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The term 'money laundering'
allegedly originated
in a scam set up by Al Capone in Chicago in the 1920s in which he set
up a
chinese laundry through which he
passed the profits of criminal activities in order to disguise their
origins. The term money-laundering nowadays means precisely that:
disguising the origins of money, so that the profits of, for example,
illegal drugs sales cannot be traced back to their origins. For law
enforcement agencies around the world the struggle against money
laundering has become one of the focal points of the struggle against
organised crime. The idea is that organised crime will find it
increasingly difficult to operate if it cannot transfer its ill-gotten
gains from the criminal underworld into the legal 'upperworld'.
From the standpoint of
organised crime money
laundering is an extremely important activity. Much money earned
through
crime remains, of course, within the criminal underworld. Some of the
profits of illegal drugs sales will simply be reinvested in further
drugs
supply. But the more profitable organised crime becomes, then the more
important it is from the standpoint of the criminals, to find ways of
shifting the profits into more legitimate activities. This is so for a
number of reasons:
Criminals need a reliable
legal income otherwise
their lifestyle may attract the attention of law enforcement and tax
authorities. Also investment in legal business may yield higher rates
of
return than some criminal activities. A luxurious lifestyle cannot be
sustained without spending a large amount of income on goods and
services
in the legal sector. Such expenditure will need to appear to be from
legal
income deposits and sources.
There
are various estimates of the amount of
money involved in laundering. The UN Human Development report for 1999
estimates it at $1.5 trillion per year or 17% of the Gross Domestic
Product (GDP) of the United States. For the UK in particular the
National
Criminal Intelligence Service (NCIS) reckons that £25 billion
a year
as being a realistic figure for the amount actually
laundered. This
estimate is based on the January 2000 International Monetary Fund
estimate of undeclared economic activity in the UK representing around
13 percent of GDP.
Who
is involved?
In fact the laundering of
the profits of organised
criminal activity is part of a much wider activity of disguising the
origins of funds. Organised crime syndicates are by no means the only
groups with an interest in disguising the origin of large amounts of
money. Other groups who have an interest in money laundering are:
-
Other criminals:
traditional project
criminals such as bank robbers need to launder their stolen money for
exactly the same reasons as organised crime. Indeed, the distinction
between the two varieties of activity is becoming increasingly blurred.
In
the UK, for example, in the case of the Brinks Matt gold bullion
robbery
of 1983, it is reckoned that only about half of the stolen gold was
recovered. Over £10 million was traced through property
dealing
throughout the world. Likewise white collar criminals such as financial
fraudsters must cover the fraudulent origins of their money. Organised
crime money launderers may provide a 'service' to these other criminal
groups.
-
Terrorists:
are another important group.
They wish to buy arms and explosives on the world market from
legitimate
companies. They need a network of 'frontmen' who will appear as
legitimate
buyers.
-
Security services:
the mirror image of
terrorist use of money laundering is that similar activities are
frequently engaged in by the Security services who are engaged in
secret
funding of covert operations.
-
Businessmen:
otherwise perfectly
legitimate businesses may wish to disguise the origins of some of their
profits. The less profits you make the less tax you pay. Companies
making
profits in countries with high tax rates may wish to secretly move
funds
to another country where tax rates are lower and make it appear that
the
money arose from business activity in that country. Another reason for
disguising profit levels may be so as not to attract the attention of
competitors to a lucrative area of business. Finally, as noted in a
previous lecture, some legitimate businesses may pay organised crime
for
certain services.
-
Politicians:
whenever some political
tyrant is overthrown somewhere in the world it usually transpires that
they spirited a large fortune of their citizens' hard earned money out
of
the country into a secure and secret bank account in Switzerland or
some
other secure vault.
Our focus here is therefore
on one variety of
money laundering.
The history of
money-laundering in recent years
has been something of an 'arms-race' between the law enforcement
agencies
and organised crime with each side developing new techniques and
detection
systems in a spiral of competitions.
