1998 Congressional HearingsIntelligence and Security
1998 Congressional Hearings
Mr. Chairman and members of the committee:
Thank you for the opportunity this hearing provides to give you an update on recent federal efforts to combat money laundering. Money laundering has developed into a global problem and, to address this problem, the Department of State has undertaken a variety of initiatives to combat this evolving national security threat. I would like to discuss global money laundering and address why it is important to fight its growth on a global basis. I also would like to discuss several initiatives the Department of State has developed to reduce the threat of international money laundering.
The Money Laundering Problem
Criminals that commit crimes need to disguise their money so that they can then use it freely by integrating it into global financial systems. This is the basis for money laundering and involves ill-gotten gains from a variety of crimes including drug trafficking, organized crime, terrorism, arms trafficking, kidnaping, and various financial crimes.
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 are seeking to use the funds. Through money laundering, the criminal tries to transform the monetary proceeds derived from illicit activities into funds with an apparently legal source.
Due to the clandestine nature of money laundering, it is difficult to estimate the total volume of laundered funds circulating internationally. Analytic techniques are highly imprecise, involving such measures as multiplying the volume of trade in an illicit activity--such as drug trafficking, arms trafficking, or fraud--by the value of that trade. Such rough estimates place the annual worldwide value of laundered funds in the range of $300-500 billion.
Weak financial regulatory systems, lax enforcement, and corruption are key factors that make certain jurisdictions particularly attractive for laundering illicit proceeds by international drug trafficking and other criminal organizations, by terrorist groups financing their activities, and by pariah states undertaking financial transactions to evade international sanctions and to acquire technologies and components for weapons of mass destruction.
As the United States assesses a jurisdiction's vulnerability to money laundering, it evaluates the role of the jurisdiction's financial services sector in facilitating illicit financial transactions, including: the laundering or otherwise improper transfer or distribution of funds or maintenance of accounts; the nature and extent of legislation and regulations to prevent illicit transactions; the capabilities and willingness of the government to enforce existing legislation and regulations and the results of the government's actions to enforce those laws; and, the volume of illicit transactions detected by U.S. law enforcement agencies in the financial services sector of that jurisdiction.
There are three elements to the complete laundering of funds, beginning with the placement of currency into a financial services institution ("placement"), continuing with the movement of funds from institution to institution to hide the source and ownership of the funds ("layering"), and concluding with the reinvestment of those funds in an ostensibly legitimate business ("integration").
While countermeasures to all three components of money laundering are important, laundered money is most vulnerable to detection at the placement stage. As a consequence, international regulatory and law enforcement efforts have concentrated especially on developing methods to make it difficult to place illicit funds without detection by developing measures such as suspicious transaction reporting requirements, cross-border monetary declaration requirements, and "know your customer" rules for those accepting cash deposits.
International standards to discourage layering have also begun to develop, through a focus on transparency and through pressure to eliminate techniques such as the use of nominees and numbered accounts to disguise the actual ownership of assets. Of additional importance has been the growing international recognition that bank secrecy rules must give way to permit law enforcement agencies to review financial records in cases where there is an active criminal investigation pertaining to the source of the funds.
Finally, integration of illicit proceeds can be fought through the strengthening of asset forfeiture laws, by which governments can seize the proceeds of criminal activity even when those proceeds have been reinvested in ostensibly legitimate enterprises. Currently, the United States and its international partners are examining methods by which asset forfeiture regimes and asset sharing among law enforcement agencies of different countries can be strengthened to place more pressure on money launderers and to make it more difficult for them to assume that after "integration" they have successfully protected their money from the law.
Why It Is Important To Fight Money Laundering
Money laundering has devastating social consequences and is a threat to national security because it provides the fuel for drug dealers, terrorists, arms dealers, and other criminals to operate and expand their criminal enterprises. In doing so, criminals manipulate financial systems in the United States and abroad. Unchecked, money laundering can erode the integrity of a nation's financial institutions. Due to the high integration of capital markets, money laundering can also negatively affect national and global interest rates as launderers reinvest funds where their schemes are less likely to be detected, rather than where rates of return are higher because of sound economic principles. Organized financial crime is assuming an increasingly significant role that threatens the safety and security of people, states, and democratic institutions. Moreover, our ability to conduct foreign policy and to promote our economic security and prosperity is hindered by these threats to our democratic and free-market partners.
In recent years, crime has become increasingly international in scope and the financial aspects of crime have become more complex due to the rapid advances in technology and globalization of the financial services industry. Money laundering can have devastating effects on financial institutions and undermine the stability of democratic nations. Modern financial systems permit criminals to transfer instantly millions of dollars though personal computers and satellite dishes. Money has been laundered through currency exchange houses, stock brokerage houses, casinos, automobile dealerships, insurance companies, and trading companies. The use of private banking facilities, offshore banking, wire systems, shell corporations, and trade financing all have the ability to mask illegal activities. The criminal's choice of money laundering vehicles is only limited by his or her creativity. Ultimately, this laundered money flows into global financial systems where it can undermine national economies and currencies. Money laundering is not only a law enforcement problem but a serious national and international security threat as well.
There is now worldwide recognition that we must deal firmly and effectively with increasingly elusive, well-financed, and technologically adept criminals who are determined to use every means available to subvert the financial systems that are the cornerstone of legitimate international commerce. Money launderers can impact countries by reducing tax revenues through underground economies, competing unfairly with legitimate businesses, damaging financial systems, and disrupting economic development. Money laundering is now being viewed as a central dilemma in dealing with all forms of international organized crime because financial gain means power. Fighting money launderers not only reduces financial crime, but it also deprives criminals of the means to commit other serious crimes.
Many countries around the world already engage in a concerted effort to combat money laundering and other financial crimes. Through the enactment of counter-money laundering laws, bilateral and multilateral agreements, and other cooperative efforts, nations have joined together to foster an international awareness of the seriousness and threat of this criminal activity.
