Money Laundering

The terrorist attacks of September 11 vividly illuminated the importance of anti-money laundering laws and controls. The attacks fostered an even greater recognition of the importance of anti-money laundering cooperation around the world. This recognition galvanized international cooperation and led to significant modifications to anti-money laundering laws. The framework of laws and regulations enacted during the last decade to address money laundering paid prompt dividends in the world community’s ability to trace the funds of those who finance international

terrorism. The developments that have taken place since September 11 will further enhance global efforts against terrorist financing and the full range of money laundering challenges.

2001 was a year of domestic and international advances in the fight against money laundering. The terrorist attacks of September 11 added urgency and intensity to a robust process already underway. In 2001, the United States continued its vigorous inter-agency international anti-money laundering training program, totaling more than $3.5 million, to improve worldwide efforts to combat money laundering and financial crime. Other governments and international organizations also strengthened anti-money laundering programs in 2001. The European Union broadened its anti-money laundering directive and imposed anti-money laundering obligations on "gatekeepers"—professionals such as lawyers and accountants who help place dirty money into the financial system. Regional anti-money laundering bodies in Europe, Asia and the Caribbean continued working effectively, and nascent anti-money laundering regional organizations in South America and Africa became operational.

A major money laundering focus of the year was the work of the Financial Action Task Force (FATF), the world’s preeminent multilateral anti-money laundering body, which continued its non-cooperative countries and territories exercise. By year’s end, all fifteen jurisdictions on the original list had passed anti-money laundering legislation and four jurisdictions were removed from the list, while eight additional jurisdictions were identified as being non-cooperative.

Thanks largely to the anti-money laundering experience and expertise accumulated by FATF over the past dozen years, many jurisdictions were well-positioned to react quickly to the threat of terrorist financing. FATF moved quickly after September 11 to convene an extraordinary Plenary on the Financing of Terrorism. At this October Plenary in Washington, the FATF decided to expand its mission beyond money laundering, and to focus its energy and expertise on the worldwide effort to combat terrorist financing. The FATF adopted eight special recommendations regarding terrorist financing and prepared an extensive questionnaire that requested members to describe what legislation they have in place, or intend to pass, to thwart terrorist financing. FATF agreed to distribute the questionnaire to all countries worldwide and analyze their responses in 2002.

Anti-money laundering measures played a critical role in efforts by law enforcement officials immediately after the September 11 attacks to help identify the perpetrators and determine who organized and financed them. The FBI, recognizing the important role of financial records, established an interagency review group to focus on the financial aspects of the terrorist network. The regulatory and investigative systems established over the past ten years were key to unraveling this network. As the terrorists were identified, various records, including credit card transactions, provided immediate information in retracing the terrorists’ movements prior to the attacks, as well as the links between them. Banks in the United States worked with law enforcement to provide swift access to information about bank accounts that were linked to the credit card accounts.

Simultaneous with the establishment of the FBI Financial Review Group and a Treasury task force, the Department of State convened an interagency task force to determine which countries’ financial systems were most heavily involved with funding these terrorists. Diplomatic outreach to those countries ensued. Teams comprised of U.S. Government technical experts were formed to assess the capabilities and technical assistance needs of those countries that exhibited the political will to block terrorist financing and to develop viable anti-money laundering regimes.

The September 11 attacks led the world’s international organizations to take prompt action against terrorist financing. On September 28, 2001, the United Nations Security Council (UNSC) adopted Resolution 1373 which reaffirmed earlier UN counterterrorism resolutions 1269 and 1368 and requires states to take prescribed actions to combat terrorism and the financing of terrorism.

The Egmont Group of Financial Intelligence Units (FIUs) provides a network for sending out leads and requests for information to FIUs around the world. Cooperation among the Egmont Group’s 58 members and their prompt responses to these requests were unprecedented.

The terrorist attacks gave strong impetus to many countries to amend and strengthen their money laundering laws. In the United States, Congress passed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism ("USA PATRIOT") Act of 2001 on October 26, 2001. This landmark piece of legislation made major changes to the U.S. anti-money laundering regime. The broad new authorities provided in the USA PATRIOT Act will have significant influence on the relationships between U.S. financial institutions and their individual and institutional customers.

While the investigations of the financial links underlying the September 11 attacks demonstrate the value of measures that have been taken to identify, prevent and attack money laundering, they also reveal shortcomings. For example, after years of discussion, far too many countries still do not require identifying information about originators of international funds transfers. While most developed countries of the world now require banks to file suspicious activity reports, many still do not require non-bank financial institutions to do so. Some countries have yet to criminalize money laundering beyond drug-related offenses and many more do not have laws that address terrorist financing. September 11 demonstrated the need to do both. And many new initiatives that will be featured in anti-money laundering efforts in 2002 are now underway to try to overcome all of these deficiencies.

Why We Must Combat Money Laundering

Money laundering is organized crime’s way of trying to disprove the adage that "crime doesn’t pay." It is an attempt to assure drug dealers, illegal arms dealers, corrupt public officials and other criminals that they can hide their profits and to provide them the fuel to operate and expand their criminal enterprises. Fighting money launderers and strengthening anti-money laundering regimes globally will reduce financial crime by depriving criminals of the means to commit other serious crimes. To a lesser but real extent, strengthening anti-money laundering regimes, particularly in the areas of identifying the originators of international wire transfers, will impact terrorist financing as well. At a minimum, strong anti-money laundering measures help to create a body of evidence that exposes criminal behavior and help law enforcement identify perpetrators and build cases against them that lead to their arrests and convictions.