There is a central
contradiction which lies behind all attempts to understand and to
combat money laundering. On the one hand, the law enforcement agencies
have, particularly since the 1980s, increasingly focused on
money laundering as a key -- if not THE key -- strategy in combatting
organised crime. Normal police methods leading to the arrest of
organised crime operatives or the seizure by customs or frontier police
of illegal commodities hardly scratches the surface of organised crime
activities. If only it could be made impossible or at least very costly
to get the profits of criminal activity into the legitimate banking
system, then criminals may lose the incentive to engage in such
activity.
| this, of course presupposes
the model of criminal entrepreneurs as rational calculators who would
turn their hand to other, non-criminal activity if the costs of
criminal activity were made too high. Tom
Naylor challenges this assumption |
But any attempt to combat money laundering is going to involve
increased regulation and surveillance of financial institutions and
markets. The contradiction is that such attempts take place under
conditions in which the financial world is becoming increasingly
de-regulated and, indeed, unregulatable. As we noted in a previous
lecture, one of the key features of globalisation is the development of
world-wide computer networks which make it increasingly easy to move
money from any place to almost anywhere in the world in a matter of
seconds. Such movements can be made to obliterate virtually all trace
of where a particular sum of money has come from. Furthermore, this
ease of movement of money around the world increases the degree to
which different financial institutions compete with one another for
business. If it is as easy to trade your shares on the Tokyo stock
exchange as it is in London -- it's all done from your computer
terminal -- then if there are too many restrictions on your activity in
London, move to Tokyo -- or Frankfurt, or New York.... This
means that any attempt to increase the level of surveillance of who is
trading shares or moving money around, is likely to drive customers
elsewhere. In the old days the leading financial institutions of the
City of London (the Bank of England and the Stock Exchange) knew the
identity of all those individuals and companies who were trading shares
or taking deposits and banks and investment houses. In order, for
example, to set up in the City of London as a share dealer, you had to
be approved by such bodies as the Council of the Stock
Exchange. But in 1986 the government of Margaret
Thatcher instituted the so-called 'Big Bang' of de-regulation whereby
it became much easier to set up as a financial or share dealer. True,
regulatory bodies were brought into existence (currently the Financial
Services Authority regulates and maintains a watchful eye over the
financial activities of the City of London) but the fact remains that
de-regulation makes it easier for relatively unknown people to set up
shop and trade. This, of course makes it easier for those dealers or
investors who are involved in money laundering to engage in activity.
This brings us to a final point.
We have noted before that in
many organised crime activities there are frequently customers
rather than victims. This is true in drugs trafficking. It is
also true in money laundering in the sense that criminal money flowing
through the banking system, in search of a new 'clean' identity, in
no way harms the banks. It is money like any other. If the
attitude of bankers, investment managers, share dealers is simply to
make money on behalf of clients who will lend them funds to invest, why
should they worry about whose money it is. There is no natural tendency
to see criminal money as a threat to the system.
Such attitudes have been
compounded by the fact that during
the 1980s the new deregulated global competition between financial
centres around the world and the entry of new traders and financiers
from a diversity of backgrounds hastened the decline of the old
'aristocratic' public-school culture of the City of London in favour of
one in
which “the game became… how much one could
consume, and how many
opponents one could annihilate.” (Stanley 1996: 88) The
result in the
dealing rooms, was widespread willingness to violate financial
regulations, such as those prohibiting money laundering, in an
environment in which
“…their
risk taking culture… coupled with the highly competitive
environment
within which they work... predispose them to break the rules more
readily than practitioners in other commercial sectors. These are the
traders to whom the compliance officer [responsible for ensuring
adherence to regulations against money laundering] is generally seen as
‘the business prevention officer’. ”
(Bosworth-Davies 1997: 7)
So the fact
is that fighting money laundering faces many
obstacles. But let us
now turn to the dynamics of money laundering itself. Here we
can do no more than give a
brief overview of some of the increasingly sophisticated forms of money
laundering that exist today. The laundering process is seen (by law
enforcement agencies) as involving three stages:
-
PLACEMENT: getting the money
derived from
criminal activities into the banking system
-
LAYERING: spreading it
around and breaking it
up, so that it is not visible or traceable
-
INTEGRATION: transforming it
into legitimate
financial instruments such as bond or credit in accounts that can be
legally spent
PLACEMENT
'suitcases full of cash'
The simplest form of money
laundering is to have a
bank account which is not known to be connected with organised crime
and
then simply try and put the money into that account. The various
members
and associates of organised crime simply deposit pay their profits in
various bank branches into the account, in the same way as for example,
a
shopkeeper or street market trader might pay his cash takings into the
bank. This is okay for small amounts of cash but as the profits of
organised crime increase, the man in the bank with a suitcase of cash
begins to stand out too much.
