Chapter 5
INTERNATIONAL EFFORT AGAINST MONEY LAUNDERING
What is Money Laundering?
Money laundering is legally defined as “conduct/acts designed in
whole or in part to conceal or disguise the nature, location, source, ownership or control of money (can be currency or equivalents, e.g. checks, electronic transfers, etc.) to avoid a transaction reporting requirement under state or federal law or to disguise the fact that the money was acquired by illegal means “ (Electric Law Library 2003). Simply put, money laundering is a crime that makes use of ways and means for the generation of funds to seem legal, that is, by operating through seemingly legitimate businesses such as fictive companies, casinos, restaurants, jewelry stores, car dealers and art agents, as well as import-export operations. The real sources of these illegitimate funds, however, are usually from drug trafficking, gun smuggling and corruption among others. (Micheloud and Cie 2003)
Measures are taken in order to hide these assets so that they
cannot be linked to the criminals and the criminals’ acts detected. For this, the Swiss banks and Swiss financial institutions are the ones mostly used by these criminals. These banks are known for their stability, quality of services and bank secrecy, factors that serve the criminals’ purposes well (Micheloud and Cie 2003).
Although money laundering is as old as crime itself (Micheloud and
Cie 2003), the advances and innovations in technology have definitely played a role in making things easier for the operation of these organized crimes, where the people usually involved are the rich and the powerful – businessmen and even those in authority.
Indeed, such activities pose a threat not only to the economy of
nations but also to international security. Negative effects on the economy, according to the IMF External Relations Department (2002), include unpredictable changes in money demand, risks to the stability of financial institutions and financial systems, illegal transactions and unpredictability of “international capital flows and exchange rates due to unanticipated cross-border transfers.” Furthermore, it can discourage foreign investors from investing in a country that may be under the control or influence of organized crime. The targets of these criminals are often those countries that are developing economically but have weak implementation of or have ineffective laws when it comes to money laundering.
The threat posed by terrorism is also heightened even more by the
presence of these organized crimes, as some of the funds generated in these illegal activities are used to support terrorist acts (IMF External Relations Department 2002).
It is then with great ardor and urgency that nations and different organizations around the world are setting up laws and measures to fight off money laundering activities.
The Fight Against Money Laundering A. Swiss Provisions Against Money Laundering
Switzerland, according to Micheloud and Cie (2003), has one of the
tightest provisions when it comes to the fight against money laundering. The Swiss criminal code punishes any act that is in the context of organized crime, that is, money laundering, corruption, fraud, drug trafficking, gun smuggling, etc. When necessary and with the proper legal provisions, a judge can lift bank secrecy on the questionable account so that account information may be released.
Furthermore, the Swiss criminal code was revised and improved in order to cover these illegal activities. On August 1, 1990 Articles 305a and 305b were created.
Article 305a penalizes money laundering, which is defined as “any act of hindrance to the identification, search or confiscation of capital assets of criminal origin” (Micheloud and Cie 2003). Money laundering is punished, regardless of where the major offense took place.
Article 305b punishes the lack of vigilance in financial transactions.
This law holds any professional financial intermediary responsible for investigating and identifying the real identity of the beneficial owner, the true owner of the funds. Negligence to identify the contracting partner or to establish the beneficial owner is punishable.
On August 1, 1994, Article 305b was substantiated by a second paragraph, which gave bankers and financial operators the right to report or submit to the authorities any information or evidence on assets that may be criminal in origin. This law relieves these bankers and financial operators of their duty of confidence, that is, on a criminal basis. The new 1998 Money Laundering Act even made this right to communication an obligation.
Still, a series of articles were adopted for the same purpose. Article 260b of the criminal code punishes any person who is involved in an organization whose structure and collaborators are kept secret and which indulges in criminal acts of violence and obtains funds in an illegal manner. Furthermore, articles 58 to 60 makes provisions for the confiscation of assets that are of unlawful origin.
The Swiss Bankers Association and the Federal Banking Commission have also imposed rules that must be followed by the entire banking system. These rules are: 1. Code of Due Diligence; and 2. Money Laundering Policy.
By the Code of Due Diligence is meant that the banks should implement self-regulation rules issued by the Swiss Bankers Association (SBA). This is the “Agreement on the Swiss banks’ code of conduct with regard to the exercise of due diligence when accepting deposits and upholding bank secrecy” of July 1, 1977. (Micheloud and Cie 2003)
This agreement is primarily concerned with ethical issues, aiming for banking activity management that is beyond reproach. It provides for the appointment of a Supervisory Board, which is in charge of handling violations to this agreement. It also binds the Swiss Bankers Association and the signatory banks.