As the tragic events of September 11 graphically demonstrated, crime has become global, and the financial aspects of crime have become more complex, due to rapid advances in technology and the globalization of the financial services industry. Modern financial systems, in addition to facilitating legitimate commerce, permit criminals to transfer millions of dollars instantly, using personal computers and satellite dishes. Only his or her creativity limits the criminal’s choice of money laundering vehicles. Money is laundered through currency exchange houses, stock brokerage houses, gold dealers, casinos, automobile dealerships, insurance companies, and trading companies. Private banking facilities, offshore banking, shell corporations, free trade zones, wire systems, and trade financing all have the ability to mask illegal activities. In so doing, criminals manipulate financial systems throughout the world.

Money laundering generally involves a series of multiple transactions used to disguise the source of financial assets so that those assets may be used without compromising the criminals who seek to use the funds. These transactions typically fall into three stages: (1) Placement, the process of placing, through deposits, wire transfers, or other means, unlawful proceeds into financial institutions; (2) Layering, the process of separating the proceeds of criminal activity from their origin through the use of layers of complex financial transactions; and (3) Integration, the process of using an apparently legitimate transaction to disguise the illicit proceeds. Through this process the criminal tries to transform the monetary proceeds derived from illicit activities into funds with an apparently legal source.

The United States and other nations are also victims of tax evasion schemes that use various financial centers around the world and their bank secrecy laws to hide money from tax authorities, undermining legitimate tax collection. Financial centers that have strong bank secrecy laws and weak corporate formation regulations, and that do not cooperate in tax inquiries from foreign governments, are found worldwide. These financial centers, known as "tax havens," thrive in providing sanctuary for the deposit of monies from individuals and businesses that evade the payment of taxes in their home jurisdictions and allow them to keep the money they have deposited from the knowledge of tax authorities.

Unchecked, money laundering can erode the integrity of a nation’s financial institutions. Due to the high integration of capital markets, money laundering adversely affects currencies and interest rates as launderers reinvest funds where their schemes are less likely to be detected, rather than where rates of return are higher. Money launderers also negatively impact jurisdictions by reducing tax revenues through underground economies, competing unfairly with legitimate businesses, damaging financial systems, and disrupting economic development. Ultimately, laundered money flows into global financial systems where it can work to undermine national economies and currencies.

There is now worldwide recognition that we must deal firmly and effectively with increasingly elusive, well-financed and technologically adept criminals and terrorists who are determined to use every means available to subvert the financial systems that are the cornerstone of legitimate international commerce. The continued abuse of some offshore financial centers, the proliferation of on-line Internet banking and the widespread use of underground banks and money-changers highlight the importance of using new technologies and strong strategies to combat money laundering schemes and terrorist financing schemes.

International Terrorism Financing

Terrorist groups differ from other criminal networks in the motive behind their crimes. While drug traffickers and organized crime groups primarily seek monetary gain, terrorist groups usually seek non-financial goals, such as publicity and political influence. Terrorism is a means to these ends. Terrorist financing also differs from money laundering in other respects. Ordinarily, criminal activity produces the funds and other proceeds that money launderers disguise so that the funds can be used for legitimate or criminal purposes. Funds that support terrorist activity are generated primarily through fundraising—often through legal non-profit entities, although terrorist groups often obtain some funds from criminal activities as well. Because terrorist activity requires very little money (the attacks on the World Trade Center and the Pentagon are estimated to have cost a little more than half a million dollars), the amounts of money that individual terrorist cells or their members seek to disguise is substantially less compared to that laundered by organized crime and drug kingpins. And it is the latter for which anti-money laundering tools were initially created. For example, the U.S. reporting requirement of cash transactions above $10,000 may not be useful in detecting terrorist financing. This may require modification of existing laws and regulations. The investigation of terrorist financing is requiring law enforcement and regulatory officials to use existing anti-money laundering laws in altogether new ways. And it will require stronger international anti-money laundering enforcement regimes.

Small Sums With Big Effects

While they do not seek financial gain as a sole end, international terrorist groups need money to attract adherents and to support their activities. Some terrorist organizations also need funds for media campaigns, to buy political influence, and to undertake social projects aimed at maintaining membership and attracting sympathetic supporters. Often, terrorists also rely in part on funds gained from traditional crime such as robbery, kidnapping for ransom, drug trafficking, extortion, document forgery, currency and merchandise counterfeiting, and smuggling. Terrorists can then divert some of the proceeds of these criminal activities to their terrorist efforts.

Terrorists typically derive only relatively small sums from the proceeds of traditional illegal activities. A substantial portion of the terrorists’ funding comes from contributors, some of whom know the intended purpose of their contribution and some of whom do not. In this key respect, terrorism financing contrasts with the financing of a drug trafficking network, which obtains virtually all of its funding from illegal activities.

Origins of Financial Support

Terrorist groups commingle illicit revenues with legitimate funds drawn from profits from commercial enterprises and donations from witting and unwitting sympathizers. They tap a range of sources for their financial support including:

Otherwise Legitimate Commercial Enterprises

Terrorist groups earn profits from businesses they own. They also secure donations from sympathetic entrepreneurs.

Social and Religious Organizations

Since the early 1990s, terrorist groups have relied increasingly on donations from social and religious organizations for financial support.

State Sponsors

Several rogue nations—Cuba, Iran, Iraq, Libya, North Korea, Sudan, and Syria—have provided material assistance, financial support or other resources to terrorists.