With a complex and sophisticated financial system that is often a target for money laundering, the United States is working hard both at home and abroad to fight this crime. An increasing number of countries have also moved to deny criminals unfettered access to their financial systems. While much progress has been made, there are still nations that are not yet adequately addressing this problem. And the international criminal is taking full advantage, moving vast sums of illicit money through the world's financial systems. International criminals know no geographic boundaries and still operate in "safe haven" jurisdictions that permit, or even encourage, this criminal activity.
If the United States, along with its international partners and allies, is ultimately going to be successful in this fight, then we must make it even more difficult for criminals. Efforts must focus on both those areas where criminals are now operating and where they will try to infiltrate in the future, and we must foster cooperation with those nations that, heretofore, have allowed criminal enterprises to flourish unchecked.
Current Global Trends in Money Laundering
Several general observations can be made regarding the current characteristics of money laundering:
One, drawn from the two most recent Financial Action Task Force (FATF) typologies exercises, is that the global nature of the money laundering phenomenon has rendered geographic borders increasingly irrelevant. Launderers tend to move their activity to jurisdictions where there are few or weak money laundering countermeasures.
Two, a number of traditional money laundering techniques, such as smurfing and the use of offshore businesses, continue to be prominent methods for hiding the proceeds of crime.
Three, while changes continue to be observed in usage of various traditional money laundering methods, there is a growing trend of money launderers moving away from the banking sector to the non-bank financial institution sector. In the non-bank financial sector, the use of bureaux de change (currency exchange houses) and money remittance businesses (such as wire transfer companies) to dispose of criminal proceeds remain among the most often cited threats.
Four, there is also a continuing increase in the amount of criminal cash being smuggled out of countries for placement into financial systems abroad. 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 on their persons, an even greater amount of cash is probably being hidden in cargo shipments. This trend of cash smuggling appears to be mostly attributable to the success of anti-money laundering measures in banks and other financial institutions.
Finally, the most noticeable trend is the increase in the use by money launderers of non-financial businesses or professions related to banking institutions. Money launderers are increasingly receiving the assistance of professional facilitators such as accountants, notaries, lawyers, real estate agents, and agents for the purchase and sale of luxury items, precious metals, and even consumer durables, textiles, and other products involved in the import-export trade who utilize a variety of vehicles to mask the origin and ownership of tainted funds. The use of shell companies, usually incorporated in offshore jurisdictions, is a common technique. Laundering of accounts held by relatives or friends is also popular.
The Administration's Anti-Money Laundering Activities
On October 21, 1995, President Clinton signed Presidential Decision Directive 42 (PDD-42) which specifically addresses the nation's fight against international crime. PDD-42 recognizes that such criminal activity threatens U.S. national security and directs the federal agencies to combat international crime from the criminal barons sheltered overseas to the violence and destruction they deliver to our streets. In this directive, the President ordered the Departments of Justice, State and Treasury, the Coast Guard, National Security Council, intelligence community, and other federal agencies to increase and integrate their efforts against international crime syndicates and money laundering. Specifically, the President noted the corrosive effect on markets and governments of the laundering of massive illicit profits and ordered U.S. Government agencies to increase efforts in going after those criminal proceeds. The United States' strategy has been to integrate domestic and international efforts and to expand cooperation and consultation among its agencies to reduce international crime.
On the following day, October 22, 1995, the President addressed the UN General Assembly and called for international cooperation to address the threats posed by money laundering, narcotics trafficking, and terrorism, noting that the forces of international crime
"jeopardize the global trend toward peace and freedom, undermine fragile democracies, sap the strength from developing countries, [and] threaten our efforts to build a safer, more prosperous world."
Following these mandates, in consultation with the Secretary of State and the Attorney General, the Secretary of the Treasury has identified egregious overseas money laundering centers, or "safe havens," for illegally obtained wealth. Interagency teams have negotiated with those governments to end the safe havens they offer. Successful negotiations have resulted in strengthened anti-money laundering regimes and weakened safe havens. If negotiations are unsuccessful, stronger measures will be employed. Significant achievements since President Clinton signed PDD-42 include:
Notwithstanding these accomplishments, much work remains to be done. In his statement before the 52nd session of the UN General Assembly on September 22, 1997, President Clinton remarked that:
"In the 21st century, our security will be challenged increasingly by interconnected groups that traffic in terror, organized crime, and drug smuggling. Already these international crime and drug syndicates drain up to $750 billion a year from legitimate economies. That sum exceeds the combined GNP of more than half the nations in this room."
Accordingly, and to promote further progress in implementing PDD-42, the National Security Council called upon the Departments of Justice, State, and the Treasury to develop and implement a comprehensive national strategy to attack international crime. The International Crime Control Strategy is that plan of action and was announced by the President on May 12, 1998.
The Strategy articulates 8 broad goals with 30 related objectives as the blueprint for an effective, long-term attack on the international crime problem. The Strategy also expresses the nation's strong resolve to combat international crime aggressively and reduce substantially its adverse impacts on the American people. At this point, Mr. Chairman, I would like to submit a copy of the Strategy to you and to the members of the committee and ask that it be attached to my testimony as part of the record.
The Strategy's goals and objectives are dynamic. They will evolve over time as conditions change, new crime trends emerge, and improved anti-crime techniques are developed. However, our firm resolve to attack and make significant inroads against international crime must and will be sustained.
Goal Four of the Strategy is to counter international financial crime. This goal has four objectives: First, combat money laundering by denying criminals access to financial institutions and by strengthening enforcement efforts to reduce inbound and outbound movement of criminal proceeds. Second, seize the assets of international criminals through aggressive use of forfeiture laws. Third, enhance bilateral and multilateral cooperation against all financial crime by working with foreign governments to establish or update enforcement tools and implement multilateral anti-money laundering standards. Fourth, target offshore centers of international fraud, counterfeiting, electronic access device schemes, and other financial crimes. The Department of State will play a significant role in implementing these objectives in its fight against global money laundering. The Department provides financial support and participates in the following activities to fight money laundering.
