyprus, according to one report. The flight of capital offshore continues. According to recent balance of payments statistics, in the first half of 1996 nearly US $6 billion was extended by Russian entities as loans or credits abroad, which could be largely unregistered capital flight. Russia continued growth of economic crimes in the financial sector, inefficient tax and government enforcement

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mechanisms, and the prevalence of capital flight suggests significant money laundering activity that warrants immediate remedial action by Russian authorities. Prime Minister Viktor Chernomyrdin stated that Russias illegal or semi-legal economy accounts for between 20-50 per cent of total economic activity. Interior Minister Anatoliy Kulikov estimates that upto $300 billion has been smuggled out of Russia in the last five years. This shadow economy is a breeding ground for corruption, money laundering, a source for further criminality, criminals and organized crime. Conversion of illegally derived proceeds to legal assets typically stems from crime of domestic origin rather than foreign-capital controls, perceived fragility of the banking sector and political instability suggest that Russia is relatively less risky for international money laundering operations. Russia abounds in financial crimes, offshore operations, capital flight abroad, and criminal influence in bank operations. According to one Russian law enforcement official, the number of economic crimes in the financial sector increased to an estimated 8,000 in the first half of 1996, compared to 13,900 for the whole of 1995. These crimes include fraud, securities forgery, illegal trading operations, and violations of currency controls. Criminal elements reportedly continue to play a role in commercial enterprises, including the ownership or control of banks. A Russian law enforcement official once estimated that at one time 550 of Russias nearly 3,000 banks were controlled by organized crime. Banks, foreign exchange houses, and other financial service institutions may be involved in money laundering. The implications of such activity go beyond money laundering. They can undermine the strength and stability of Russias financial system by contributing to the widespread perception that some banks are untrustworthy, depriving the financial system and

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industry of resources and investment. Owning a bank is a classic means to launder huge sums of money. In Russia and some East European States, banks can be readily purchased for very little money though few of them have electronic banking access to SWIFT. SWIFT is the principal international service for wire transfer message trafficking that can initiate funds transfers. SWIFT is a cooperative society located in Belgium having 2,600 institutions in 65 countries. It provides services to : Security breakers & dealers Clearing institutions Recognized Security Exchanges This is what the future nightmare envisioned by the authorities will be like with organised crime in control of banks and able to launder huge sums of money, not only for themselves but also for other criminal organisations. Already, in Russia it is said that criminal groups control over 400 banks and 47 exchanges. This is worrying bank chairmen in Russia as between 1994 to July 1995 there were thirty assassination attempts against top banking officials, sixteen of whom were killed. These killings along with earlier ones, were important indicators of the efforts by criminal organisations to infiltrate the Russian banking system. Infiltration of the banking system offers significant advantages for criminal organisations, not least the opportunity it gives to facilitate money laundering for both Russian and foreign criminal organisations. The strength, vitality and freedom of economies can serve as indicators of the relative vulnerability of a financial system to penetration by money laundering. Money laundering must be made to feel that there is no place to hide. Russian officials have worked with FATF and US government agencies to put into place more effective regulations and procedures to combat money laundering.

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The draft legislation that has been positively reviewed by FATF would provide a legal framework to combat money laundering in accordance with international standards. Cyprus government has enacted the anti-money laundering law and is one of the first steps taken by a government in the Middle East. It remains to be seen how strongly Cyprus implements the law, and whether it has the determination to set up the financial intelligence unit called for in the law. Germany is an important regional financial centre and is increasingly becoming a venue for money laundering. Money laundering is the product of such activities as smuggling, gambling, and the sex-slave traffic as well as narcotics. Germany is not considered a tax haven or offshore banking centre. Money laundering occurs primarily in the banking system. Both local and international organizations are involved. Large trans-border cash movements are not subject to any reporting requirements under German law. There are no controls on the amount of currency brought into or taken out of Germany. German authorities view this lack of currency import/export reporting requirements as a significant loophole in the law and a major impediment to effective investigation. Forfeitures are difficult in Germany, because the burden of proof is on the prosecutor. The law only allows for criminal forfeiture. The German government effectively enforces existing drug-related asset seizure and forfeiture law. Hong Kongs primary role in the international drug trade is that of a money-laundering base. Criminal elements both within and outside Hong Kong use the territorys well-developed financial networks to finance and arrange shipments of narcotics originating in Southeast Asia to the United States and other markets. Hong Kongs financial system attracts money launderers. Its proximity to major drug-producing countries

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in Asia adds to the attraction. Low taxation rates, simple procedures for company registration, and absence of controls on the amount of money that can enter and leave the territory all add to Hong Kongs attractiveness to money launderers. There is no credible evidence that local trafficking organizations exert control over Hong Kong financial institutions. Money laundering is not limited to narcotics-related activities, but also involves the proceeds from other criminal activities. Drug traffickers continue to use Hong Kongs largely unregulated non-banking sector (remittance centres and moneychangers) to launder drug proceeds. Money laundering is a criminal offence under both the Drug Trafficking (Recovery of Proceeds) Ordinance (DTROP) and the Organized and Serious Crimes Ordinance (OSCO). The DTROP was amended in 1995 to bring its provisions for tracing, restraining, and confiscating proceeds derived from drug trafficking in line with the 1988 UN convention. Italy serves as a significant money-laundering centre for both narcotics and other illicit funds. Local and South American drug traffickers primarily to launder proceeds from heroin and cocaine drug activities use the Italian banking and non-banking systems. Italys 1994 comprehensive money laundering law is fully consistent with FATF forty recommendations and the European Union money laundering directive. Italy has an established system for identifying, tracing, freezing, seizing and forfeiting narcotics related assets. Italy is committed under the Council of Europe convention procedures to share such assets with other governments. Italian agencies are investigating the Mafias use of the foreign exchange and securities markets as well as the use of cybercurrency in money laundering. Mexico ranks among the top money laundering countries in the Western Hemisphere, along with the United

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States, Colombia, Panama and Venezuela. Mexico is an important financial centre in the region, and, given the primary methods used to move narcotics proceeds in the mid-90s, Mexicos financial system has become the indispensable money laundering centre for criminal organizations throughout the Americas. Mexicos position is precarious as: There is close working relationship between Colombian and Mexican drug cartels. All-pervasive corruption in Mexican political, judicial and law enforcement systems. Laxity of enforcement. Length of land border with America facilitating smuggling of currency into Mexico. Lack of banking regulations. Mexican bank drafts are increasingly a financial instrument of choice of money launderers, particularly along the US-Mexico border. US currency is first smuggled into Mexico and then exchanged for Mexican bank drafts. The drafts are then transported or mailed into the United States and deposited or exchanged for US cashiers cheques. If deposited into US bank accounts, the laundered funds can be transferred by wire anywhere. Because Mexican bank drafts are not recognized as bearer instruments by the US Treasury, a Currency Monetary Instrument Report (CMIR) does not have to be filed when bank drafts are transported across the border. In addition, a Currency Transaction Report (CTR) is not required when bank drafts are deposited in US banks. This makes Mexican bank drafts an excellent vehicle for laundering illegal funds. Money laundering is now a criminal offence in Mexico. The penal reform bill, which became law in May 1996, makes money laundering a criminal, as well as fiscal, offence. The Netherlands is a major international financial centre and, as such, offers opportunities for laundering funds

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generated from a variety of illicit or fraudulent activities, including narcotics trafficking. Money laundering is done through the banking system, money exchange houses, casinos, credit card companies, and insurance and securities firms. Money laundered in the Netherlands is considered most likely to be owned by major drug cartels and international organized crime. A considerable portion of the illicit money laundered in the Netherlands is believed to have been generated through activities involving fraud. Money laundering is not a separate criminal offence. It is currently dealt with as a fencing offence. This means that, in arresting and prosecuting money launderers, law enforcers first have to prove the underlying offence (drug trafficking, burglary), before being able to address the offence of money laundering. The size of Nigerias population, land area and economy makes it a powerful force in West Africa. Its position as a major trans-shipment point for international narcotics traffic, and the largest transit country in Africa, coupled with rampant corruption in government agencies including law enforcement, customs and immigration, has led to an increase in financial crimes of all types, including bank fraud, advance fee fraud, and money laundering. Financial fraud has had a devastating effect on Nigerias banking and financial sector and the economy as a whole. Money laundering is a criminal offence in Nigeria. Banks are required to report suspicious movement of funds and report all transactions involving more than $6,500. Though Government of Nigeria has initiated measures to prevent money laundering, yet illegal financial activities continue unabated. Nigerian money laundering organizations have quickly adapted to increased monitoring of financial transactions and have found new ways to avoid detection. Some have altered and expanded their operations to include businesses in neighbouring countries, which act as fronts. The large sums involved in financial criminal

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activity in Nigeria have resulted in a situation where criminals are better funded than law enforcement agencies. The money laundering decree of 1995 provides for the seizure and forfeiture of drug-related assets. Several businesses belonging to suspected narcotics traffickers and money launderers have been seized. Panama is suffering from money laundering because of weak controls on cash and commodity imports/exports through the Colon Free Zone, weak incorporation regulations, and a dollar-based economy. The government and the banking community are aware of the potentially destructive impact of narcotics trafficking and narcoticsrelated money laundering on their countrys political and economic stability. A number of steps have been taken to combat the problem. The new laws require companies other than banks to report transactions over US $10,000 to the Financial Analysis Unit (FAU); requires Colon Free Zone businesses to report individual transactions to the CFZ directorate and send summary lists to the FAU as well. The drug-related financial crime is posing a serious problem especially where the actual drug transaction occurred in another country. Money laundering crimes continue to be tied to the drug nexus and there is no legislation to prosecute such offences. Money laundering in Panama is quite diversified. In addition to cash transactions through banks and contraband smuggling, money launderers are investing drug and other dollars in legitimate businesses, particularly construction. Some money laundering techniques involve the use of presigned and pre-stamped blank invoices made out to fictitious companies, and fraudulent invoice over/under representing goods shipped. Singapore is an important regional financial centre. It is also a significant money-laundering centre, as was borne out by the authorities seizure of US $20 million in just one case in 1996. Singapore is not viewed as a tax haven but its

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financial institutions draw considerable capital from the region. Bank secrecy laws make information sharing difficult, but not insurmountable. Penalties for money laundering are onerous, including seizure of the account. Narcotics associated money laundering is a criminal offence, in conformity with the UN Convention. Banks must positively identify customers engaging in large currency transactions. Singapore has internal procedures for identifying, tracing, freezing, seizing and forfeiting narcotics-related assets. It has long-established laws respecting bank secrecy which make it a significant target for money laundering operations, not limited to drug trafficking proceeds. Money laundering in Switzerland derives from all three major drugs: cocaine, heroin, and cannabis. While Switzerland serves as a transit point for money, funds are also converted here. The major traffickers themselves are generally not present in Switzerland during these transactions. Switzerland is in fact more important as a tax haven than as a money-laundering site, since Swiss law does not allow legal assistance if tax evasion is the only alleged crime. Money laundering has involved both banks and non-banking financial institutions. Swiss authorities and the US have cooperated closely in many important cases. In excess of US $425 million has been frozen in Swiss banking institutions since 1990 and was identified primarily via narcotics investigations by the US Drug enforcement agency. Switzerland has signed the 1988 UN Convention and is a member of the FATF and has moved to implement effectively FATF recommendations. Switzerland routinely coordinates and exchanges information on money laundering cases with other countries, primarily with the US. The Swiss penal code has explicitly recognized money

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laundering as a criminal offence since August 1990. The change in the law facilitates confiscation of illicitly acquired assets without having to establish an exact linkage between a given asset and a specific crime. In addition, the revised penal code allows bank employees to report suspicious transactions without fear of violating the bank secrecy regulations. Swiss banks are already self-regulated on the issue of customer identification through the due-diligence convention of 1987. This due-diligence convention requires Swiss bankers to identify the beneficial owner of accounts and provides sanctions against banks, which fail to live up to the convention. The convention was renewed in 1992 and strengthened to conform with FATF recommendations and the circular letter. Switzerland has ratified the Council of Europe convention on money laundering and confiscation of criminal wealth. Cantonal magistrates have the authority to trace, freeze, and eventually confiscate assets. They take action whenever they are convinced that the wealth was derived from criminal activity. Thailand is a prominent regional financial centre, which has yet to adopt the safeguards, which should have accompanied its accelerated financial expansion thus increasing its vulnerability to financial crime, not limited to drug-related money laundering. An offshore banking facility in Bangkok specifically designed to meet the needs of outside investors in these neighbouring countries was created in 1992. Large amounts of money from illicit drug trafficking, smuggling of commodities such as oil and arms, and from gambling, prostitution, counterfeiting and other illegal practices have created a situation where, in the opinion of most international experts, money laundering is inevitable and relatively widespread.

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Since there is an absence of appropriate money laundering legislation and current bank secrecy practices make it nearly impossible for the Royal Thai Government itself to obtain financial information required for narcoticsrelated financial investigations. Turkey passed laws in November 1996 to criminalize money laundering and meet minimum FATF standards, including controlled delivery. Criminalize the laundering of proceeds of a number of serious offences, including but not limited to arms and drug smuggling, traffic in human organs and terrorist activity. Turkey is an emerging regional financial centre. Turkish banking sector is well developed. Although proceeds from smuggling heroin through Turkey are a significant source of illicit funds, money laundering is not primarily related to narcotics proceeds. Illegal cross-border trade (suitcase trade) of commercial goods is also a major source of funds, which are then laundered. Some illicit funds are generally assumed to be laundered through casinos or the construction industry. United States currency is the currency of choice for international narcotics sales. Financial institutions will report suspicious transactions. Banks and other financial institutions are required to know, record, and report the identities of customers engaging in currency transactions over one billion Turkish lira (currently US $10,000). Money laundering controls are applied to non-banking financial institutions. Money laundering includes narcotics proceeds converted in the UK and transited through the country. HM Treasury and other authorities prosecute money laundering vigorously and cooperate extensively with other governments, as the Channel Islands and Isle of Man governments. Some British Crown territories in the Caribbean have enacted stricter anti-money laundering

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legislation based on the British model, and the Foreign Office has announced plans to encourage more territories to do the same. On January 1, 1997, the Drug Trafficking Act of 1994 came into effect. The Act enables courts in England and Wales to freeze and confiscate the proceeds of drug trafficking on behalf of 144 other countries and territories. Venezuela continues to be a major drug moneylaundering centre due to its proximity to Colombia as well as to the size and sophistication of its financial markets. Money laundering is closely linked to cocaine trafficking by Colombian organisations but, while the narcotics proceeds are primarily owned by Colombians or other third-country nationals, the money laundering networks are generally run by Venezuelans. Most money laundering occurs through commercial banks, exchange houses, gambling sites, and fraudulently invoiced foreign trade, contraband and real estate transactions. The Organic Drug Law in 1993 criminalizes money laundering linked to drug trafficking, which greatly limits its utility in 1996, the Congress drafted an organized crime bill which would criminalize money laundering from any illicit activity. In banking complete identification of account holders is mandatory and records must be maintained for five years. In practice, few banks or other financial institutions have complied fully with the requirements. In October 1993, the Venezuelan National Guard investigated and arrested 35 members of a major money laundering organization (Sinforoso Caballero) which was laundering millions of US dollars in drug proceeds through money exchange houses located near the Colombian border. However, in December 1993 jurisdiction in the case was removed from the original judge in Caracas, and, after bouncing around the Venezuelan judicial system, ended up back in the State of Tachira where most of the defendants reside. In May

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1994, the Tachira judge dismissed the arrest believed to have been a result of judicial corruption, and the government immediately appealed the decision. The Venezuelan Supreme Court overturned this decision in December 1994 and reopened the case for prosecution. However, jurisdictional problems continued to hamper prosecution of the case during 1996. The continuing developments of offshore financial services have enhanced the vulnerability of the Eastern Caribbean to attract drug money. The Caribbean has long been regarded as a haven for money laundering operations. Official estimates suggest that as much as 50 billion dollars of an annual 500 billion dollars in annual worldwide drug profits are laundered through the Caribbean as a whole. In the Eastern Caribbean there is lack of mechanism, which would help prevent money laundering the offshore financial services industry. There is lack of resources, expertise, and technical capacity. In addition, laundering techniques are becoming increasingly varied, with growing use of non-bank financial institutions, commercial businesses, and lotteries. All of these factors together have made the Caribbean an attractive place for money launderers and criminal elements to do business. Russian organized crime established banks to launder money from drug trafficking and other criminal activity. The Caribbean Basin states and territories have joined to create the Caribbean Financial Action Task Force (CFATF) modelled on the Paris-based FATF. There are 26 jurisdictions including Barbados, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines. It is a very vulnerable financial centre in the Caribbean with limited regulatory capabilities. It is an attractive money-laundering centre. Efforts are now being made to enforce laws. Special institutional arrangements are being made and a Special Advisor to the Prime Minister on Money Laundering and Counternarcotics has been

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appointed. The Special Advisors office is hiring personnel and looking to establish a financial regulatory unit with enhanced capabilities to vett bank applications and monitor banking activities. Argentina is neither a tax haven nor an important offshore banking centre. Money laundering is a criminal offence when narcotics is involved (decree 1849/90). Under draft money laundering legislation, which President Menem sent to the Congress on 26.9.96, GOA will punish laundering of assets related to terrorism, trafficking in narcotics, humans, human organs and crimes against public administration. Austria has abolished anonymous securities accounts. Anonymity of passbook savings accounts remains, but Austria may be forced to abolish such accounts to conform to European Union regulations. However, the utility of such accounts for money laundering is limited. Those accounts are available only to citizens and permanent residents of Austria. Bankers and financial institutions must report suspicious transactions. The Banking Act of 1994 prohibited money laundering and money laundering was added to the Austrian penal code. It is difficult to gauge money-laundering levels in Brazil because the practice is still not defined as a criminal act. Estimates of illegal funds in circulation range from tens of millions to hundreds of billions of dollars. There are reports of foreign criminal interests buying up failing businesses (e.g. hotels, air, taxi services, transport, construction and insurance companies) to serve as repositories for laundering illicit profits. Money laundering is not a criminal offence. The bill before Congress would criminalize all types of money laundering, not just that related to drug trafficking. It is difficult to quantify the various potential sources of money laundering proceeds. Narcotics trafficking is

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probably the major source, but there are numerous lucrative organized crime activities in Brazil which generate a need to hide illicit profits, such as gambling, arms smuggling, bribery, prostitution, tax fraud and theft of government funds. Government oversight of the financial system has been poor, leading to extensive bank frauds and the collapse of several banks due to political interference in granting loans. The Peoples Republic of China is not currently believed to be a major money laundering country. There is no money laundering law per se, but Chinese officials cite a law prohibiting covering up the source of assets and laws against fraud as other legal tools to prosecute moneylaundering offences. Money laundering remains a serious, but difficult-toquantify, problem in Costa Rica. Some launderers smuggle funds into the country and convert them into Costa Rican currency before depositing them into bank accounts. It is suspected that drug trafficking revenues find their way into real estate and tourism developments. Costa Rican law establishes drug-related money laundering as a criminal offence. Prosecutors, however, must prove that defendants knew the funds came directly from drug trafficking, thereby making convictions difficult. Banking secrecy exists, but courts may order banks to reveal information on specific accounts. Costa Ricas antidrug law requires people entering the country to declare currency above one million colones (about $4,650) but the statute lacks implementation provisions. Israel has become a significant money-laundering centre, particularly for Russian organized crime. The Israel national police consider adoption of a money laundering law essential for stemming the tide of drug trafficking and distribution. Money laundering is not yet a prosecutable crime, and benign banking laws and a policy of not taxing foreign accounts make Israel an attractive

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safe haven for illicit money. As yet, major money laundering has not been specifically linked to narcotics trafficking. Money laundering is not an independently prosecutable crime; a specific criminal conviction must be obtained before forfeiture proceedings to seize income, property and other fruit of trafficking. This legal requirement has limited the success of law enforcement agencies in pursuing money-laundering cases.
Ali, A.S. A Gateway for Money Laundering? Financial Liberalisation in Developing and Transnational Economies. Journal of Money Laundering Control, Vol.1, No. 4, April 1998. 2. International Monetary Fund. Money Laundering and the International Financial System. Working Paper prepared by V. Tanzi. May 1996. 3. MacDonald, S. Money Laundering and the Asia/Pacific Region. International Enforcement Law Reporter, Volume 9, Issue 6, June 1993; 215-221. 4. Nardo, Massimo. Crime, Illegality and Social Structure: The Road Towards an Integrated Strategy. Journal of Money Laundering Control. Institute of Advanced Legal Studies. Volume Two, Number One, Summer 1998. 5. Paradise, T.S. Money Laundering and International Political Economy. Journal of Money Laundering Control, Vol. 1, No. 3, January 1998. 6. Savona, E (ed). Responding to Money Laundering: International Perspectives. Harwood Academic Publishers, Amsterdam, 1997. 7. Savona, E, and De Feo, M. Money Trails: International Money Laundering Trends and Prevention/Control Policies. Paper presented to the International Conference on Preventing and Controlling Money Laundering and the Use of the Proceeds of Crime: A Global Approach, Courmayeur Mont Blanc, Italy, 18-20 June 1994. 8. Thoumi, Francisco. U.S., Colombia struggle over drugs, dirty money. Forum for Applied Research and Public Policy; Spring 1997. 9. United Nations. Control of the proceeds of crime. Report of the Secretary-General. UN Document E/CN./15/1996/3; 3 April 1996. 10. United Nations. Countering Money-Laundering. Paper presented at the second inter-sessional meeting held on 7-9 October 1997 in preparation for the Special Session of the General Assembly. UN Doc. E/CN.7/1997/PC/CRP.6; 15 August 1997. 11. U.S. Money Laundering Laws: International Implications. New York Law School Journal of International and Comparative Law Review, 1988; 1-45.

References
1.