Moving Terrorist Money

Tracking terrorist financial transactions is more difficult than following the money trails of mainstream criminal groups. While many organized crime groups are adept at concealing their wealth and cash flows for long periods of time, their involvement in the physical trade of illicit drugs, arms, and other commodities often exposes the revenues and expenditures connected to these illegal dealings. In contrast, terrorist actions generally are comparatively inexpensive and their financing is often overshadowed by the larger financial resources allocated for the group’s political and social activities, making it more difficult to uncover the illicit nexus.

Terrorist groups use a variety of means to move their funds, including:

Currency Transport by courier

International Financial Institutions

Money Changers

Underground Banks

Offshore Financial Centers

Although there is little consensus regarding the exact definition of an offshore financial center (OFC), certain characteristics distinguish traditional onshore financial centers from those termed "offshore". Offshore financial centers are, in the vast majority of cases, segregated from the traditional banking structure of the jurisdiction. At least 90 percent of all jurisdictions offering offshore financial services restrict access to the offshore sector to non-residents, thereby creating a highly confidential and parallel financial system within their own borders. Many jurisdictions with OFCs conduct financial transactions only in currencies other than the local currency. OFCs also differ from onshore jurisdictions in their regulatory regimes and legal frameworks. Many OFCs lack the stringent regulatory and supervisory regimes found in developed onshore jurisdictions. In the majority of OFCs, banks are not required to adhere to a wide range of regulations normally imposed on onshore banks. In most OFCs, non-bank financial industries, such as the insurance and securities industries, are subject to even less, if any, regulation than is the banking industry.

OFCs maintain that their carefully crafted laws and regulations provide beneficial business and financial planning options for their clients. These include, but are not limited to: sophisticated trade financing; estate planning for high net worth individuals; tax mitigation for individuals and corporations; avoidance of exchange controls; liability containment for ships and airplanes; sophisticated insurance management options; investment opportunities that transcend home country marketing regulations; preservation of assets; investment of overnight funds; and freedom from certain home country regulatory requirements.

Freedom from certain home country regulatory requirements provides opportunities to those with criminal intent. In many OFCs, a bank can be formed, registered and its ownership placed in the hands of nominee directors via the Internet. However formed, there are few, if any, disclosure requirements, bank transactions are free of exchange and interest rate restrictions, minimal or no capital reserve requirements are required and transactions are mostly tax-free. Some OFCs permit the licensing and registration of "shell banks"—generally understood as banks that exist on paper only and do not have a physical presence in any jurisdiction. Of the more than 4000 offshore banks thought to exist, the number of shell banks remains unknown.

A principal attraction of the OFCs is often the existence of legal frameworks designed to obscure the identity of the beneficial owner, to promote regulatory and supervisory arbitrage, and to provide mitigation or evasion of home-country tax regimes. Some of these OFCs offer the ability to form and manage confidentiality of a variety of international business companies (IBCs) and exempt companies, trusts, investment funds and insurance companies, many with nominee directors, nominee officeholders and nominee shareholders.1 When combined with the use of bearer shares (shares that do not name the owner) and "mini-trusts" (the latter are instruments used to further insulate the beneficial owner while bridging the ownership and management of the corporate entity), IBCs can present impenetrable barriers to law enforcement.

This lack of transparency and the ability to engage in regulatory arbitrage, coupled with a concomitant reluctance or refusal of many OFCs to cooperate with regulators and law enforcement officials from other jurisdictions, attract those with both legitimate and illegitimate purposes. Drug traffickers, terrorists, money launderers, tax evaders and other criminals have found the OFCs a particularly inviting venue in which to conduct and conceal their activities. With the advent of the Internet and other technological advances, funds can be transferred around the globe instantaneously, providing further opportunities to engage in the placement and layering of illicitly gained funds. There is also a growing concern that terrorists and other criminals are increasingly enlisting the services of unethical lawyers, accountants and other professionals to help them discover and manipulate new money laundering and terrorist financing opportunities afforded by the new technologies. The attraction for small states in the offshore financial services market is a dependable source of income that in some instances exceeds 50 percent of a jurisdiction’s GDP.

Although IBCs have served as the predominant instruments for committing financial crimes in OFCs, a variety of types of trusts play important roles as well. One form of trust, the Asset Protection Trust (APT), protects the assets of individuals from civil judgments in their home countries. A common provision of APTs is that challenges or claims against the assets of the trust must be brought before the courts of the jurisdiction of the APT domicile within a relatively short period of time (usually two years). Many APTs contain "flee clauses" providing for funds to be immediately transferred to another OFC if the APT is threatened by inquiry. Used in combination, IBCs, mini-trusts, bearer shares and APTs make it nearly impossible for competent authorities to generate paper trails or to identify beneficial owners of companies, while they simultaneously protect those engaging in serious financial crime from civil or criminal prosecution.

Other practices found in some OFCs cause problems for law enforcement. One such practice, well advertised on the Internet, is the selling of "economic citizenship"—a practice that, if improperly controlled, can enable individuals suspected of committing crimes to purchase citizenship in an OFC jurisdiction that may not have an extradition agreement with the purchaser’s original home country. Purchasers of economic citizenships can change their names to go along with their new passports, creating yet another impediment to law enforcement. During 2001, three Caribbean Basin OFCs sold inadequately controlled economic citizenships: Belize, Dominica and St. Kitts & Nevis. Grenada suspended selling improperly controlled economic citizenships in 2001. In the Pacific region, Nauru sells improperly controlled economic citizenships.

Not only criminals purchase economic citizenships. Terrorists do as well. In December, two individuals purchased economic citizenships from Belize for $25,000 apiece. They then attempted to obtain visas to enter the United States as citizens of Belize. They were denied entry visas by the consular staff of the American embassy in Belize because the two applicants were members of a proscribed Middle Eastern terrorist group. The government of Belize subsequently announced that it would cease selling economic citizenships in January 2002.