The Department of State's Bureau of International Narcotics and Law Enforcement Affairs (INL) has developed an FY 1997 $36.2 million program for providing law enforcement, rule of law, and central bank training and assistance to emerging democracies. A prime focus of the training program is a multi-agency approach to addressing international financial crimes, law enforcement development, organized crime, and counternarcotics training. Supported by and in cooperation with INL, the Department of Justice (DOJ), Treasury Department component agencies (including the Financial Crimes Enforcement Network (FinCEN)) and the Office of the Comptroller of the Currency (OCC)), the Board of Governors of the Federal Reserve (FRB), and non-government organizations offered law enforcement and criminal justice programs worldwide.
During 1997, INL funded numerous programs to combat international financial crimes, including money laundering. Nearly every federal law enforcement agency assisted in this effort by providing over 80 basic and advanced training courses in all aspects of financial criminal activity to over 50 countries. These activities included funding to conduct assessments and develop specialized training in identified countries worldwide by numerous federal law enforcement agencies.
In 1998, INL has planned an additional 50 anti-money laundering and financial crime programs covering over 30 countries. The programs will provide multiagency financial crime training, technical assistance, and money laundering assessments for a variety of countries worldwide.
As in previous years, INL training programs continue to focus on the interagency approach and bring together, where possible, law enforcement, judicial, and central bank authorities in assessments and training programs. This approach allows for an exchange of information and a dialogue usually not undertaken by those attending the training seminars. This approach has proved successful in various parts of the globe, from Central and South America to Russia, the New Independent States (NIS) of the former Soviet Union, and Central Europe. INL provides funding for many of the training and technical assistance programs offered by the various law enforcement agencies, including those at the International Law Enforcement Academy (ILEA) Budapest.
International Law Enforcement Academies (ILEA)
Five 12-hour training segments were presented at ILEA in Budapest. These segments provided instruction in financial investigative techniques and money laundering. They were attended by participants from the region, including representatives from Hungry, Croatia, and the Former Yugoslav Republic of Macedonia, Estonia, Latvia, and Lithuania. These courses were a portion of a consolidated interagency curriculum presented by various U.S. law enforcement agencies during an 8-week period.
In Panama, several ILEA-related financial crime and money laundering courses will be taught during 1998. These modules are included in the regular 2-week ILEA training courses, and an additional 1-week specialized course has been added on financial crime.
ILEA Bangkok is just in its organizational stage; however, we are planning to initiate training by fall 1998. Several financial crime and money laundering modules are scheduled for ILEA Bangkok and may commence as early as September 1998. Attendees are expected from countries throughout the region.
Treaties and Agreements
Mutual Legal Assistance Treaties (MLATs) allow generally for the exchange of evidence and information in criminal and related matters. In money laundering and asset forfeiture cases, they can be extremely useful as a means of exchanging banking and other financial records with our treaty partners. MLATs, which are negotiated by the Department of State in cooperation with the Department of Justice, are in force with the following countries: Argentina, the Bahamas, Canada, Hungary, Italy, Jamaica, Mexico, Morocco, the Netherlands, Panama, the Philippines, Spain, South Korea, Switzerland, Thailand, Turkey, the United Kingdom, the United Kingdom with respect to its Caribbean dependent territories (the Cayman Islands, Anguilla, the British Virgin Islands, Montserrat, and the Turks and Caicos Islands), and Uruguay. MLATs have been signed but not yet brought into force with another 21 governments: Antigua and Barbuda, Australia, Austria, Barbados, Belgium, Brazil, Colombia, the Czech Republic, Dominica, Grenada, Hong Kong, Israel, Latvia, Lithuania, Luxembourg, Nigeria, Poland, St. Kitts and Nevis, St. Lucia, Trinidad and Tobago, and Venezuela. The United States is actively engaged in negotiating additional MLATs around the world. The United States has also signed the Organization of American States' MLAT.
In addition, the United States has entered into executive agreements on forfeiture cooperation, including: (1) an agreement with the United Kingdom providing for forfeiture assistance and asset sharing in narcotics cases, and (2) a forfeiture cooperation and asset sharing agreement with the Netherlands. The United States has asset sharing agreements with Canada, Colombia, Ecuador, Mexico, and the United Kingdom on behalf of Anguilla, the British Virgin Islands, the Cayman Islands, Montserrat, and Turks and Caicos.
Financial Information Exchange Agreements (FIEAs) facilitate the exchange of currency transaction information between the U.S. Treasury Department and other governments' finance ministries. The United States has FIEAs with Colombia, Ecuador, Mexico, Panama, Paraguay, Peru, and Venezuela. FinCEN has a Memorandum of Understanding or an exchange of letters in place to facilitate exchange of information with the FIUs of the following countries: Argentina, Australia, Belgium, France, Slovenia, Spain, and the United Kingdom.
The United States has Customs Mutual Assistance Agreements (CMAAs) with the European Community and with the following countries: Argentina, Australia, Austria, Belarus, Belgium, Canada, Cyprus, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Italy, Japan, Korea, Mexico, Mongolia, New Zealand, Norway, Poland, Portugal, the Russian Federation, Slovakia, Spain, Sweden, Ukraine, the United Kingdom, and Yugoslavia. (The U.S. view is that the Socialist Federal Republic of Yugoslavia (SFRY) has dissolved and that the successors that formerly made up the SFRY--Bosnia and Herzegovina, Croatia, the Former Yugoslav Republic of Macedonia, Slovenia, and the Federal Republic of Yugoslavia (Serbia and Montenegro)--continue to be bound by the agreement with the SFRY at the time of dissolution.) The United States has also concluded CMAAs which are not yet in force with the following countries: Honduras, Ireland, Kazakhstan, the Netherlands, Turkey, and Venezuela. In addition, the United States has non-binding CMAAs with both Hong Kong and the United Kingdom. All of these agreements are patterned after a World Customs Organization Model CMAA. Since assistance can be provided under these agreements in the enforcement of any laws related to customs, the USCS uses these agreements to assist in the gathering of information and evidence for criminal and civil cases involving trade fraud, smuggling, violations of export control laws, and most recently, in the growing effort to combat narcotics trafficking and money laundering.
