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FACTORS WHICH SEVERELY HAMPER LAW ENFORCEMENT EFFORTS

Acceptance of Flight Capital by Western Countries

The desire of foreign private citizens and government officials to accumulate hidden wealth is accommodated by Western businesses and banks. By assisting in this activity —this movement of flight capital that passes illegally out of one country but almost always legally into another country —they are providing exactly the same channels through which criminal money is laundered.

The easiest thing for criminals to do is to make their criminal money look like it is merely tax-evading money, and when that is done it passes easily through the international financial system. The approximated $100 billion a year in illegal flight capital coming to the west provides cover for a far larger amount of criminal money that is laundered there.

These two flows, criminal money laundering and illegal flight capital, use the same international financial system. The Treasury Department estimates that 99.9 percent of the criminal money that is presented for laundering in the United States is successfully deposited into secure accounts.

Authorities will never effectively curtail criminal money laundering while at the same time attracting and facilitating illegal flight capital. The United States enacted cash deposit reporting requirements and anti money-laundering legislation some 25 years ago. In contrast, Treasury Department officials have stated on multiple occasions that it is U.S. policy to attract flight capital out of other countries, with little or no heed paid to whether or not it is tax-evading.

Laws and Limitations of Other Countries

Police and judicial systems in many countries are ineffective, and many countries have outdated or nonexistent extradition, immigration, asset seizure, anti-money laundering, computer, and anti-corruption laws.

Many countries have neither the resources nor the expertise to mount complex or sustained investigations of international crimes. Criminals use these shortcomings to find safe havens for themselves and their money, while governments and law enforcement remain constrained by national boundaries.

In many European and other countries there are no cross-border controls on the movement of cash, and it is relatively simple for launderers to take large sums of cash by road to neighboring countries. As with drugs, law enforcement officials believe that while passengers are carrying large amounts of cash, an even greater amount is probably being hidden in cargo shipments.

The trend around the world is now to criminalize the very act of laundering money and to make it, completely independent of the underlying offense, grounds for asset forfeiture. In fact, in some jurisdictions, laundering the proceeds of crime can lead to far more severe penalties than the underlying offenses.

This creates a means for imposing potentially heavier sentences on those charged with the underlying offense and for using the threat of such heavier charges to secure cooperation and as a device for financing police activities.

Jurisdictional Conflicts and Lack of International Coordination

Currently the country and the law enforcement agency that initiates a criminal investigation is in charge but must also fund the investigation. While requests for assistance come from that agency as the investigation proceeds, it tends to overlook aspects that they cannot prosecute.

A formal system of large case coordination would speed law enforcement efforts. Law enforcement officials should also be able to identify the responsible agency official in each country by consulting an on-line directory.

There is also a tendency for police to give foreign requests for assistance a low priority. Efforts to share forfeited proceeds with countries which cooperate on money laundering investigations and prosecutions to help offset the expense of this assistance, have proven to be a successful inducement.

Bankings' Role in Facilitation of the Activity

In some countries the primary role of banking supervision is to maintain the overall financial stability and soundness of banks rather than to ensure that individual transactions conducted by bank customers are legitimate.

While even the perception of foreign tax evasion is supposed to generate a suspicious transactions report, banks handling the transactions in major money centers appear to be fully aware that tax evasion is the purpose, yet fail to act as criminally compliant foreign banks regularly inundate them with the proceeds of ill-gotten gains.

And though they often facilitate it, banks are unlikely to be found guilty of money laundering because authorities have to prove that it was criminal in origin, and that there was a lack of proper care in seeing to the flow of that money. It should be an explicit policy that significant business transactions will not be conducted with customers who fail to provide adequate evidence of their identity.

Public confidence in banks may be undermined through their association with criminals and 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. Money-laundering has become so lucrative that bank officials and others with access to the financial system are sometimes corrupted.

An organized crime syndicate laundered the proceeds of its drug trafficking business by making cash deposits several times a week at a branch of a Montreal bank. Total cash deposits equaled $13 million dollars (US). In one month alone, a single deposit of $1.2 million was made. The amount of money being laundered was so great that cash would be stuffed into tote bags and suitcases, loaded onto pick-up trucks and backed up to the front door of the branch.

So much cash was deposited that the bank requested it be organized in bundles of $5,000 before being brought in. The request was complied with, and the bank accepted these large cash deposits without question. They even created a special account for the customer.

The greater the overlapping in the financial services that are offered by banks, the more difficult the job of detecting money-laundering becomes. Once money passes the first barrier to gain entry into the financial supermarket (which is itself competing vociferously for new business), there are no more layers of scrutiny to pass, while the capacity to shift funds from asset to asset and from place to place is greatly enhanced.

Bank Secrecy

Today, more than ninety jurisdictions offer the protection of bank secrecy laws which impose criminal sanctions on those who release information regarding clients' transactions. Even bankers who cooperate with law enforcement are safe from bank secrecy prosecution in less than one fourth of the world's financial community.

There are countries where the trust law requires no disclosure of beneficiary or trustee or amount or anything relating to the trust. In the event a banker breaches that confidentiality, clients also have recourse in civil court.