Internet gaming executed via the use of credit cards and offshore banks represents yet another powerful vehicle for criminals to launder funds from illicit sources as well as to evade taxes. Advertised on the Internet as being located primarily in the Caribbean Basin, virtual casinos can be extremely profitable for governments that sell the licenses and likely share in the operator’s profits. At the beginning of 2001, Antigua and Barbuda, for example, reportedly had licensed more than 80 Internet gaming websites at a cost of $75,000–$85,000 per license for sports betting shop and $100,000 for virtual casinos. As the Offshore Financial Services chart at the end of this section illustrates, St. Kitts/Nevis is the only Caribbean OFC to sell "economic citizenships" and license virtual casinos. In the Pacific region, only the Palau and Vanuatu OFCs are reported to sell gaming licenses, although neither sells economic citizenships.

The USA PATRIOT Act also required U.S. financial institutions to take "reasonable steps" to ensure that their correspondent account holders (foreign banks) are not using those accounts to provide banking services to foreign shell banks indirectly in violation of the USA PATRIOT Act. U.S. Treasury Department regulations suggested that one "reasonable step" would be for U.S. financial institutions to obtain written notification from their corresponding banking clients certifying that none of their account holders are shell banks as defined by the Act.

In Nauru, for example, it is believed that nearly all, if not all, 400 banks registered in Nauru are shell banks—banks that exist on paper only for the purpose of "booking" monies through them. In many cases, the beneficial owners of the shell bank are anonymous and have established equally anonymous IBCs that are aggressively employed to move funds through their fictional shell banks.

While Nauru might be the extreme example, the number of banks currently registered in jurisdictions that offer offshore services (as noted on the Offshore Services chart that follows this section) may decrease dramatically in 2002 as shell banks come under closer scrutiny.

The USA PATRIOT Act also allows the U.S. Government to seize funds held by foreign banks in U.S. correspondent accounts to satisfy certain types of seizure orders against funds deposited in the foreign bank abroad. The first such seizure of this nature occurred December 2001 with respect to forfeitable funds deposited by two U.S. citizens in the OFC of Belize.

The continuation of the IMF assessments, the FATF NCCT exercise and the adherence to and enforcement of the USA PATRIOT Act will not only continue to distinguish well regulated offshore jurisdictions from those that are not, but will diminish the capacity of OFCs to cater to criminals attempting to launder money or finance terrorist activities through U.S. financial institutions.

Public information regarding offshore financial centers can be difficult to obtain. Industry publications, discussions with regulators of the OFCs, foreign government finance officials, embassy reports, and analyses from United States Government (USG) agencies, international organizations, and secondary sources provided the data for the chart.

Excluded are jurisdictions that provide low or no taxes to individuals but offer no other services or products normally associated with the offshore financial service sector. Also excluded are jurisdictions that have established OFCs but for which the USG has little or no information regarding the operations of the OFC. Within most categories presented on the chart, the designations Y and N are used to denote the existence (Y) or the non-existence (N) of the entity or service in a specific jurisdiction. Where there is no information regarding specific categories, or available information is inconclusive, the corresponding cells on the chart are left blank. In some categories, symbols other than or in addition to Y or N are used. Explanations for additional symbols are provided below.

Explanations of the categories themselves are either provided in the preceding text, are considered to be self-evident, or are provided below.

Category Designations on the Offshore Financial Services Chart

Offshore Banks: The number is provided if known. A Y indicates that although a jurisdiction that offers offshore financial services (OFC) licenses offshore banks, the number of such banks is not known. An N indicates that no offshore banks are known to be licensed in the jurisdiction. A blank cell indicates no or inconclusive information regarding whether offshore banks are offered within the OFC.

Trust and Management Companies: These are companies that provide fiduciary services, as well as serving as marketing agents, representatives, lawyers, accountants, trustees, nominee shareholders, directors, and officers of international business companies.

International Business Companies (IBCs) & Restricted Companies: Numbers are provided when known and public; in many cases, the numbers are significantly underreported. A P indicates that the jurisdiction does not publicize the number of IBCs registered within it.

Bearer Shares: Share certificates can be issued without the name of the beneficial owner. A Y indicates that the OFC offers bearer shares; an N indicates that it does not; and a blank cell indicates that the USG does not know if bearer shares are offered within the OFC.

Asset Protection Trusts (APTs): Trusts that protect assets from civil judgment. A Y indicates that the OFC offers APTs; an N indicates that it does not; and a blank cell indicates no or inconclusive information regarding whether APTs are offered within the OFC.

Insurance and Re-insurance Company Formation: A Y indicates that the OFC allows formation of insurance and re-insurance companies; an N indicates that it does not; and a blank cell indicates no or inconclusive information regarding whether insurance and re-insurance companies are allowed within the OFC.

Sells "Economic Citizenship": A Y indicates that the OFC sells economic citizenships; an N indicates that it does not; and a blank cell indicates no or inconclusive information regarding whether the OFC sells economic citizenships. An S indicates that an OFC has suspended or ceased sales in 2001.

Internet Gaming: Licenses granted by jurisdictions that enable grantees to establish "virtual casinos" on the Internet, in which customers can pay via credit card. A Y indicates that the OFC licenses Internet gaming; an N indicates that it does not; and a blank cell indicates no or inconclusive information regarding whether Internet gaming is offered within the OFC.