Asset Sharing
Pursuant to the provisions of the 1988 UN Drug Convention, the Departments of Justice, State, and Treasury have aggressively sought to encourage foreign governments to cooperate in joint investigations of drug trafficking and money laundering, offering the inducement of sharing forfeited assets. A parallel goal has been to encourage use of these assets to improve narcotics law enforcement. The long-term goal has been to encourage governments to improve asset forfeiture laws and procedures so that they will be able to conduct investigations and prosecutions against property within their own borders. The United States and its partners in the G-8 (formerly the G-7 industrialized nations plus Russia) agreed, at the May 1998 Birmingham Summit, on principles and the need for adequate legislation to facilitate asset confiscation from convicted criminals, including ways to help each other trace, freeze, and confiscate those assets, and where possible, in accordance with national legislation, share seized assets with other nations. To date, Canada, Switzerland, Jersey, and the United Kingdom have shared forfeited assets with the United States.
From 1989 through December 1997, the international asset sharing program, administered by the Department of Justice, resulted in the forfeiture in the U.S. of $190,275,879 of which $66,096,963 was shared with foreign governments which cooperated and assisted in the investigations. In 1997, the Department of Justice transferred forfeited proceeds to: Canada ($84,669); the Cayman Islands ($58,439); Luxembourg ($18,104,348), and the United Kingdom ($244,238). Prior recipients of shared assets (1989-1996) include: Argentina, the Bahamas, the British Virgin Islands, Canada, the Cayman Islands, Colombia, Costa Rica, Ecuador, Egypt, Guatemala, Guernsey, Hungary, Israel, Liechtenstein, Luxembourg, Paraguay, Romania, St. Maarten, Switzerland, the United Kingdom, and Venezuela.
MULTILATERAL ACTIVITIES
Financial Action Task Force (FATF)
The Financial Action Task Force on Money Laundering (FATF), which was established at the G-7 Economic Summit in Paris in 1989, is an intergovernmental body whose purpose is the development and promotion of policies to combat money laundering. These policies aim to prevent proceeds of crime from being utilized in future criminal activities and from affecting legitimate economic activities.
The FATF currently consists of 26 jurisdictions and two international organizations. Its membership includes the major financial center countries of Europe, North America, and Asia. The 26 FATF member countries and governments are: Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, Turkey, United Kingdom, and the United States. The two international organizations are the European Commission and the Gulf Cooperation Council. One of the guiding principles of the FATF is that money laundering is a complex economic crime which cannot be effectively controlled by conventional law enforcement methods alone, and that finance ministries, financial institutions, and regulators must work closely with law enforcement agencies in combating money laundering. Accordingly, the FATF is a multi-disciplinary body, bringing legal, financial, and law enforcement experts into the policy-making process.
In 1997, the FATF focused on several major initiatives. Perhaps the greatest achievement during 1997 is that all FATF members now have anti-money laundering legislation substantially in line with the FATF 40 Recommendations. With the strong encouragement of its FATF co-members, Turkey passed significant anti-money laundering legislation and enacted implementing regulations which put the law into force in 1997.
The FATF's second round of mutual evaluations, which commenced in early 1996 and is currently underway, is focused on the practical effectiveness of members' anti-money laundering measures and also assesses follow-up action taken in response to the recommendations for improvement made in the first round. During 1997, FATF conducted 11 second round mutual evaluations. Denmark, the United States, Austria, Belgium, Switzerland, Canada, Netherlands, Germany, Italy, Norway, and Japan. In addition, the Gulf Cooperation Council (GCC) agreed to institute a self-assessment program for its member states. This is a first step in addressing the problem that although the GCC is a FATF member, the GCC member states are not subject to FATF member requirements.
In February 1997, discussion began on the future of the FATF after 1999. At the Denver Economic Summit held in June 1997, the G-7 Heads of State issued a statement which "urged the FATF to review ways to advance its essential work and consider renewal of its mandate for an additional 5-year period." Specific issues, such as expansion of membership and identification of possible new members, were approved by the FATF in February 1998. At the May 1998 meeting of the Finance Ministers of the G-8 in Birmingham, the FATF mandate was continued for another 5 years.
The FATF adopted a policy allowing those international organizations that have agreed to carry out mutual evaluations of their members and whose evaluation procedures have been validated by the FATF Plenary to attend the discussions of the FATF mutual evaluation reports and to receive the related documents. Specifically, the FATF endorsed the mutual evaluation procedures of the Caribbean Financial Action Task Force (CFATF), the Council of Europe (which will be focusing on those of its members which are not FATF members), and the Offshore Group of Banking Supervisors (OGBS). The FATF will provide guidance to these organizations and may issue public statements regarding efforts made by non-members to combat money laundering. This will further encourage non-FATF members to adopt the FATF's recommendations and procedures.
In addition, several multilateral development banks, including the International Monetary Fund (IMF) and the World Bank, are increasingly focusing on anti-money laundering issues, and the FATF has established a constructive dialogue with them. The FATF has approached these organizations and attempted to gain their support for inclusion of anti-money laundering programs in their operations.
Other external relations activities included the participation of FATF representatives in the June 1997 United Nations Center for International Crime Prevention's Regional Ministerial Workshop on Organized Crime in Dakar, Senegal. In September 1997, a FATF mission to Cyprus was conducted to assess the money laundering situation and measures to combat it. In October 1997, the FATF co-hosted a money laundering seminar with the Bank of Russia in St. Petersburg. FATF provided a detailed exposition of anti-money laundering guidelines and recommendations of various FATF member countries and addressed the issue of cooperation between the financial sector and law enforcement authorities. FATF plans to co-host another money laundering seminar with the Black Sea Economic Cooperation (BSEC) in early 1998.