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THE WALKER MODEL ON GLOBAL MONEY LAUNDERING


As per the Walker Model of Global Money Laundering: 1. Money laundering is a flow of funds. 2. There is essentially a place where the money is generated and a place where it is laundered. 3. The money may be laundered in the same country in which it was generated or be sent to another country (or other countries) for laundering. 4. It may flow on from its first placement to other countries, and may often return eventually to the originating country so that the offenders can invest this money into legitimate enterprises in their home country. After the initial point of laundering, the onwards transactions have all the legitimacy of ordinary monetary flows. In statistical terms, we would be double counting if we followed hot money all the way round its circuitous path from the scene of the crime to that of the final investment, and counted the same money each time it moved. If $1 million is earned from crime in Australia and sent, say, to a Hong Kong bank for laundering, and from there via Switzerland to the Cayman Islands, from where it is returned cleansed to Australia, it is wrong to say that these four moves amount to $4 million of money laundering. The quantity of money laundering generated in each country is dependent upon: the nature and extent of crime in that country, an estimated amount of money laundered per reported crime, for each type of crime, and the economic environment in which the crime and the

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laundering takes place. The potential of money laundering is high in crimeinfested countries. The destination of slush funds will be based on the following considerations: 1. The presence or absence of banking secrecy provisions: Countries with banking secrecy and poor governance are attractive destinations. 2. Government attitude to money laundering. 3. Levels of corruption and regional conflict: high level of corruption favours money launderers. Too much corruption can prove fatal for launderers. 4. Geographical, ethnic or trading proximities between the origin and destination countries. 5. There will be higher frauds of laundered funds between places of geographical proximity and strong trading or community lines. 6. Strict government regulations will discourage flow of funds, hence money laundering. The quantity of money laundering attracted by a country will depend upon: That foreign countries with a tolerant attitude towards money laundering (e.g. those with banking secrecy laws or uncooperative government attitudes towards the prevention of money laundering) will attract a greater proportion of the funds than more vigilant countries. That high level of corruption and/or conflict will deter money launderers, because of the risks of losing their funds. That countries with high levels of GNP/capita will be preferred by money launderers, since it would be easier to hide their transactions. That other things being equal, geographic distance, and linguistic or cultural differences, work as deterrents to money launderers. Based upon the above factors an equation has been drawn by the International Narcotics and Law Enforcement

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Department as under: [GNP per capita] [Bank secrecy + Government attitude + SWIFT member conflict corruption + 15] Bank Secrecy is a scale from 0 (no secrecy laws) to 5 (bank secrecy laws enforced) Government Attitude is a scale from 0 (government anti-laundering) to 4 (tolerant of laundering) SWIFT member is 0 for non-member countries and 1 for members of the SWIFT international fund transfer network. Conflict is a scale from 0 (no conflict situation) to 4(conflict situation exists). Corruption is the modified Transparency International index (1=low, 5=high corruption) And the constant 15 is included to ensure that all scores are greater than zero. High scores on the index can be achieved by providing a secure environment for investments generally, as well as by providing a benign environment for money launderers. The Walker model of global money laundering relies upon a wide range of risk assessment indices, including crime and economic statistics alongside subjective assessments such as Transparency Internationals wellknown Corruption Index. While such information does not provide absolute numbers for estimates of the proceeds of crime and of money laundering, it provides information on the likely limitations on criminal proceeds and on levels of money laundering in a given country. Limitations 1. The data should be more reliable. Official data of this clandestine activity, done in secrecy, is difficult to obtain. 2. The model is not an entirely rigorous technique for the identification of key data on money laundering. 3. The model makes use of a wide range of risk assessment indices such as crime and economic statistics and also

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the subjective assessment such as its well-known Corruption Index. It does not provide absolute numbers for estimates of proceeds of crime and of money laundering. There are many problems with missing and noncomparable data, there also appear to be rational techniques for using expert knowledge to fill in these gaps. The model concentrates on assembling or estimating information that can be cross-checked. Based upon above formula the ranking of various countries is as under: Table 1: Attractiveness to Money Launderers Rank Order [the higher the score, the greater the attractiveness for money launderers] COUNTRY Luxembourg United States Switzerland Cayman Islands Austria Netherlands Liechtenstein Vatican City United Kingdom Singapore Hong Kong Ireland Bermuda Bahamas, Andorra, Brunei, Norway, Iceland, Canada Portugal, Denmark, Sweden, Monaco, Japan, Finland, Germany, New Zealand, Australia, Belgium Bahrain, Qatar, Italy, Taiwan, United Arab Emirates, Barbados, SCORE 686 634 617 600 497 476 466 449 439 429 397 356 313 250-299 200-249

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Malta, France, Cyprus 150-199 Gibraltar, Azores (Portugal), Canary Islands, Greenland, Belarus, Spain, Israel 100-149 Czech Rep., Latvia, St.Vincent, Malaysia, Estonia, Oman, Lithuania, N.Mariana Isls, Greece, South Korea, Seychelles, Azerbaijan, Anguilla, Aruba (Neth.), Kuwait, Hungary, Saudi Arabia, British Virgin Islands, Guam, Brazil, Panama, Russia, Costa Rica, Mauritius, Gobon, Armenia, Thailand, Macedonia, Grenada 50-99 Poland, Slovakia, Georgia, St.Kitts-Nevis, Dominica, St.Lucia, Belize, Guadeloupe, Martinique, Puerto Rico, U.S. Virgin Islands, Argentina, Croatia, Uruguay, Midway Islands, Barbuda, Slovenia, Suriname, Botswana, Romania, Chile, Bulgaria, French Polynesia, New Caledonia, Yugoslavia, Trinidad, Libya, Turkey, Albania, Lebanon, Guatemala, Ecuador, Moldova, South Africa, French Guiana 25-49 Falkland Islands, Vanuatu, Venezuela, Ukraine, Cook Islands, Philippines, Turks and Caicos Islands, Fiji, Marshall Islands, Mexico, Nauru, Algeria, Antigua, Bolivia, Uzbekistan, Syria, Western Samoa, Morocco, Indonesia, Colombia, Cuba, Bosnia and Herzegovina, Tunisia, Jordan, Paraguay, Jamaica, San Marino, Palau Islands, Honduras, Niue, Reunion, Namibia, Somalia, Congo, Tonga, Iraq, Swaziland, Dominican Republic, Kazakhstan, Kyrgyzstan, Turkmenistan, El Salvador 10-24

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Cameroon, Bhutan, North Korea, Ivory Coast, Fed States Micronesia, Kiribati, Tuvalu, Papua New Guinea, Zimbabwe, Western Sahara, Iran, Cape Verde, Senegal, Egypt, Peru, Sri Lanka, Djibouti

0-9

Following table (Table 3 of Walkers Model) shows the top twenty countries of origin for laundered money, as estimated by the model. Note that most are developed countries: Table 3. Top 20 Origins of Laundered Money Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 United States Italy Russia China Germany France Romania Canada United Kingdom Hong Kong Spain Thailand South Korea Mexico Austria Poland Philippines Netherlands Japan Brazil Total All Countries Origin Amount ($US mill/yr) % of Total 1320228 46.3% 150054 5.3% 147187 5.2% 131360 4.6% 128266 4.5% 124748 4.4% 115585 4.1% 82374 2.9% 68740 2.4% 62856 2.2% 56287 2.0% 32834 1.2% 21240 0.7% 21119 0.7% 20231 0.7% 19714 0.7% 18867 0.7% 18362 0.6% 16975 0.6% 16786 0.7% 2850470 100.0%

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Table 4. Top 20 Flows of Laundered Money Rank Origin 1 2 3 4. 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Total Destination Amount % of ($US milly/yr) Total 528091 118927 94834 94579 87845 63087 61378 57883 55056 47202 46745 28819 24953 23634 21747 20897 19514 18804 18796 2850470 18.5% 4.6% 4.2% 3.3% 3.3% 3.1% 2.2% 2.2% 2.0% 1.9% 1.7% 1.6% 1.0% 0.9% 0.8% 0.8% 0.7% 0.7% 0.7% 0.7% 100.0%

United States United States Russia Italy China Romania Russia Italy China Romania

United States Cayman Islands 129755

United States Canada United States Bahamas France Italy Germany Spain Thailand Hong Kong Canada United Kingdom Germany Hong Kong France Vatican City Germany Spain Thailand Hong Kong Canada United Kingdom Luxembourg Taiwan

United States Bermuda

United States Luxembourg

All Countries All Countries

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Table 5. Top 20 Destinations of Laundered Money Rank Destination 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 United States Cayman Islands Russia Italy China Romania Canada Vatican City Luxembourg France Bahamas Germany Switzerland Bermuda Netherlands Liechtenstein Austria Hong Kong United Kingdom Spain Amount ($ US milly/year 538145 138329 120493 105688 94726 89595 85444 80596 78468 68471 66398 61315 58993 52887 49591 48949 48376 44519 44478 35461 % of Total 18.9% 4.9% 4.2% 3.7% 3.3% 3.1% 3.0% 2.8% 2.8% 2.4% 2.3% 2.2% 2.1% 1.9% 1.7% 1.7% 1.7% 1.6% 1.6% 1.2%

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Comparisons of Estimates contained in Media reports against Model results: Press Clippings Illegal grey economy in Czech Republic about 10% of GDP(Hospodarske Noviny, 2 Apr 98) $30 bill illegal drugs reach the US from Mexico each year(Chicago Tribune, 25 Mar 98) More than $2 bill is laundered in Poland each year (National Bank of Poland, reported on 15 Apr 98) Share of shadow business in Russias economy may range between 25%-50% (TASS 17 Mar 98) In the estimate of experts from the Russian interior and economics ministries, between $50 bn and $250 bn has been illegally transferred from Russia to western banks over the past five years (Interfax News Agency, 23 Apr 99) Switzerland is implicated in $500 bill of money laundering each year (Swiss Finance Ministry, reported on 26 Mar 98) Model results Model estimates 14.8% of GDP

Model estimates $26 bill laundered in Mexico each year Model estimates $3 bill sent for laundering in Poland each year Model estimates money laundering 15% of Russian GDP Model estimates an annual $28 bn is laundered from Russia into western banks; i.e. $140 bn in a five-year period.

Model estimates $59 bill including only first-stage laundering

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UK black economy between 7-13% of GDP (Sunday Telegraph, 29 Mar 98) Money laundering in Belarus about 30% of GDP (European Humanities University, 20 Nov 98) Illicit funds generated and laundered in Canada per year between $5 and $17 billion. (Canadian Solicitor General, Sep 1998)

Model estimates total money laundering 7.4% of UK GDP. Model estimates 22.2% of GDP

Model estimates $22 billion generated and laundered in Canada per year, but also that $63 billion of US crime funds laundered in Canada Model estimates that $2.1 billion laundered in Colombia every year Model estimates $34.6 billion generated and laundered by illicit drug trade in USA

Approximately $2.7 billion are laundered in Colombia every year (BBC Monitoring Service, Latin America, 25 Nov 98) Illicit drug sales generated upto $48 billion a year in profits that criminals tried to put back into the mainstream economy through money laundering, a Congressional hearing told. (Reuters, 16 April 99) Illegal profits total 2.5% of world GDP or $1.3 trillion (Dow Jones News, 12 Mar 98)

Model estimates total global money laundering $2.85 trillion

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Money Laundering: An Insight into the Dark World of Financial Frauds

Reference

Laundering on the Internet: an economic model for forecasting on-line flows of dirty money by John Walker for the CyberLaundering conference, Trento 11 June 1999.

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Money laundering is the processing of criminal proceeds to disguise their illegal origin. It enables the criminal to enjoy the profits without jeopardizing their source. Illegal arms sales, smuggling, and the activities of organised crime including, for example, drug trafficking and prostitution rings, can generate huge sums. Embezzlement, insider trading, bribery and computer fraud schemes can also produce large profits and create the incentive to legitimize the ill-gotten gains through money laundering. When a criminal activity generates substantial profits, the criminals control the funds without being caught by disguising the sources, changing the form, or moving the funds to a place where they are least likely to attract attention. The International Monetary Fund, for example, has stated that the aggregate size of money laundering in the world could be somewhere between two and five per cent of the worlds gross domestic product. Money laundering is an international problem, international cooperation is a critical necessity in the fight against it. A number of initiatives have been initiated for dealing with the problem at the international level. International organisations, such as the United Nations or the Banks for International Settlements, took some initial steps at the end of the 1980s to address the problem. Following the creation of the FATF in 1989, regional groupings the European Union, Council of Europe,

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Organisation of American States, to name just a few established anti-money laundering standards for their member countries. The Caribbean, Asia, and Eastern Europe have created regional anti-money laundering task forcelike organisations, and similar groupings are planned for Africa and Latin America in the coming years. International Accords Concerted efforts by governments to fight money laundering have been going on for the past fifteen years. The main international agreements addressing money laundering are: The 1988 UN Convention Against Drug Trafficking Basle Committee on Banking Regulations and Supervisory Practices Statement of Principles of December 1988 The Financial Action Task Force Report of April 1990 (with its 40 recommendations for action) The Council of Europe Convention on Laundering, Search, Seizure and Confiscation of Proceeds of Crime of September 8, 1990 The 61 recommendations of the Caribbean Drug Money Laundering Conference of June 1990 The agreement on EC legislation by the European Communitys Ministers for Economy and Finance of December 17, 1990 The Organisation of American States Model Regulations on Crimes Related to Laundering of Property and Proceeds Related to Drug Trafficking of March 1992 The Declaration of Principles issued by the Summit of the Americas Ministerial Conference on Money Laundering held in Buenos Aires at the end of November and beginning of December 1995. The FATF was established by the G-7 Summit in Paris in 1989. It is a policy making body to combat money

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laundering. Its primary goal is to generate the political will necessary for bringing about national legislative and regulatory reforms. It monitors effectively the money laundering measures adopted and being implemented by the member states. The 1990 Council of Europe Convention adopted in November 1990, lays down the Council policy on money laundering. It sets out a common definition of money laundering and common measures for dealing with it. The convention lays down the principles for international cooperation among the contracting parties, which may include states outside the Council of Europe. Its scope is not limited to money from drug trafficking. In December 1988, the G-10s Basle Committee on Banking Supervision issued a statement of principles with which the international banks of member states are expected to comply. These principles cover identifying customers, avoiding suspicious transactions, and cooperating with law enforcement agencies. In issuing these principles, the committee noted the risk to public confidence in banks, and thus to their stability, that can arise if they inadvertently become associated with money laundering. The Basle Committee on Banking Regulations and Supervisory Practices followed the Vienna Convention in December 1989. The committee consisted of representatives of the central banks of the G-10 nations. The Basle Committee argued that banks and other financial institutions may, unwittingly, be used as intermediaries for the transfer of illegally obtained money. It was further argued that banking supervisors and management should treat these practices as a matter of urgency, the main causes for concern asserted by a committee was (that) public confidence in banks, and hence their stability, can be undermined by adverse publicity as a result of inadvertent association by banks with criminals. The Basle Committee

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adopted the Statement of Principles on the prevention of criminal use of the banking system for the purpose of money laundering. In order to reduce the possibility of banks being used in money laundering schemes, they formulated the following two measures: 1. The requirement that customers be clearly identified. 2. Greater cooperation between banks and law enforcement services. The Basle Committee has observed public confidence in banks, and hence their stability, can be undermined by adverse publicity as a result of inadvertent association by banks with criminals. In addition, banks may lay themselves open to direct losses from fraud, either through negligence in screening undesirable customers or where the integrity of their own officers has been undermined through association with criminals. For these reasons the members of the Basle Committee consider that banking supervisors have a general role to encourage ethical standards of professional conduct among banks and other financial institutions. The Committee considers that the first and most important safeguard against money laundering is the integrity of banks own managements and their vigilant determination to prevent their institutions becoming associated with criminals or being used as a channel for money laundering. Statement of Principles lays down: i) Customer identification ii) Compliance with laws iii) Cooperation with law enforcement iv) Adherence to the statement. The provisions of the 1991 Council Directive imposes an obligation on member states to ensure that credit and financial institutions conduct business in a manner which facilitates investigations into money laundering activities. Some of these provisions include, identifying customers in

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certain circumstances and maintaining the identification documents for at least five years, the keeping of adequate records of suspicious transactions, paying special attention to transactions with third countries which do not apply comparable anti-money laundering standards to those established by the EU, the lifting of banking secrecy for cases under investigation. The 1988 Convention requires member states of the United Nations to make money laundering illegal, to adopt measures to enable the tracing, freezing, seizing and confiscation of the proceeds, to cooperate with other countries in identifying, tracing, freezing and seizing those assets, and to provide for bank, financial or commercial records to be available to investigators, notwithstanding bank secrecy. Countries are supposed to help each other through mutual legal assistance and investigations, through prosecutions and by providing for the attendance of witnesses. They are also urged, though not obliged, to share confiscated proceeds with cooperating countries and international organizations, and to reverse the burden of proof as to the lawfulness of the origins of any proceeds they discover. Basle Committee on Banking Supervision: The Basle Committee on Banking Supervision is a Committee of banking supervisory authorities which was established by the central bank Governors of the Group of Ten countries in 1975. It consists of senior representatives of banking supervisory authorities and central banks from Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, Netherlands, Sweden, Switzerland, United Kingdom and the United States. In June 1991, the Council of the European Communities adopted a directive on the Prevention of the Use of the Financial System for the Purpose of Money Laundering. This directive was issued in response to the new opportunities for money laundering opened up by the

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liberalization of capital movements and cross-border financial services in the European Union. The directive imposes an obligation on member states: (1) to outlaw money laundering. (2) They must require financial institutions to establish and maintain internal systems to prevent laundering. (3) To obtain the identification of customers with whom they enter into transactions of more than ECU 15,000. (4) To keep proper records for at least five years. (5) Member states must also require financial institutions to report suspicious transactions and must ensure that such reporting does not result in liability for the institution or its employees. The International Organization of Securities Commission (IOSCO) adopted, in October 1992, a report and resolution encouraging its members to take necessary steps to combat money laundering in securities and futures markets. A working group of IOSCOs Consultative Committee has been set up to collect information from IOSCO members self-regulatory organisations and exchanges on their efforts to encourage their own members to fight money laundering. There is a surprising amount of information about global trends in crime and in money laundering. For example: United Nations Crime and Justice databases, describing crimes officially recorded at the national level in over eighty countries; International Crime Victims Surveys, that provide insights into the relationships between crime (including crimes not officially recorded) and national socioeconomic characteristics in over sixty countries; Estimates of the proceeds of crimes particularly drugrelated and other transnational crimes; Indices of corruption and susceptibility to money laundering, such as those compiled by Transparency International or the Australian Office of Strategic Crime Assessments in Canberra;

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Geographic, demographic, economic, trade and finance data at the national and international levels. India has been committed to the introduction of such a legislation since it became a signatory to the 1988 UN Convention on Illicit Traffic and Narcotics and later as member of the 1989 Financial Action Task Force. The Task Forces 40 recommendations include one for banks and financial institutions to pay special attention to all complex, unusual large transactions. While no time frame will be stipulated for confiscation, action will be taken in consultation with other enforcement agencies in India. Should the assets or property be purchased in foreign countries, action will be taken through mutual bilateral agreements. The proposed Money Laundering Bill stipulated the minimum amount at Rs. 30 lakh that should fall in its net, but this amount was too big considering the general economic conditions of the country. A number of counter-money laundering measures have been adopted such as in USA the Bank Secrecy Act of 1970, the Comprehensive Crime Control Act of 1984, the Money Laundering Control Act of 1986, the Anti-Drug Abuse Act of 1988, the Annunzio-Wylie Anti-Money Laundeing Act of 1992, and the Money Laundering Suppression Act of 1994 which have extended the scope of efforts to prevent and control money laundering and have imposed requirements for the reporting of large cash transactions as well as suspicious transaction reports. In the 1996 UN Crime Prevention Branch report to the Commission on efforts to control money laundering it was clear that an increasing number of states are passing legislation to prevent and control money laundering. In many cases, as Kirk Munroe has pointed out, the innovation lies in the criminalization of money laundering per se: the process itself now is a crime separate from the crime that produced the money.

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Money laundering has the potential to weaken the rule of law and increase the risks to domestic and global financial systems. Because of these macroeconomic concerns, the International Financial Institutions (IFIs) have agreed to take on an enhanced role in the global fight against money laundering. In April 2001, the IMF and World Bank Executive Boards recognized the FATF Forty Recommendations as the accepted international anti-money laundering standard. The IFIs also agreed to (a) intensify their focus on anti-money laundering elements in all relevant supervisory principles (b) work more closely with major international anti-money laundering groups; (c) increase the provision of technical assistance (d) include anti-money laundering concerns in their surveillance and other operational activities when macroeconomic relevant, and (e) undertake additional studies and publicize the importance of countries acting to protect themselves against money laundering. The IMF and the World Bank have indicated their willingness to work with other international organizations and provide technical assistance to countries in order to combat global money laundering. According to Article 1 of the European Union Directive, money-laundering means the following conduct when committed intentionally: credit institution means a credit institution, as defined in the first indent of Article 1 of Directive 77/780/EEC, as last amended by Directive 89/646/EEC, and includes branches within the meaning of the third indent of that Article and located in the Community, of credit institutions having their head offices outside the Community. financial institution means an undertaking other than a credit institution whose principal activity is to carry out one or more of the operations included in numbers 2 to 12 and number 14 of the list annexed to Directive

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89/646/EEC, or an insurance company duly authorised in accordance with Directive 79/267/EEC, as last amended by Directive 90/619/EEC, in so far as it carries out activities covered by that Directive; this definition includes branches located in the Community of financial institutions whose head offices are outside the Community. Money laundering means the following conduct when committed intentionally. The conversion or transfer of property, knowing that such property is derived from criminal activity or from an act of participation in such activity, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in the commission of such activity to evade the legal consequences of his action. 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 criminal activity or from an act of participation in such activity. The acquisition, possession or use of property, knowing, at the time of receipt, that such property was derived from criminal activity or from an act of participation in such activity. Participation in, association to commit, attempts to commit and aiding, abetting, facilitating and counseling the commission of any of the actions mentioned in the foregoing paragraphs. Knowledge, intent or purpose required as an element of the above mentioned activities may be inferred from objective factual circumstances. Money laundering shall be regarded as such even where the activities which generated the property to be laundered were perpetrated in the territory of another member state or in that of a third country.

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Property means assets of every kind, whether corporeal or incorporeal, movable or immovable, tangible or intangible, and legal documents or instruments evidencing title to or interests in such assets. Criminal activity means a crime specified in Article 3(1) (a) of the Vienna Convention and any other criminal activity designated as such for the purposes of this Directive by each member state. Competent Authorities mean the national authorities empowered by law or regulation to supervise credit or financial institutions. Reviews and reports on laundering trends, techniques and counter-measures, promote the adoption and implementation of FATF anti-money laundering standards globally. Through the enactment of counter-money laundering laws, bilateral and multilateral agreements nations have joined together to cultivate an international awareness of the seriousness of money laundering. The following is the broad overview of international efforts which have been established to deal with the phenomenon. The United Nations (UN) Convention against illicit traffic in narcotic drugs and psychotropic substances, which was held in Vienna, Austria, on 20th December 1988 was one of the first international efforts to criminalise the proceeds of drug trafficking and to provide for confiscation of these monies and for extradition of offenders. In addition, the representatives also agreed to the following: Mutual legal assistance The transfer of criminal prosecutions from one signatory to another The traditional secrecy and confidentiality between bank and customer should be disregarded during criminal investigations The member states take appropriate measures to facilitate the confiscation of assets, which were believed

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to be the proceeds of money laundering. On 1 August 1994, another set of measures came into effect, dealing with the responsibility of professional asset managers to notify the competent authorities of evidence suggesting possible laundering activities. Forfeiture regulations have been tightened under current law, it is enough to show that the funds in question are at the disposal of a criminal organization or one of its members. Such funds are now forfeited. The burden of proof has been reversed. The Money Laundering Act became effective on 1 April 1998 and this Act closed an important loophole in the nonbank sector. Thus, rules and measures applicable to banks now also apply to non-bank financial institutions. The Act provides for verification of the contracting partner(s) identity; obligation to preserve documents in order to guarantee the paper trail; and the financial intermediarys duty to exercise due diligence. Financial intermediaries are now obliged to notify authorities, if they are aware of the fact or have sufficient reason to suspect that the funds in question are somehow linked to money laundering activities; that the funds are the proceeds of criminal activities; or that the funds belong to a criminal organization. Financial intermediaries are then required to freeze dubious funds for five days. Within the Swiss Penal Code, fiscal offences have never been considered true crimes. Fiscal offences committed as a preparatory act to money laundering are not subject to prosecution; to deposit hot money is therefore not a punishable act. Committee of Ministers of the Council of Europe in June 1980, in its report concluded that . the banking system can play a highly effective preventive role while the co-operation of the banks also assists in the repression of such criminal acts by the judicial authorities and the police.