This reiterates the duty to identify the contracting partner or the beneficial owner, in the event that they are not the same person. This also prohibits anyone from assisting in any activity that is meant to deceive Swiss or foreign authorities. The Supervisory Board can issue up to 10 million Swiss francs upon the violation of this Code of Conduct.
The Federal Banking Commission (FBC) is instituted to grant authorization to practice a banking activity once all the conditions are met, one of which is a banking activity that is beyond reproach. However, once the FBC verifies that the bank no longer conforms to the conditions, it can withdraw authorization at any time.
The FBC enacted the “Policy on the prevention and fight against money laundering.” It aids in the interpretation of the criminal code and states clearly the standards that the banks and traders in securities should follow with regards to banking activity that is beyond reproach.
The organizational requirements oblige banks to implement internal policy, to train personnel and to assign a special anti-money laundering unit.
On April 1998 the “Federal Act on the prevention of money laundering in the financial sector” (MLA) was implemented. It contains the same principles as the ones stated previously, but this time applied to the entire financial sector. It applies equally to all financial intermediaries, that is, “any person who, on a professional basis, accepts, maintains deposit of or helps to invest or transfer assets belonging to a third party (e.g.: banks, fiduciaries, wealth managers, traders in securities, funds directorates, lawyers and notaries, the post office or the Swiss Federal Railways and change bureaus)” (Micheloud and Cie 2003). Among the duties imposed by this act are new organizational duties such as training personnel and imposing internal policy, and policy duties such as verifying the contracting partner and the beneficial owner, verifying the economic background of suspicious transactions and retaining documents that validate these verifications.
In 1994, the Central Offices for Criminal Police were formed within the Federal Office for Police. They were in charge of investigating drug trafficking and counterfeits, coordinating the Swiss and international investigation procedures and evaluating information obtained regarding organized crime.
B. Measures Used Against Money Laundering at an International Level
¥ International Judicial Cooperation
Switzerland has sanctioned international agreements in which it is
committed to provide judicial cooperation, otherwise known as mutual assistance, in criminal matters. The most important of these agreements consisted of the European Convention on Mutual Assistance in Criminal Matters on April 20, 1957. In compliance with the “Federal Act on international mutual assistance in criminal matters” (1983), Switzerland grants judicial cooperation in criminal matters by freezing accounts and releasing them to the authorities if needed. Judicial cooperation is granted if the crime being prosecuted is also punishable in Switzerland and if the foreign authority guarantees that the information obtained will be used only for the investigation.
¥ Interpol
The International Police, with the aid of Switzerland, is involved in
the exchange of information between police authorities concerning money-laundering activities among others.
¥ Basle Committee on Banking Supervision
The Declaration of the Basle Calmat on Banking Supervision in 1988 established the first international code of conduct for banks, aiming to keep the banking industry from being abused for money laundering purposes.
¥ Strasbourg Convention
The “Council of Europe Convention no. 141 on Laundering, Search,
Seizure and Confiscation of the Proceeds from Crime” was ratified by Switzerland in 1993. The Strasbourg Convention allows Switzerland to cooperate on an international level for the fight against cross-border criminality and the means used to gain funds.
Aside from those mentioned above, there were other international
instruments (U.S. Department of State’s Office of International Information Programs 2003) used to combat money laundering. A brief description of each follows.
¥ Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (1997)
Adopted on November 21,1997, by OECD[1] members and 5 non-
member countries (Argentina, Brazil, Bulgaria, Chile and the Slovak Republic), and signed in Paris on December 17, 1997, the convention represents an important step in an effort to criminalize bribery and to reduce the rampant corruption in world economies. It aims to stop the use of bribe money in closing or attaining international business deals and to help in the domestic fight against corruption, aiming to improve standards of governance and encouraging participation within the society.
¥ Lima Declaration Against Corruption[2]
“Concluded at the 8th International Conference Against Corruption,
held September 7 to 11, 1997, in Lima, Peru, the conference brought together senior figures from international organizations and aid agencies, representatives of governments, officers of anti-corruption agencies and professional associations, as well as journalists, academics, businessmen, and representatives of civil society.”
¥ OECD Anti-Bribery Unit of OECD Convention and Other Instruments
This was about the OECD instruments used against corruption and
how they were being implemented. It also included an overview of these said instruments and information about the OECD Convention and how they relate to other OECD instruments against corruption.
¥ OAS Inter-American Convention Against Corruption (1996)[3]
“This was adopted at the third plenary session meeting, held on
March 29, 1996.”