In June 1997, Mr. Jean Spreutels of Belgium assumed the FATF Presidency for FATF's ninth round of work (1997-1998). In June 1998, FATF will continue to work with the private financial services sector by hosting another Financial Services Forum. The President-Elect for FATF-X (1998-1999) is Mr. Jun Yokota from Japan's Ministry of Foreign Affairs. This will be the first time an Asian FATF member will serve as President of the FATF.
During June 1997, FATF established an Internet web site that allows it to reach a much wider audience, providing access to basic FATF documents, such as the 40 Recommendations and the annual Typologies Reports on money laundering methods and trends, as well as other key documents on money laundering (including the 1988 UN Drug Convention, the 19 Aruba Recommendations, and the Riga Declaration), and other documents of concern to FATF members. The site also serves as a single location in which the texts of various anti-money laundering statutes and regulations for both FATF and non-FATF members may be placed. Additionally, users will be able to find still more related information either through links to other related sites or through contact information provided within the site. The FATF web site can be found at http://www.oecd.org/fatf.
In 1997, FATF created a regional Ad Hoc Group on Central and Eastern Europe, chaired by the Netherlands, to support, coordinate, and exchange information between the other international organizations who are conducting anti-money laundering initiatives in the region. There are currently Ad Hoc Groups on Asia (Australian Chair) and Latin America (French Chair). The regional ad hoc groups serve as a catalyst for external relations efforts in each particular region and have been instrumental in creating FATF regional bodies.
An Ad Hoc Group on Estimating the Magnitude of Money Laundering, chaired by FinCEN's Director, was also established last year to develop a methodology to measure the money laundering problem from a global perspective. The purpose is to confirm that money laundering is a significant element in the global financial system and to quantify the amount of money laundering activity. Each participating country has formed an advisory board of experts for the purpose of identifying the quantifiable sources of data. This Ad Hoc Group will compile a draft methodology which will be used to develop a quantifiable estimate of the problem. Several international organizations, including the OECD, IMF, INTERPOL, Commonwealth Secretariat, and OAS/CICAD, are actively contributing to the work of this group. Once determined, this figure will allow policy makers and the public, through press reporting, to appreciate the critical value of anti-money laundering programs and their relationship to ensuring the integrity of the global financial system.
In November 1997, the FATF concluded a highly successful meeting on money laundering typologies. The purpose of the typologies exercise is to provide a forum for law enforcement experts--those primarily tasked with combating money laundering--to discuss recent trends in the laundering of criminal proceeds, emerging threats, and effective countermeasures. Discussions focused primarily on new payment technologies, remittance services, and the use of non-financial businesses in money laundering schemes. Money laundering countermeasures were also discussed in greater detail than in prior years. Overall, FATF jurisdictions found that conventional money laundering methods are still being used with refinements being made to existing techniques. In addition, as new countermeasures are developed, money launderers continue to shift from traditional financial institutions to non-financial businesses. The FATF will meet next at the end of June 1998.
Asia-Pacific Group on Money Laundering (APG)
In order to make progress in the external relations work of the FATF, an "FATF Asia Secretariat" was created in 1994 to set up a regional anti-money laundering body in the Asia-Pacific region. The United States has been working with the FATF to create regional anti-money laundering groups to form an international alliance against money laundering. Through the results of the FATF Asia Secretariat and other FATF members, the Asia-Pacific Group on Money Laundering (APG) was formally established in February 1997 at the Fourth Asia-Pacific Money Laundering Symposium in Bangkok, Thailand. Initial membership of the group consists of Australia, Bangladesh, Hong Kong, Japan, New Zealand, People's Republic of China, Philippines, Singapore, Sri Lanka, Taiwan, Thailand, the United States, and Vanuatu. The establishment of this group is a positive step toward recognizing that money laundering is a significant international issue that affects the Asia-Pacific region and that jurisdictions within the region need to cooperate in combating money laundering.
The APG will meet twice yearly to provide a focus for regional anti-money laundering efforts and will work in close cooperation with the FATF and the CFATF. The first goal of this group is to develop a statement of principles and measures for application within the region.
The Fourth Asia-Pacific Money Laundering Symposium also resulted in a set of proposed recommendations and a consensus that money laundering is a serious threat that must be addressed globally. Participants recognized that money laundering undermines the integrity of the region's financial institutions and that anti-money laundering controls have a positive effect on economic growth by attracting legitimate investments and capital. There was agreement that bank secrecy laws should not interfere with the ability to ensure the integrity of financial institutions and that central banks and Finance Ministries play a very important role. It was also recognized that the offense of money laundering should cover all serious crimes.
In July 1997, the first meeting of the APG's Working Party was held in Beijing, China. The Working Party developed a work program and a statement of principles and measures for application within the region in relation to money laundering. The Working Party agreed that the APG accepts the FATF 40 Recommendations in principle as the "international standard" and discussed how they can be applied in the region. The APG will have members complete anti-money laundering "jurisdiction reports" which will include each jurisdiction's relevant laws as well as identify what training is needed.
In 1997, the Asia-Pacific Economic Cooperation (APEC) continued to express support for anti-money laundering initiatives. The APEC Finance Ministers issued a Joint Ministerial Statement on April 6, 1997 which supported the establishment of the APG. The anti-money laundering text of that statement follows:
Money laundering remains a priority concern because of the threat it can pose to the integrity of legitimate financial institutions. In this regard, we welcome the establishment of the Asia-Pacific Group on Money Laundering of which several APEC economies are members. We pointed out, however, that money laundering is a global phenomenon and in this regard, we encourage all other economies to join in a determined global effort to effectively address it. We ask the assistance of the relevant international organizations to integrate support for anti-money laundering activities in their operations to strengthen the integrity of financial systems.
During March 1998, the APG held its first annual meeting in Tokyo, Japan. As part of the meeting, the group established an action plan which addressed the FATF 40 Recommendations, agreed to the completion of the tasks identified at the Beijing Working Party Meeting, and agreed to conduct various other tasks such as assistance missions to member jurisdictions, money laundering workshops, and missions to offshore financial centers in the South Pacific.