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There are no uniform standards of anti-money laundering enforcement, or bank regulations, among all nations and territories to prevent and control money laundering. The Basle Committee on Banking Supervision contains 29 recommendations designed to strengthen the effectiveness of supervision by both home and host-country authorities of banks, which operate outside their national boundaries. Supervisors can obtain the information they need for effective consolidated supervision of an international banking group and suggest ways and means to overcome deficiencies. The paper also contains guidelines for determining the effectiveness of home country supervisions, for monitoring supervisory standards in host countries, and for dealing with corporate structures which create potential supervisory gaps. There are also guidelines for host country supervision. The supervisors recognized that some of the recommendations are in conflict with bank secrecy or similar legislation in certain countries. Where there is conflict, the supervisors have agreed to use best efforts to have the conflicting legislation amended. The Offshore Group of Banking Supervisors (OGBS) has reached agreement with FATF on a protocol for evaluating the effectiveness of the money laundering laws and policies of its members. This is a positive development but OGBS includes only about half of the known offshore banking centres among its members, and there is a continued belief that OGBS remains the best available vehicle for reaching out to these centres, hopefully with an expanded membership. Several other international organizations such as the Organization for Economic Cooperation and Development (OECD) which has recently issued Cryptography Guidelines, the Bank for International Settlements (BIS), the Basle Committee as well as others are involved in the study of cyberpayments.

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In addition, at the G-7 Summit in Lyon last June, Heads of States and Governments called for a cooperative study to investigate the implications of recent technological advances that make possible the creation of sophisticated methods for making retail electronic payments. In response the Group of Ten (G-10) countries deputies formed a Working Party in 1996 to develop a broad understanding of the international dimensions of policy issues resulting from the development of electronic payment systems. FinCen is using an automated exercise-based approach to assess the implications of emerging Cyberpayment technologies. It is developing a simulation exercise, which will serve to: Educate participants on the nature and key characteristics of these emerging technologies. Raise general awareness regarding the potential vulnerabilities emerging from Cyberpayment technologies to financial crime. Explore various avenues for potential criminal applications of these technologies. Generate and identify a draft set of potential response strategies for dealing with these key vulnerabilities. Consider potential legal, regulatory, and educational action plans associated with selected strategies. Over one hundred governments have ratified the 1988 UN Convention, including the majority of high to medium priority governments. However, inconsistent enforcement of anti-money laundering provisions is an important factor in the continued high level of global financial crime. Sixteen of the 64 eligible governments ranked as High, Medium-High or Medium Priority money laundering concerns by the US Government in 1997 have not ratified the 1988 UN Convention. Thus, one-fourth of the worlds important financial centre countries have not ratified this universal accord six years after its entry into force. The Financial Stability Forums Offshore Working Group and the Financial Action Task Forces Non-

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Cooperative Countries and Territories initiative, have had a direct impact on the offshore financial services industry in 2000. These initiatives have drawn distinctions between the better-regulated and cooperative jurisdictions and those that are not. Both initiatives have focused a great deal of attention on the OFCs although the FATF initiative addresses jurisdictions beyond OFCs. The Financial Stability Forum Working Group has issued a report concluding that a number of the OFCs were perceived as having weaknesses in financial supervision, cross-border cooperation and transparency. Fifteen Non-Cooperative Jurisdictions Fifteen jurisdictions were non-cooperative in the international fight against money laundering. Those fifteen were as follows: the Bahamas, the Cayman Islands, the Cook Islands, Dominica, Israel, Lebanon, Liechtenstein, the Marshall Islands, Nauru, Niue, Panama, the Philippines, Russia, St. Kitts, Nevis, St.Vincent and the Grenadines. All but Israel, Lebanon and Russia are OFCs. Fourteen other jurisdictions, all OFCs, were identified as having deficiencies, but were not placed on the noncooperative list. Those jurisdictions are as follows: Antigua and Barbuda, Belize, Bermuda, British Virgin Islands, Cyprus, Gibraltar, Guemsey, the Isle of Man, Jersey, Malta, Mauritius, Monaco, Samoa and St. Lucia. The reviews of two other OFC jurisdictions, Vanuatu and the Seychelles, neither jurisdiction was determined to be non-cooperative. Anti-money laundering groups as under have been formed. Eastern and Southern African Anti-Money Laundering Group (Tanzania, Kenya, Malawi, Mauritius, Mozambique, Namibia, Seychelles, Uganda, Zambia, Botswana). Inter-Governmental Action Group against Money Laundering (GIABA) (Berlin, Cape Verde Islands, Gambia, Ghana, Guines, Guines-Bissau, Ivory Coast, Liberia, Mauritania, Mail, Niger, Nigeria, Senegal, and Togo)

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Asia/Pacific Group against Money Laundering comprised of nineteen members from South Asia, Southeast and East Asia and the South Pacific. There are also seven observer jurisdictions and thirteen observers international and regional organizations. The Caribbean Financial Action Task Force (CFATF), a FATF-style regional body, comprised of 25 jurisdictions, continues to advance its anti-money laundering initiatives within the Caribbean basin. CFATF members include Anguilla, Antigua and Barbuda, Aruba, Commonwealth of the Bahamas, Barbados, Belize, Bermuda, the British Virgin Island the Cayman Islands, Costa Rica, Dominica, the Dominican Republic, Grenada, Jamaica, Montserrat, the Netherlands Antilles, Nicaragua, Panama, St. Kit and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, Turks and Caicos Islands, Trinidad and Tobago and Venezuela. The Council of Europes Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures include Albania, Andorra, Bulgaria, Croatia, Cyprus, Czech Republic, Estonia, the Former Yugoslav Republic of Macedonia, Georgia, Hungary, Latvia, Liechtenstein, Lithuania, Malta, Moldova, Poland, Romania, the Russian Federation, San Marino, Slovakia, Slovenia, and Ukraine. Financial Action Task Force Against Money Laundering in South America has nine member states: Argentina, Bolivia, Brazil, Colombia, Chile, Ecuador, Peru, Paraguay, and Uruguay. In addition, the Organization of American States Inter-American Drug Abuse Control Commission (OAS/CICAD) is a special member of GAFISUD. The UN Convention against Transnational Organized Crime (Convention), signed by 125 countries including the United States at high-level signing conference in Palermo, Italy, is the first legally binding multilateral treaty specifically targeting transnational organized crime. It requires parties to have laws criminalizing the most

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prevalent types of criminal conduct associated with organized crime groups, including money laundering, obstruction of justice, corruption of public officials and conspiracy. The article on money laundering requires parties to institute a comprehensive domestic regulatory and supervisory regime for banks and financial institutions to deter and detect money laundering. The regime will have to emphasize requirements for customer identification, record keeping and reporting of suspicious transactions. The United Nations Office for Drug Control and Crime Prevention (UNODCCP), through its Global Programme Against Money Laundering (GPML), serves a unique function as the only global international organization providing comprehensive anti-money laundering training and technical assistance. Its programmes extend to legislators, law enforcement officials, prosecutors and judge regulators, bankers and providers of other financial services. On December 9, 1999, the United Nations General Assembly adopted the International Convention for the Suppression of the Financing of Terrorism. It was opened for signature from January 10, 2000 to December 31, 2001. This Convention requires parties to criminalize the provision or collection of funds with the intent that they be used, or in the knowledge that they are to be used, to conduct certain terrorist activity. Article 18 of the Convention requires states parties to cooperate in the prevention of terrorist financing by adapting their domestic legislation. The Convention also encourages states parties to obligate financial institutions to report complex or large transactions and unusual patterns of transactions which have no apparent economic or lawful purpose, without incurring criminal or civil liability for good faith reporting; to require financial institutions to maintain records for five years; to supervise (for example, through licensing money-

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transmission agencies); and to monitor the physical crossborder transportation of cash and bearer negotiable instruments. Finally, the Convention addresses information exchange, including through the International Criminal Police Organization (Interpol). As of January 29, 2001, 37 states had signed the Convention, including the United States. The fight against money laundering has been an essential part of the overall struggle to combat illegal narcotics trafficking and the activities of organized crime. The measures governments have developed to counter money laundering can also help in curbing corruption, terrorist financing, and other serious crime. Banks and other financial institutions are an important source for collecting information about money laundering and other financial crimes. Financial Intelligence Units are centralized agencies which collect, receive, analyze, and disclose to competent authorities information provided by financial institutions (and other mandated entities) concerning possible money laundering and other financial crimes. FIUs offer law enforcement agencies around the world an important new avenue for information collection and exchange. There are currently 53 operational FIU units worldwide, with many others in various stages of development. FIUs operate in: 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, Antilles, New Zealand, Norway, Panama, Paraguay, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, Switzerland, Taiwan, Turkey, United Kingdom, United States and Venezuela. (Source: US Department of State)

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Measures as enumerated in various conventions are summarized below: 1. Laundering related to drug trafficking 2. Criminalize Beyond Drugs: The jurisdiction has extended anti-money laundering statutes and regulations to include non-drug-related money laundering. 3. Record Large Transactions: By law or regulation, banks are required to maintain records of large transactions in currency or other monetary instruments. 4. Maintain Records over Time: By law or regulation, banks are required to keep records, especially of large or unusual transactions, for a specified period of time, e.g. five years. 5. Report Suspicious Transactions: An M (for mandatory) indicates that by law or regulation, banks are required to record and report suspicious or unusual transactions to designated authorities. A P indicates that law or regulation permits banks permitted to record and report suspicious transactions. An effective knowyour-customer policy is considered a prerequisite in this category. 6. Financial Intelligence Unit: The jurisdiction has established a central, national agency responsible for receiving (and, as permitted, requesting), analyzing, and disseminating to the competent authorities disclosures of financial information concerning suspected proceeds of crime, or required by national legislation or regulation, order to counter money laundering. These reflect those jurisdictions that are members of the Egmont Group. 7. System for Identifying and Forfeiting Assets: The jurisdiction has enacted laws authorizing the tracing, freezing, seizure and forfeiture of assets identified as relating to or generated by money laundering activities. 8. Arrangements for Asset Sharing: By law, regulation or

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9.

10.

11.

12.

13.

14.

bilateral agreement, the jurisdiction permits sharing of seized assets with third party jurisdictions which assisted in the conduct of the underlying investigation. Cooperate with Domestic Law Enforcement: By law or regulation, banks are required to cooperate with authorised law enforcement investigations into money laundering or the predicate offence, including production of bank records, or otherwise lifting the veil of bank secrecy. Cooperate with International Law Enforcement: By law or regulation, banks are permitted/required to cooperate with authorized investigations involving or initiated by third party jurisdictions, including sharing of records or other financial data. International Transportation of Currency: By law or regulation, the jurisdiction, in cooperation with banks, controls or monitors the flow of currency and monetary instruments crossing its borders. Of critical weight here are the presence or absence of wire transfer regulations and use of reports completed by each person transitioning the jurisdiction and reports of monetary instrument transmitters. Mutual Legal Assistance: By law or through treaty, the jurisdiction has agreed to provide and receive mutual legal assistance, including the sharing of records and data. Non-Bank Financial Institutions: By law or regulation, the jurisdiction requires non-bank financial institutions to meet the same customer identification standards and adhere to the same reporting requirements that it imposes on banks. Disclosure Protection Safe Harbour: By law, the jurisdiction provides a safe harbour defence to banks or other financial institutions and their employees who provide otherwise confidential banking data in pursuit of authorized investigations.

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15. Offshore Financial Centers: By law or regulation, the jurisdiction authorizes the licensing of offshore banking and business facilities. 16. States Parties to 1988 UN Drug Convention: As of December 31, 2000, a party to the 1988 United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, or a territorial entity to which the application of the Convention has been extended by a party to the Convention. President Bush recently stated, We will aggressively enforce our money laundering laws with accountability and coordination at the Federal, State, and international levels. Our goal is to disrupt and dismantle large-scale criminal enterprises and prosecute professional money launderers including corrupt lawyers, bankers, and accountants. The strategy should include supervision, and training of specialized money laundering task forces located in High Risk Money Laundering and Related Financial Crimes Areas(HIFCAs). Anti-money laundering legislation should include assets forfeiture laws, strip criminals of their ill-gotten wealth, attack their financial base and prosecutions. The effort should be to dismantle all criminal enterprises by disrupting the financial operations of these illicit organisations. The efficacy of enforcement mechanism will be determined by achievement rather than the size of establishment. Money laundering should be made a high risk low profit venture. A comprehensive money laundering strategy must include an effective regulatory regime that denies money launderers easy access to the financial sector. Legislation should be enacted to correct deficiencies in current money laundering laws thereby strengthening law enforcements ability to fight money laundering organisations. The dynamic nature of money laundering activity

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requires periodical re-examination of existing statutory schemes. If anti-money laundering initiatives are not making a significant difference disrupting money laundering activity, principles of good government mandate that law enforcement discontinue those efforts. The government should be able to report on a regular basis the significance and number of money laundering investigations, prosecutions, and convictions; the number of seizures; the value of property forfeited in all money laundering related cases; and the criminal market-place price of laundering money. Law enforcement must use this data to compare and present performance and determine whether progress is being made in combating money laundering. The criminal activity of money laundering by organised criminal groups, those engaged in large-scale tax evasion and those that divert public fund in other countries, usually involves complex financial transactions that are conducted along convoluted pathways across increasingly broad geographic areas. Improved understanding of the money laundering environment is essential (1) to identify the most serious money laundering threats, (2) to predict possible directions in which money laundering methods may evolve (often tide to advances in technology), (3) to measure the effectiveness in law enforcement and regulatory efforts to shut off or slow down the movement of criminal proceeds, and (4) to determine hot spot money laundering areas to guide policy makers in determining the appropriate allocation of resources. Efforts to prevent money laundering must include an effective regulatory regime and cooperation between the public and private sectors to deny money launderers easy access to the financial sector. It is desirable to examine the efficacy of existing reporting obligations, increase the usefulness of information to financial law enforcement and federal financial

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supervisory agencies and enhance the ability of financial institutions to defend against money laundering, including through the use of foreign correspondent banks. Money Services Business (MSB) industry must register with the Department of the Treasury. The MSBs must report suspicious activity about; (1) money transmitters, (2) issuers, sellers, and redeemers of money orders and travellers cheques. Casinos and card clubs to report suspicious transactions. Information sharing among law enforcement, regulators, and the regulated industry is crucial to the success of any countrys anti-money laundering strategy. In USA federal law requires financial institutions to submit currency transaction reports (CTRs) and suspicious activity reports (SARs) to FinCEN. One of the most important development in the implementation of the international counter-money laundering standards has been the successful cooperation between and among FIUs (Financial Intelligence Units). These entities are created to receive international suspicious activity reports (required under their respective domestic laws), analyse financial information related to law enforcement activity, disseminate information to domestic enforcement agency, and exchange information internationally. FIUs can play a critical role in ongoing investigations and in effective implementation of antimoney laundering measures. Establishment of an international financial crimes task force comprising experts on money laundering will help in anti-money laundering efforts. Task force members would jointly investigate multinational money laundering organisations and systems through shared intelligence and operational experiences. The participating law enforcement agencies would determine how best to structure the task force and assign responsibilities. The international financial crimes task force should further coordinate activities and work closely with INTERPOL.

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The Financial Stability Forums (FSF) spring 2000 report of offshore financial centres control indicates that enhanced implementation of international standards by Offshore Foreign Centres (OFCs), particularly with regard to regulation and supervision, disclosure and information sharing, would help to prevent cirminal abuse of the international financial system. Regulatory mechanism will significantly deter money laundering. These regulators ensure that institutions that they supervise have in place adequate anti-money laundering internal controls and procedures that include, among other things, procedure to ensure compliance with the reporting and record keeping provisions of the BSA (Bank Secrecy Act) and procedures to detect and report suspicious activity. Global Programme Against Money Laundering is uniquely equipped to play an important role in making the three Fs possible: the finding, freezing and forfeiting of criminally derived income and assets. Reports estimate that at least $500 billion is laundered every year. A special Protocol to complement the Convention devoted to countering money laundering and, in particular, to strengthening transparency in financial business must be in place. Many countries have gone into competition to provide the best corporate law, the most secret corporation; and this competition a fight for the lowest possible common denominator has to end. A widely used tool is the trust, the offshore trust. We now have trusts called asset protection trusts, state-of-theart trusts. With such trusts, you cannot find out who the beneficiary is, or who the guarantor of the trust is. Other tools are also being used, such as free trade zones, or brass plate banks, which are banks having nothing other than the title of bank. They are unregulated, unsupervised, and owners enjoy anonymity.

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We have also looked at secrecy and privacy. Anybody would like his financial affairs kept secret. The issue of privacy requires international agreement to sort out what it means, who alongwith should be protected, and what they should be protected against? It is no longer reasonable to say that the offshore business, and the impenetrability that lawyers and accountants have structured for their clients, is simply the way wealthy people do business: the rule of law must follow that money. The level playing field will help in controlling money laundering. It implies the countries will apply the same regulatory framework everywhere in an effective manner. In theory, a country could introduce a framework but may not enforce it. We need, therefore, a level playing field in the sense that the same standards of strict regulation should apply in all countries. On 3 August 1990 the first set of measures to combat money laundering was enacted. From then on, money laundering and failure to exercise proper care in financial transactions have been considered statutory offences. FinCEN is the United States Financial Intelligence Unit: these are governmental bodies set up to collect, analyze and disseminate money laundering related information, such as suspicious transaction reports and other reporting by financial institutions or individuals concerning the movement of money and financial transactions in general. Financial Intelligence units are very new: there are only about 28 of them around the world, but their numbers are growing. For better enforcement we should encourage jurisdictions to establish these units where they have not yet done so, and also provide assistance to governments in setting up such units, or in further developing them where they already exist. It is believed that FIUs are key to the fight against money laundering. Crime and money laundering must include having effective witness protection programmes in place.

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Witnesses and even judges are becoming more and more the targets of criminal organizations, and if we want to carry these investigations through to a successful conclusion, protection must be offered to those who may need it. Italy provides an excellent example of successful legislation in the area of witness protection. It should also be pointed out that laws per se are not the issue. Excellent laws can exist, but it is their enforcement that is the critical issue and on that front, the record is not necessarily so good. Transparency of ownership of corporations is an important issue, this would enable us to track down who is doing what, and why. Concerted and coordinated efforts striking at the root of corruption must be initiated all over the world. This will include abolishing bank secrecy in criminal investigations all over the world, enacting laws providing for the confiscation of criminal assets, extending protection to witnesses, adopting universal standards to counter money laundering, doing away with tax havens and maintaining independence of the judiciary. All-out efforts must be made to deal with Transnational Organized Crime with an iron hand. Based on the detailed research, the following recommendations have been made: Separate criminals from their ill-gotten gains. UN Convention to be ratified by all countries. More effective implementation of laws and enactment of forfeiture laws. To strengthen international cooperation on information exchange and law enforcement. Proper mechanisms for handling suspicious reports. A compliance culture among financial institutions; and to ensure that they put proper systems and procedures in place. To encourage financial supervisors to apply bank

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licensing procedures strictly, exchange information, and train practitioners. To increase public awareness of the threat from money laundering. Increasing coordination between the multiple agencies (national and international) involved and to improve the limited intelligence sharing. To increase the limited human resources involved in the labour-intensive and time-consuming work of investigating suspected violations. Implementation on a worldwide basis of a consistent set of policies. To focus on new technologies and increase countermeasures to combat their use for money laundering. To share forfeited proceeds with law enforcement agencies. Introduce measures that make the movement of money more visible.
Alexander, Richard. EU: The EC Money Laundering Directive. Journal of Money Laundering Control. Institute of Advanced Legal Studies. Volume Two, Number One, Summer 1998. Ali, S.A. Jamaica: Combating Money Laundering A Review of the Money Laundering Act. Journal of Money Laundering Control, Vol. 1, No. 3, January 1998. Australian Senate Committee. Checking the Cash: A Report on the Effectiveness of the Financial Transaction Reports Act 1988. Senate Standing Committee on Legal and Constitutional Affairs, Canberra, 1993. Baldwin, Fletcher N. Jr. The Constitution, Forfeiture, Proportionality and Instrumentality: USA v. Bajakajian The U.S. Supreme Court Tries Again. Journal of Money Laundering Control, Vol. 1, No.4, April 1998. Baldwin, Fletcher N. Jr. Laws Designed to Take the Profit Out of Crime; The United States and International Cooperation: Are There Constitutional Flaws? Paper delivered at the Twelfth International Symposium on Economic Crime, Jesus College, Cambridge; September 11-17, 1994.

References
1. 2. 3.

4.

5.

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11. 12. 13. 14.

15. 16.

17. 18. 19.

Biros, M. and Kelly, B. Global Reach for Ill-Gotten Gains (U.S. anti-money laundering laws). American Bar Association Criminal Justice Review, Volume 8, No. 4, Winter 1995; 54-57. Bridges, M. Taking the profit out of crime. Journal of Money Laundering Control, Vol. 1, June 1997. British Commonwealth. International Efforts to Combat Money Laundering. Cambridge International Document Series Vol. 4, Grotius Publishing, Cambridge, England, 1992. Candler, L.J. Commingled Funds: How to Seize Proceeds of Electronic Crime. Journal of Cooperation in Fight Against Money Laundering in Context of European Community Integration. BNAs Banking Report, January 22, 1990; 119-122. Carla Del Ponte, Prosecutor General of the Swiss Confederation, Practical and Legal Obstacles to International Judicial Cooperation in Financial Investigations in Global Programme against Money Laundering. Cooperation in Fight Against Money Laundering in Context of European Community Integration. BNAs Banking Report, January 22, 1990; 119-122. Crook, P. Guernsey: International Cooperation Against the Modern International Criminal. Journal of Money Laundering Control, Vol. 1, No. 4, April 1998. Financial Crimes Enforcement Network (FinCEN). An Assessment of Narcotics-Related Money Laundering. United States Department of the Treasury, Washington, DC: 1992. Fisse, B. Money Laundering, Regulatory Strategy and International Corporate Controls. Paper presented to the International Conference on Preventing and Controlling Money Laundering and the Use of the Proceeds of Crime: A Global Approach. Courmayeur Mont Blanc, Italy, 18-20 June 1994. Glover, J. Taxing the Proceeds of Crime. Journal of Money Laundering Control, Vol. 1, No. 2, October 1997. Greenberg, T.S. Anti-Money Laundering Activities in the United States. Action Against Transnational Criminality: Papers from the 1993 Oxford Conference on International and White Collar Crime, London, 1994. Ian Hamilton Fazey, Financial Times, Moderator, Debate and Discussions on Money Laundering in Global Programme against Money Laundering. Levi, Michael. Evaluating the New Policing: Attacking the Money Trail of Organized Crime. The Australian and New Zealand Journal of Criminology, 30, 1997 Levi, Michael. Incriminating Disclosures: An Evaluation of Money Laundering Regulations in England and Wales. European Journal of Crime, Criminal Law and Criminal Justice, 2, 1995, 202-217.