From the standpoint of law
enforcement the main
tactic has been to try and co-opt the banking and financial
institutions
as 'eyes and ears' of the law enforcement agencies -- a type of
financial
"Neighbourhood Watch". The main tactic has been that of
requiring the banks to report to the law enforcement agencies whenever
money is deposited which might possibly be associated with organised
crime. In the United States the approach has involved blanket
surveillance
of large cash deposits. Thus under the terms of the Bank Security Act
of
1970 it became a requirement for banks to fill out a 'Cash Transaction
Report'
(CTR) for all transactions over $10,000. In completing such
documentation
the depositor must produce documents to establish their identity. Also,
bank and financial employees have acquired obligations to report
'suspicious activity' and face prosecution if they fail to do so. Many
other countries have instituted similar arrangements.
In Britain legislation began
over a decade later
- the problem did not reach Europe until the1980s. Here the approach
has focussed on the reporting of 'suspicious activity'. The
Drug
Trafficking Offences Act 1986, the Prevention of Terrorism Act 1989,
the
European Union Directive on Money Laundering, incorporated into British
law by the Criminal Justice Act 1993 and the Drug Trafficking Act 1994
and
most recently the Proceeds of Crime Act 2002 all
make it an offence for an
employee of a bank or anyone else to fail to disclose to the
authorities
any knowledge of 'suspicious activity' (relating to money laundering
activities) acquired in the course of professional activities (as a
bank
clerk or accountant) Such suspicions will of course focus on large cash
deposits.
Since
February 2003, when the Proceeds of Crime Act took effect, reporting
officers in
banks and finance companies have faced criminal prosecution if they
fail to justify why their suspicions were not reported to the police.
In response to the new rules, it is understood NCIS has seen a jump in
the number of reports to 7,000 a month.
This brings us to the
effects of this type of law enforcement strategy.
On the one hand criminals, trying to get their deposits into banks have
resorted to breaking up their deposits into smaller amounts so as to
attract less attention and to avoid the necessity, in the US, for a CTR
to
be filled out.. This is sometimes known as 'smurfing'. The problem is
that
it is labour intensive. There is a need for a
growing army of depositors. During the 1970s in the US it was not
uncommon
for criminals to arrive unsuspected in a small town and hire
an army
of local hoods or even students to deposit small amounts of money in
the
local bank branches to buy Money Orders for the criminals. In return
they
were paid a small fee but heaven help whoever ran off with the cash and
failed to return with the money order! The more people
involved, the
more have to be paid and even if the fee is small, it adds up. And of
course the authorities responded by lowering the minimum size of the
cash
deposit which required a CTR to be filled out. The authorities had some
successes against organised crime groups, drugs traffickers in
particular,
by analysing the patter of CTR returns and then deciding to concentrate
their forces in areas which had a high level of reported cash deposits.
But, if depositing the
profits of crime in the
banks becomes more labour intensive, so does the problem of
surveillance.
Compliance with such surveillance requirement is, for the banks, also a
time consuming and labour intensive activity. Then there is the time
required by the law enforcement agencies to check the reports that are
filed with them. In the US the annual number of CTRs rose steadily from
121,000 in 1979, to about about 7
million a year by the end of the 1990s. After the terrorist outrages of
11
September 2001, there has been a renewed emphasis on detection of
terrorist money laundering. In 2002 according to the American
Banking Association, banks filed approximately 600,000 suspicious
activity
reports and more than 12 million cash transaction reports with the US
Treasury Department.
In the UK there is a similar
problem. A recent report (2003) for the
government by a leading firm of auditors, KPMG, found that the number
of
suspicious activity reports (SARs) had jumped from 15,000 a year in
1995 to 63,000 in 2002 and projected a rise to 100,000 this
year (2003), partly as a result of changes to the rules for
reporting under the Proceeds of Crime Act
2002 (see below) The backlog is
currently at an all time high of 58,000, the report found. The report
said there was a lack of overall management of the process. As a result
it recommended beefing up the management of the economic crime branch
of NCIS and overhauling the computer systems used.