Criminalized Drug Money Laundering: A D indicates that the OFC has a law criminalizing narcotics-related money laundering only. A BD indicates that crimes other than those related to narcotics are considered to be predicate crimes for money laundering in the OFC. An N indicates that there is no legislation criminalizing money laundering in the OFC.

Financial Action Task Force (FATF) Non-Cooperative Exercise: This column provides the FATF finding. NC indicates the jurisdiction was determined to be non-cooperative; R indicates that the jurisdiction was reviewed and was not identified as non-cooperative; a blank cell indicates that the jurisdiction was not reviewed. RM indicates that FATF removed the jurisdiction from the NCCT list.

Wire Transfer and Shell Company Activity

Suspicious Activity Reports (SARs) filed by U.S. based banks have cited suspicious wire transfer activity transpiring through U.S. correspondent accounts maintained by foreign banks. The SARS typically reference possible shell entities as parties to the wire transfer activity. Many of these shell companies are domestically based.

Reports filed on correspondent accounts revealed large dollar volumes of suspicious wire transfer activity transpiring through U.S. correspondent accounts maintained by foreign banks. This activity has often involved so-called "unsubstantiated entities" (companies who do not appear as listed on the Internet or through other research). These "unsubstantiated" entities have been involved as parties to the suspicious wire transfer activity transpiring through the correspondent accounts maintained by foreign banks with the U.S. reporting bank.

Some reports also referenced suspected "shell banks" as parties to the suspicious wire transfer activity through foreign correspondent bank accounts. Other suspicious factors cited by the reporting banks, beyond the detection of suspected shell entities, include: large dollar volume wire transfers; repetitive patterns of frequent wire transfers; and unusual directional flows considered by the reporting banks to be deviations from normal legitimate business transaction flows.

Several U.S. based banks have the ability to detect and report this suspicious activity through monitoring of the correspondent accounts that they maintain for foreign banks Some U.S. based banks have also closed correspondent accounts maintained by foreign banks due to continuous suspicions that many of the foreign banks’ customers are possible shell entities.

Computer Intrusion

Law enforcement has identified computer intrusion as a new type of suspicious activity as a result of reports from financial institutions regarding possible attempts to intrude into their computer systems. Computer Intrusion is defined as gaining access to a computer system of a financial institution to: remove, steal, procure or otherwise affect funds of the institution or the institution’s customers; remove, steal, procure or otherwise affect critical information of the institution including customer account information; or damage, disable or otherwise affect critical systems of the institution. For purposes of this reporting, computer intrusion does not mean attempted intrusions of web-sites or other non-critical information systems of the institution that provide no access to institution or customer financial data or other critical information.

From June 1, 2000 to May 31, 2001, 147 suspicious activity reports on computer intrusion were filed by financial institutions in 34 states and Puerto Rico. All were filed by depository institutions, with those in New York, California and Illinois accounting for nearly 30 percent.

Money Transmitters

The majority of companies in the United States that make up the money services businesses (MSB) industry recognize that the products and services that they provide may be vulnerable to abuse. Some of the national MSBs, including the leading money transmission services, money order and travelers’ checks issuers, check cashing businesses and currency exchange providers have developed internal systems to detect suspicious activity.

Reports filed by money transmitter companies, both primary companies (companies that own a money transmitter business) and agent businesses (companies that act as agents), indicate that there are many varied patterns of suspicious activity involving money transmitter companies. Primary among those are customer attempts to disperse transactions and circumvent record keeping dollar amount thresholds.

Identity Theft

Identity theft and related fraudulent activities have been reported by financial institutions since 1996. In the June 2001 Issue of the SAR Activity Review, identity theft was selected as the Highlighted Trend based on the financial industry’s perception of increases in both the incidence of identity theft-based fraud and increased SAR reporting.

Since December 1, 2000, filing of reports related to identity theft have increased by 50 percent from the same period a year before. Because the rate of identity theft incidents continues to increase, the Federal Trade Commission has developed a pamphlet to assist consumers in avoiding identity theft and, in instances of abuse, to give steps to take in addressing stolen identities. Federal bank supervisors also recently released guidance to banking organizations on identity theft.

Terrorist Financing

U.S. law enforcement conducted a review of investigative case files to provide guidance to financial institutions on indicators of activity that could be linked to various criminal activities including terrorism. The following patterns of activity indicate collection and movement of funds that could be associated with terrorist financing:

Use of multiple personal and business accounts to collect and funnel funds to a small number of foreign beneficiaries;

Deposits are followed within a short period of time by wire transfers of funds;

Beneficiaries are located in a problematic foreign jurisdiction;

Structuring of cash deposits in small amounts in an apparent attempt to circumvent Federal Currency Transaction Report requirements;

Mixing of cash deposits and monetary instruments;

Deposits of a combination of monetary instruments atypical of legitimate business activity (business checks, payroll checks and social security checks);

Stated occupations of those engaging in transactions that are not commensurate with the level of activity (e.g., student, unemployed, self-employed);

Large currency withdrawals from a business account not normally associated with cash transactions.

Other Money Laundering Trends and Typologies

Alternative Money Remittance Systems

Alternative remittance systems, sometimes also referred to as informal value transfer systems (IVTS), are a family of monetary remittance systems that provide for the transfer of value outside of the regulated financial industry. These systems are known by a variety of names reflecting ethnic and national origins, predominantly South Asian and Chinese. They operate throughout the world, especially in countries with large expatriate populations from Africa and Asia. Included, among others, are such systems as hawala (India), hundi (Pakistan), fei ch’ien (China), phoe kuan (Thailand), hui k’uan (Mandarin Chinese), ch’iao hui (Mandarin Chinese) and nging sing kek (Cantonese Chinese). Most of these systems pre-date the emergence of modern banking and other financial institutions. The Colombian Black Market Peso Exchange can also be characterized as a form of alternative remittance system.