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20. Levi, Michael and Osofsky, L. Investigating, Seizing and Confiscating the Proceeds of Crime, Police Research Group Paper 61, Home Office, London, 1995. 21. Levi, Michael, Pecunia non olet: cleansing the money-launderers from the Temple, Crime, Law and Social Change, Vol. 16, 1991. 22. Levi, Michael and Osofsky, L. Investigating, Seizing and Confiscating the Proceeds of Crime. Police Research Group Paper 61, Home Office, London, 1995. 22. Mitchell, A & Hinton, N. Confiscation inquiries what the Dickens?, Journal of Criminal Law, Vol. 58, 1994; pp 201-208. 23. Pino Arlacchi. The Need for a Gloabl Attack on Money Laundering in Global Programme against Money Laundering, United Nations, 10 June, 1998. 24. Pino Arlacchi, Under Secretary, United Nations, The Need for a Global attack on Money Laundering. 25. Record-keeping and Reporting in an Attempt to Stop the Money Laundering Cycle: Why Blanket Recording and Reporting of Wire and Electronic Funds Transfers is not the Answer. Notre Dame Law Review, 1991; 863-92. 26. Sansonetti, Riccardo. Switzerland: Legislation to Combat Money Laundering. Journal of Money Laundering Control. Institute of Advanced Legal Studies. Volume Two, Number One, Summer 1998. 27. Savona, E. (ed.) Responding to Money Trails: International Money Laundering Trends and Prevention/Control Policies. Paper presented to the International Conference on Preventing and Controlling Money Laundering and the Use of the Proceeds of Crime: A Global Approach, Courmayeur Mont Blanc, Italy, 18-20 June 1994. 28. Spaulding, K. Hit them where it hurts: RICO criminal forfeitures and white-collar crime, The Journal of Criminal Law and Criminology, Vol. 80 (1), 1989; pp. 197-292. 29. The US 2001 National Money Laundering Strategy. 30. Vigilance and Questioning Stop Money Launderers: Training Prevents Institutions from Becoming Targets. Savings Institutions, September 1987; Vol. 1, 10-11. 31. What is the Global Programme against the Money Laundering? The United Nations General Assembly Resolution, June 1998. 32. Zagaris, B., and Kingman, E., Asset Forfeiture International and Foreign Law: An Emerging Regime. Emory International Law Review, 1991, 445+.

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MAGNITUDE, MACRO AND MICRO ECONOMY EFFECTS OF MONEY LAUNDERING


Mr. Stanley Morris, Chairman of the OECDs Financial Action Task Force (FATF) Working Group on Statistics and Methods, stated that the need to estimate the size of money laundering and quantify its constituent parts has been a concern of the FATF since its initial report. His report identified at least four areas of legitimate demand for quantitative measures of money laundering: Understanding the magnitude of the crime, to enable law enforcers and legislators to arrive at an agreement on the place of counter- money laundering programmes and thus prepare an enforcement programme so that law enforcement authorities, national legislators, and international organisations can reach agreement on the place of counter-money laundering programmes within national and international enforcement and regulatory agendas. Understanding the effectiveness of counter-money laundering efforts, and to evaluate the programmes. Understanding the macro-economic effects of money laundering, particularly the adverse effects of money laundering on financial institutions and economies. Various parts of the phenomena are grouped together when we speak of money laundering. Properly understanding each part is essential to combat the problem. He concluded however there is not at present any economic deus ex machina that will allow the accurate

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measurement of money laundering worldwide, or even within most large nations. The basis for such estimations simply does not exist. What is defined as a crime in one country may not necessarily be a crime in another. The most profitable crimes in some countries may not be profitable in others. Criminals in some countries might choose to launder their profits, while those in other countries might simply spend them. To this extent, Morriss conclusion that there is no single model that explains money laundering may be correct. However, there may be only a relatively small number of variants of a basic formula. One might be able to say, for example, that in countries like X, the average profit per recorded fraud is probably around $20,000, but in countries like Y the figure is more like $2,000. Or in countries like A, around 60% of the proceeds of crime will be laundered, while in countries like B it is likely to be only around 20%. The annual profits from drug trafficking (cannabis, cocaine, heroin) are estimated at $300-500bn (not to mention the rapidly mushrooming synthetic drugs), that is 8% to 10% of world trade. Computer piracy has a turnover in excess of $200bn, counterfeit goods $100bn, European Community budget fraud $10-15bn, animal smuggling $20bn etc. In all, the magnitude of the worlds gross criminal product totals far above $1,000bn a year, nearly 20% of world trade. Even allowing for overheads (production and suppliers, intermediaries and corruption, investment expenditure, management costs, losses from seizures and crackdowns) amounting to roughly 50% of turnover, that still leaves annual profits of $500bn. Over ten years that makes $5,000bn, more than three times the foreign currency reserves of all the central banks, one quarter of the capitalization of the worlds top five stock markets and ten times that of Paris.

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Managing this fabulous wealth is an onerous job, impossible as it is to dispose of in small denomination notes. It is enough to set the worlds financial brains spinning. But these are the people whose help the criminal organisations need if they are to launder all this money and recycle it through legal channels. They are willing to pay the price, and they do. The cost is about one third, $150bn shared between banking networks and intermediaries, lawyers, brokers and trust managers. The upshot is that over $350bn are laundered and reinvested annually, that is $1bn a day. Estimates of the size of the money laundering problem totals more than $500 billion annually worldwide. This is staggering amount and detrimental, by any calculation, to the financial systems involved. Loss of revenue to government resulting in increase in unnecessary hike of tax rates and large-scale tax evasion which in turn undermine equity of tax system Distortion of consumption and production pattern in favour of luxury and wasteful expenses that in turn encourage reduction in household expenses Increase in inflation and the rise of extraordinary demand for gold and silver Pushing up of land and building price Puts a break on the possibility of public investment and thereby weakening the whole developmental planning process Bending of political and economic policies to serve the vested interests against overall social benefits Weakening of controls leaving loopholes for evasion of tax by eliciting political and administrative patronage Helps creating many newer jobs mostly in undesirable service sectors like touts and agents, brokers, consultants and advisers, musclemen etc. who help tilting the balance against production. It has been recently recommended that the predicate

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offences for money laundering should be extended beyond drug trafficking. Money laundering should be made an unrewarding or as risky as handling stolen goods, then there would be an impact upon financial crime. Financial crime affects everyone: It results in increased taxes for those that do not evade tax. It results in increased insurance policy premiums for those that do not evade tax. It results in higher taxes for those who do not make fraudulent claims for benefits. It results in higher costs to businesses which means a combination of less profits and higher prices to consumers. It makes shopping on the internet or even at your local supermarket more risky because the trader may be a fraudster. It means that money flows into the hands of corrupt politicians and businessmen, including those engaged in trafficking in drugs, arms and people. Financial Effects of money laundering 1. The integrity of the financial system and its professional and ethical norms are compromised. 2. The institution is drawn into active complicity with criminals and becomes part of the criminal network itself like the Bank of Credit and Commerce International (BCCI) which has been described as Bank of Criminals and Crooks International. 3. The IMF has warned about the inexplicable changes in money demand, risks to bank soundness and contamination of legal financial transactions. 4. The international flow of capital and exchange rates will become volatile due to unanticipated cross-border movement of funds.

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What influence does money laundering have on economic development? 1. Economies with growing or developing financial centres, but inadequate controls are particularly vulnerable vis--vis the developed money market with strict anti-money laundering regulations. 2. Money launderers tend to move their networks to countries and financial systems with weak or ineffective countermeasures. 3. It will be wrong to suggest that developing economies cannot afford to be too selective about the sources of capital they attract. But postponing action is dangerous. The more it is deferred, the more entrenched organised crime can become. 4. There is a dampening effect on foreign direct investment when a countrys commercial and financial sectors are perceived to be subject to the control and influence of organised crime. Social and Political effects: The Social and Political effects of unchecked money laundering are serious: 1. Organised crime can infiltrate financial institutions, acquire control of large sectors of the economy through investment, or offer bribes to public officials and indeed governments. 2. The social and ethical fabric of the society will be jeopardized threatening the democratic institutions of society. The criminal influence will be more hazardous in countries in transition. The government will be rendered ineffective. Money laundering enables criminal activity to continue. Unchecked money laundering can erode the integrity of a nations financial institutions. Due to the high integration of capital markets, money laundering could also

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adversely affect currencies and interest rates as launderers reinvest funds where their schemes are less likely to be detected, rather than where rates of return are higher. Ultimately, this laundered money flows into global financial systems where it could undermine national economies and currencies. Money laundering is thus not only a law enforcement problem but also poses a serious national and international security threat as well. Reducing tax revenues through underground economies, competing unfairly with legitimate businesses, damaging financial systems, and disrupting economic development will be inevitable. Fighting money launderers not only reduces financial crime; it also deprives criminals and terrorists of the means to commit other serious crimes. References
1. 2. 2. 4. Fiorentini, G and Peltzman S. The Economics of Organized Crime. Cambridge University Press, Cambridge, 1997. International Monetary Fund. Macroeconomic Implications of Money Laundering. Working Paper prepared by P. Quirk. April 1996. Masciandaro, Donato, Money Laundering Regulation: The Micro Economics. Journal of Money Laundering Control . Institute of Advanced Legal Studies. Volume Two, Number One, Summer 1998. United Nations International Drug Control Programme. Drug Money in a Changing World: Economic Reform and Criminal Finance. UNDCP Technical Series No. 4, 1996.

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The Financial Action Task Force (FATF) on Money Laundering has been active in addressing money laundering and expanding the list of offences, including corruption, that constitute money laundering. It is an intergovernmental body whose purpose is the development and promotion of policies to combat money laundering. The task forces forty recommendations include non-drug predicate offences and require the criminalization of money laundering based on serious offences. This recognizes that it is practically impossible to distinguish between drug trafficking proceeds and their laundering and any other type of dirty money. Each jurisdiction is responsible for determining which crimes should be designated as money laundering offences. This opens the way for countries to include corruption as an offence. Originally targeted at OECD countries, the forty recommendations are now also being addressed to middle-income countries with the hope that government adopt them and cooperate with other authorities in international efforts to control money laundering. In this way national efforts can be supported by international action and vice versa. The FATF has not only developed recommendations designed to prevent, control or expose money laundering, but is also concerned with monitoring the effectiveness with which the states involved are implementing these recommendations. Particularly important in all this has been the FATF both in trying to ensure compliance with its recommendations among its members (through a mix of self-assessments and external evaluations) and to extend

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the principles embodied in these recommendations to other countries and regions. In its 1996 report the FATF not only recommended that money laundering crimes be extended beyond the predicate offence of drug trafficking to incorporate laundering by criminal organizations whose activities go well beyond drug trafficking. It was also proposed for consideration whether additional measures were needed to prevent the unlawful use of shell corporations. It also proposed to make efforts to restrict or control opportunities to use new or developing technologies to conduct large-scale transaction instantly removing remotely anonymously and outside traditional financial institutions. These proposals were accompanied by the recommendation that the same laws and regulations that have been developed for the banking sector be extended to non-bank financial institutions. Drafted by the FATF in 1990 and revised in 1996, taking into account the changing money laundering trends and potential future threats, the Forty Recommendations are a comprehensive blueprint for action against money laundering. They cover the criminal justice system and law enforcement, the financial system and its regulation and international cooperation. FATF members have made a firm political commitment to combat money laundering based on them. The Forty Recommendations have come to be recognized as the international standard for anti-money laundering programmes. They are not hinging on international convention. All the member countries have made a firm political commitment to fight money laundering. These Forty Recommendations of FATF establish a basic framework for anti-money laundering efforts. They address the criminal justice, law enforcement and financial systems with respect to regulation and international co-operation. Money laundering is an evolving activity involving

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information, analyzing the developments in money laundering techniques and trends. It includes the use by criminals of sophisticated and complex ways to legitimize illegal assets, the professionalism of the process, the use of different sectors of the financial system and of the economy, and the recourse to new geographical routes. The following international bodies and organisations have observer status with the FATF : FATF Regional Bodies Asia/Pacific Group on Money Laundering (APG) Caribbean Financial Action Task Force (CFATF) Council of Europe PC-R-EV Committee Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) Intergovernmental Task Force against Money Laundering in Africa (ITFMLA). Other International Organisations Asian Development Bank The Commonwealth Secretariat European Bank for Reconstruction and Development (EBRD) Inter-American Development Bank (IDB) International Monetary Fund (IMF) Interpol International Organisation of Securities Commission (IOSCO) Organisation of American States/Inter-American Drug Abuse Control Commission (OAS/CICAD) Offshore Group of Banking Supervisors (OGBS) United Nations Office for Drug Control and Crime Prevention (UNODCCP) World Bank World Customs Organisation (WCO) The FATF is comprised of 26 countries, the European

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Commission and the Gulf Cooperation Council, and was established to promote the development of effective antimoney laundering controls and to encourage cooperation to counter-money laundering efforts among its membership around the world. The FATFs mandate was to assess the results of cooperation already undertaken in order to prevent the utilization of the banking system and financial institutions for the purpose of money laundering, and to consider additional preventive efforts in this field, including the adaptation of legal and regulatory systems so as to enhance multilateral judicial assistance. The first report of the FATF was published in April 1990 and was endorsed by the Finance Ministers of all FATF members in May of that year. This report contained 40 recommendations to counter money laundering and has been regarded as being the most influential report to date in the fight against money laundering. The recommendations included: That the United Nations Convention be adopted and ratified by the countries. That bank secrecy should be curtailed for investigating purposes. That money laundering should be criminalised by means of national criminal laws. Extending not only to the proceeds of drug trafficking but also to include the illegal proceeds of other crimes. That all bank transactions over a certain level to register and that all suspicious transactions be reported. That bank employees be trained to recognize suspicious transactions. That international cooperation should be strengthened and that extradition of persons suspected of involvement in money laundering should be facilitated. The view expressed in this document is that if confidence in the financial markets, as a whole, could be jeopardized, it leads to a fall in public trust and confidence. The Financial Action Task Force has noted that many

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features can be found in the states of the former Soviet Union and Eastern Bloc which made the country very attractive to money launderers. It maintains that much of the banking system is corrupt or corruptible, and many countries possess no money laundering legislation. It further maintains that law enforcement structures are ill equipped to curtail the movement of drug related monies, that there is a high propensity for official corruption and there exists a desperate need for capital. These issues coupled with the suggestion that more than 50 per cent of all newly created banks in Russia have been acquired by the so called Russian Mafia establishes Eastern Europe as a major money laundering centre for the proceeds of crime for the foreseeable future. Other major laundering centres are Colombia, Mexico, Negeria, Middle East and Southeast Asia. The main centres in Southeast Asia are Thailand, Singapore and Hong Kong, where money laundering is conducted through a complicated maze of trusted confidantes who engage in underground banking known as hawala or chit banking. At its June 1996 plenary, the FATF adopted a set of new recommendations stating that countries should pay special attention to money laundering threats inherent in new or developing technologies that might favour anonymity, and take measures, if needed, to prevent their use in money laundering schemes. At its October 1996 plenary, the FATF agreed to call on Society for Worldwide Interbank Financial Telecommunications System (the international messaging system for financial transactions) to provide additional information on the originator of financial messages between legitimate financial institutions. It was determined that a discussion of current technology developments in alternative payment methods would be beneficial and appropriate as many of the FATFs 40 Recommendations could also apply to cyber-payment system.

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Throughout 2000, the FATF continued its efforts to persuade Austria to eliminate its system of anonymous savings passbooks. On February 3, 2000, the FATF decided to suspend Austria as one of its members in June 2000 unless action was taken to eliminate anonymous passbooks. Following this unprecedented move, the Government of Austria took the appropriate steps to meet the conditions required by the FATF and thus avert suspension of its membership, through new legislation and issuance of a banking circular. Fifteen of those countries (Bahamas, Cayman Islands, Cook Islands, Dominica, Israel, Lebanon, Liechtenstein, Marshall Islands, Nauru, Niue, Panama, Philippines, Russia, St.Kitts and Nevis and St.Vincent and the Grenadines) were identified in the report and having serious deficiencies in their anti-money laundering systems and thus named non-cooperative. Immediately following the issuance of the June NCCT report, the G-7 members issued advisories to their financial institutions recommending increased scrutiny of transactions involving these jurisdictions. As of October, 2000, seven of the NCCTs (Bahamas, Cayman Islands, Cook Islands, Israel, Liechtenstein, Panama and St.Vincent and the Grenadines) had enacted legislation to address deficiencies identified by the FATF and several others had taken steps or made political commitments for the same. The FATF decided to monitor progress towards meeting international standards and addressing the deficiencies previously identified. In February 2001, FATF issued a press release acknowledging that seven jurisdictions the Bahamas, the Cayman Islands, the Cook Islands, Israel, Liechtenstein, the Marshall Islands and Panama have enacted most, if not all, legislation needed to remedy the deficiencies identified in June, 2000. The FATF continued to analyze the question of

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cooperation between anti-money laundering authorities and tax administrations. The objectives of this cooperation were to ensure that suspicious transactions reporting obligations were not undermined by the so-called fiscal excuse and to permit, to the fullest extent possible, the exchange of information between anti-money laundering and tax authorities without jeopardizing the effectiveness of antimoney laundering systems. The purpose of all these groups is to accept anti-money laundering standards as set out in the 40 Recommendations of FATF. The governments must enact laws and enforce them to curb drug trafficking, money laundering and ensure strict banking regulations with regard to licensing. References
1. 2. 3. 4. The forty recommendations of FATF. FATF documents. Initiatives and Legislations. FATF and other regional bodies to counter money laundering.

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ROLE OF TECHNOLOGY
Technology has created a virtual free zone of financial activity by permitting the proliferation of financial centres outside the regulatory sphere. By aiding the fluidity of capital, technology contributes to a global market for both legitimate and illegitimate capital. It is now possible to move slush funds at the speed of light on roads where there are no policemen to call halt, custom or immigration authorities to detect and seize. The most recent example of the capacity to defraud in the high-technology world was a bank that existed only on the Internet. Created by sophisticated Russian offenders, it had no reserves and did not deserve to be designated a bank. Its sole purpose was to be a financial front for laundering money. This case is part of a larger phenomenon where Russian capital is moved out of the country by means of front companies. In this manner, billions of dollars have left the country since the collapse of the Soviet Union. Anonymous Digital Cash and Money Laundering Money laundering is no more a physical effort as in the past. Funds can be laundered without physically transporting them completely hidden to the attention of tax and enforcing agencies. Electronic cash, digital cash, digital currency and cyber currency are synonymous for an electronic medium of exchange. Cyberlaundering by means of anonymous digital cash is the latest technique in money laundering. Digital cash is also known as electronic cash and is an electronic substitute for cash. It involves a number of series having an intrinsic value in some form of cash. Assets are transferred through

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digital communications with the help of identified representation of bills. All the players in the game have one trait in common: lack of anonymity which is the feature of E-cash. Initially money laundering involved a physical effort to conceal the illegal source and application of income and then disguise this income to make it concealing the existence, the illegal source, or illegal application of income, and then disguising that income to make it appear legitimate required that the launderer have the means to physically transport the hard cash. The trick was, and still is, to avoid attracting unwanted attention, thus alerting the Internal Revenue Service (IRS) and other government agencies involved in searching out ill-gotten gains appear legitimate. This was an era of low-tech world of money laundering. Money went out from one country to another country with less stringent banking laws. The physical world of money laundering gave way to electronic transfers to avoid detection, also known as wire transfers. Wire transfers are more reliable and provide a fast and risk free conduit for moving money between countries. It is not possible to keep record of transactions which makes the task of investigators difficult and thus increasing the possibility of successful laundering. A wire transfer is the transfer of funds by electronic messages between banks. It is a series of transactions beginning with the originators payments order, made for the purpose of making payment to the beneficiary of the order. Wire transfers provide limited information about the parties involved. Their privacy can be compromised with electronic surveillances of transfers. The easy access to internet will allow faster, cleaner laundry. There are three major electronic funds transfer systems: (1) SWIFT: the Society of Worldwide Interbank Financial Telecommunication, is a Belgian-based association of banks

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that provides the communications network for a large number of international funds transfers, as well as intracountry transfers within the United States; (2) CHIPS : the Clearing House Interbank Payments System, is a funds settlement system operated by the New York Clearing House; and (3) Fedwire: the funds transfer system operated exclusively by the Federal Reserve System. Electronic cash, digital cash, digital currency and cybercurrency are synonyms for an electronic medium of exchange which has no intrinsic value, and the barest trace of physical existence. Anonymous ecash Digicash an Amsterdam-based company, created by David Chaum, has contributed to internet commerce an online payment product called ecash. Ecash combines computerised convenience with privacy and security that improves on paper cash. It is designed for secure payments from any personal computer to any other workstation, over e-mail or internet. It uses public key digital blind signature technique and makes it impossible to link the payment to the payer. Perfect anonymity is maintained. But users can prove without doubt whether they made or did not make a payment without revealing anything more. This provides anonymity to the money launderers. Once the ecash account has been established, digital funds can be accessed from any computer that is properly connected to the Internet. A launderer could access funds via telnet. Telnet is a basic command that involves the protocol for connecting to another computer on the Internet. Thus, a launderer could transfer illegally earned funds from his laptop on the Pacific Island of Vanuatu, telneting to his account leased from any unknowing Internet Service provider in the United States and have his leased Internet account actually call the bank to transfer the funds, thus

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concealing his true identity. This would, of course, leave an even longer trail for law enforcement to follow. Anyhow, ecash, being completely anonymous, allows the account holder total privacy to make Internet transactions. Thus, the bank holding the digital cash, as well as any seller which accepts ecash, has virtually no means of identifying the purchaser. Anonymous purchase of real or personal property can be effected. Transfers can be to avoid reporting requirements. If the cyberbanks are outside the reach of current banking regulations, these banks have no duty to file any currency transaction reports. Nevertheless, assuming that cyberbanks which accept anonymous ecash are somehow subject to the same laws and regulations which financial institutions in the tangible world are must first be caught before he can be found guilty. This is where anonymous ecash saves the launderer from fines and jail. Doug Drug Dealer is the CEO of a narcotics corporation having huge amount of illegal profits. He wanted to legitimise these profits and engaged a launderer Linda. Linda in turn hired couriers (smurfs) who deposited funds in different names between amounts $7500 and $8500 in a number of bank branches. This structuring afforded her protection from filing the currency transaction report (CTR) as the amount was less than $10,000. These funds were subsequently deposited with the Internet banks, which accept ecash. Once the hard currency has been converted into digital ecash, the illegal money becomes untraceable, anonymous. The launderer has access to legitimate electronic cash. Money was transferred from non-internet bank accounts to Internet based ecash accounts. The cyberbank is not automatically required to file a CTR as the transaction is below $10,000 filing requirement. Cyberbanks are able to operate outside the reach of federal regulations. Laundering on the Web will become

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one of the most expanding industry. The Struggle for Privacy Technology has enabled money launderers to be anonymous and digital ecash has made them untraceable. Money cannot be traced into a particular account. Internet is the launderers paradise. Strict monitoring of financial transactions will not be relished by advocates of privacy rights. Electronic transfers of funds are known as wire transfers. Wire transfer systems allow criminal organisations, as well as legitimate businesses and individual banking customers, to enjoy a swift and nearly risk free conduit for moving money between countries. Considering that an estimated 700,000 wire transfers occur daily in the United States, moving about $3 trillion, illicit wire transfers are easily hidden. Federal agencies estimate that as much as $300 billion is laundered annually, worldwide. If the privacy of wire transfers is compromised, due to burdensomely detailed record keeping regulations, electronic surveillance of transfers, or other potentially invasionary tactics, then the leap from the physical to the virtual world will be nearly complete. If laundering is to survive it must expand its approach, entering the world of cyberspace. The Right to Financial Privacy Act of 1982 (RFPA) attempted to further protect financial records. Under RFPA, in order to obtain a customers financial records from a financial institution, the federal government must serve a subpoena on the customer before or concurrently with service on the bank. The government must show that the records are related to a legitimate law enforcement inquiry, and notify the customer that it can take steps to block the banks disclosure of the records. Applying current law to the Internet, the result is inadequate protection of individual financial privacy. The

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combination of the Privacy Act and RFPA prevent the government from groundless searches of individual financial records. However, the standard required for a search is only that there exists some evidence that the records are related to a legitimate law enforcement inquiry. The government need only claim that it requires access to financial records due to a legitimate law enforcement inquiry. Technology has created the means and ability to launder money by use of completely untraceable digital currency. In USA the current money laundering laws apply to the fledgling area of cyberlaundering, the actual effect of these laws may be limited. Structuring of transactions so as to avoid currency reporting requirements becomes less risky if the funds used to structure are virtually untraceable. In addition, the filing of currency transaction reports may be pointless if the money cannot be traced into a specific account. However, the actual requirement that a transaction report be filed may be nonexistent if cyberbanks which accept ecash deposit accounts do not fall under currency federal or state regulation of financial institutions. Internet may become a launderers paradise. Additional nail in the coffin of privacy rights may not permit strict monitoring of anonymous transactions. References
1. Candler, L.J. Commingled Funds: How to Seize Proceeds of Electronic Crime. Journal of Money Laundering Control, Vol. 1, No. 4, April 1998. Financial Crimes Enforcement Network (FinCEN). Wire Transfer Systems: CHIPS and SWIFT. A Reference Guide. United States Department of the Treasury, Washington, DC: 1992. Kumar, B.V. India: The Misuse and Abuse of Legal Provisions in Money Laundering. Journal of Money Laundering Control, Vol.1, No. 2, October 1997. Mackenzie, Robin. Virtual Money, Vanishing Law: Dematerialisation in Electronic Funds Transfer, Financial Wrongs

2. 3. 4.