Money laundering through
legitimate business
Another,
more sophisticated, method of trying to avoid bank
surveillance, in particular by criminals with larger amounts of cash to
be
handled, has been to 'launder' the money before it gets to the point of
being put in the bank. In this case the deposit will be a perfectly
legal transaction involving money whose criminal origins have already
been disguised. Those types of business which routinely handle a large
amount of cash will be most attractive to organised crime.
If there is a high cash turnover then criminal money can be disguised
as,
for example, earnings from gambling. For the American Mafia the
gambling casino was traditionally an important place for money
laundering. But bars, restaurants, entertainment arcades: in fact any
business which has a high volume of cash sales, making accurate audits
of business volume very difficult, are all suitable. In one of the most
famous cases of heroin smuggling in America in the mid 1980s which came
to trial in 1986 as the 'Pizza Connection' in New York, Sicilian Mafia
groups were found to be distributing heroin through a chain of Pizza
restaurants and take-aways. These establishments are
also suitable for money laundering as the number of actual pizzas sold
is hardly likely to be clearly known and so a certain amount of profits
can be fictitious and in fact be laundered drugs money. But of course
too great a profit by a particular establishment is likely to attract
the attention of the accountants or tax authorities sooner or later.
'How come you are making so much profit when you only spend this amount
on buying pizza dough and mozzarella cheese?'
All
sorts of institutions outside the
banking system have a large cash flow which makes them suitable for
money
laundering activities. Casinos, bars, retail outlets, art dealers,
restaurants,
private bureaux de change, all have quite a high percentage of cash
purchases. Estate Agents for example, might collect rents for clients
for
which only part of the money paid will actually be rent paid by
tenants.
Another example is travel agents. Holidays may be sold for cash. Some
of these holidays may in fact be fictitious but the cash paid for them
appears as
legitimate income.
Jewellers and gold dealers
have always been
particular targets because, being old, well established institutions,
with
a long tradition of trading based on mutual trust, the integrity of the
purchaser may be taken for granted. London's Hatton Garden diamond and
gold trading area with its old traditions of trust is becoming more
important
for money laundering (See the link above)
Laundering specialists
The attempt to widen the
ring of surveillance to
include financial professionals such as accountants represents a
recognition that as money laundering has grown a division of labour
occurred between the underworld itself and various semi-legal money
launderers who will hire out their services to the criminal underworld
and
to the variety of other groups mentioned above who seek to disguise the
origins of their money. The services of white-collar professionals,
such
as lawyers and accountants, will be hired to provide investment
counselling, create nominee trust accounts, handle international funds
transfers, and exploit tax avoidance schemes in foreign jurisdictions.
Their main service is the manipulation of financial, commercial, and
legal
procedures to conceal the origin or true ownership of the assets under
their control. Again, their clients may be from a variety of sources,
legal business as well as the criminal underworld.
There is also an increasing
role for specialist
couriers who arrange for the transport of currency to a laundering site
where it is converted to another method of payment, such as money
orders.
The value of such people lies in their apparent legitimacy and lack of
any
obvious connection to the true owner of the currency; indeed they may
not
even know the owner of the money they are transporting. They will be
connected to legitimate business, particularly travel agencies or other
activities which allow them to travel internationally on a regular
basis
without attracting undue attention.
These specialists rarely
operate as subordinate
units of the criminal organisations they serve. Rather, they function
as
loose clusters of free agents who may sell their services on a one-time
or
longer term basis to such organisations. These specialists may work for
more than one criminal organisation, as well as for high-level
individual
criminals who manage independent organisations, such as drug importers.
The general pressure then
from law enforcement agencies and governments
has been for a widening range of financial institutions and
professionals
to take on the tasks of surveillance. This has involved three types of
activities
-
automatic checks on deposits
over a certain amount, establishing the
identity of the depositor
-
reporting of any suspicious
transaction,
irrespective of value
-
a general injunction to
financial institutions
and professionals to exercise 'due diligence' and take steps to 'know
your customer'
In the UK the Proceeds
of Crime Act 2002, aiming
to respond to the ingenuity of criminals in laundering money outside
the
main banks and financial institutions, has widened the range of
institutions which are now required to file SARs. The list now
includes:
financial advisors, estate agents, accountants, jewellers and high
value
car dealers must take steps to check the source of any cash transaction
over €15,000 (£10,700). This of course is the reason
why the number of
SARs has shot up recently.