C. The FATF
The FATF (Financial Action Task Force) was established by the G-
7 Summit in Paris in 1989. It is a group of countries that aims to develop and implement policies against money laundering. Presently, it is composed of 29 countries with membership from the financial centers of Europe, North and South America and Asia. It brings together the policy-making powers of legal, financial and law enforcement experts in order to come up with effective measures in fighting money laundering. It also works with other international organizations such as FATF-style regional bodies, the IMF, World Bank, and other international financial institutions, as well as, the United Nations and the Egmont Group of Financial Intelligence Units.
Though OECD[4] houses the FATF secretariat, the FATF is not part of the organization. The two secretariats, however, consult and coordinate with each other on matters such as bribery and corruption or the functioning of the international financial system.
One of the first tasks accomplished by the FATF is the development and implementation of the “FATF 40 Recommendations”[5]. It consists of guidelines and the internationally recognized standard of measures that a country must undertake in order to combat money laundering. “ They concern the countries’ legal and financial systems, as well as international cooperation.” (Micheloud and Cie 2003)
Since the Recommendations were revised in 1996, there have been changes in the methods and techniques used in money laundering, new advances in technology and new developments in the fight against money laundering. This prompted Hong Kong, in the person of Mrs. Clarie Lo, then president of the FATF, to review the said recommendations. This led to the publication of the “Review of the FATF Forty Recommendations, Consultation Paper Task Force on Money Laundering”[6] in 2002. The review process had been open and transparent, with participation from FATF members and observers, non-FATF countries, international organizations and the private sectors, all of which were later invited to continue their participation in the review process.
The consultation paper covered three main areas (Press Release 2002), which are: 1. Customer identification and due diligence, suspicious transaction reporting, regulation and supervision; 2. Information on the beneficial owners and controllers of corporate vehicles e.g. companies, trusts, foundations, with particular attention to bearer shares and trusts; and 3. The possibility of extending the Forty Recommendations to seven categories of non-financial businesses and professions: casinos and other gambling businesses; dealers in real estate and high value items; company and trust service providers; lawyers; notaries; accounting professional and investment advisors.
After September 11, 2001, the FATF expanded its duties beyond money laundering and focused its attention on combating terrorist financing. At an extraordinary Plenary on the Financing of Terrorism held in Washington, D.C. in October 2001, the FATF issued new international standards called the “8 Special Recommendations to Combat Terrorist Financing.”[7] They are meant to supplement the “40 Recommendations “ and to direct the FATF into intensifying its cooperation with other governments and organizations in the fight against money laundering and terrorist financing. The implementation of these special recommendations prohibits terrorists and their supporters from accessing international financial systems and commits its members (Financial Action Task Force on Money Laundering 2003) to:
¥ Take immediate steps to ratify and implement the relevant United Nations instruments.
¥ Criminalize the financing of terrorism, terrorist acts and terrorist organizations.
¥ Freeze and confiscate terrorist assets.
¥ Report suspicious transactions linked to terrorism.
¥ Provide the widest possible range of assistance to other countries’ law enforcement and regulatory authorities for terrorist financing investigations.
¥ Impose anti-money laundering requirements on alternative remittance systems.
¥ Strengthen customer identification measures in international and domestic wire transfers.
¥ Ensure that entities, in particular non-profit organizations, cannot be misused to finance terrorism.
In order to ensure the effective and prompt implementation of these
new standards, the FATF agreed to the following comprehensive Plan of Action (Financial Action Task Force on Money Laundering 2003):
¥ By December 31, 2001, self-assessment by all FATF members against the Special Recommendations was conducted. This included a commitment to come into compliance with the Special Recommendations by June 2002 and with the action plans addressing the implementation of Recommendations not already in place. All countries around the world were invited to participate on the same terms as FATF members.
¥ By February 2002, additional guidance was developed for financial institutions on the techniques and mechanisms used in the financing of terrorism.
¥ In June 2002, a process was initiated to identify jurisdictions that lack appropriate measures to combat terrorist financing, and a discussion was made concerning the next steps, including the possibility of counter-measures, for jurisdictions that do not counter terrorist financing.
¥ Regular publication by its members of the amount of suspected terrorist assets frozen, in accordance with the appropriate United Nations Security Council Resolutions.
¥ The provision by FATF members of technical assistance to non-members, as necessary, to assist them in complying with the Special Recommendations.
Indeed, international cooperation in the fight against money
laundering has done a lot to minimize money laundering activities and their destructive effects on businesses, societies and governments.
It is because of this that the FATF has become even more ardent in implementing these standards and in encouraging other groups and governments to abide by them. “By the U.S. government’s count, about 130 jurisdictions — representing about 85 percent of world population and about 90 to 95 percent of global economic output — have made political commitments to implementing ‘The Forty Recommendations.’” (Myers 2003)
To further encourage the participation and cooperation of non-members, the FATF published a list of non-cooperative countries and territories (NCCT) — jurisdictions that lack a commitment to fight money laundering. Sure enough, the June 2000 publication of the first list was followed by the implementation of the standards by 15 NCCT jurisdictions.