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Money Laundering: An Insight into the Dark World of Financial Frauds and Doctrinal Makeshifts in English Legal Structures. Journal of Money Laundering Control. Institute of Advanced Legal Studies. Volume Two, Number One, Summer 1998. Priess, Richard T. The Consequences of Anonymous Access to the Financial Payments System. Journal of Money Laundering Control. Institute of Advanced Legal Studies. Volume Two, Number One, Summer 1998.

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ROLE OF BANKS
The worlds worst banking scandal, inflicting huge financial losses on thousands of people worldwide, surfaced in the media in 1991. This was the Bank of Credit and Commerce International (BCCI). As could be expected, it had heavy ties with the CIA, terrorist organisations, drug traffickers, and any other crooked financial transactions shunned by most other banks. It financed terrorist activities, financial drug trafficking deals, defrauded depositors. Years before it was shut down, Robert Gates, FBI Chief, referred to BCCI as the Bank of Crooks and Criminals. Source of Startup Funding BCCI commenced operations in Pakistan in 1972, with much of its funding provided by Bank of America and the CIA. Bank of America claims that it sold its BCCI interest in the early 1980s, but records show that Bank of America continued to control much of BCCIs operation until shortly before BCCI was shut down. In the early 1970s CIA operative Gunther Russbacher transferred sizeable amounts of CIA funds into the bank for the start-up operations. Made to Order for CIA Activities The CIA knew about BCCIs activities, finding its mindset to be very manipulating and planned its own operations through BCCI. BCCI was custom-made for the covert and corrupt activities of the CIA, the Mossad, drug dealers, and terrorists. CIA operatives used the bank to launder money from CIA enterprises, including drug trafficking proceeds, and from its various financial activities within the United States, including its looting of savings and loans, to fund unlawful arms shipments, finance

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terrorist operations, undermine foreign governments, and other covert activities. Manipulating US Checks and Balances Investigative reports showed that BCCI was able to simultaneously manipulate the spy agencies of numerous countries, including the US, Israel, Pakistan, China, Saudi Arabia, among others. BCCI was supplying funds for terrorist organisations such as Abu Nidal. BCCI rigged international commodity markets that permitted certain insiders to make hundreds of millions of dollars in profits, offset by the same amount lost by depositors. BCCI was laundering drug money for drug cartels throughout the world. Bank Fraud and Money Laundering: A Changing Scenario International banking continues to grow, developing worldwide connections among banks, as well as the increasing sophistication of banking methods. The constant challenge is to ensure that every bank can account for its customers. Every government has laws which ensure the prosecution of financial crimes, and that every society sets a moral and ethical standard for the conduct of commerce. Many important financial centres have now adopted legislation to curb drug-related money laundering, and the number of governments which have ratified the 1988 UN Convention continued to increase. But, the race between criminals seeking new venues and oversight bodies seeking more widespread compliance still goes to the crooks. In 1987, when the first INCSR money laundering chapter was published, the priority concern was with twelve leading financial centres including the United States, United Kingdom, France, Germany, Italy, Switzerland,

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Hong Kong, Singapore, Panama, the Bahamas, the Cayman Islands, and Colombia. When FATF was founded in September 1989, the belief was that major relief could be achieved through a congruence of laws and policies among 15 major industrialized countries: the US, UK, Germany, France, Italy, Canada, Japan, Netherlands, Australia, Switzerland, Luxembourg, Spain, Sweden, Belgium and Austria. By 1991, FATF had expanded to include all 24 members of the Organization for Economic Cooperation and Development, as well as Hong Kong and Singapore Crimes In one instance, financial fraudsters obtained the secret telex codes which banks use for bank-to-bank transactions and were able to take $42 million in cash out of Hong Kong and Shanghai Bank in Jakarta. A number of other alleged scams have also involved the principals of Dragon Bank, which is chartered in Vanuatu but operates in Manila and elsewhere. It has now lost its licence in Jakarta. In the wake of the Dragon Bank incident, Embassy officials in Jakarta, Hong Kong and other cities met with US banks, and learned that foreign and national banks in many Asian countries are being confronted on virtually a continuous basis by what are perceived to be financial frauds. One attempted transfer confirms that the world of banking is truly a world without horizons. We learned that one group proposed to transfer $1.3 billion from a bank in the Caribbean to Indonesia, which heightens the concern to us. These and other attempts are notable, not only for their variation, but also because of their higher probability of success. Frauds from Small Bank Accounts The fraudsters use fake certificates of deposit drawn on other branches of an international bank, which can range

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from $10 million to $25 million. The fraudsters also use fund transfers, which involve real dollars, opening up small accounts into which they then pour millions of dollars. Fraudsters will also use counterfeit letters of agreement, drawn on bank letterheads, seemingly vouching for a client from another branch of that bank, or confirming a deal has been approved, etc. Many of these proposed frauds are easily detected. A request for a loan on a US bank for $36 billion was easily refused, as were telexes, which omitted the needed secret codes or had the wrong codes. But all banks in every region have to be concerned that not all of these deals are illegitimate just because they are to be made in currency or the details are thinly documented. The problem, which creates a temptation to approve such transactions, is that these banks may be turning away legitimate business. Thus, there is concern that banks operating overseas may be at a competitive disadvantage because they adhere to standards for knowing your customer, identifying beneficial owners of transactions, refusing suspicious or unusual transactions etc. The banks should be advised informally that the answer is not to lower standards in the home country or abroad, but to intensify efforts to ensure that all major financial centres operate within the limits of an international consensus on countermeasures. October 2000, eleven world money centre banks agreed to a set of anti-money laundering guidelines the Wolfsberg Anti-Money Laundering Principles for private banking activities. The guidelines state at the outset that bank policy will be to prevent the use of its worldwide operations for criminal purposes. References
1. Adams, James Ring and Douglas Frantz. A Full Service Bank, How BCCI Stole Millions Around the World, Simon & Schuster Inc., New York, 1992.

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5. 6.

7. 8. 9. 10. 11. 12. 13. 14.

15. 16.

Alba, R.M. Panama: Bank Secrecy and Prevention of Economic Crime. Journal of Money Laundering Control, Vol.1, No.4, April 1998. Blau, Charles W. Taking the Starch Out of Money Laundering : Structuring an Internal Review and Training Program for Employees. Banking Law Review, Winter 1990; 20-28. Blum, Jack A., Michael Levi, R. Thomas Naylor and Phil Williams. Financial havens, banking secrecy and money laundering. A study prepared on behalf of the United Nations under the auspices of the Global Programme against Money Laundering, Office for Drug Control and Crime Prevention; Vienna, Austria. Preliminary Report dated 29 May 1998. Crocker, T. Bankers, Police Yourselves: Recommendations of the G-7 Financial Action Task Force on Money Laundering Issues. International Financial Law Review, June 1990; 10-1 1. DIngeo, Magdsa and Rawlings, Philip. Yuppies, Drugs and Tesco: Should the Bank of England Blame Itself for Bank Failures? Journal of Money Laundering Control. Institute of Advanced Legal Studies. Volume Two, Number One, Summer 1998. Deady, P. Tough Money-Laundering Laws Put Increased Pressure on Banks. National Law Journal, May 7, 1990; 36-37+. Executive Summary Financial Havens, Banking Secrecy and Money Laundering, United Nations Office for Drug Control and Crime Prevention. Froomkin, S.M. Offshore Centres and Money Laundering. Journal of Money Laundering Control, Vol.1, No.2, October 1997. Gaylord, M. The Chinese Laundry: International Drug Trafficking and Hong Kongs Banking Industry. Contemporary Crises, Volume 14, Kluwer Academic Publishers, 1990; 23-37. Jack A. Blum, Financial Havens and Banking Secrecy, Global Programme against Money Laundering. Maynard, P.D. Offshore Centres and Money Laundering. Journal of Money Laundering Control, Vol. 1, No. 4, April 1998. Nove, S. Underground banking systems. International Criminal Police Review, July-August 1991; 2-5. Spencer, D. Bank Liability Under the U.N. Drug Trafficking Convention: Do the New Measures to Combat Money Laundering Go Far Enough. International Financial Law Review, March 1990; 16-19. Timothy B. Donalson, Offshore Financial Business and Banking Regulations. Tito Tanzi, Director of Fiscal Affairs, International Monety Fund, Macroeconomic aspects of offshore centres and the importance of money-laundering in offshore financial flows.

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THE CAPITAL FLIGHT : MEANS AND EFFECTS


The sources of secret funds abroad are many. Capital flight, corruption, smuggling and manipulation in currencies and securities are the most prominent among them. A significant portion of the money India borrows for investment in the country goes back as clandestine assets of Indians abroad. It seems it is true of every developing nation. This fact becomes very apparent by the recent happenings in Indonesia where according to World Bank estimates 30% of the foreign assistance found its way back to donors and laundered by way of kickbacks, commissions, etc. An international study estimates that during 1975 to 1983, over US $120 billion was transferred by residents of developing countries into clandestine assets abroad. Another estimate shows that 23 developing nations added US $381.5 billion to their external debt during 1978 to 1983 and out of this sum not less than US $103 billion flowed back as flight capital through illegal means. India is no exception. The buccaneers of the private sector would no doubt lead in numbers and in volume. That the public sector is no different is not a secret either. Dr. Raja Chelliah and colleagues have confirmed with the help of retired government officials and public sector executives that foreign suppliers usually provide a cushion of three per cent to seven per cent on imports of the public sector. Where does this cushion go? Its destination is predictable clandestine Indian assets

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abroad. Here is a specific instance. The Finance Ministry was told by the World Bank that it would not put Bank funds into gas-based fertilizer plants in India. Why? According to the Bank, each of the four plant projects already under implementation in India involved an additional capital cost of Rs. 50 crore to Rs. 100 crore each. These projects were in the public as well as the private sector. Though the World Bank put it rather gently, it really suspected capital flight to the extent of Rs. 50 to 100 crore in each project. Incidentally, the turnkey contracts for all these projects went to Snam Progetti , the Italian firm whose business with India had grown phenomenally. Many government deals involve bribe, which induce capital flight. These bribes are never paid as such. In many cases, says Ingo Walter, international bribes can be routed through agents fees to independent third parties acting on behalf of the payer. Bribes are paid into secret accounts maintained by or for the receiver. There are impregnable mechanisms by which the secret account can be distanced and insulated from its corrupt owner. There are numbered bank accounts without names, bank accounts in false names and coded names (Lotus, Rose or whatever), accounts operated through nominees and trustees and accounts owned by shell-companies which have no apparent proprietors. The list is endless. According to the New York Times (January 19, 1984), something like US $ 5 to 7 billion (Rs. 7,000 crore to Rs. 10,000 crore) in graft was collected and sent abroad by various ministers and officials of the Nigerian Government that was overthrown in 1983. An official was found to possess a solid gold bathtub in his English vacation home. If you are looking for legal proof, the revelation would not be adequate. The truth in practice, is no truth in law.

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There is at least one exception, which serves as proof as well, although in todays context, its value is somewhat historical. A civil servant of rare integrity happened to negotiate with a Japanese firm on behalf of the Tamil Nadu Government for establishing eight textile mills. This was in the early sixties. As the terms were settled, the leader of the Japanese team whispered into the ears of the young civil servant about the 12 per cent cushion they had kept in the price and asked him what they should do with it. Pat came the reply, give us the ninth mill. The surprised Japanese agreed and the ninth mill was set up at no extra cost. The Ex-President, Mr. R. Venkataraman, was the Industries Minister in Tamil Nadu. When in a discussion in the assembly, the opposition asked the Minister whether any commission was accepted, the Minister replied in the affirmative and said the ninth mill represented the commission amount. Had the civil servant or the Minister been less than honest, things would have been different. The ninth mill would have disappeared into some secret account abroad. As for the bribery and the capital flight associated with it, the chief beneficiaries generally are those against whom it is difficult to prove the charge. In every such deal, the corrupt politician is the beneficiary with a string of corruption-sharers. In the end, the statesman who is appointed to prevent the State being cheated, himself cheats the State. The more devastating form of smuggling is not the clandestine movement of goods across frontiers but the manipulation of values in international trade. This requires no jet-boats or private light-houses. It is a more sophisticated operation carried out right in the customs offices. According to one researcher (Dr. Bidwai), smuggling of gold alone was of the order of Rs. 7,000 crore a year in

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1970s. According to another (Dr. Thiruvenkatachari), invoice manipulation in international trade with India was of the order of several hundred crores every year during the 1970s. Dr. Satyendra Naik arrived at a similar figure in yet another detailed study. The current rate of manipulation must be incomparably higher. No one denies it either. Smuggling and invoice manipulation requires secret accounts and produce secret money too. This lucrative trade requires the cooption of a powerful sleeping partner, the government. This alone can ensure that no one will enforce the law against the offender. The author rightly disbelieved that English businessmen would make a gift of a plant worth Rs. 25 crore to an Indian businessman. Dealing in currencies and securities in violation of currency loss have a more devastating impact on the economy. The flight of currency feeds smuggling and invoice manipulation, and aids capital outflow. In the process, a parallel exchange develops. The slush money operates through the medium of the official mechanism also. Dr. Raja Chelliah and his colleagues have noted: Transformation of black to white via foreign exchange is believed to be growing rapidly with some of the recent schemes to attract savings and investments from nonresident Indians. For instance, if something is smuggled into India, it has to be paid for in foreign exchange abroad. So foreign exchange has to be acquired by payment in rupees. It is an open affair in all major cities of India. There is a regular market for exchange of rupees into dollars and sterling. Some Indians keep a regular reserve of foreign exchange. Many others keep their black wealth in foreign accounts. A few have brought back their black wealth into India as investment by non-resident Indians with the right of repatriation in foreign exchange.

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The economic offences cheat the public of what is legitimately due to it and transfers to private coffers what does not belong to it. The economic offences involve evasion of tax, customs and currency regulations. Tax evasion is both the cause and the effect of secret operations through tax shelters that abound all over the world. The increasing volume of such dealings makes tax evasion a national malady. Says Ingo Walter: The fact that some people are getting away without shouldering a fair share of tax burden clearly undermines the willingness of others to go along with their system regarded as grossly inequitable and can result in wholesale erosion of tax morality. Once tax evasion becomes a national sport with or without financial secrecy, it is extraordinarily difficult to rebuild tax compliance as a number of countries have found it to their dismay. When someone evades tax of the order of crores of rupees and gets away with it, it is bad enough. It sets off a competition in evasion. But when a tax evader is apprehended and the political leadership protects him, the entire system of government is subverted. The emperor himself has become a player, and, in a sense, a partner in the game. The enforcing agencies simply carry out the wishes of the emperor by closing their eyes and showering favours to the kins of the emperor. Secrecy is considered to be the mother of corruption. There is a ready international market that supplies impregnable secrecy. There are countries which thrive only by providing secrecy for international slush money. The illegal money burgled from the hungry millions of Africa, for instance, by their businessmen and politicians, resides in tax havens and tax shelters that abound the world over. It is in the club of specialist racketeers that our businessmen and politicians are fast becoming active members. The international club of economic offenders is a vast and powerful one, whose membership consists of narcotics

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peddlers, arms dealers, terrorists, smugglers of goods and currency and other economic offenders. Financial secrecy is their common need and it is a thick wall of crime. The vendors of secrecy charge a hefty fee for what they provide, which is sophisticated types of covers at varying rate. The range is almost endless. There are tax havens and tax shelters which guarantee tax free economic life at an insignificant cost. These guarantees are provided by state laws. The banking system guarantees by force of law provide secrecy in varying degrees. There are shell corporations and banks whose existence is not even registered in public record. Tax havens are the most common instrumentality in international frauds. According to a list prepared by the US Commissioner of Inland Revenue (the equivalent of our Central Board of Direct Taxes) there are about 50 tax shelters all over the world some 20 of them in the Caribbean and Atlantic regions, 11 in Europe, the Middle East and Africa and 8 in Asia. Hundreds of thousands of dubious corporations function from these tax havens and a number of them also trade as bankers. They are also known as off-shore companies or banks meaning that their ownership is secret. Besides tax concessions, the tax havens provide for secrecy of ownership and complete absence of state regulation. In some countries like Antigua, there is not even the formality of registering a corporation with the government. A lawyer can form a company in his office for an industrialist in India on telephonic instructions and the government of Antigua will not even know about it. So is the case in the Bahamas and Bermuda. In Panama and the Cayman Islands, the rules are similar there is complete secrecy about the ownership of companies. A hundred companies can be registered in a matter of hours and it can be done from India over the phone. Hundreds of readymade companies are available for sale off-the-shelf

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and are sold every day by solicitors, whose only business is the sale of incorporated companies. In the Cayman Islands, the rules of secrecy regarding banks and financial activities are more stringent than even in Switzerland. So, too, in Panama. Our country now has begun attracting large-scale investments from these dubious areas. The licences granted by Islands in the Caribbean, however, do not command great respect in the international money market. But corporations and trusts registered in Liechtenstein provide, besides high respectability, a totally safe cover with a company law that guarantees secrecy. Liechtenstein is a small principality with an area of 65 sq. miles between France and Switzerland. The law here provides for the formation of companies and family foundations with guaranteed secrecy of ownership. Ingo Walter says most such forms of corporate organisations are openly referred to as dummy are paper corporations used to hold or transfer assets, while at the same time protecting from tax liabilities. The company registry does not require disclosure of ownership. Only the Swiss banker and the lawyer who register the company know who the true owner is. There is no tax other than a single one time tax of 1/10 per cent levied on the initial capital and the minimum capital required is 20,000 Swiss Francs. There is no tax on the income whatever its size. International banking laws, providing for the strictest secrecy and confidentiality, have become the current concern of international secret deals. The degree of secrecy varies from country to country. Whereas disclosures for tax purposes are permitted in the US, France, Spain and the UK, in West Germany and the Netherlands the tax authorities must ask specific questions and cannot go on fishing expeditions. In Austria, Switzerland and Italy the secrecy in bankclient relationship cannot be breached and no disclosure is

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permitted except where crimes, other than tax frauds, are involved. The banks use the statutory cover of secrecy and actively cooperate in the highly questionable activities of their clients. The Swiss banking law makes it a crime to breach the confidentiality between a bank and its client. Even negligence of an employee or a former employee of a bank is punishable with fines and imprisonment. Inducement to breach this privilege is equated with espionage against Switzerland and is punishable under the Swiss Penal Code. However, some changes have been effected in the laws since 1990. The Swiss banking system and its organised secret services provide the greatest attraction to the economic offenders of the world. According to an expert the location of Switzerland itself was outstanding; transportation and communication facilities make easy to slip funds into and out of the country without attracting undue attention. If an Indian goes to Italy, he can enter Switzerland in the morning and return in the evening without a passport entry. Swiss banks attract a greater volume of deposits. According to an estimate of 1983, some 56 Swiss banks had about 367 billion Swiss Francs (about rupees 30,000 crore) in external deposits accounts. The facilities provided by Swiss banks include numbered accounts, where only the clients signature is on bank records and not his name and the account is identified by the use of numbered or a series of letters. Account can also be opened under a false name or pseudonym like Lotus. There can also be accounts with beneficiaries unknown to banks. Trustees can operate accounts for beneficiaries under a secret deed of trust. To open a numbered Swiss account the client only fills in a form without entering his name. This account generally precludes the withdrawal of cash over the counter. A professional lawyer, notary or certified auditor may operate

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the account so that the true owner is nowhere in the picture. Despite all this Switzerland is ceasing to be the most attractive destination for slush funds as there is competition among tax havens. Some of the territories are providing better security to money launderers and criminals to hide their identity. This outline is the World of Secrecy which every law endorsement machinery all over the world is trying to break into. After a tenacious battle to get information from Swiss banks, the United States concluded a treaty with Switzerland effective from 1977. Switzerland has now passed laws permitting disclosure where such disclosure is essential to investigate social crimes such as bribery, misappropriation, extortion and narcotic traffic. But disclosure is permitted only on the request of the official agencies of the country that seeks the information after the concerned government has registered a proper criminal case. A number of developing countries have found capital flight to be among their most troublesome economic problem. Capital flight leads to further external borrowing and debt crisis that has engulfed the developing nations since the early 1980s. Secret outflows depreciate the value of the countrys currency in terms of the stronger currencies of the world. This is not the end of the story. If exports bring less money, imports cost more. The effect is liquidation of the countrys meagre capital resource. Further, capital formation stops, the rate of economic growth declines, government loses the capacity to invest in the social and economic infrastructure and the economic morality of the whole nation crumbles. Black money causes misinformation about the real health of the economy, distorts the data on savings, investment and expenditure, results in loss of revenue to the exchequer, undermines the equitability of the tax

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system, affects public investment in the infrastructure and increases the gap between the rich and the poor. References
1. Banking company means a banking company or a cooperative bank to which the Banking Regulation Act, 1949 applies and includes any bank of banking institution referred to in section 51 of that act. 2. Export and import in relations to foreign exchange Management Act Paper presented by Prof. S.C. Srivastava India at Seminar on Foreign Exchange Management Act (FEMA) organized by Guru Nanak Dev University, Amritsar and NRI Sabha, Punjab (Jalandhar 6th January, 2002). 3. FERA, FEMA and Money Laundering paper presented by Dr. Shamsuddin, Deputy Legal Adviser, Enforcement Directorate, Govt. of India at Seminar on FEMA organised by Guru Nanak Dev University, Amritsar and NRI Sabha, Punjab (Jalandhar 6th January, 2002). 4. Foreign Exchange Management (current Account Transactions) Rules, 2000 5. Foreign Exchange Management (permissible Capital Account Transactions) Regulation, 2000 6. Four articles written by S. Gurumurthy in Indian Express in 1989. 7. NRIs Investment in movable and immovable assets in India and repatriation of proceeds outside India Paper presented by Shri S.S. Dawra, the then, Director of Enforcement, Government of India, New Delhi at Seminar on Foreign exchange Management Act (FEMA) organized by Guru Nanak Dev University, Amritsar and NRI Sabha, Punjab (Jalandhar 6th January, 2002). 8. Transfer of funds to the Countries and Vice-versa; through underground and parallel banking system Paper presented by Shri Jyoti Trehan at Seminar on Foreign Exchange Management Act (FEMA) organized by Guru Nanak Dev University, Amritsar and NRI Sabha, Punjab (Jalandhar 6th January, 2002). 9. Walter, Ingo. Secret Money Market: Inside the Dark World of Tax Evasion. Financial Fraud, Insider Trading, Money Laundering, and Capital Flight. Harper & Row, Ballinger Division, New York, 1990. 10. Walter, Ingo. Secret Money: The World of International Financial Secrecy. Lexington Books, Lexington, MA, (rev. ed.) 1989.