The whole approach of
governments and law enforcement agencies in trying to
stifle organised criminal finance by forcing a widening range of
financial
institutions to take on the role of surveillance has come in for severe
criticism from experts like Tom
Naylor, the Canadian organised crime and money laundering specialist.
He regards
the whole approach as doomed to failure. He points out the inherent
difficulty,
not to mention strained relations between private financial
institutions and
clients, of identifying suspicious transactions where, unlike with
counterfeit
currency or forged cheques, the illegal origins of the funds are not
evident. He
points out furthermore the fact that new technological developments in
banking
are enabling such regulatory apparatus to be circumnavigated.
The advent of electronic
purses with peer-to-peer transfer, and the propensity for people to
enter and leave countries, not with cash and travellers' cheques, but
with debit cards, threatens to make the reporting apparatus now being
carefully put in place, largely irrelevant. (from Naylor
2000 page 29. See also the reference to his latest book at
the bottom of the page)
A second problem is the
massive increase in the flow of useless material to
the authorities. There is a clear distinction to be made between
information
about crime and low quality useless information which will just clog up
the
works and consume time and resources. It should be obvious that the
combination
of increasing difficultly of identifying finance of criminal origins
with
increasing legal compulsion to do so, is a recipe for just such a flood
of
useless information. In the UK the Proceeds of Crime Act
2002 provides
for criminal prosecution of employees who fail to report suspicious
financial
transactions. Since the Act came into force in Febrarury 2003
suspicious transaction reports rose from 18,408 in 2000 to 60,000 in
2002. By
March 2004 reports to NCIS were running at the rate of 100 a day.
LAYERING
Once the money has
successfully entered the banking system then it
needs to be spread around and disbursed. A large amount of credit from
a
single source, in a single account, might still attract the attention
of
bank regulators. Money needs to be sent abroad, distributed through
shell
companies, trusts, invested in real estate that has no suspicion of
illegality etc. and then, at the reintegration stage, turned into
legitimate 'washed' credit at the disposal of the people who originally
acquired it by illegal means but with all traces of that illegality
removed.
Offshore banking
The term 'offshore' refers
to banks which act as
private banks to wealthy non-resident clients, offering low or
non-existent tax rates to depositors, allowing complete confidentiality
of
records including refusal to divulge details of bank accounts held by
customers to investigators from other countries, and where there is a
general absence of regulation and inspection of activities conducted
internationally from the country in which the bank is based. Offshore
banking has grown rapidly as part of the general expansion of the
global
financial economy and the need of international financiers to move
money
quickly around the globe with a minimum of regulation and
form-filling.
It is true there are strong
traditions of bank
secrecy and private banking in Europe itself. Small states like
Luxembourg
and Lichtenstein are territories which guarantee bank secrecy.
Switzerland
has the strongest reputation for secure anonymous bank accounts, which
is
why so many dubious political figures have stashed their money there.
Swiss governments have in recent years however forced their banks to
more
co-operative in investigations as to the origins of the accounts they
hold. Finally, Britain is not without its 'offshore' operations. In the
Isle of Man and the Channel Islands (Jersey and Guernsey) are
technically
part of the United Kingdom but have had complete independence in
financial
matters and there is a different regime of banking regulation. These
European forms of private banking have, in recent years been subject to
pressure to be more forthcoming with information to investigators of
fraud
and money laundering.
This leaves the large number
of private banks
operating in small poorer countries. There are numerous in the
Caribbean
area. The classic 'offshore' bank haven is often seen as the Cayman
Islands, a small British dependency in the Caribbean. In 1964 the
Cayman
Islands had just two banks as might be expected for such a small
country.
By 1987 no less than 360 branches of foreign banks and over 8,000
registered financial companies had set up there. By the end of the
1990s
the figure was 590 banks and 30,000 financial companies, most little
more than a brass plate
on the door of a lawyer's office. Cayman is now the fifth largest
financial
centre in the world, with a financial turnover similar to that
of in New York, London, and Frankfurt.