Caribbean Financial Action Task Force (CFATF)
The Caribbean Financial Action Task Force (CFATF) continues its important anti-money laundering initiatives in the region. The CFATF requires its member jurisdictions to implement the FATF 40 Recommendations as well as an additional 19 recommendations specific to the region that CFATF adopted. Barbados currently chairs the organization, and Attorney General David Simmons will serve as Chairman until October 1998. The Cayman Islands has been elected as the next CFATF chair. The Secretariat of the CFATF is housed in Trinidad and Tobago.
In October 1996, the CFATF adopted a Memorandum of Understanding (MOU) which formalizes the organization by delineating its mission, objectives, and membership requirements. Since November 1996, the following have been CFATF members: Anguilla, Antigua and Barbuda, Aruba, the Bahamas, Barbados, Belize, Bermuda, the British Virgin Islands, the Cayman Islands, Costa Rica, the Dominican Republic, Grenada, Guatemala, Montserrat, the Netherlands Antilles, Nicaragua, Panama, St. Lucia, St. Vincent and the Grenadines, Turks and Caicos, and Trinidad and Tobago. In October 1997, Jamaica and Venezuela subscribed to the CFATF MOU, and in December 1997, Dominica subscribed as well, raising the organization's membership to a total of 24 members. Additional countries are expected to sign the MOU in the near future. There has been no change in membership of the five Cooperating and Supporting Nations (Canada, France, the Netherlands, the United Kingdom, and the United States), which have provided financial and other support to CFATF since its inception.
The pace of CFATF's activities has continued to increase. In 1997, CFATF conducted mutual evaluators of four of its members (the Dominican Republic, Barbados, St. Vincent and the Grenadines, and the Bahamas). Six additional CFATF mutual evaluations are scheduled to occur in 1998: Antigua and Barbuda, Turks and Caicos, Bermuda, St. Lucia, St. Kitts and Nevis, Nicaragua.
In July 1997, CFATF and FinCEN co-sponsored a Casino Regulatory Conference in Aruba as part the CFATF typologies exercise. The conference identified vulnerabilities to money laundering within the gaming industry as well as minimum regulatory and legislative standards needed to address those vulnerabilities. Representatives from Aruba, the Bahamas, Belize, Brazil, the British Virgin Islands, Canada, Cayman Islands, Chile, Colombia, Costa Rica, Dominica, the Dominican Republic, France, Jamaica, the Netherlands Antilles, Panama, Peru, St. Lucia, the Netherlands, Trinidad and Tobago, the United Kingdom, the U.S. Virgin Islands, Uruguay, the United States, and Venezuela attended the conference.
CFATF also completed two typologies exercises, which are used to assess current trends in money laundering in the Caribbean and to develop effective countermeasures. The first typologies exercise focused on domestic financial institutions, and the second addressed the casino and gaming industry in the region.
The CFATF will play a leading role in implementing the joint U.S.-EU anti-money laundering training and technical assistance initiative for the Caribbean. This comprehensive program, covering financial, legal, law enforcement, and regulatory measures, is the culmination of a number of efforts to develop a regional training and technical assistance program by the U.S., EU, CFATF, and UNDCP. At the December 1997 regional meeting held in the Dominican Republic to review the progress in implementing the May 1996 Barbados Plan of Action, the participants agreed, in the Santo Domingo Declaration, to implement the regional anti-money laundering project through CFATF in association with the EC, the U.S., and other cooperating and supporting countries. Funding to implement this project has been committed jointly by the European Commission and the United States Government (INL), and implementation plans were discussed at the March 1998 CFATF meeting in Port of Spain. CFATF will meet next this coming August.
Summit of the Americas
The Heads of State of the Western Hemisphere most recently singled out the money laundering threat when they gathered in Santiago, Chile, last April for the Summit of the Americas. There, they agreed to an antidrug and crime action plan that called on financial institutions to redouble their efforts to prevent money laundering. And they agreed to strengthen national efforts to establish or strengthen existing specialized units (otherwise known as financial intelligence units--FIUs) to request, analyze, and exchange information on money laundering.
OAS/CICAD
In recognition of the growing importance of money laundering issues and the need to develop a framework to assist member governments in implementing the provisions of the Buenos Aires communique, the OAS/CICAD reconvened the CICAD Experts Group to Control Money Laundering in June 1996. Substantive discussion of regional money laundering issues now regularly occurs within this Experts Group under the OAS framework.
In its meeting in Santiago in October 1997, the Experts Group made a number of significant recommendations, which were officially adopted by the OAS/CICAD in its November 1997 meeting in Lima, Peru. Among the recommendations of the Experts Group were:
The Experts Group also agreed to conduct a yearly typologies exercise to determine the money laundering methods being utilized in the hemisphere by sharing experiences in dealing with this problem. The United States and two other countries presented typologies at the Santiago meeting. Annual typologies reports will be produced.
During May 1998, the Experts Group met in Washington, DC to discuss possible changes to the Model Regulations to control money laundering and to formulate a training and assistance plan to assist governments to implement anti-money laundering programs. The meeting resulted in agreement to amend some of the Model Regulations and a money laundering training program. Both of these initiatives will be addressed further when the Group next meets in Argentina this coming October. Two countries also made typologies presentations.
An initial analysis of member responses to the CICAD Self-Assessment Questionnaire (used to determine progress in implementing the Buenos Aires Communiqué Plan of Action) was produced and an English text will be widely circulated in the near future.
Finally, progress also continues on the joint Organization of American States/Inter-American Development Bank Anti-Money Laundering Training and Technical Assistance Initiative. It is expected that the IDB will provide funding in 1998 for a pilot project focused on "know your customer" policies and reporting of suspicious transactions for banking regulators and key management positions within financial institutions as well.
Financial Intelligence Units (FIUs) and the Egmont Group
Over the past 5-7 years, a number of specialized governmental agencies have been created as countries develop systems to deal with the problem of money laundering. These entities are commonly referred to as "financial intelligence units" or "FIUs." These units have attracted increasing attention with their ever more important role in anti-money laundering programs.