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HAWALA
Another way to move money is an underground system known as hawala. For many people in remote areas of the world, the hawala system is faster, cheaper and more reliable than Citibank, Wechsler said. Organised through a series of informal chits and promises, such a system can move huge amounts of cash. None of it crosses borders, and except for personal notes theres no record of the transactions. Banks have three functions warehousing savings, lending money, and settling obligations between customers. Advisory services are, in essence, developments or broking of one of these three. Parallel bankers strip out the basics and perform only one or more of those three functions. The parallel banking industry works outside that system of regulation and supervision. In countries where a licence is required for a particular activity, and the conduct of the activity is a crime, parallel bankers are by definition criminals. Underground Banking is sometimes called parallel banking. These systems tend to mirror more conventional bank practices, but are highly efficient and use wholly unauthorized methods of transferring money around the world. The best known among them are the Chop, Hundi and Hawala banking within various ethnic communities, which enables the avoidance of any conventional paper record of the financial transaction. Such methods do not require the actual movement of money but nonetheless facilitate the payment of funds to another party in another country in local currency, drawn on the reserves of the overseas partner(s) of the Hawala banker. The system is dependent on considerable trust and considerable

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simplicity the money launderer places an amount with the underground bank the identifying receipt for a transaction being a password or some identifiable symbol. Hawala operates on trust and connections (trust is one of several meanings associated with the word hawala). Customers trust hawala bankers or operators (known as hawaladars) who use their connections to facilitate money movement worldwide. Hawala transfers take place with little, if any, paper trail; and, when records are kept, they are usually kept in code. Hawala is an ancient system; it was the primary money transfer mechanism used in South Asia prior to the introduction of Western banking. Today, hawala continues to be used for many legitimate transfers for cultural and financial reasons; and it also often operates in conjunction with Western banking operations. Some of the money transfer mechanisms (the chop, Hawala, etc.) which form the basis of parallel banking, were developed to enable the movement of value of the money without the actual movement of money. This was so that banditry could be avoided. Now, with the use of technology, the means of moving value without money are available. Some illicit money does not enter the formal banking system but is instead transmitted through underground or alternative banking systems such as the hawala in India and Pakistan. These parallel banking systems are based on family or gang alliances. They work without a paper trail. As Malhotra notes, a Hawala banker issues neither a written receipt for the sum received nor an order for payment of rupees in India. What he does make is a firm verbal commitment to the seller of dollars to make an equivalent rupee payment, at the agreed rate of exchange, through his agent in India; he then sends a coded message to his partner containing the designated recipients name and the time, date, and address for the payment. For such

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services the dealer can charge up to 15 per cent of the sum exchanged. In spite of the significant commission charges, the hawala system handles large amounts of money. In 1992, for example, British authorities arrested a Londonbased Pakistani who had moved nearly US $13 million a week, while in 1993, police in Delhi arrested a hawala banker who, over a two-year period, had reportedly handled US $1.45 billion in payments for his clients in Dubai. One of the reasons that these schemes work so effectively is that they are protected through bribery and corruption. As one hawala banker claimed: It is very easy to purchase protection by bribing police, politicians, local governments. The Chinese have a similar system that is known as fie chien or flying money. This is based on trust, family ties, local social structures, and the threat of ostracism for any breach of good faith. The result is that a banker who breaks a trust effectively commits economic suicide. This system, which is also sometimes described as the chit system, generally involves depositing money in one country in exchange for a chit or a chop (i.e. a seal) and the remittance of this money in another country on presentation of the chit. It is fast and convenient, does not involve the transportation of bulk cash, leaves little trail for investigators, has the virtue of anonymity, and the cost, apart from the commission to the banker, is fairly low. As long ago as 1989, the New York Times reported that in New York, California, Florida and Texas, cheque-cashing establishments and storefront money-transmitting business, which wired money to other countries, were flourishing, even though most of them were unlicensed, unregulated and illegal. Almost seven years later the INCSR noted a continued problem with non-bank financial institutions including a wide variety of exchange houses, check-cashing services, insurers, mortgagers, brokers, importers, exporters, trading companies, gold and precious

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metal dealers, casinos, express delivery services and other money movers of varying degree of sophistication and capability. Hawala is an alternative remittance system predating traditional or western banking used primarily in India and Pakistan. It can be exploited and abused for a wide range of illegal purposes. Black Hawala is to refer to illegal transactions involving hawala. Certain aspects of hawala are contributing to significant problems in India, such as corruption and smuggling. In Pakistan, hawala is a component of corruption and drug trafficking. Elsewhere in the world, hawala has been found to be a component of many financial crimes, such as money laundering and tax evasion. The term hawala is often used interchangeably with the term hundi. Both refer to an alternative remittance system used extensively in India and Pakistan. In current usage in Hindi and Urdu, the word hawala has the meaning trust and reference. It is also used colloquially for money (hawala is a means of transferring money, and it is based on trust or an appropriate reference). In some contexts (particularly journalism), it may be used to refer to payments made in connection with bribery and money laundering. The term hawaladar refers to a hawala broker or dealer. Today, hawala and traditional banking exist as parallel, but intertwined, economic systems in India and Pakistan. Hawala consists of several distinct but interacting schemes that form the overall hawala system. The following are the three main schemes: 1. Transfer of money through a hawaladar. This is the most common type of hawala transaction or hawala scheme, and it is often erroneously assumed that these transfers are the entire hawala system. 2. The second scheme is the manipulation of invoices to hide the movement of money in shipments of goods.

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3. The hawaladars give a better rate of exchange than the official rate, charge no fee/nominal fee and deliver faster than official channel leaving behind no paper trail. There is no need for receipts, or other paperwork. This scheme involves smuggling gold, often using Dubai as a starting point, to India and Pakistan. While dealing with two local hawaladars, one encounters slightly different pricing schemes. The first hawaladar will give him a slightly better rate (this would be the black market rate $) than the bank or bureau de change which will charge a fee of ten per cent of the amount to be sent. An expatriate Indian can send money to his kith and kin in India : i) Through banking channel at the official rate of exchange plus the fee. The expatriate has to undergo a large number of paper trails which he may not like to undergo. ii) The Bureau de change is even less attractive than banks as it offers lower rate of exchange and higher fee. A common way to move money illicitly into a country with strict currency import controls is to under-invoice the value of goods shipped there, establishing enough of a paper trail to satisfy casual scrutiny and to provide the appearance of compliance with currency controls. The hawaladar inflates the value and invoices appropriately (bribery or a free trade zone are often used to avoid excessive duty payments, or merchandise that is not subject to duty can be used). Once again enough of a paper trail has been established to provide an appearance of compliance with currency control regulations. Gold can almost always be sold at a profit in India. Several hawaladars have decided to pool some money and purchase a large quantity of gold in Dubai. They will arrange to have this gold smuggled from Dubai to India through various means, such as small ships sailing between

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Dubai and Mumbai or through an informal network of couriers (often Indians or Pakistanis working in the Gulf) who make extra money smuggling gold bars into India. Once the gold has reached India, the smugglers deliver the gold to a designated person (usually another hawaladar or a jeweller who does business with hawaladars) who pays them for their services; this payment can be money or a share of the gold that was smuggled. Records of individual hawala transactions are not usually kept, making tracing them almost impossible. Hawaladars maintain records indicating money owned and money due, but little more than that, records are not necessarily maintained after accounts have been settled. The ability to conduct anonymous transactions makes it possible to violate various provisions of Indias Foreign Exchange Maintenance Act (FEMA). Some of the objectives of FERA were the establishment of controls over foreign exchange, the prevention of capital flight and the maintenance of external solvency. The misrepresentation of the value of shipment constitutes a violation of customs regulations in both India and the exporting country. Over-invoicing facilitates the transfer of money out of India in violation of the FEMA. The appearance of a payment for imports provides an illusion of compliance with the FEMA, but the law is being violated nonetheless. The manipulation of invoices is not limited to the settlement of accounts between hawaladars. It is a major means of facilitating capital flight out of India. In a study of trade between the United States and India, it was determined that these techniques were used to move US $370 million out of India illegally in 1993 out of a total trade amount of US $ 1065 i.e. about 30%. The demand for gold is greater than the supply. Smuggling of gold is a profitable enterprise. In January 1997, Indian authorities doubled the amount of gold that

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NRIs could bring into the country from 5 to 10 kilograms. This change was done to recoup at least some of the duty that is lost through gold smuggling; it is not clear what overall effect this will have on the gold smuggling situation in India. Thus Hawala facilitates : Use of hawala by expatriate workers to remit money; Manipulation of invoices to remit money; Black market currency speculation; Gold smuggling. Pakistan has a significant internal heroin abuse problem, and it is a major trans-shipment point for drugs produced in Afghanistan. The proceeds from the domestic heroin trade must be laundered, as must the money associated with the export drug trade. Hawala is particularly attractive to drug traffickers (in Pakistan and elsewhere) for several reasons. These are: Anonymity: hawala transactions are usually impossible to trace; Speed : hawaladars can move money with a phone call or fax; Economy: black market speculation is cost-effective. These circumstances, combined with the availability of foreign currency and accounts and the deregulation of foreign exchange in Pakistan have created an environment conducive to Black hawala which facilitates drug trafficking and other crimes in Pakistan. Black hawala facilitates crimes such as capital flight, currency transfer violations and gold smuggling in India and Pakistan. It is also undoubtedly a facilitator of criminal activity elsewhere. In the US and UK, indicators of hawala might be found in cases involving customs offences, tax evasion and drug trafficking. In one US case (US v Ismail) a Pakistani living in the Washington DC area was doing hawala transfers for other expatriates. Large cash transactions at the bank used

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by some of the defendants were brought to the attention of customs and tax authorities. Their subsequent investigations uncovered a scheme in which surgical instruments were being imported at inflated prices (overinvoicing) to facilitate the illegal transfer of money from the US to Pakistan. Convictions were obtained for customs violations, making false statements and filing tax fraud. This case typifies one of the problems encountered with hawala; what is illegal in one jurisdiction is not illegal in another. Providing an alternative remittance service is not illegal in the United States; had there been no tax and customs violations, there would not have been a case. A United Kingdom case from 1985 is also worth discussing. In this case, Mr. Choraria was convicted of being knowingly concerned in the fraudulent evasion of the prohibition of importation of a Class A controlled drug, namely heroin. Choraria is described as the banker who knowingly enabled payment for heroin imported into UK illegally to be transferred to India from where the heroin had been sent. Choraria operated two legitimate businesses a confirming house and a remittance service, both of which were appropriately licensed (given the facts of the case, it is likely that at least part of the remittance business was hawala-based). In this case, Mr. Choraria facilitated the transfer of money from parties in Karachi and Mumbai as part of heroin smuggling. What is interesting about this case is the fact that hawala, a term unknown to the bankers from Hambros (Chroarias bankers), had to be explained at length by Mr. Choraria and his nephew, an accountant, during the course of the trial. It also appears that even some of the criminals in the United Kingdom did not understand the means by which money was being moved! In early 1997, it was anticipated that principals in MGM Marwex International, the United States subsidiary of

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Frankfurt-based MGM Marwex Geldwechsel, would go on trial for laundering drug money. The defendants are accused of using Marwex as well as hawala techniques to facilitate the laundering of money for an international drug trafficking organization. The illegal profits have to be laundered to continue the criminal activity. All but the smallest drug operations depend on money laundering to survive. Money laundering may be further divided into three sub-processes or stages: Placement Layering Integration In the placement stage, the money launderer disposes off the proceeds of a criminal activity, (which are often in the form of cash). At this stage, financial institutions can be a check-point in the money laundering cycle, and it is also at this stage that laundered money is particularly vulnerable to detection. Many countries have enacted antimoney laundering counter-measures that exploit this vulnerability. In the United States, the Bank Secrecy Act calls for several types of reporting to the United States Department of the Treasury. First, all cash transactions at casinos and physical shipments of cash into or out of the United States must be reported. Secondly, any shipment or receipt of monetary instruments with a value greater than US $10,000 must be reported. Thirdly, any person with a financial interest or signatory authority over bank, securities or other financial accounts outside the United States with a value greater than US $10,000 must report it. In the layering stage, the money launderer manipulates the illicit funds to make them appear as if they were derived from a legitimate source. A component of many layering schemes has been seen to be the transfer of money from one account to another. Even though this is done as carefully as possible, when it is done through the

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traditional banking system it presents two problems to the money launderer. First, there is the possibility that a transaction could be considered to be suspicious and reported as such. Related to this is the paper trail created by these transactions! If any portion of the laundering network is examined, the related paper trails could lead a diligent investigator directly to the source of the criminal proceeds and unravel the money-laundering network. Hawala transfers, as seen above, leave what is at best a confusing paper trail. Even when invoice manipulation is used, the mixture of legal goods and illegal money, confusion about valid prices and a possibly complex international shipping network create a trail much more complicated than a simple wire transfer. Hawalas formidable ability to convert money into gold is another consideration. Gold is as good as money (money is as good as gold!), can always be sold at a good price and is traded on markets worldwide. Gold is also untraceable. Evidence suggests that BCCI used hawala techniques in conjunction with its global network to facilitate arms deals, tariff evasion and other crimes. In the integration stage, the launderer invests in other assets, uses the funds to enjoy a luxurious lifestyle or reinvests his profits into criminal activities. Money seems to become legitimate, and, as we have seen, hawala techniques are capable of transforming money into almost any form, offering many possibilities for establishing an appearance of legitimacy. Brokers offer as much as $500 million to a bank or another broker at a point or two below the official exchange rate. The offer is probably not for a single transaction, but reflects the amount of money brokers have at their disposal. However, transactions are increasing in size. One recent transfer reportedly involved US $78 million, which went through a US bank in a single transaction. Why then dont US reports and economic indicators

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reflect this volume of money transfer? The answer is that these kinds of transactions are designed to fall outside the scope of Treasury and other reporting. For example, US banking laws do not require reports on bank to bank transfers, let alone transfers from one branch to another of the same bank. Transactions in bulk conducted outside traditional foreign exchange venues are probably escaping conventional monitoring systems. However, currency does not have to leave a placement site physically. Banks are at least one generation or more beyond the period in which physical money was moved to settle accounts. Settlements are accomplished through reciprocal balances. The use of non-bank financial institutions is not confined to the Western Hemisphere. The 1997 Financial Action Task Force (FATF) report cited a continuing trend of money launderers moving away from banks to nonbanks in many sections of the world. There has not yet been a parallel effort in many countries to subject these non-bank financial institutions to the same kinds of regulations as banks. In effect, when the money hits a bank, the money broker has already achieved first-stage placement, and is now in the process of layering his funds through banks and ultimately integrating his funds into legitimate business. 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.

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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 money 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 money without regard to the source of the funds. The unique aspect of the case was the method in which funds were transferred to India. Money was given to the defendants in increments greater than US $10,000. These funds were then structured into their bank accounts in amounts less than US $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. 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 money 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. A major marijuana trafficker and seventeen other

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codefendants pleaded guilty to narcotic and money laundering offences in a case concluded in 1996. The major trafficker was 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 US $12 million in narcotic proceeds. The 2000 National Money Laundering Financial Sector Strategy Conference, co-sponsored by the U.S. Departments of Treasury and Justice, provided a forum for discussing recently observed trends pertaining to the use of money remitted for illicit funds transfer and money laundering. There was a general consensus among the conference participants that there are three major categories of remitters currently operating: (a) money remitters that are corrupt and are working directly with the money launderers and drug dealers; (b) money remitters that might not be directly involved with the illicit proceeds, but are wilfully blind to these activities and transactions; and (c) money remitters who are not necessarily aware of nor

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wilfully blind to the illicit activities. The hawala (or hundi) alternative (or parallel) remittance system continues to be a key factor in money laundering and other financial crimes committed in and associated with South Asia. It is closely related to the black or off the books economies in the region. The sizes of the underground economies in South Asia are estimated to be 50 to 100 per cent the size of the white or documented economies. Dubai, India and Pakistan form a hawala triangle responsible for significant international money laundering activities that go far beyond South Asia. While interdiction of non-bank money laundering system, such as hawala, is difficult enough in itself, this difficulty is sometimes compounded by ineffective money laundering countermeasures in Dubai and the other Emirates. The underground hawala system, which has existed in India and throughout Southwest Asia for generations, continues to be a money laundering method of choice for drug traffickers wishing to return their proceeds to that part of the world. There have been a number of scandals involving high-profile political figures in India, which focused attention on this system and its facilitation of money movements for terrorists as well as drug traffickers. However, no effective deterrent to the hawala system has been implemented. The government has attempted to lure money out of the underground channels and into the legitimate economy by liberalizing its policies on gold imports, gold deposits and foreign currency holdings. As a result, hawala activity has been slowed. Law enforcement officials believe that the hawala system will continue to be used by individuals involved in such illicit activities as tax evasion, drug trafficking, money laundering and arms smuggling. While there is no actual underground banking system in the United States, the hawala system becomes a linkage

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in a chain of procedures to make payment in India for goods sold in New York a procedure not unlike the grey market in dollars and pesos which links Colombian and Panamanian businessmen to the proceeds of drug trafficking. Indian merchants in high-value global trading businesses, such as gold and gem dealers, can make arrangements with Mumbai traffickers to receive payment for heroin sold in New York. The New York merchant receives cash or cheques whose value is less than the US $10,000 reporting threshold. The merchant then informs the trafficker in Mumbai that payment was received and directs the trafficker to a gem or gold merchant in Mumbai who will pay the trafficker in rupees. The merchant receives fees of 3-10% for his services. Hawala merchants often settle accounts through wire transfers, which involve commingled funds from legitimate businesses, or even other illegitimate businesses, making it nearly impossible to trace drug proceeds. Historically, drug proceeds have also been returned to India in the form of gold, which has significant cultural and religious value in India. Indians often hold wealth in gold to hedge against declines in rupee exchange rates or to shelter income from taxation. Until 1992, gold imports were restricted, which drove up the price. Typically, drug money was taken to the gold markets in Dubai and Abu Dhabi, converted into gold which was then smuggled into India where it was sold on the black market, reportedly at 40% above world gold prices. Invoice manipulation is also widely used to justify movements of money into India, including proceeds of drug sales in Europe. Hawala and Terrorism A nexus between arrested hawala operators and the Lashkar-e-Toiba, Hizbul and the Harkat-ul-Ansar groups and other hawala trails has been uncovered after the attack on the Red Fort and Parliament.

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The Enforcement Directorate has asked the Government to return to it powers of arrest and prosecution at least in terrorism-related cases. Mushtak Ahmed Gilkar confessed to around Rs. 70 crore being sent annually by the ISI for the Hizbul via the Hawala route. December 16, 2001: Arrests which linked three Hawala dealers Mohammad Shabhan Khan, Abdul Rehman Lala and Jamal Nasir to the Lashkar-e-Toiba, the Hizbul and 16 other organisations. December 13, 2001: Attack on Parliament in which it has been alleged that Mohammad Afzal and Shaukat Hussain used the hawala route to fund the operation. A laptop computer and Rs. 10 lakh were recovered from them and they later confessed to having received Rs. 60 lakh of hawala money. June 20, 2001: Arrests of Feroz Ahmed Mir and others connected with a group based in PoK. The hawala operators worked from Chandni Chowk and Rs. 15 lakh was recovered from them. December 22, 2000: Attack on the Red Fort after which two-hawala dealers Arif Mohammad and Sher Zaman were arrested. Arif is said to have received Rs. 41.15 lakh to finance the attack mounted by the Lashkar-e-Toiba. Aftab Ansari, Dubai based, is involved in kidnapping of Kolkata leather merchant Partha Paritam Roy Burman. His family apparently paid a ransom of Rs. 37.5 million to Aftab Ansari through Hawala operators. The kidnapping took place in July 2001 and the State police learnt about it in August-September. The 19 men who were trained to crash the Jet Airliners into World Trade Center and Pentagon received more than $1,14,000 in financial transfer from Germany and the United Arab Emirates (UAE) for their flight training and other preparations. They received these amounts through Hawala and wire transfers. They are also reported to have wired

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back more than $42,000 in excess funds a day before suicide attack. They had returned the money they had not used to the UAE. The terrorists who attacked Indian Parliament on 13th December 2001 had received Rs. 22 lakhs through Hawala channels. Hawala has emerged as the most sacred mode of transfer of funds for the terrorists. Terrorist operations are usually funded through Hawala. Usually terrorists use counterfeit currency in their low priority operations, the use of real money means that they did not want to risk anything going wrong. Hawala is also being carried out through diamond trade. The terrorists managed to smuggle diamonds and sell them at very high prices. The proceeds are utilized for carrying out their activities. Diamonds are easy to hide and carry. The terrorists have made use of front companies to transfer funds from one country to another. The transfers appear as genuine funds, as they are legally transferred, whereas the money is used for destructive purposes. The Mauritius government has now instituted a Financial Intelligence Unit as a separate entity which will collate information and intelligence, disseminate it and offer it to similar units in 54 other countries under the Egmount forum. This FIU, on the lines of the National Crime Intelligence Service in Britain, Tracfin in France and FinCen in the United States, is likely to prevent operators from routing Hawala money through Mauritius. Mauritius will remain the preferred investment route because it offers more than a taxation advantage. Indian operators have used and abused the offshore (now described as global business) centre very aggressively. Khushiram, a Minister from Mauritius, said: Mauritius has been instrumental in providing India access to international capital. I want to make it categorically clear that our country is not a tax haven where post office boxes and shell companies can be created. While we share

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responsibility for what has happened in the past, the share manipulation was done in India. Now that misuse has come to light, our policing on knowing our client will be stringently enforced. The Indian government allowed the creation of OCBs (Overseas Corporate Bodies) because it wanted to attract nonresident capital; we supported them in this endeavour, now we are clear that nothing will escape our attention. We want to be a facilitator in India just as Hong Kong and Singapore are to China. Hawala a largely paperless financial system that relies on money launderers active both in the Middle East, as well as in the US will be one of the areas given greater scrutiny by federal investigators. In addition, hawala dealers will be required to register with the Treasury Department by December 31, 2001 as part of new regulations issued in 1999 that created a new category of non-bank financial institutions called money services businesses. The informal banking system is being brought under scrutiny and regulation. References
1. 2. 3. 4. 5. 6. Patrick Jost, Black Hawala, Financial Crimes and the World Drug Trade, International Conference on Global Drugs Law, 1997. See Section 9 of FERA, 1973 : Restriction on payments See Section 3 of FEMA, 1999 : Dealing in foreign exchange See Section 14 of the Customs : Valuation of goods for purpose of assessment. See Section 30 of the Sea Customs Act, 1878 A case study with illustrative Examples under the provisions of FERA & FEMA paper presented by Dr. Shamsuddin, Deputy Legal Adviser, Enforcement Directorate, Govt. of India, New Delhi at National Academy of Direct Taxes, Nagpur on 11.12.2002. An overview of FEMA in the context of Forex Management and Money Laundering paper presented by Dr. Shamsuddin, Deputy Legal Adviser, Enforcement Directorate, Govt. of India, New Delhi at National academy of Direct Taxes, Nagpur on 11.12.2002. See the Economic Offences (inapplicability of Limitation) Act, 1974 (Act No. 12 of 1974) which provides for the inapplicability of the

7.