A sophisticated money
launderer will form a company (rather than act as
an individual) which will open an account in an offshore bank and
register
the company in an offshore territory where similar lack of inspection
and
regulation will be applied to companies as to banks. The system is that
as
long as the company does no business in the territory where it is
registered it can maintain complete anonymity and escape taxation. A
number of such businesses can be set up with accounts in offshore
jurisdictions and money moved between companies and bank accounts, and
between different offshore jurisdictions thus hiding the trail and
'layering' the funds. The services of money laundering professionals,
mentioned above, are often important in setting up and sustaining the
organisation of the operation. Also, global computer networks which
allow
money to be moved instantaneously to any part of the network, are
important facilitating mechanisms in allowing the launderer to quickly
layer the funds between a large number of different companies and banks.
Offshore banks can, of
course, be useful at the placement stage if the
cash can be transported to the territory in which the bank operates.
During the 1980s drugs money from the US was allegedly being shipped by
air to certain banks in Panama where it was readily accepted over the
counter. See below for an account of BCCI the bank which provided all
aspects of a money laundering service.
INTEGRATION
Once the origins of the
funds have been effectively disguised by
distribution throughout the international financial system, they can
then
be 'repatriated' to be used for personal consumption of as capital for
legitimate or other criminal enterprise. Here offshore banks can play
an
important role
credit cards can be issued
by the offshore bank, the details of the
user being protected by the general offshore regime of secrecy. One of
the
offshore companies you set up can hire you as a consultant at a large
fee,
pay for your house and 'company car' etc., or grant you a financial
'loan'
as would a normal business. Again, businesses and retail outlets,
restaurants etc are useful. Where it is difficult for the authorities
to
check the exact amount of business being conducted, the 'takings' can
be
inflated and include some of the criminal money which will then appear
as
legitimate income.
These are just a couple of
examples of numerous sophisticated scams to
be found in the criminal world of laundered money.
Globalisation and regulation
In
recent years, and in particular following 11 september 2001 and
consequent fear of terrorist groups as well as organised crime
developing
effective money laundering services, the assault on offshore bank
secrecy
has been intensified. The international financial institutions such as
the
World Trade Organisation and the International Monetary Fund have
placed
money laundering high on their agendas. In the late 1990s 28 members of
the OCED (Organisation for Economic Cooperation and Development)
set up an organisation called the Financial Action Task Force Against
Money Laundering to standardize financial practices and pressure
offshore centers to comply with them.
The United Nations has put pressure on member states to act in a
concerted
way against money laundering and fraud.
Under
pressure from the UK, the Cayman Islands has introduced "know your
customer" regulations and increased
its supervision of banks. The UK has also tightened banking regulations
in two other British offshore havens, the Isle of Man and the Channel
Islands.
The United States has been particularly anxious (again, with increased
urgency since 2001) to move against money laundering.
However there are formidible
forces working in the opposite direction.
The forces of globalisation, as mentioned in a previous lecture, have
produced widening inequalities in the world in terms of the
distribution
of income and wealth. We mentioned before how poor farmers in the
global
south had responded to declining earnings from the production of goods
for
export to Europe and North America had turned to the production of
cocaine
or heroin. In similar ways during the last decade the governments of
many
poor countries, suffereing from no prospects of significant economic
growth, have seen offshore banking and the international business it
attracts as welcome sources of income.
We
have mentioned the Cayman Islands. Another example from the same
area is the Caribbean island of Dominica (population 83,000) which
since
1996 has incorporated five offshore banks and 4,600 international
business
corporations. Its government gained around $3.6 million from offshore
financial activities in 1997, according to a
US State Department report. It also is reported to sell "economic
citizenship" in exchange for a $50,000 local deposit--an offer seized
upon by hundreds of Russians. Similarly, the economy of the Bahamas
derives substantial income from 70,000 international corporations, 400
offshore banks, 97 trust companies, and 62 insurance companies.
The economies of these poor countries would be on the verge of collapse
without the earnings derived from offshore financial services.
flight capital
To make matters more
complicated the intererests of money launderers on
the one hand and many perfectly respectable business corporations on
the
other, are by no means diametrically opposed. One aspect of
globalisation, as we
have mentioned above, is the ability by legitimate business
to seek areas of low taxation.