The FIU concept has developed rapidly during the past 2 years. In spite of the specialized nature of such units, there has often been some confusion between FIUs and other official entities with seemingly similar responsibilities. Police units established for the purpose of investigating financial and white-collar crime--to include money laundering--have often been dubbed "financial investigative units" with the acronym "FIU." These units certainly play an important and useful role in their countries' overall anti-money laundering effort; however, the simple designation "FIU" does not necessarily mean that the unit functions as defined by the Egmont Group.
A number of countries have resolved this confusion by continuing to call the purely police unit an "FIU" ("financial investigative unit"), while terming the intelligence unit an "FAU" ("financial analysis unit"). Making this distinction then allows some countries to avoid the word "intelligence" (which has a somewhat negative connotation in certain areas) by focusing on the function of the unit rather than the material with which it works.
An FIU, quite simply, is a central office that obtains financial disclosure information, processes it in some way and then provides it to an appropriate government authority in support of a national anti-money laundering effort. Although the definition states that the activities performed by an FIU include "receiving, analyzing, and disseminating" information, it does not exclude other activities that may be performed on the basis of this material. Therefore, an FIU could conceivably perform the activities mentioned in the definition and investigate and/or prosecute violations indicated by the disclosures.
The creation of FIUs has been shaped by two major influences: law enforcement and detection.
Law Enforcement. Most countries have implemented anti-money laundering measures alongside already existing law enforcement systems. Certain countries, due to their size and perhaps the inherent difficulty in investigating money laundering, decided to provide a clearinghouse for financial information. Agencies created under this impetus were designed, first and foremost, to support the efforts of multiple law enforcement or judicial authorities with concurrent or sometimes competing jurisdictional authority to investigate money laundering.
Detection. Through the FATF 40 Recommendations and regional organizations initiatives such as the European Union, the Council of Europe, CFATF, and OAS/CICAD, the concept of suspicious transaction disclosures has become a standard part of money laundering detection efforts. In creating transaction disclosure systems, some countries saw the logic in centralizing this effort in a single office for receiving, assessing, and processing these reports. FIUs established in this way often play the role of a "buffer" between the private financial sector and law enforcement and judicial/prosecutorial authorities. This has, in some cases, fostered a greater amount of trust in the anti-money laundering system with the FIU serving as the honest broker between the private and government sectors.
Over time, FIUs in the first category have tended to add the disclosure receiving function to their list of attributions. Moreover, regulatory oversight has also increasingly become a function of a number of FIUs. Since a disclosing requirement mandates the receiving agency to deal with the disclosing institution, it was logical that some FIUs would become primary forces in working with the private sector to find ways to perfect anti-money laundering systems.
The Egmont Group
Despite the fact that several FIUs were created throughout the world in the early 1990s, their creation was at first seen as individualized phenomena related to the specific needs of the jurisdictions establishing them. Since 1995, a number of FIUs have begun working together in an informal organization known as the Egmont Group (named for the location of the first meeting at the Egmont-Arenberg Palace in Brussels). The goal of the group is to provide a forum for FIUs to find ways of improving support to their respective national anti-money laundering programs. This support includes expanding and systematizing the exchange of financial intelligence information, improving expertise and capabilities of personnel of such organizations, and fostering better communication among FIUs through application of technology. Within the Egmont Group, working groups are focused on three major areas: legal matters, technology, and training. The next Egmont meeting will take place at the end of June 1998.
Council of Europe (COE)
During December 1997, the COE established the Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures (Committee). The Committee was organized for its 21 European countries which are members of the COE but are not members of the FATF. One of the purposes of the Committee is to conduct money laundering mutual evaluations for the 21 member countries and make recommendations for improving or developing money laundering regimes. During June 1998, the COE held its second meeting of the Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures. The meeting covered the results of the 1997 self-assessment questionnaire approved at the December 1997 organizational meeting and the results and discussion of the mutual evaluations of both Slovenia and Cyprus. In addition, countries selected for future evaluations were discussed along with time frames and the need for evaluators. The COE Committee is expected to be a significant influence on its membership and result in elevating money laundering standards throughout the region.
On June 8, 1998, President Clinton addressed the Special Session of the United Nations General Assembly regarding the common threat of worldwide drug trafficking and abuse. As a part of his remarks, President Clinton indicated the U.S. partnership in global law enforcement and specifically noted assistance that the U.S. is providing to establish and strengthen financial intelligence units to fight money laundering.
Future Policy Initiatives
The Administration has created an anti-money laundering and financial crime program with activities that literally span the globe. Working in a coordinated fashion, U.S. diplomats, law enforcement agents, regulators, and financial analysts have drafted and reviewed money laundering legislation and regimes in the Americas, the Middle East, Africa, Asia and Europe and have provided training and technical assistance to countries seeking to strengthen their capabilities against money laundering.
In Russia, for instance, U.S. regulatory, law enforcement and foreign affairs specialists are working as a team with their counterparts to develop new laws, regulations, and investigative capabilities. The Administration plans to implement new anti-money laundering initiatives in countries throughout the world, including in Kazakhstan, Kyrgyzstan, Uzbekistan, and Romania. The Administration also has embarked upon an innovative, multi-year, multilateral training program with the European Union in conjunction with CFATF and UNDCP in the Caribbean to address the problem of money laundering in that region.
As technology improves and continues to provide new ways to steal and launder money, so too will the Administration marshall the resources necessary to thwart such criminal enterprises. With significant U.S. contributions, CFATF is attacking these problems by bringing together experts on issues such as cyberpayment systems and Internet gaming. With the active support of the United States and our international partners, CFATF is emerging as a model for development of other regional anti-money laundering organizations around the globe.
As money launderers and other financial criminals constantly search for jurisdictions with weak regulatory, legal, and law enforcement regimes, the Administration is committed to raising international crime fighting standards by promoting the development of such regional organizations and encouraging those regional bodies to work together in a spirit of cooperation. In the coming years, the FATF will promote the development of regional FATF-style bodies and will likely increase its own membership to expand its effectiveness. As FATF norms continue to gain prominence throughout the world, so too do the anti-money laundering practices that the United States and other FATF members are continuing to develop and implement. In the same vein, the Administration is continuing to seek support of entities such as the multilateral development banks and regional political bodies to promote increased transparency and good governance practices by nations in which failure to adhere to these norms have resulted in financial or economic chaos.
