FACTORS WHICH SEVERELY
HAMPER LAW ENFORCEMENT EFFORTS
Acceptance of Flight Capital by
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and many countries have outdated or nonexistent extradition, immigration,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
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.
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
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
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
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
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.
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
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.
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:
criminalization of money-laundering;
of financial secrecy;
your customer" rules;
and reporting of suspicious transactions;
the regulation of businesses/professionals who conduct financial
strict individual liability on any senior executive, regardless
of the location or territory of the crime committed;
impunity for commission of money-laundering offences, regardless
of all fiscal offences, in particular fiscal fraud and insider
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
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.