8.

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provisions of Chapter XXXVI of the code of Criminal Procedure, 1973 to certain economic offences. 9. Money Laundering trends in India paper presented by Dr. Shamsuddin, Deputy Legal Adviser, Enforcement Directorate, Govt. of India, New Delhi at National Police Academy, Hyderabad in the year, 2001. 10. Basic Features of FERA vis-a-viz FEMA paper presented by Dr. Shamsuddin, Deputy Legal Adviser, Enforcement Directorate, Govt. of India, New Delhi at FEMA Orientation Workshop organised by the Chamber of Income Tax Consultants at Mumbai in the year 2002. 11. Bharats Treatise on FERA (Law & Practice) by Dilip K. Sheth, (3rd Edition, 1999) 12. Taxmans Foreign Exchange Law & Practice by S.K. Gupta (New Delhi, 1993)

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The Concept of Money Laundering Money laundering is a dynamic three-stage process that requires: first, moving funds from direct association with the crime; second disguising the trail to foil pursuit and, third, making the money available to the criminal once again with the occupational and geographic origins hidden from view. Money laundering is a vital component of all financially motivated crime. According to the United Nations: ... the need to launder proceeds [of crime] stems from the desire of criminals both to conceal the crime which generated those proceeds and to be able to enjoy them. The strategy of criminal organisations is to manipulate their illicit proceeds, usually but not always through the legitimate financial sector, in such a manner as to make those proceeds appear to have come from a legitimate source. Thus, money laundering is a vital component of all financially motivated crime. More specifically, United Nations International Drug Control Programme defines money laundering as the ...process by which one conceals the existence, illegal source or illegal appliction of income and then disguises or converts that income to make it appear legitimate. Money laundering is not linked exclusively to the illicit drug industry; rather it is a necessary step in almost any criminal venture that yields profits. Tax + security frauds relying on systems of financial secrecy constitute money laundering on massive scale. In general, offences such as corruption or tax evasion do not constitute a sufficient basis

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for access to be granted for cooperation. The overall purpose of money laundering is to reduce risk and purify. Money laundering breaks the links between the criminal and crime. The goal of money laundering is to obscure the link between the criminal and the crime. In the process of laundering their profits for use in the legal economy, criminals simultaneously launder themselves, moving from underworld crooks to apparently bona fide entrepreneurs and financiers. This offers the flexibility to invest either in criminal or legal enterprises, depending on which option offers the best combination of earnings and security. The placement stage represents the initial entry of the funds into the financial system. This stage serves two purposes it relieves the holder of the physical bulk of cash, and it positions the sum in the financial system in preparation for the next stage. In many respects the placement stage is the riskiest, for it is then that the chances of discovery are the greatest. The layering stage is the most complex and the most international in nature. The money launderer sends funds electronically from one country to another moving them constantly to elude detection by exploiting loopholes or discrepancies in legislation, and delays in judicial or police cooperation. In the integration stage funds return fully assimilated into the legal economy. Specific techniques have been used to circumvent antimoney laundering legislation: a) Smurfing Smurfing consists of breaking down a large volume of cash in amounts less than the threshold of the particular countrys reporting requirements, thereby avoiding the requirement to justify the transaction. Structuring arises from the traffickers need to launder large amounts of cash. The trafficker organizes a number

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of individuals, or smurfs. After making a deposit, the smurf will purchase monetary instruments at other banks in the same area. Generally the cash is exchanged for bearer cheques or international money orders, which are then deposited into the traffickers account by an intermediary of the same organization. Smurfing is labour-intensive, expensive and timeconsuming, but it is still used by money launderers because it enables the disbursement of large amounts of bulk cash. b) The Use of Front and Shell Companies Restaurants, hotels, casinos, bars, nightclubs, dry cleaners, retail outlets, video rental companies, vending machine companies, parking lots of construction companies are cash intensive concerns. Money launderers use these as front companies where illegal profits can be co-mingled with revenues derived from legitimate undertakings. Front companies are of medium-to-large-scale money laundering operations and are used in both the placement and layering stages of the laundering process. Shell Corporations are businesses which have no commercial purpose. They are incorporated (normally in offshore centres which ensure anonymity) to conceal the true ownership of accounts and assets owned by the criminal organisation. (c) Accounting Techniques Invoice manipulation over-invoicing of imports and under-invoicing of exports is an important money laundering technique used by front companies. Merchandise are purchased from abroad at an artificially high price. The difference between the invoice price and the actual price is deposited in a special offshore account. This technique is also used for tax and duty evasion. A

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commodity subject to very heavy duty in the importing country can be under-invoiced to escape duty. (d) Private investment techniques The criminals objective is to repatriate the funds parked in offshore shell companies. Repatriation is done by a loan back method. The criminal with a foreign account decides to make an investment which he secures with a down payment of legitimate funds. He arranges the balance payment by taking two loans one legitimate and second, from foreign bank holding his illicit funds. He repays the loan and the interest as if both were legitimate. The income from the initial investment is fully documented and legitimate. He also repays the loan of his initial illicit funds, they are again available to him for borrowing and the cycle can be repeated. (e) Use of non-bank financial institutions 1. Currency exchange houses, where not subject to regulations, are used to cash the cheques (usually made payable to the bearer). The smurfs acquire these cheques from banks. 2. Gold, gems, diamonds and other precious metals can be easily converted into cash. 3. Insurance companies have been used as a means of money laundering. The launderer purchases a policy with a heavy-cash surrender benefit. He pays for the premium in cash and shortly after receiving the policy will cash it in and request for payment. Launderers purchase expensive round-trip airtime tickets and return them for a cash refund upon completion of a portion of the journey. Similarly large cash sums can be converted into casino chips which are subsequently cashed in. Investments in government or treasury bonds are a transferable instrument payable to the bearer. They can be purchased, sold or exchanged anonymously.

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(f) Acquisition of sick companies The launderer acquires total or partial management control of ailing business. He draws the benefit of the cover of a clean front company. When the money market is tight, the money launderer acts as a moneylender at higher rates of interest. (g) Hawala Launderers favour Hawala as it operates informally on the basis of trust and confidentiality. The transactions are cash based, leaving no paper trail and do not fall within the regulatory scope of banking system. THE ROLE OF OFFSHORE CENTRES Definition The association between offshore centres and money laundering activity is frequently made and is well founded, although is not always well understood. Offshore centres are ...financial system whose banks have external assets and liabilities that are out of proportion to the current account transactions of their domestic economies and where the ratio of bank external assets to exports of goods and services is more than three times the world average. The legitimate role of offshore financial centres in the international markets is threefold 1. to provide a centre of domicile for international companies to incorporate commercial holding companies and overseas subsidiaries in the most advantageous fiscal and/or exchange control climate; 2. to exploit international capital and money markets with greater freedom of action than is possible in the country of business origin; and 3. to act as secure havens for international earnings, savings and other liquidity seeking international investment in a tax neutral environment.

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The additional attributes of an offshore centre for a money launderer are: a) the high degree of secrecy within which all financial transactions are conducted; b) their role as a point of transit for money; and c) their status as tax havens for non-residents, which serves the double function of keeping the owner of the money physically separated from the money and safe from any taxes. Identifying an offshore centre is not as easy a task as it may seem. The International Monetary Fund applies the term major offshore centres to the following countries: the Bahamas, Bahrain, the Cayman Islands, Hong Kong, the Netherlands, Antilles, Panama and Singapore. Smaller offshore centres include: Dublin, Cyprus, Madeira, Malta, Malaysias Labaun Island, and Thailands Bangkok International Banking Facility. London is sometimes considered an international offshore financial centre for non-resident investors because a large share of international activity takes place in the city, because it does not impose reserve requirements on Eurocurrency deposits, and it does not levy withholding taxes or report information to foreign tax authorities on the interest income of non-residents. The largest offshore centres are London, Nassau, Hong Kong, Singapore and Luxembourg. In fact, despite their small number relative to the locations of conventional financial centres, in value terms, sums deposited in offshore centres are extremely high. By some estimates, more than half the worlds stock of money transits through offshore centres, about US $2 trillion of private wealth (20% of total private wealth) is invested in these centres and around 75% of the captive insurance industry is located offshore. In 1993, banks had US$ 1.5 trillion of external assets invested offshore, representing about 30% of those in industrial countries, while offshorebased investment funds had around US$1 trillion of assets

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under management. Trends in Money Laundering Two trends have characterised money laundering in recent years. The first of these is the increasing professionalisation of the function. The United States Senate Committee on Government Affairs stated: Money laundering is now an extremely lucrative criminal enterprise in its own right. The Treasurys investigations have uncovered members of an emerging criminal class professional money launderers who aid and abet other criminals through financial activities. These individuals hardly fit the stereotype of an underworld criminal. Money laundering undermines the integrity of the financial system and this, depending on the extent and the rapidity of the loss of confidence, can have devastating consequences at national and international level. Organised international economic crime poses threats to the stability of commerce and national economic and social development and well-being with an ensuing risk of political instability. Under these circumstances we are at war and that a foreign enemy is at work whose activities may affect the economic or, in the case of drugs, physical well-being, of people back home. Dirty money has dirty origin and flies from abroad. This has resulted in the development of a professional criminal class of money launderers which include accountants, bankers and lawyers. They need not become involved with the underlying criminal activity except to conceal and transfer the proceeds that result from it. Professionals are used not only to conceal the origin of the source of the proceeds, but to manage the subsequent investment into legitimate real estate and other assets. It is believed that there has been a steady increase in the standard fees paid to money launderers from 6-8% at the beginning of the 1980s to up to 20% by the mid-1990s.

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The internationalisation of money laundering is the second major trend, and has been brought about by two factors first, the integration of financial markets into a complex, global entity; and second, the effort by traffickers to avoid detection by concentrating operations in countries where enforcement is weak and legislation absent or embryonic. Unfortunately, many countries fall into this latter category, in particular those classified as emerging markets. Evidence and investigation of crimes is much more difficult where the crimes are among consenting parties and all organised economic crime is that. Rarely does a complaining victim break out from within a market system of advantageous exchange. All parties to that advantage have an interest in protecting the system and keeping it secret. The participants do not forget that there can be penalties for violating these rules. The absence of or disorganization of, a state apparatus which might otherwise provide coherent public safety or crime control can create a climate which could encourage the presence of foreign criminal entrepreneurs. A country or region may highly specialize in banditry. The use of high technology to develop the immense capacity to listen and watch covertly and from afar, to tap computers, plot airplane autocourses, electronically survey individuals from afar (their paths or conversations), see through cargoes or crop camouflage, decode bank transmissions and transactions, hold the key for effective investigations. Issues in Prosecution Exceedingly serious issues of sovereignty, privacy, commercial espionage potential, official blackmail and extradition surface as soon as one assumes that bank penetration, bearer bond purchaser identity, puppet manipulator identities and other sensitive information

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normally guaranteed to be anonymous are in the hands of any clandestine service. How is evidence to be used, if obtained illegally according to the laws of the host country? The main aim of the process of money laundering is to conceal the illegal origin of funds obtained through various criminal activities. It is the process by which one conceals the existence, illegal source or illegal application of income and then disguises or converts that income to make it appear as legitimate. The criminals enjoy the proceeds so generated but they still keep under wrap the tainted source of these funds. In the Indian context, there cannot be any better assessment of the changing internationalised economic scenario, vis-a-vis the menace of money laundering, than by referring to the role of Mauritius. It may be interesting to observe that a very large chunk of foreign investments into India, consequent to the start of the process of economic liberalisation, came from Mauritius. Suffice to say that in an island of the size/potential of Mauritius, the source of these funds, if thoroughly investigated, would lead one to a complex chain of money laundering. The statistical data, as given below, will bear testimony to the above aspect of involvement of Mauritius: A. Total foreign direct investments from around 100 countries, approved during 1996 to 2000 Rs. 18,72,576 million B. F.D.I. from Mauritius, out of (A) above Rs. 2,69,648 million C. Total F.D.Is from over 50 countries approved during January June, 2001 Rs. 1,40,867 million D. F.D.I. from Mauritius out of (C) above Rs. 13,778 million The above data is a direct indicator of the fact that ever since the process of economic liberalisation/loosening of exchange controls have started, Mauritius has acquired a distinct position of an important base for the money

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launderers. According to the proposed legislation, ...Money Laundering Act will come into play only after the trial in the main criminal case has been concluded which may take years. Belated action, if any, will be meaningless. In the course of the examination of the Bill in its sittings held for the purpose, the Parliamentary Committee felt that the Bill per se does not effectively deal with money laundering independently as such, with the prosecution for the offence being made dependent on the outcome of the trial in Court for the offence under the Schedule with which the accused has been charged. Nonetheless, the Committee having regard to the fact that this is the first serious step flowing more out of international obligations to deal separately with money laundering approves the same for enactment by Parliament.... There are certain deficiencies making enforcement ineffective. Search is an essential ingredient of investigation. Authorities under this Act will be handicapped to carry out any search operations as it is stipulated that the competent authority can authorise search only after necessary report under Section 173 Cr.PC is filed before the Magistrate, except in cases of offences of waging war against the country or those under NDTS Act, in which the stage of issuing search authorisation would be that of filing of a police report or complaint for taking cognizance of offence by the Special Court. Terrorist funds coming through hawala will lie outside the purview of this Act. To make PMLB effective: i) It should include violations of exchange control laws, tax laws as also import and export laws. ii) Invariably, international Hawala transactions should be covered under this new Act. iii) Besides the main offenders, PMLB should also cover all those who connive or abet the commission of the

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scheduled offences. Money laundering should be made an offence per se independent of schedule offences. iv) Like other criminal laws, attempt to commit violation of PMLB should also be treated as a substantive offence. v) The prosecution should not be required to prove culpable mental state, i.e. mens rea. vi) Since it would entail very lengthy process of law for a money laundering offence to be finally proved in the Court of Law, it would be imperative to have provisions of preventive detention, during the interim period of registration of a case. IMPORTANT DEFINITIONS : Definition of Money Laundering Whoever acquires, owns, possesses or transfers any proceeds of crime; or knowingly enters into any transaction which is related to proceeds of crime either directly or indirectly or conceals or aids in the concealment of the proceeds or gains of crime within or outside India commits the offence of money laundering. The essential ingredients of this definition are threefold that (i) a crime has been committed, (ii) there are proceeds of crime and (iii) a transaction has taken place in respect of the proceeds of the crime. Definition of Proceeds of Crime Proceeds of Crime means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property. Definition of Property Property means any property or assets of every description, whether corporeal or incorporeal, movable or immovable, tangible or intangible and includes deeds and

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instruments, evidencing title to or interest in, such property or assets, wherever located. Definition of Transfer Transfer includes sale, purchase, mortgage, pledge, gift, loan or any other form of transfer of right, title, possession or lien. Banking Company means a banking company or a cooperative bank to which the Banking Regulations Act, 1949 applies and includes any bank or banking institution referred to in section 51 of that Act. Chit Fund Company means a company managing, conducting or supervising, as foreman, agent or in any other capacity, chits as defined in Section 2 of the Chit Funds Act, 1982. Co-operative Bank shall have the same meaning as assigned to it in clause (dd) of Section 2 of the Deposit Insurance and Credit Guarantee Corporation Act, 1961. Financial Institution means a financial institution as defined in clause (c) of section 45-I of the Reserve Bank of India Act, 1934 and includes a chit fund company, a cooperative bank, a housing finance institution and a nonbanking financial company. Housing Finance Institution shall have the meaning as assigned to it in clause (d) of Section 2 of the National Housing Bank Act, 1987. Non-banking Financial Company shall have the same meaning as assigned to it in clause (f) of section 45-I of the Reserve Bank of India Act, 1934. The role of financial institutions is covered in the Bill in Section 11. Every financial institution and intermediary shall a) maintain a record of all transactions, whether such transactions is a single transaction or a series of transactions integrally connected to each other where such series of transactions take place within a month,

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exceed the value 30 lakh rupees. b) Furnish information of transactions referred to include (a) to the commissioner of income tax having jurisdiction in respect of such financial institution or intermediary. c) Verify and maintain the records of the identity of the clients in such a manner as may be prescribed. d) The records referred shall be maintained for a period of 5 years from the date of cessation of the transactions between client and the institution. An interim report of SEBI reveals that the entire operation was led by Stock Broker Ketan Parekh in cahoots with two overseas corporate bodies (OCBs) and foreign institutional investors (FIIs). They routed the funds via Mauritius which has a double taxation avoidance treaty with India. Between January 1999 and March 2001 while the total inflow from these OCBs was Rs. 717 crore, they repatriated a cool Rs. 3,677 crore from the Indian stock market. Between May 1999 and March 2001, Wakefield Holding Ltd. (WHL), an OCB with a net worth of $5,500, managed to take out Rs.1,995 crore. Again between March 30, 1999 and December 2000, another OCB, Brentfield Holding Ltd. (BHL) worth $5,000, repatriated Rs. 663 crore. At least four FIIs, through their sub-accounts, were involved in transacting scrips regarded as part of KP-10, Coral Reef Investments Co. Ltd., CALFP (Mauritius), DBMG (Mauritius) and Kallar Kahar; the subaccounts of FIIs RP&C International, Credit Agricole Lazard Fin Prod, Deutsche International Trust Corp. C. I. Ltd and Credit Suisse First Boston (CSFB). The FIIS operated through an innovative instrument called Participatory Notes (PNs). FIIs issued PNs to their clients who are otherwise not entitled for registration as FIIs to trade in Indian markets or those who may or may not be eligible but want to hide their identities, the report states. The OCBs, in effect, have made these transactions

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on behalf of those whose identity is yet to be established. PNs enable the clients to take benefit of the Indo-Mauritius treaty. The pattern of investment or trading transactions, the timings, the inter-connections, all point towards prima facie misuse of the OCBs and FII sub-account route. It also provides channels for the repatriation of profits based on the manipulated prices and possible siphoning off money out of India. It is estimated that over $100 billion worth of funds have been generated and retained out of India by resident Indians in defiance of the provisions of the Foreign Exchange Regulations Act, 1973 which stands repealed and replaced by the Foreign Exchange Management Act, 1999 with effect from 1.6.2000. The latest mechanics of real estate transactions in India have resulted into the emergence of an ingenious additional component apart from black and white, namely green. Obviously, green implies money received abroad, and this now constitutes the most preferred category. Little wonder those official (white) prices of real estate in India are on the decline. Owning and holding foreign exchange or foreign asset by person in or resident in India are prohibited barring specific exemptions that have been carved out. Despite this, unlawful overseas accounts and assets maintained by residents continue to flourish. The enforcement of Section 14 of FERA has thus been dismal. Hit at the criminals where it hurts them the most. Making money is the be-all and end-all for criminals and going to jail is treated as a minor occupational hazard by them. The purpose of the Money Laundering Bill is to prevent money laundering and to provide for confiscation of property derived from, or involved in, money laundering and for matters connected therewith or incidental thereto. Whereas the Political Declaration and Global

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Programme of Action, annexed to the resolution S-17/2 was adopted by the General Assembly of the United Nations at its seventeenth special session on the twentythird day of February, 1990. And whereas the Political Declaration adopted by the Special Session of the United Nations General Assembly held on 8th to 10th June, 1998 calls upon the Member States to adopt national money laundering legislation and programme. And whereas it is considered necessary to implement the aforesaid resolution and the Declaration. This Act may be called the Prevention of Money Laundering Act, 2000. It extends to the whole of India It shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint, and different dates may be appointed for different provisions of this Act and any reference in any such provision to the commencement of this Act shall be construed as a reference to the coming into force of that provision. The Lok Sabha has passed the Prevention of Money Laundering Bill in 1999. It seeks to provide stringent punishment for money laundering and confiscation of proceeds since it not only poses a threat to the financial system of the country but also to its sovereignty and integrity. It is considered part of the twin legislations to replace the so-called draconian Foreign Exchange Regulation Act, 1973 FERA. The main objective of the bill was to prevent laundering of proceeds from drug-related crimes, which have been assuming dangerous proportions. A joint select committee of the Rajya Sabha, which submitted its report in July 2000, examined it. Currently the said bill has been passed by both the Houses of the Parliament and it will soon become an Act once the President gives his assent to the bill.