At present, most data requests to bank secrecy jurisdictions are made under bilateral mutual legal assistance agreements. While some countries comply, others assert their complete unwillingness to cooperate with any foreign investigation.

There are also cultural barriers to overcome. Secrecy has been a hallmark of Asian banking for centuries, and officials there are not accustomed to the invasiveness of reporting requirements.

Many banking systems remain obliged to inform account holders that someone is both investigating them and may seize their accounts, providing criminals the opportunity to move assets and leave town.

Volume and Complexity of International Transfers

Criminal money is frequently moved abroad and then cycled throughthe international payments system to obscure the audit trail. Money in electronic form can now move anywhere in the world with speed and ease using advances in technology and communications. The volume and value of the transactions each day is more than 665,000 wire transfers valued at more than $2 trillion dollars.

There can be multiple bank transfers, again from country to country, where each transfer is protected by secrecy laws that must be breached one at a time. The funds-transfer trail can be broken on occasion with the launderer picking up the money in cash from a bank in one place, re-depositing it in a bank somewhere else and then wiring it to yet a third location.

US banking law does 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 also escaping conventional monitoring systems.

The fields for sender and receiver should be completed with their respective names and addresses in an effort to ensure that the SWIFT system is not used by criminals as a means to break the money laundering audit trail.

Internet Based Banking

New banking practices such as direct access banking undermine the ability of banks to monitor account activity.

Certain bank products offering electronic cash management services may be used by bank customers to launder money. These products are available through third party vendors, although some institutions have developed proprietary products where customers have access to diverse electronic banking services and can manage their accounts from their own computers. This feature allows bank customers to engage in a wide variety of transactions affecting their accounts from virtually anywhere in the world, without significant bank involvement.

The central problem with virtual banks is that there is virtually no oversight, not least because it is not clear who has jurisdiction or where the crime is being committed. In many cases, banks and other financial institutions have no inclination to know their customers, especially if it puts them at a competitive disadvantage.

Very shortly people will be able to transfer money across the planet without it being traced.

There will be private banks that will take it and deposit it and invest it, and nobody will be able to tell who the owners are or who the bankers are.

Tax Havens as Sanctuaries

Although many offshore financial centres say that they will cooperate with requests from foreign law enforcement agencies, such cooperation can intentionally involve considerable delays. The result is that there is an opportunity for money to be moved to another jurisdiction.

These mini-states are in the business of selling sovereignty and operating completely outside international laws. By their competitive under-enforcement of money-laundering regulations the effectiveness of controls are being undermined while those countries who take their regulations seriously are subject to outflows of capital as a consequence of their integrity.

Offshore Corporations

There are an estimated three million anonymous corporations, with assets of $8 trillion dollars, that have no identifiable officers, directors, employees or financial statements.

Criminals can have multiple systems of interlocking companies, all incorporated in different places, forcing law enforcement officers to proceed from haven to haven. Vast quantities of funds can be transferred overseas without arousing any suspicion, especially since inter-company transactions become a black hole in any efforts to detect money-laundering.

Having to Prove Fraudulent Transfer

State laws generally do not permit an individual to place assets in trust for his or her own benefit while at the same time effectively placing those assets beyond the reach of creditors. For this reason, people look to the laws of offshore jurisdictions that have extended protections to self-settled trusts, provided the trusts are not created or funded with pending, threatened or expected claims against the person setting up the trust.

To set aside a fraudulent transfer, fraudulent intent must be established beyond a reasonable doubt and it must leave insolvent the settlor who created it. Moreover, in some jurisdictions the statute of limitations on fraudulent conveyance claims may be as little as two years, which is likely to have already expired by the time suit is brought in that jurisdiction.

Even if a creditor manages to prove a fraudulent conveyance, the recovery is then limited to the amount of the tainted transfers, rather than the entire trust fund.

Shortfalls of Reporting Requirements

Ultimately cash deposit reports are of little use unless there are not only the resources to process them but also personnel who know what they are looking for. It may well be that all reporting requirements can offer is assistance in following money flows once crimes have already been detected using traditional investigatory techniques. Artificial intelligence is no substitute for human intelligence.

Even data mining systems can hardly anticipate all the criminal variations on techniques and methods that appear to be innocent but are intended to hide illegally obtained money.

Non-bank Financial Institutions

Non-bank financial institutions which are unevenly regulated in most parts of the world include a wide variety of exchange houses, check cashing services, insurers, mortgagors, brokers, importers, exporters and other trading companies, gold and precious metal dealers, casinos and express delivery services which can move money with ease, speed and virtually no oversight.

Currency exchange houses, particularly ones located near the U.S. border, are suspected of moving large amounts of laundered money between the U.S. and Canada.

Criminals Influencing Government and Bank Support

The increasing concentrations of wealth among criminal groups in a number of jurisdictions is a concern because of possible impacts on investments, real estate values, legitimate commerce and government integrity. They also appear to be directing large cash deposits into new building and land development projects. On Bonaire, certain groups have attempted to provide unconventional financial services to hotel facilities who are in need of refinancing. There are increasing indications that money launderers are utilizing legitimate businesses as straw purchasers.