A
business may, for example, do most of its production in country A but
seek
to show that it makes most of its profits in country B because the tax
rate is lower there. This involves the secret movement of funds (flight
capital) from country A to country B. It may be illegal in country A to
move money out of the country in this way but as far as country B is
concerned, the money entering the country is not illegal. Offshore
banks
are used for precisely these purposes by legitimate business. The
problem
is that governments, by keeping the door open to 'flight capital' may
undermine their ability to deal with money laundering. Particularly if
money launderers can disguise their funds as flight capital.
Criminal banking
A much more serious obstacle
to money laundering is where an entire
bank, or key section of it, is either captured by criminals or, in the
search for profits openly approaches money launderers.
In 1982 the Italian bank
'Banco Ambrosiano'
collapsed with debts varying from $30m to $300m. The bank director
Roberto
Calvi was found hanging dead under Blackfriars Bridge in London. It is
widely rumoured that organised crime had considerable deposits in the
Banco Ambrosiano which were effectively being laundered. Recently,
(October 2003) police inquiries into the circumstances of the death of
Roberto Calvi have been re-opened after a long period.
The second case was the
closure of the Bank of
Credit and Commerce International in 1992. BCCI was founded
in 1972
and grew to be the largest private bank in the world, expanding from
146
branches in 32 countries 1977 to over 400 branches in 73 countries at
the
time of its closure by the banking regulators of seven countries in a
co-ordinated move led by the Bank of England last July 1992.
BCCI branches and especially
the Panama City
branch had in fact been cited in several money laundering cases in the
US
in the early 1980s. But the incidents were seen as simply the
activities
of individual branch managers rather than the activities of the bank as
a
whole. Branch managers and individual bank staff were convicted of
money
laundering 1986, 1988 and 1990. The techniques revealed in the 1988
case
in which $14m was laundered for the Colombian drugs cartel based in
Medellin showed the level of sophistication reached and worked as
follows.
Bank officers received cash undercover which they wired to various
branches around the world but notably in Europe London, Paris or
Luxembourg. These branches would then issue certificates of deposit in
branches 'nearer home' in Bahamas or Barbados. The traffickers could
then
take out loans at these branches with the certificates of deposit as
collateral and the loans would be repaid from the original deposits by
the
bank.
By 1991 it became clear
that the bank was not financially sound and was engaging in other
activities such as lending large amounts to dubious clients without
much
collateral.
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An
article I wrote for a newspaper some years ago on BCCI
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BCCI can be regarded as
either the tip of an
iceberg or the exeption that proves the rule of basically honest
banking.
BCCI was exceptional in that it was a global bank that appeared to
solicit
close relations with organised crime. However in the period since the
closure of BCCI a slightly different problem has assumed importance
One aspect of the growth in
global inequality during the last decades
has been the large number of local wars in regions with very weak
governments: in parts of Africa, South East Asia, and the former Soviet
Union. Areas such as the Congo, Chechnya, Afghanistan, Albania, are
sometimes referred to a 'failed states' or territories where effective
government is weak and can become a 'shell' in which forces such as
terrorist groups or organised crime can exercise effective control.
Such
areas then become 'captured states' which
"...
are characterized by the tendency of at least some criminal
organizations to cloak their power in the mantle of state authority.
This is not to suggest that the criminal symbiosis will determine all
aspects of state behavior. Where the state is captured by organized
crime, the state will still carry out many of its traditional functions
in international relations. At the same time, state authorities will
take measures to ensure that organized crime functions unhindered in
its pursuit of wealth. The implication is that there will continue to
be states that provide sanctuaries for criminal organizations. Indeed,
their number could well increase as transnational criminal
organizations continue to entrench themselves in weak states in the
former Soviet Union, Africa, Latin America, and parts of Asia. Captured
states are likely to become particularly prevalent in Africa where,
ironically, democratization and the simultaneous cutbacks in Western
aid and assistance provide new opportunities for
transnational criminal organizations to exert influence through the
electoral process."
Williams, Phil (2001)
'Crime, Illicit Markets and Money Laundering' in Chantal de Jonge
Oudraat and P.J. Simmons, eds. Managing Global Issues:
Lessons Learned. New York: Carnegie Endowment for
International Peace
(page 139)
Such areas are not
completely ungovernable but still have some of the
institutions of government and economy notably banking systems. Banks
in
such regions are ideal targets for money laundering by organised crime
groups which will have effective government collaboration in such
activity. This problem will be of growing significance in the coming
period.
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