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The salient features of this bill are that it sets up a money laundering authority and subordinate officers, delineates reporting requirements of financial institutions in cases of suspicious transactions, incorporates provision for searches, seizures, attachment and confiscation of proceeds of crime and sets up special courts, a separate adjudicating authority and an appellate authority with provisions for adjudication and appeal. The Money Laundering Bill incorporates some of the provisions for offences under the Indian Penal Code, the Immoral Traffic Prevention Act, the Arms Act, the Narcotic Drugs and Psychotropic Substances Act, the Prevention of Corruption Act and Wildlife Protection Act. The Bill is in conformity with the commitment made to the United Nations Convention against illicit traffic of narcotic drugs and psychotropic substances and the 1989 Basle Statement of Principles outlining the policies and procedures that banks should follow to assist law enforcement agencies in tackling the problem of money laundering. The bill also incorporates the major features of the 40 recommendations made by the Financial Action Task Force of G-7 to combat the problem of money laundering, which included declaring the offence as extraditable, confiscation of proceeds of crime, promotion of international cooperation in investigation and working out modalities of disclosure by financial institutions regarding reportable transactions. The money laundering offences can be divided into two categories. First category relates to offences against the state and narcotic, where money laundering of any amount of money is an offence, whereas all other instances come within the threshold limit of rupees 30 lakh or more. In no country of the world such a provision exists. It would amount to encouraging a technique known as smurfing in the US, whereby money is broken up into smaller components to escape the threshold limit of reporting suspicious requirements. The only difference as regards

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smurfing in the context of the proposed law in India would be that laundering by this technique would become more blatant because in all amounts below rupees 30 lakh, the offence would not come into play. What is sought to be tackled through the bill is organised crime and terrorism. In the absence of a separate law, the bill envisages to deal with these crimes through the scheduled Acts i.e. Indian Penal Code, prevention of Corruption Act, Immoral Trafficking Act, Arms Act, Wild Life Protection Act, NDPS Act. The proposed Acts would become operational where the amount involved is in excess of Rs. 30 lakh to deal with these crimes through the Indian Penal Code (IPC), like offences against the State, murder, etc. We need to have different Acts to deal with organised crime and terrorism and these have been listed out in the schedule of offences in the proposed law, instead of dealing with these crimes in a general manner through the schedule of IPC offences. The Maharashtra government has enacted the Maharashtra State Organised Crime Control Act to deal with this problem in Mumbai. A country badly afflicted by terrorism cannot afford the luxury of not having a special law to deal with it. The main provision of the Prevention of Corruption Act (Section 13) relating to misuse of official position and disproportionate assets is not included. The Income tax Act, the Customs Act and FEMA are not included in the schedule of offences. Exclusion of these Acts tantamounts to encouraging money laundering because it is primarily done through trade and commerce to which these Acts relate. The Money Laundering Bill is a mix of four different laws: the Income-tax Act, the Civil Procedure Code, the Criminal Procedure Code (CrPC), and the IPC. It suffers from procedural barriers. Section 3 of the Prevention of Money Laundering Bill

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defines money laundering as under: Whoever (a) acquires, owns, possesses or transfers any proceeds of crime; or (b) knowingly enters into any transaction which is related to proceeds of crime either directly or indirectly; or (c) conceals or aids in the concealment of the proceeds of crime, commits the offence of money laundering. According to the bill, the money laundering authority can only pass a provisional order of attachment or search (except in the narcotics cases and offences against the State) only after a Police Report has been filed under Section 173 of the CrPC in a court of law. This means the final report of the police to the court after investigations have been completed which includes lists of documents and witnesses that the enforcement agencies would be relying upon. This is a ridiculous provision and amounts to taking to guns once the enemy has already intruded into the house. There is a provision relating to vexatious searches which becomes infructuous in view of the provisions relating to search stated above. Such a provision is not a sound provision in terms of principles of jurisprudence because it militates against the doctrine of good faith. Even after necessary amendment to procedural law, no officer would carry out searches if this provision on vexatious searches exists in the proposed law. Even the Select Committee seems to have been taken in by this red herring of vexatious searches and has suggested that the sanction to prosecute officers should be deemed in case no opinion is given by the government on such a sanction within a period of 90 days after a reference is made to it. The trial courts are to deal with money laundering offences whereas provisions relating to attachment and confiscation of property are to be dealt with by a separate hierarchy of quasi-judicial authorities. Such a system exists in no country and the trial court might even consider it a

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derogatory provision belittling its role. The parallel streams would mean more expense to the government and bureaucratic expansion. A better idea would be that the special courts could have some advisors on retainership basis to guide it within the financial maze of investigations. It talks about two concepts in law beyond reasonable doubts and preponderance of probability. The first is the requirement of the criminal law and the second is the requirement of civil law. It is not clear as to what standards will apply in this context. However, the Select Committee has sought that a provision regarding the reversal of burden of proof should be incorporated whereby the criminal has to prove that the assets have been legitimately acquired. It incorporates a major recommendation of the committee to increase punishment for furnishing false information to two years imprisonment or a fine of Rs. 50,000 or both, instead of three months jail term or a fine of Rs. 10,000 or both as prescribed in the original Bill. In addition, it relaxes the condition prescribed for grant of bail to persons below 16 years or women or the sick or infirm person. Offences relating to falsification of accounts have strangely been omitted from the purview of the Bill. The Bill also does not consider transactions relating to money laundering and inter-connected transactions to be attempts at money laundering unless otherwise proved to the satisfaction of the authority concerned. It is mandatory for every banking company to report transactions and empowers the Central government to evaluate them. The huge profits and financial wealth generated by illicit traffic in narcotics trade enables the drug traffickers and transnational criminal organisations to weaken the structure of legitimate Governments and civic societies at all levels. Terrorists financed through hawala and money laundering indulge in money laundering activities and the money derived through the illegal means is converted into white

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money by way of laundry cycle. It is noticed that many a time laundered money is used for anti-social and antinational activities. There are six schedules appended to the Prevention of Money Laundering Bill which are equally important as they are integral part of the Bill. In these schedules, crimes recognised under various statutes are listed and these are: 1. Offences under the Indian Penal Code, 1860; 2. Offences under the Immoral Traffic (Prevention) Act, 1956; 3. Offences under the Arms Act, 1959; 4. Offences under the Narcotic Drugs and Psychotropic Substances Act, 1985; 5. Offences under the Prevention of Corruption Act, 1988; and 6. Wild Life Protection Act, 1972. The aforesaid offences involve money laundering directly or indirectly. Emphasis has also been put on bilateral treaties for identifying and investigating money launderers. The Bill contains provisions relating to provisional and final attachment of property and its confiscation procedure. Economic offences should be brought under the purview of Money Laundering Bill. If economic offences are excluded from the purview of money laundering bill, large number of cases involving money laundering will go unchecked. Section 477A (Falsification of accounts) of the Indian Penal Code also should be brought under the purview of the legislation as proposed in the original bill. Clauses 15, 16, 17, 18 and 19 are inappropriate and will impose a restriction on the authorities for conducting searches, seizures, and search of persons, arresting persons, retention of property etc. This will only facilitate the money launders to get out of the clutches of law. The standard practice in economic offence is that the existence of culpable mental state on the part of the accused

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is presumed and the onus lies on the accused to prove that he had no such mental state with respect to the act in respect of which he has been charged. If the presumption of the existence of culpable mental state is removed from such economic offences, it would be almost impossible to successfully prosecute the money launderers. Clause 11 of the proposed legislation is not sufficient. Responsibility should be fixed on the officers for reporting suspicious transactions. There should also be a provision for removal of bank secrecy. Exchange Control Laws The under-developed/developing countries have to take recourse to imposition of various exchange control measures. In India, the system of exchange control laws goes back to as early as 1939 i.e. with the outbreak of the Second World War; initially these controls were promulgated and enforced through a series of rules formulated under the Defence of India Act, 1939. A bill was introduced in November 1946, in the, then existing Parliament of India. After due deliberations, with effect from 25.3.1947, a new Act viz. Foreign Exchange Regulation Act, 1947 (FERA 47) came into being. It was, however, still a temporary Act, which was finally placed permanently on the Statute Book by a subsequent Act passed in 1973. The Foreign Exchange Regulation Act, 1973 as notified in the Gazette of India dated 20.9.1973, FERA 73, thereafter came into effect from 1.1.1974. The enforcement aspect of the laws was assigned to a new Government body named as Enforcement Directorate, which came into being with effect from 1.5.1956, the department having powers of adjudicating and prosecuting the offences/offenders. Since 1975, yet another functional power was given to the officers of the Enforcement Directorate in the form of preventive detention

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of habitual offenders under the provisions of COFEPOSA, 1974. Exchange Control was first introduced in India as wartime measures on the outbreak of Second World War. More precisely it was on 3rd September 1939 that the Government invoked the emergency powers under Defence of India Rules, the financial provision of which provided the basis for administration of Exchange Control in the country. Exchange Control continued in some form or the other even after the end of the war in 1945 and was finally given a statutory backing by the Foreign Exchange Regulation Act, 1947 that came into force on 25th March 1947. The Act of 1947 was repealed and replaced by Foreign Exchange Regulation Act, 1973 (for short, FERA) which came into force on 1st January 1974. However, it is the Reserve Bank of India, which is the Chief authority for administration of exchange control in India. It has been empowered to regulate all foreign exchange transactions, which fall within the ambit of FERA. The provisions of FERA are enforced by the Central Government through the institution of the Enforcement Directorate. FERA extends to whole of India and is also applicable to persons who at the time of transactions are out of India if they are Indian citizens. Similarly, FERA is applicable to the foreign branches and foreign agencies of non-juridical persons that are incorporated or registered in India. The FERA has since been repealed. Changeover from FERA to FEMA Since 1992-93, in line with the process of economic liberalisation the government removed a number of restrictions and granted general exemptions/permissions. A beginning was made to demolish FERA. The business class, the World Bank, the International Monetary Fund, the Asian Development Bank, The General Agreement on Trade and Tariff and the WTO spearheaded the campaign

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against FERA. The process for repealing FERA was initiated in 1993 and accelerated in 1998. It culminated in the enactment of Foreign Exchange Management Act which came into force with effect from 1st June 2000 and the FERA, 1973 stood repealed. FERA was to be replaced by two Acts : FEMA (which takes care of the civil liability aspect of FERA) and the Prevention of Money Laundering Act (PMLA) (This Act is yet to enacted). It will partly take care of the criminal liability aspect of FERA. FEMA and the proposed PML Bill were supposed to cover all the offences under FERA. But hawala operators and exchange control violations have not been included as scheduled offences under PMLB. Subsequent Governments in office, starting with the Congress Government led by Sh.P.V.Narsimha Rao, followed by the three non-Congress Governments initiated the process of repeal of FERA, which was finally accelerated during the year 1998, with the bringing in of two new Bills Foreign Exchange Management Bill, 1998 and Prevention of Money Laundering Bill, 1998. However, before these two bills could be passed, the then, Lok Sabha was dissolved. New Bills were thereafter introduced in the Lok Sabha in 1999 and out of the two, Foreign Exchange Management Bill, 1999 was passed by the Parliament and consequent thereto FEMA, 1999 came into being with effect from 1.6.2000 and simultaneously FERA stood repealed from the said date. Foreign Exchange Management Act (FEMA) has replaced the Foreign Exchange Regulation Act (FERA) in 2000, which had powers of arrest and prosecution along with other wide-ranging powers. It was felt that FERA was against policy of liberalization and, therefore, replaced with much more lenient set of rules to manage the Forex reserves.

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Under FEMA, the only person receiving payment by Hawala transactions is liable to face penalty action, which is civil in nature. Mechanism of Prevention of Money Laundering Bill Section 3 of the Bill will safeguard against harassment of innocent persons who may have unknowingly dealt in proceeds of crime. After the amendments, only a person who directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity concerned with the proceeds of crime and projecting it as untainted property shall be guilty of the offence of money laundering. Threshold Money laundering offences will fall under two categories. All transactions in proceeds of offences against the state and those involving narcotics are in the first category, where there is no threshold limit for attracting the provisions of the anti-money laundering law. But in the second category are the proceeds from other crimes, where there will be a threshold limit of Rs.30 lakh. Mechanism The Money Laundering Authority and subordinate offices will be set up to administer the law. Powers The officials of the Authority can seize, undertake searches and attach properties of persons involved in money laundering, confiscate the proceeds of crime and arrest the money launderers. Safeguard against misuse The officials will be subject to prosecution in case of motivated searches, but it will require explicit permission from the government.

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Objective The law seeks to curb laundering of the proceeds from a number of crimes under various laws of the land. Punishment Unlike the Foreign Exchange Management Act, which is a corollary piece of legislation but mostly provides for compounding of offences and fines, the money laundering prevention law provides for criminal prosecution. FEMA & PML B VIS-A-VIS FERA A Comparative Overview I. PML It has nothing to do with foreign (Prevention of exchange. Money Laundering) It will lift the Exchange Control on the Corporate Sector and practically free current account transactions. The real boom will be to the foreign exchange racketeers, especially the hawala operators. Hawala operators have been totally let off because inter-country Hawala or compensatory payments will no longer be an offence. It has no relation to provisions of the FEMA the

II. FEMA (Foreign Exchange Management Act)

III. PML

It does not include any offences related to the inter-country hawala or compensatory payments or any foreign exchange offences.

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IV. Primary Restrictions in FERA vis--vis the position in FEMA (a) FERA (Section 8) No one can deal in foreign exchange by purchase, sale or transfer except through an authorised dealer. Sections 3 & 4 No one can retain foreign exchange and foreign exchange earned should be surrendered to the Government kitty i.e., authorised dealers. As a consequence of this restriction, export proceeds and other earnings in foreign exchange were required to be expeditiously realised and surrendered. Sections 7 & 8 All transactions even in rupees between a resident and a nonresident were restricted. No corresponding provisions.

FEMA (b) FERA (Sections 14,16&18)

FEMA (c) FERA (Section 9)

PML

(d) FERA [Sec.8(3)&8(4)] Misuse/leakage of foreign exchange drawn from Government kitty (authorised dealers) against import of goods or for any other purpose were taken care of. FEMA PML Section 11(5) & (6) No corresponding provisions.

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V. COFEPOSA

A dead law under FEMA and PML. It provides for preventive detention of smugglers and foreign exchange racketeers for activities prejudicial to the conservation and/or augmentation of foreign exchange. However, when hawala payments i.e., the payment in India by order or on behalf of non-residents is itself not an offence, the Enforcement Directorate will no longer be investigating such payments. There is no other agency which will now watch out for foreign exchange racketeers even if it is covered by the phrase activities prejudicial to the conservation/ augmentation of foreign exchange. Thus, COFEPOSA itself is going to become a dead law.

VI. PML

An offence of money laundering will be made out only if the laundering can be connected to any of the crimes listed in the six Schedules to the PML i.e., IPC, Immoral Traffic (Prevention) Act, Arms Act, Narcotics Drugs & Psychotropic Substances Act and Prevention of Corruption Act and Wild Life (Protection) Act, 1972.

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Very rarely does a hawala transaction reveal the purpose of the transfer and the source of transfer. The utmost it may reveal is that the money is being transferred by compensatory payments between persons in India and persons outside India. It is naive to think that cases of money laundering under the PML Act will take care of hawala and foreign exchange racketeering. Does not have any provision to check over-invoicing and under-invoicing of exports and imports. no safeguard ensuring the use of foreign exchange for the purpose for which it was released. Sec.8(3) FERA. no safeguard against compensatory payments/ hawala payments. definition of person resident in India in FEMA period of stay has been made the basis rather than the intention as in FERA. absence of clauses corresponding to sections 64, 71, 72 of FERA.

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Basic Features of FEMA 1. The aim and object of FEMA is for promoting the orderly development and maintenance of foreign exchange market in India. 2. The concept of criminal liability under FERA has changed into civil liability under FEMA 3. Sections 3, 4, 5, 6, and 8 of FEMA are substantive contraventions and in the event of contraventions of these provisions, civil liability is invoked in the form of imposition of penalty or civil imprisonment as the case may be. 4. The quantum of penalty under Section 13 of FEMA will be up to thrice the sum involved where such amount is quantifiable and where such contravention is a continuing one, further penalty of Rs. 5,000 for every day after the first day during which the contravention continues may also be imposed. 5. Any contravention under Section 15 of FEMA may be compounded in accordance with the procedure prescribed in the Compounding Rules, 2000 and once this is done, no further proceedings shall be initiated in respect of the contravention so compounded. FEMA set to get more teeth Foreign Exchange Management Act (FEMA) has replaced the FERA in 2000, which had the powers of arrest and prosecution along with other wide-ranging powers. It was felt that FERA was against policy of liberalization and, therefore, replaced with much more lenient set of rules to manage the FOREX reserves. After FERA was scrapped, several cases of organized crime syndicates and terrorists being funded by hawala transactions have been detected. Unfortunately, the offenders were just fined. Both the ED and the Central Economic Intelligence Bureau (CEIB) have reported that organized crime

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syndicates and militants were being funded by hawala transactions and since the offence had been reduced to a civil offence, there was no effective way to tackle them. The ED had also sent a proposal to the Union Finance Ministry seeking immediate changes in FEMA, as they were unable to deal with the spurt in hawala transactions after FERA was scrapped. It is also believed that under the strengthened FEMA, Full-Fledged Money Changers (FFMC) would also be subjected to more checks as several of them have been found involved in transactions that are suspected to have benefited crime syndicates. Prevention of Money Laundering Bill, 1999 A bill to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money-laundering and for matters connected therewith or incidental thereto. WHEREAS the Political Declaration and Global Programme of Action, annexed to the resolution S-17/2 was adopted by the General Assembly of the United Nations at its seventeenth special session on the twentythird day of February, 1990. AND WHEREAS the Political Declaration adopted by the Special Session of the United Nations General Assembly held on 8th to 10th June, 1998 calls upon the Member States to adopt national money-laundering legislation and programme; AND WHEREAS it is considered necessary to implement the aforesaid resolution and the Declaration. Where the Director, on the basis of information in his possession, has reason to believe the reasons for such belief to be recorded in writing; that any person i) has committed any act which constitutes moneylaundering, or ii) is in possession of any proceeds of crime involved in

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money-laundering, or iii) is in possession of any records relating to moneylaundering, Then subject to the rules made in this behalf, he may authorise any officer subordinate to him to a) enter and search any building, place, vessel, vehicle or aircraft where he has reason to suspect that such records or proceeds of crime are kept; b) break open the lock of any door, box, locker, safe, almirah or other receptacle for exercising the powers conferred by clause (a) where keys not available; c) seize any record of property found as a result of such search; d) place marks of identification on such record or make or cause to be made extracts or copies therefrom; e) make a note or an inventory of such record or property; f) examine on oath any person, who is found to be in possession or control of any record or property, in respect of all matters relevant for the purposes of any investigation under this Act: Provided that no search shall be conducted unless, in relation to an offence under: Paragraph 1 of Part A and Part B of the Schedule, a report has been forwarded to a Magistrate under Section 173 of the Code of Criminal Procedure, 1973.

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SCHEDULED OFFENCES UNDER THE PREVENTION OF MONEY LAUNDERING LEGISLATION IN INDIA PART I OFFENCES UNDER THE INDIAN PENAL CODE, 1860 Section Description of Offence 121 121A 302 304 Waging, or attempting to wage war or abetting waging of war, against the Government of India Conspiracy to commit offences punishable by Section 121 against the State Murder Culpable homicide not amounting to murder, if act by which the death is caused is done with the intention of causing death Attempt to murder Attempt to commit culpable homicide Voluntarily causing hurt to extort property, or a valuable security, or to constrain to do anything which is illegal or which may facilitate the commission of the offence Voluntarily causing grievous hurt to extort property, or a valuable security, or to constrain to do anything which is illegal or which may facilitate the commission of the offence.

307 308 327

329

364A Kidnapping for ransom, etc. 384-389 Offences relating to extortion 392-402 Offences relating to robbery and dacoity 467 489A 489B Forgery of a valuable security, will or authority to make or transfer any valuable security, or to receive any money, etc. Counterfeiting currency notes or bank notes Using as genuine, forged or counterfeit currency notes or bank notes

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PART II OFFENCES UNDER THE IMMORAL TRAFFIC (PREVENTION ) ACT, 1956 Section Description of Offence 5 6 8 9 Procuring, inducing or taking person for the sake of prostitution Detaining a person in premises where prostitution is carried on Seducing or soliciting for purpose of prostitution Seduction of a person in custody

PART III OFFENCES UNDER THE ARMS ACT, 1959 Section Description of Offence 25 To manufacture, sell, transfer, convert, repair or test or prove or expose or offer for sale or transfer or have in his possession for sale, transfer, conversion, repair, test or proof, any arms or ammunition in contravention of Section 5 of the Arms Act, 1959. To acquire, have in possessions or carry any prohibited arms or prohibited ammunition in contravention of Section 7 of the Arms Act, 1959. Contravention of Section 24A of the Arms Act, 1959 relating to prohibition as to possession of notified arms in disturbed areas, etc. Contravention of Section 24B of the Arms Act, 1959 relating to prohibition as to carrying of notified arms in or through public places in disturbed areas. Other offences specified in Section 25.

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To do any act in contravention of any provisions of Section 3,4,10 or 12 of the Arms Act, 1959 in such manner as specified in sub-section (1) of Section 26 of the said Act. To do any act in contravention of any provisions of Section 5, 6, 7 or 11 of the Arms Act, 1959 in such manner as specified in sub-section (2) of Section 26 of the said Act. Other offences specified in Section 26 Use of arms or ammunitions in contravention of Section 5 or use of any arms or ammunition in contravention of Section 7 of the Arms Act, 1959. Use and possession of firearms or imitation firearms in certain cases. Knowingly purchasing arms for unlicensed person or for delivering arms, etc. to person not entitled to possess the same. Contravention of any condition of a licence or any provisions of the Arms Act, 1959 or any rule made thereunder.

27

28 29

30

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PART IV OFFENCES UNDER THE NARCOTIC DRUGS AND PSYCHOTROPIC SUBSTANCES ACT, 1985 Section Description of offence 15 18 20 22 23 Contravention in relation to poppy straw Contravention in relation to opium poppy and opium Contravention in relation to cannabis plant and cannabis Contravention in relation to psychotropic substances Illegal import into India, export from India or transshipment of narcotic drugs and psychotropic substances External dealings in narcotic drugs and psychotropic substances in contravention of Section 12 of the Narcotic Drugs and Psychotropic Substances Act, 1985 Contravention of orders made under Section 9A of the Narcotic Drugs and Psychotropic Substances Act, 1985 Financing illicit traffic and harbouring offenders. Abetment and criminal conspiracy

24

25A

27A 29

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PART V OFFENCES UNDER THE PREVENTION OF CORRUPTION ACT, 1988 Section Description of offence 7 8 9 10 Public servant taking gratification other than legal remuneration in respect of official act. Taking gratification in order, by corrupt or illegal means, to influence public servant. Taking gratification for exercise of personal influence, with public servant. Abetment by public servant of offences defined in Section 8 or Section 9 of the Prevention of Corruption Act, 1988.

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PART VI OFFENCES UNDER THE WILD LIFE (PROTECTION) ACT, 1972 Section Description of offence 51 Contravention of provisions of section 17A read with relating to prohibition of picking, uprooting, section 17A etc. of specified plants. 51 Contravention of provisions of section 39 read with relating to wild animals etc., to be section 39 Government property. 51 Contravention of provisions of section 44 read with relating to dealings in trophy and animal section 44 articles without licence prohibited. 51 Contravention of provisions of section 48 read with relating to purchase of animal, etc., by section 48 licencee 51 Contravention of provisions of section 49B read with relating to prohibition of dealings in trophies, section 49B animal articles, etc., derived from scheduled animals.

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References

6.

7. 8. 9.

10. 11. 12. 13.

The Foreign Exchange Regulation Act (FERA), 1973. The Foreign Exchange Maintenance Act (FEMA), 1999. The Prevention of Money Laundering Bill, 1999. Rajya Sabha, Parliament of India, Report of the Select Committee on the Prevention of Money Laundering Bill, 1999. Report of the Select Committee on the Prevention of Money Laundering Bill, 1999 which seeks to prevent money laundering and to provide for confiscation of property derived from, or involved in, money-laundering and for matters connected therewith or incidental thereto (Rajya Sabha Secretariat, New Delhi, July, 2000). FERA, FEMA and Money-Laundering : An Overview Paper presented by Dr. Shamsuddin, Deputy Legal Adviser, Enforcement Directorate, Government of India, New Delhi at Seminar on Foreign exchange Management Act (FEMA) organized by Guru Nanak Dev University, Amritsar and NRI Sabha, Punjab (Jalandhar 6th January, 2002). United Nations Global Programme against Money Laundering published by the United Nations Department of Public Information DPI/2010-98-28445E-December 1998-10M United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, 1988 Statement of Principles on Prevention of Criminal use of the Banking System for the purpose of Money Laundering of the Basel Committee on Banking Regulations and Supervisory Practice of December, 1988, referred to as the Basel Statement; The 40 recommendations on money laundering of the Financial Action Task Force (FATF) of February 1990, as revised in June 1996, referred to as the FATE Recommendations; The 19 recommendations of the Carribbean Financial Action Task Force (CFATF) of June, 1990, referred to as the CFATF Recommendations; Convention on Laundering Search, Seizure and Confiscation of the Proceeds from Crime, opened for signature on 8 November, 1990 referred to as the Strasbourg Convention; Political Declaration and Action Plan against Money Laundering adopted at the twentieth special session of the United nations General Assembly devoted to countering the world drug problem, New York, 10 June 1998.