These systems provide mechanisms for the remittance of currency or other forms of monetary value—most commonly gold—without physical transportation or use of contemporary monetary instruments. These systems are used extensively as a means for expatriates, such as foreign laborers, to have funds delivered to families in the home country without contact with authorities on either the sending or receiving end. The systems rely on a pairing of brokers, one who orders a disbursement on behalf of a sender and another that makes the disbursement to the receiver, followed at some point in time with a clearing process to settle account imbalances between the brokers. The systems operate on the basis of a trusted relationship established in the context of narrowly defined ethnic and national ties. Records are not typically kept about the identities of the transactors or details of the transactions.

Because of the anonymity and secrecy of the remittance transactions, these systems are known to have been used in a variety of criminal activities including money laundering, terrorist financing, alien smuggling, drug trafficking, arms trafficking, corruption of government officials, currency controls evasion and tax evasion. Although these systems operate outside of the regulated financial industry, they may intersect with banks and other traditional financial institutions in order to either obtain currency needed to make disbursements, or as links in the account clearing process involving wire transfers, imports and exports of goods such as electronics, securities transactions etc. It is at these links that the brokers or their representatives may become known to financial institutions, and their transactions reviewed for indications of unusual activity in countries that require the reporting of suspicious transactions.

Black Market Peso Exchange System

The Black Market Peso Exchange System (BMPE) is a trade-based system that depends on commercial traffic between the U.S. and Colombia to launder profits from the sale of illegal drugs in the United States. The BMPE is a significant money laundering conduit used by Colombian narcotics traffickers in repatriating revenues to Colombia. The process begins when a Colombian drug organization arranges the shipment of drugs to the United States. The drugs are sold in the U.S. in exchange for U.S. currency that is then sold to a Colombian black market peso broker’s agent in the United States. The U.S. currency is sold at a discount because the broker and his agent must assume the risk of evading the Bank Secrecy Act reporting requirements when later placing the dollars into the U.S. financial system.

Once the dollars are delivered to the U.S.-based agent of the peso broker, the peso broker in Colombia deposits the agreed upon equivalent in Colombian pesos into the organization’s account in Colombia. At this point, the organization has laundered its money because it has successfully converted its drug dollars into pesos, and the Colombian broker and his agent now assume the risk for introducing the laundered drug dollars into the U.S. banking system, usually through a variety of surreptitious transactions. Having introduced the dollars into the U.S. banking system, the Colombian black market peso broker now has a pool of laundered dollars to sell to Colombian importers. These importers then use the dollars to purchase goods, either from the U.S. or from other markets, which are transported to Colombia, often via smuggling in order to avoid applicable Colombian law.

The exact size and structure of the BMPE system cannot be determined with any degree of precision. However, based on anecdotal law enforcement evidence, informants’ statements, and Colombian law enforcement and intelligence officials, it is believed that between $3 billion and $6 billion is laundered annually. Other sources of demand for BMPE dollars include capital outflows by Colombian residents, who seek either to conceal the funds from the Colombian authorities or simply to take advantage of the favorable BMPE exchange rate.

To combat the BMPE, the U.S. Department of Treasury instituted an interagency working group whose aggressive attack on this problem has resulted in enhanced coordination of anti-BMPE investigations and increased successful prosecutions. Treasury’s outreach programs to educate U.S. exporters of the operations of and their vulnerability to the BMPE have also achieved success. During the past year, high-level U.S. Government officials met with senior officials of U.S. companies whose products are vulnerable to the BMPE to explain the system and to encourage them to develop programs to counter the BMPE. Subsequently, company officials and government experts developed draft best practice guidelines to help U.S. importers and exporters identify BMPE-related transactions and institute protective measures. These draft guidelines are now under study by U.S. companies and are being adapted to fit business practices in various industries. These guidelines are expected to be implemented by June 2002.

In addition to domestic outreach efforts, the United States, Colombia, Panama, Venezuela and Aruba formed an international working group of experts to combat this money laundering system. This working group is to study the BMPE, report its findings, and recommend policy options and actions that can be taken by the governments against the BMPE.

On October 21, 2000, U.S. Treasury Department and Department of Justice officials and government officials from Aruba, Colombia, Panama, and Venezuela participated in the first meeting of this working group. At the meeting, the 30 experts discussed how the BMPE money laundering system affected each of their respective countries. Topics of discussion included the BMPE steps, documentation of international commercial transactions, the problems with existing paper trails and laws, and ways to improve international cooperation.

During 2001, the BMPE Multilateral Working Group met in Panama, Colombia, and the United States and conducted studies of day-to-day operations and regulation of free trade zones, the relationship between merchants in and operators of these zones and zone authorities including Customs. As a result of these meetings, experts from the participating countries formulated policies and actions as recommendations to their respective governments.

These wide ranging recommendations included improving international cooperation through the design and implementation of standardized recording and reporting of international shipments to facilitate information exchange between governments, The Experts Group also recommended adequate screening and regulation of free trade zone merchants and operators, and expanded efforts to educate international commerce merchants to the risks of trade-based money laundering and methods to combat it. Recognizing that contraband trade and related money laundering is endemic to the economies of certain regions, the experts of the Multilateral Group also recommended conducting studies of economic, social, political and/or legal issues to find comprehensive responses to problems. The Multilateral Working Group is expected to reconvene in 2003 to review progress in implementing these recommendations and to report on results achieved in combating trade-based money laundering,

The Hawala System

The hawala (or hundi) alternative remittance system (sometimes also known as parallel or underground banking) continues to be a key factor in money laundering and financial crimes associated with South Asia. It is used in both the huge "underground" economies of the region and is also widely used in everyday transactions involving legitimate commerce. Hawala has been called "the poor man’s banking system." Unfortunately, criminal organizations take advantage of hawala networks to launder illegally derived proceeds or transfer funds for the financing of criminal activities. In 2001, the use of hawala was noted in terrorist financing investigations. Moreover, because of changing immigration patterns, the use of hawala is no longer confined to South Asia but has spread around the world.