Several countries also formed organizations in order to coordinate the activities of law enforcement agencies, such as the U.S. Financial Crimes Enforcement Network (FinCEN), against money laundering.
Still, in the mid-1990s, people working in FIUs (Financial Intelligence Units) began to meet and share their ideas and knowledge, resulting in more cooperation against money laundering.
Summary and Conclusion
Money laundering, the act of concealing the real sources of assets obtained illegally, is a widespread crime in our world today. It’s a crime that is committed by the rich and that takes advantage of the weaknesses of developing countries. It corrodes not only the economy of these countries but also heightens the threat of terrorism, as proceeds from money laundering activities are sometimes used to support terrorist activities.
In line with this, action has been taken to combat money
laundering. International cooperation has been enforced, with Switzerland playing a major role. This is because most criminals hide their assets in Swiss banks and Swiss financial institutions, which are known for their quality service, their stability and their policy of upholding confidentiality.
Bank secrecy is not a hindrance to the aim of catching these
criminals, though. The Swiss law has made provisions, giving bankers and other professional financial intermediaries, the right and the duty to report suspicious transactions and to submit evidence of such to the authorities.
Law enforcement agencies in different parts of the world also
coordinate with each other in order to facilitate the activities being undertaken to put a stop to these organized crimes, and other organizations have contributed to the development of laws and standards against money laundering
One such organization is the FATF (Financial Action Task Force),
the primary group that is in charge of the combat against money laundering. It has developed the “40 Recommendations,” which are guidelines or standards that other countries are urged to implement or to follow in order to guard against and fight money laundering. This was supplemented with the “8 Special Recommendations,” which provided standards for dealing with terrorism as related to money laundering.
Indeed, measures are being taken worldwide in order to fight money laundering. The implementation of international standards and laws help a lot, but it still depends largely on the individual nations, as the nations should be able to effectively implement their laws, and they should be able to do their part in the effort to suppress organized crime at an international level.
These standards and the countries’ cooperation have made improvement on the situation concerning money laundering, but there’s always room for improvement. Though money laundering cannot be completely eradicated, the writer agrees with Joseph Myers (2003) that continuous and vigorous international cooperation is the best thing we can do in order to keep organized crime and money laundering activities under control.
BIBLIOGRAPHY
Electric Law Library. ‘The ‘Lectric Law Library’s Lexicon On Money Laundering.’
http://www.lectlaw.com/def2/m038.htm. 2003
Financial Action Task Force on Money Laundering. ‘Terrorist Financing.’
http://www.fatf-gafi.org/TerFinance_en.htm. February 14, 2003
IMF External Relations Department. ‘The IMF and the Fight Against
Money Laundering and the Financing of Terrorism, A Fact Sheet.’
http://www.imf.org/external/np/exr/facts/aml.htm. August 31, 2002.
Micheloud and Cie, ‘Measures Used for the Fight Against Money Laundering.’
http://swiss-bank-accounts.com/e/banking/secrecy
/international.cooperation.html. 2003
Myers, Joseph. ‘Document in Translation: International Standards and
Cooperation in the Fight against Money Laundering.’
http://www.usa.or.th/services/docs/work39.htm. 2003
OECD. ‘Organisation for Economic Cooperation and Development (OECD).’
http://www.mft.govt.nz/foreign/oecd/about.html. 2003
Press Release. ‘Consultation on Anti-money Laundering Standards to End Soon.’
http://www.info.gov.hk/gia/general/200208/21/0821147.htm. August 2002.
U.S. Department of State’s Office of International Information Programs. ‘Money
Laundering and Corruption Legislation.’
http://usinfo.state.gov/topical/econ/mlc/legislate.htm 2003
[1] http://www1.oecd.org
[2] See details at http://usinfo.state.gov/journals/ites/1198/ijee/factlima.htm
[3] http://usinfo.state.gov/topical/econ/mlc/oas0329.htm
[4] Based in Paris, France, the Organization for Economic Cooperation and Development (the OECD) provides the setting for democratic and market oriented economies to study and develop economic and social policies with the ultimate aim of maximizing economic growth. See http://www.mft.govt.nz/foreign/oecd/about.html
[5] See http://www1.oecd.org/fatf/40Recs_en.htm
[6] http://www.fatf-gafi.org/pdf/Review40_en.pdf
[7] http://www.fatf-gafi.org/SRecsTF_en.htm
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