Related financial crimes such as counterfeiting, advance fee and credit card fraud, and other crimes of financial deception have cost consumers, financial institutions, and governments billions of dollars. The Administration will increase aggressive enforcement against foreign criminal groups engaged in financial schemes that victimize U.S. nationals, attack U.S. and international financial systems, threaten to destabilize foreign financial institutions, and undermine world economic progress.
Counterfeiting. Because of vigorous anti-counterfeiting measures, the amount of counterfeit currency has dropped precipitously, with passed and seized counterfeit $100 bills falling from $126 million to $53 million between 1994 and 1997. Nevertheless, the problem is significant and increasingly global. The Federal Reserve System estimates that approximately $450 billion of U.S. currency circulates worldwide and that two-thirds of that currency circulates outside the country. As the demand for genuine U.S. currency grows overseas, so will the threat of counterfeiting by foreign organized crime groups. In FY 1996, approximately 65% of all counterfeit U.S. currency detected domestically was produced outside our borders.
International counterfeiting schemes--furthered by improved copying and publishing technology--include reproduced financial instruments such as commercial checks, traveler's checks and money orders. In addition, international criminal enterprises are increasingly using fictitious securities and negotiable instruments to defraud the government, individuals, corporations,and financial institutions. Criminals have used bogus instruments to obtain government benefits, underwrite loans, serve as insurance collateral, and defraud individual investors, pension funds, and retirement accounts.
The Administration will seek enhanced cooperation from foreign and domestic manufacturers to help prevent the production of counterfeit currency and instruments, partnerships with private sector financial institutions to improve detection of counterfeit instruments, and aggressive investigations to pursue counterfeiters in the international arena. The redesign of the $100 and $50 bills, which made them harder to replicate, is an example of preventive actions to combat counterfeiters here and abroad. At the same time, the Administration continues to strengthen its overseas presence to respond more effectively to any counterfeit currency and instruments actually produced.
Advance Fee Fraud. Advance fee fraud is committed largely by Nigerian criminal enterprises, and it has become one of the most lucrative financial crimes worldwide. Criminals purporting to be officials of their government, banking system, or oil companies, mail or fax letters to numerous individuals and businesses in the United States, enticing them to take part in million dollar windfalls, but requiring "up front" fees to pay for bribes, taxes, and legal fees--which must be paid before the deal can be concluded. Often, the criminals persuade victims to travel to Nigeria to close the deal, where they are then intimidated into further participation and sometimes are even killed. Financial losses associated with these frauds are estimated in the hundreds of millions of dollars annually.
In response to this growing problem, the Administration has established programs designated to target advance fee frauds on a global scale. Through "Operation 4-1-9" (whose name is derived from the Nigerian criminal statute covering advance fee fraud), the Secret Service receives approximately 100 calls and 300-500 pieces of correspondence per day from potential victims and has established liaisons with the Departments of Justice and State, and with the Government of Nigeria. Those efforts have significantly reduced the number of reported victims.
Access Device Fraud. Frauds involving a variety of financial "access devices" such as credit cards, debit cards, smart cards, and communications systems that transfer financial data are a growing problem. Major credit card issuers estimate fraud losses in excess of $2 billion in 1996. Approximately one-third of the issuers' losses occurred because of international fraudulent activity.
While South America and Mexico are emerging as centers of counterfeit credit card manufacturing plants, the criminal activity is global. A recent counterfeit credit card suppression case in Guanzhuang, China resulted in the seizure of thousands of counterfeit credit cards, uncut blank credit cards, magnetic strips, issuer holograms, embossers, encoders, laptop computers, and extensive manufacturing equipment. The investigation revealed that the scheme stretched to Honolulu, Bangkok, Hong Kong, Macau, Canada, Taiwan, and Buffalo, New York.
Investigative activity against international financial frauds and the criminal groups that employ them will be increased. The President's proposed International Crime Control Act will enhance our ability to strike at credit card and other overseas access device fraud by authorizing U.S. law enforcement to take action when the activity is directed at U.S.-based payment systems or financial institutions.
International Cybercrime. Governments cannot solve all these problems alone. This is especially true in the context of cybercrime that can transcend international borders in a matter or seconds. In one illustrative example of what we can achieve through international efforts, cooperation among private sector executives, U.S. federal agents, and numerous foreign law enforcement officials enabled the United States to charge and bring to New York in September 1997 the perpetrator of the first documented case of on-line bank theft. Vladimir Levin pilfered $5 million from Citibank accounts worldwide, and placed them into his accomplices' accounts in the United States, Israel, Finland, Germany, the Netherlands, and Switzerland. Levin worked from a small business in St. Petersburg, Russia, and he accomplished his crimes with a home computer and modem. Russian Ministry of the Interior (MVD) officers and FBI worked closely to investigate the case, and Russian police officers traveled to New York in August 1996 to obtain evidence related to the case. Levin was extradited to the United States in 1997, pled guilty in January 1998 to conspiracy to commit bank fraud, and was sentenced in February 1998 to 36 months' imprisonment.
Further Efforts To Research Emerging Problems. Recent high-tech advances include new media for conducting financial transactions electronically, such as the Integrated Circuit (or smart) Card. Electronic commerce today is an estimated $400 million a year industry, but by the year 2000 it could increase to as much as $3 trillion annually. Smart card technology will enable multiple currency values to be maintained on a card and transferred to another card or around the world via computer or telephone. This technology is fast becoming standardized for financial and telecommunications services. Shifting from paper to electronic money will present new international challenges for law enforcement, most notably in money laundering and fraud-related crime, as ever larger sums are stored on these small, portable cards. Further research efforts focused on emerging technology's vulnerability to international crime will be undertaken. Thank you.
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