Hawala operates on trust and connections. In fact "trust" is one of several meanings associated with the word hawala. Customers trust hawala operators or "hawaladars" to use their connections to facilitate money movement or more accurately transfer value around the world. The hawala money transfer system is generally much more rapid and inexpensive then the use of traditional banking institutions. Hawala transactions are often based on the trade of a commodity such as electronics or gold. Fictitious, under-or over-invoicing are often used to "balance the books." The actual hawala records themselves provide little paper trail and often the records are written in code. Most hawala networks are based on ethnic and family ties. This facilitates the trust necessary for hawala, and also makes it very difficult for law enforcement to penetrate the networks.

Dubai in the United Arab Emirates has often surfaced as the conduit for hawala transfers involving India, Pakistan, Afghanistan, Somalia, and other countries in the region. The UAE is beginning to study possible countermeasures to hawala transactions. However, any solution must also address the underlying causes of hawala in South Asia such as severe foreign exchange restrictions, inefficient and costly banking channels, and tax and duty policies.

Lawyers/Notaries, Accountants and Other Non-Financial Professionals

United States law enforcement authorities have observed that as money laundering schemes become more complex, the perpetrators turn to the learned expertise of attorneys, accountants, consultants and agent representatives to aid them in the movement of illegal currency. These professionals, using shell corporations, nominees and fictitious records, devise elaborate paper trails to disguise the true source of illegal income.

The Market for Gold and Other Precious Metals

Gold is known to play a significant role in international money laundering. Gold, just like certain currencies (e.g., the U.S. dollar, Swiss franc, and British pound, the Euro) is a nearly universal commodity for international commerce. The attractiveness and value of a particular currency depend on a complex and often unstable variety of political and economic conditions. Gold has been a key medium of exchange since antiquity and will, in fact, most likely always enjoy this position, as it appears nearly immune to the consequences of changing global fortunes.

Gold serves as both a commodity and, to a lesser extent, a medium of exchange in money laundering conducted in Latin America, the United States, Europe and Asia. In this cycle, for example, gold bullion makes its way to Italy via Swiss brokers. There it is made into jewelry, much of which is then shipped to Latin America. In Latin America, this jewelry (or the raw gold from which it was made) then becomes one, if not the most important, of the commodities in the black market peso exchange.

Use of Traveler’s Checks to Disguise Identities

Criminals may be using traveler’s checks as a money laundering tool. Although traveler’s checks can be the preferred mechanism for conducting large business transactions in some countries, the use of traveler’s checks can offer the opportunity to commingle illicit funds with legitimate funds. Several major U.S. banks and traveler’s check issuers have detected and reported suspicious practices involving the use of hundreds of thousands of dollars in traveler’s checks per instance, often in strings of sequentially numbered thousand-dollar traveler’s checks. In some cases, the payee was a numbered account in a foreign bank. Frequently the name and/or address on the purchase agreement were left blank, unverifiable, illegible, or not matching the signature name on the corresponding traveler’s checks.

Mexico, Nigeria, Israel, and a number of East Asian countries have been frequently cited as the point of origin or negotiation for instruments involved in this type of activity. An example was the purchase of traveler’s checks from an investment house/travel agency in Asia, where one employee of the traveler’s check seller personally signed the purchase agreements for $27 million worth of traveler’s checks. When the traveler’s check issuer told the seller to have the buyer sign the purchase agreement, the traveler’s check seller started producing purchase agreements with many different names, but frequent similarities in handwriting.

Pre-paid Telephone Cards as Cover for Money Laundering

Increased reporting on the sale of pre-paid telephone cards led to the May 2001 issuance of FinCEN’s Bulletin on suspicious activity related to phone card businesses. Over 160 reports indicating suspicious financial activity were filed related to businesses involved in phone card sales. Some of the companies or businesses involved in the reported activity offer other services such as check cashing, money orders, beepers, cellular phones, faxes, lottery tickets, and travel tickets. Financial institutions in fourteen states, particularly in New York, New Jersey, Texas, California and Florida, reported this suspicious activity.

Phone card sale businesses routinely generate significant legitimate cash flow. Information reported by financial institutions shows problematic transactions suggestive of money laundering or other illicit financial activity such as large and unexplained cash flow increases or transactions structured to stay below CTR reporting requirements associated with illegitimate use of these businesses. Additionally, law enforcement information suggests the use of phone cards may be a possible mechanism to launder illicit funds. The reported dollar volumes associated with this activity range from $300,000 to $50 million. In one instance, a bank reported 370 cash deposits by a prepaid phone card business totaling more than $3 million in approximately three months, exceeding the business’ expected cash flow.

Vulnerability Factors

The current ability of money launderers to penetrate virtually any financial system makes every jurisdiction a potential money laundering center. There is no precise measure of vulnerability for any financial system, and not every vulnerable financial system will, in fact, be host to large volumes of laundered proceeds, but a checklist of what drug money managers reportedly look for provides a basic guide. The checklist includes:

Failure to criminalize money laundering for all serious crimes or limiting the offense to narrow predicates.