They can also make large campaign contributions to candidates, who in turn agree to assist the criminals. On the other hand, if a haven develops too unsavory a reputation as a home for "dirty money" or a haunt of organized crime and drug traffickers, then not only will legitimate money go elsewhere, as respectable companies move their businesses to avoid tarnishing their reputations, but so too will more sophisticated criminals who want to avoid any taint by association.

Antigua, criticized for lacking discrimination about its customers, is where anyone with $1 million can open a bank which can consist of nothing but a brass plate or a room with a fax machine.

Differentiating From Legitimate Business Transactions

The use of cash in day-to-day transactions is shrinking rapidly. Criminals now have only to gain access to a merchant direct access terminal to allow direct payments rather than troublesome cash.

The more the business structure of production and distribution of non-financial goods and services is dominated by small and independent firms or self-employed individuals, the more difficult the job of separating legal from illegal transactions. As well, the greater the facility for using cheques, credit cards and other non-cash instruments for effecting illegal financial transactions, the more difficult is the detection of money-laundering.

The Widespread Use and Acceptance of Trade Mispricing

Falsification of pricing in international trade is a major mechanism of routing illegal flight capital. These are situations where buyers and sellers cooperate in the movement of money. It is the most common component of illegal flight capital. It is done in secret, almost never put in writing but based on verbal agreements to facilitate the movement of illegal flight capital by means of trade mispricing.

To do this an exporter from a developing country under-invoices his exports to here. Say he ships $6 million worth of goods but indicates to his country's officials that it is an order for $5 million. The actual payment by the U.S. importer is $6 million as agreed, but that's deposited into two bank accounts in the United States. The $5 million is transferred back home and reported but the $1 million balance is now safely out of the exporters country, free of taxation.

It's done on both imports and exports. It's tax evading, and therefore illegal out of the countries in which it's done but perfectly legal for Western businessmen to do this. Because there is no law or company policy that says that it shouldn't be done, it's done all the time. The Western business is happy to help his supplier out as long as it does not hurt him. In cases where kickbacks are offered as inducement, it may even be profitable to do so.

Sometimes the buyers and the sellers are the same entity, where the company in the foreign country has set up its own purchasing subsidiary in the United States.

The United States requires a customs declaration to be filed in connection with imports and exports into and out of the United States, and it is an offense to file a false declaration. Yet, in practical terms the customs declaration is signed by a freight forwarder, not by the buyer or seller, and so long as it accords with the commercial invoice accompanying the transaction, it is rarely challenged by the U.S. Customs Services.

Because of this laxity, trade mispricing in the form of commissions, rebates and kickbacks is often routine practice in winning and maintaining export and import orders in soft currency markets and is present in hundreds of thousands of transactions handled by U.S. commercial and banking interests.

Postal Laws

Outbound international letter-class mail is virtually the only means by which merchandise can be transported across the U.S. border without being subject to Customs inspection (unless a warrant is obtained). This handicaps efforts to deal with this relatively safe and inexpensive means for criminals to transport currency out of the country.

Under Postal Service regulations, a letter-class mail parcel can weigh up to four pounds when mailed internationally, and up to 60 pounds when mailed to Canada. A single four-pound letter-class parcel can accommodate approximately $180,000 in $100 bills while a sixty pound box will hold $2,700,000 worth.


DETERRENTS NEEDED TO IMPROVE EFFORTS

There are ample ways to deal with the problem within the proper mechanisms of the free market system. The following points should be the focus of immediate action and the starting-point for resolution of the problem areas by all countries:

blue bullet point the criminalization of money-laundering;
blue bullet point limitation of financial secrecy;
blue bullet point "know your customer" rules;
blue bullet point identification and reporting of suspicious transactions;
blue bullet point improving the regulation of businesses/professionals who conduct financial operations;
blue bullet point developing asset forfeiture;  
blue bullet point imposing strict individual liability on any senior executive, regardless of the location or territory of the crime committed;
blue bullet point no impunity for commission of money-laundering offences, regardless of jurisdiction;
blue bullet point criminalization of all fiscal offences, in particular fiscal fraud and insider trading; and 
blue bullet point prosecution of corrupt foreign officials.

No honest reason for being offshore really requires secrecy against inquiry by criminal authorities or tax authorities who are trying to resolve problems in their own country. You can have secrecy, but with transparency for global legal systems. Little progress can be made in combating corruption so long as many jurisdictions continue to promote numbered accounts and secrecy to flight capital and dirty money.

Criminal procedures with regard to the initiation of an investigation should be relaxed to expedite the process. Furthermore, bank secrecy should be addressed by facilitating the seizure of bank assets and alleged illicit revenues pending investigations; for example, by imposing the burden of unaccounted-for assets on the account holder.

Tax evasion should be a predicate for money laundering both here and abroad and evaders should understand that they run the risk of losing their money and being penalized severely for considering themselves to be privileged.

 

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Crimes of Persuasion ISBN 0968713300