Cleaning up - Following last week's terrorist attack, US financial regulators are set to clamp down, says John Willman
Published: September 20 2001 20:21 | Last Updated: September 20 2001 20:32
Property dealers, photocopying bureaux, carpet traders, fairground operators, computer memory chip suppliers, mobile telephone importers - the modern face of money-laundering, according to international investigators. These are some of the businesses used by criminals and corrupt politicians to hide cash, according to a study published this year.
The cases highlighted by the Egmont Group of 58 national anti-money-laundering organisations celebrate the investigators' successes but they also highlight the diversity of ways to move money around the world avoiding conventional channels. And for those striving to cut off the supply of finance to terrorists following last week's attack on America, they emphasise the complexity of the task in a global economy where funds flow freely between financial centres.
Tracking down the financial networks that support terrorists such as Osama bin Laden will be further complicated by the fact that - unlike with crime - much of the money is legitimate in origin. The pursuit of criminal money-launderers has made great strides over the past decade, but the armoury of weapons available to investigators trying to block the movement of terrorist funds remains incomplete.
The war against money-laundering dates from 1989, when the Group of Seven leading industrial countries - at the urging of the US - set up the Financial Action Task Force to attack the drug trade. The FATF, under the umbrella of the Paris-based Organisation for Economic Co-operation and Development, has established 40 principles covering financial regulation, law enforcement and international co-operation.
The FATF has also established a blacklist of 19 financial centres that fall short of international standards, including Russia, Ukraine and Israel. Most are attempting to take the measures necessary to be removed from the list, but those remaining "non-co-operative" could face sanctions that would reduce their ability to function as financial centres.
Nonetheless, the International Monetary Fund estimates that global crime and corruption generates flows of as much as $1,500bn a year. Some of this passes through offshore financial centres such as Switzerland, Luxembourg, the Channel Islands and small Caribbean nations, which offer either strict banking secrecy or lax regulation. Mainstream financial centres such as London and New York are also used for money-laundering simply because it can be easier to conceal illicit funds in the enormous amounts that flow through daily. "If you are in the business of trying to hide needles, you look for large haystacks," as a senior official at the Financial Services Authority, the UK financial regulator, said last year. His statement came after revelations that much of $4bn spirited out of Nigeria under the late General Sani Abacha passed through London, often en route to other financial centres such as Jersey and Switzerland.
A US Senate sub-committee report in 1999 criticised Citibank, part of Citigroup, the financial services company, for its role in handling huge sums of money for Raul Salinas, brother of a former Mexican president. Earlier that year, Bank of New York was found to have handled more than $7bn of suspect Russian funds.
Bankers admit that until the 1990s, it was relatively easy to move illicit funds through the international financial system. In the absence of legislation requiring scrutiny of customers, money-launderers could open accounts with minimal information about the ownership of the money - especially with private banks whose brand strength was guaranteed discretion. The discovery of funds linked to former rulers from Ferdinand Marcos, the late Philippines president, to Gen Abacha led many countries to introduce "Know Your Customer" rules.
These require banks to make sure they know the true identity of customers, including the owners of companies registered in tax havens such as the British Virgin Islands. They should also understand the origin of their funds and the nature of their businesses so they can detect unusual transactions.
Know Your Customer rules are now a requirement of the Financial Action Task Force. They were also the centrepiece of the Wolfsberg anti-money-laundering guidelines backed last year by 11 international private banking groups, including Citigroup and Chase Manhattan of the US. However, the US Congress has refused to tighten Know Your Customer rules, rejecting legislation in 1999 after criticism that it was a threat to civil liberties.
Most countries also have requirements to report suspicious transactions to a regulator or intelligence organisation, with criminal investigators finding movements of funds valuable in detecting organised crime. In the US, all transactions over $10,000 must be reported, a procedure that is cumbersome for banks and disliked by investigators because most of the information is about legitimate payments by businesses or home-buyers.
A concern for regulators is the system by which banks in one country handle payments for "correspondent banks" elsewhere. These relationships can lead to a well known bank that accepts a payment from a less well regulated correspondent inadvertently putting its imprimatur on the money. "The payment becomes a Citibank or an HSBC one," says Professor Mark Pieth of Basle university, who helped to draft the Wolfsberg declaration.
The Wolfsberg banks are discussing ways of closing this entry point to the financial system, which worries the biggest banking groups on both sides of the Atlantic. In February, the US Senate's permanent sub-committee on investigations said weak control over correspondent banking had created a gateway for "rogue" foreign banks to launder cash from illegal activities such as internet gambling, investment scams and drug trafficking.
European banks regard payments from US banks with suspicion because of the country's weak Know Your Customer requirement, according to Richard Parlour, a lawyer with Richards Butler in London who advises banks and regulators. In one recent case a US bank account had been opened with no more information than the customer's full name and a mobile telephone number. "Financial institutions don't want to open branches in every country," he adds, "but there will have to be more co-ordination."
Another concern for regulators is the ingenuity of money-launderers in sidestepping bank controls with alternative ways of moving cash such as those listed by the Egmont group. The Financial Action Task Force has extended its recommendations to include insurance companies, lawyers, accountants and bureaux de change, and a variety of seemingly commercial transactions are coming under scrutiny.
One alternative that is likely to appeal to financial networks supporting terrorists such as Mr bin Laden is hawala and other informal money transmission systems commonly used in the Middle East and Asia to bypass banks. These allow payments to be made in one place in return for cash being provided in another - for a fee. According to Prof Pieth, regulators know little about these informal systems.
However, European regulators will welcome the new commitment of the US - made this week - to step up its fight against money-laundering. Mr Bush's team had looked unwilling to support further international initiatives to crack down on tax-haven secrecy, under pressure from the same groups that blocked a tougher Know Your Customer regime. In May it reversed its opposition and on Wednesday said it would focus its efforts on "large-impact" cases rather than automatic reporting of smaller cash transactions. "The process of introducing uniform international standards on money-laundering is unstoppable," says Richard Wiebusch of Hale & Dorr, a Boston law firm. |