Rigid bank secrecy rules that obstruct law enforcement investigations or that prohibit or inhibit large value and/or suspicious or unusual transaction reporting by both banks and non-bank financial institutions.

Lack of or inadequate "know your client" requirements to open accounts or conduct financial transactions, including the permitted use of anonymous, nominee, numbered or trustee accounts.

No Lack of effective monitoring of cross-border currency movements. requirement to disclose the beneficial owner of an account or the true beneficiary of a transaction.

No reporting requirements for large cash transactions.

No requirement to maintain financial records over a specific period of time.

No mandatory requirement to report suspicious transactions or a pattern of inconsistent reporting under a voluntary system; lack of uniform guidelines for identifying suspicious transactions.

Use of bearer monetary instruments.

Well-established non-bank financial systems, especially where regulation, supervision, and monitoring are absent or lax.

Patterns of evasion of exchange controls by legitimate businesses.

Ease of incorporation, especially where ownership can be held through nominees or bearer shares, or where off-the-shelf corporations can be acquired.

No central reporting unit for receiving, analyzing and disseminating to the competent authorities information on large value, suspicious or unusual financial transactions that might identify possible money laundering activity.

Lack of or weak bank regulatory controls, or failure to adopt or adhere to the Basle Principles for International Banking Supervision, especially in jurisdictions where the monetary or bank supervisory authority is understaffed, under skilled or uncommitted.

Well-established offshore financial centers or tax-haven banking systems, especially jurisdictions where such banks and accounts can be readily established with minimal background investigations.

Extensive foreign banking operations, especially where there is significant wire transfer activity or multiple branches of foreign banks, or limited audit authority over foreign-owned banks or institutions.

Limited asset seizure or confiscation authority.

Limited narcotics, money laundering and financial crime enforcement and lack of trained investigators or regulators.

A jurisdiction with free trade zones where there is little government presence or other supervisory authority.

Patterns of official corruption or a laissez-faire attitude toward the business and banking communities.

Jurisdictions where the U.S. dollar is readily accepted, especially jurisdictions where banks and other financial institutions allow dollar deposits.

Well-established access to international bullion trading centers in New York, Istanbul, Zurich, Dubai and Mumbai.

Jurisdictions where there is significant trade in or export of gems, particularly diamonds.

Jurisdictions with large parallel or black market economies.

Limited or no ability to share financial information with foreign law enforcement authorities.

Glossary of Terms

1. "Criminalized Drug Money Laundering": The jurisdiction has enacted laws criminalizing the offense of money laundering related to drug trafficking.

2. "Criminalized Beyond Drugs": The jurisdiction has extended anti-money laundering statutes and regulations to include non-drug-related money laundering.

3. "Record Large Transactions": By law or regulation, banks are required to maintain records of large transactions in currency or other monetary instruments.

4. "Maintain Records Over Time": By law or regulation, banks are required to keep records, especially of large or unusual transactions, for a specified period of time, e.g., five years.

5. "Report Suspicious Transactions": An "M" (for "mandatory") indicates that by law or regulation, banks are required to record and report suspicious or unusual transactions to designated authorities. A "P" indicates that by law or regulation, banks are permitted to record and report suspicious transactions. An effective know-your-customer policy is considered a prerequisite in this category.

6. "Financial Intelligence Unit": The jurisdiction has established a central, national agency responsible for receiving (and, as permitted, requesting), analyzing, and disseminating to the competent authorities disclosures of financial information concerning suspected proceeds of crime, or required by national legislation or regulation, in order to counter money laundering. These reflect those jurisdictions that are members of the Egmont Group.

7. "System for Identifying and Forfeiting Assets": The jurisdiction has enacted laws authorizing the tracing, freezing, seizure and forfeiture of assets identified as relating to or generated by money laundering activities.

8. "Arrangements for Asset Sharing": By law, regulation or bilateral agreement, the jurisdiction permits sharing of seized assets with third party jurisdictions which assisted in the conduct of the underlying investigation.

9. "Cooperates w/Domestic Law Enforcement": By law or regulation, banks are required to cooperate with authorized law enforcement investigations into money laundering or the predicate offense, including production of bank records, or otherwise lifting the veil of bank secrecy.

10. "Cooperates w/International Law Enforcement": By law or regulation, banks are permitted/required to cooperate with authorized investigations involving or initiated by third party jurisdictions, including sharing of records or other financial data.

11. "International Transportation of Currency": By law or regulation, the jurisdiction, in cooperation with banks, controls or monitors the flow of currency and monetary instruments crossing its borders. Of critical weight here is the presence or absence of wire transfer regulations and use of reports completed by each person transiting the jurisdiction and reports of monetary instrument transmitters.

12. "Mutual Legal Assistance": By law or through treaty, the jurisdiction has agreed to provide and receive mutual legal assistance, including the sharing of records and data.

13. "Non-Bank Financial Institutions": By law or regulation, the jurisdiction requires non-bank financial institutions to meet the same customer identification standards and adhere to the same reporting requirements that it imposes on banks.

14. "Disclosure Protection Safe Harbor": By law, the jurisdiction provides a "safe harbor" defense to banks or other financial institutions and their employees who provide otherwise confidential banking data to authorities in pursuit of authorized investigations.

15. "Offshore Financial Centers": By law or regulation, the jurisdiction authorizes the licensing of offshore banking and business facilities.

"States Parties to 1988 UN Drug Convention": As of December 31, 2001, a party to the 1988 United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, or a territorial entity to which the application of the Convention has been extended by a party to the Convention.