Money Laundering

Franklin Jurado, a Harvard-educated Colombian economist, pleaded guilty to a single count of money laundering in a New York federal court in April 1996 and was sentenced to seven and a half years in prison. Using the tools he learned at America's top university, he moved $36 million in profits, from US cocaine sales for the late Colombian drug lord Jose Santacruz-Londono, in and out of banks and companies in an effort to make the assets appear to be of legitimate origin.

Jurado laundered the $36 million by wiring it out of Panama, through the offices of Merrill Lynch and other financial institutions, to Europe. In three years, he opened more than 100 accounts in 68 banks in nine countries: Austria, Denmark, the United Kingdom, France, Germany, Hungary, Italy, Luxembourg, and Monaco. Some of the accounts were opened in the names of Santacruz's mistresses and relatives, others under assumed European-sounding names.

Keeping balances below $10,000 to avoid investigation, Jurado shifted the funds between the various accounts. He established European front companies with the eventual aim of transferring the "clean" money back to Colombia, to be invested in Santacruz's restaurants, construction companies, pharmacies and real estate holdings.

The scheme was interrupted when a bank failure in Monaco exposed several accounts linked to Jurado. And in Luxembourg, endless noise from a money-counting machine in Jurado's house prompted a neighbour to alert the local police. Empowered by new laws against money laundering, the police initiated a wiretap in April 1990. Jurado was arrested two months later, convicted of money laundering in a Luxembourg court in 1992 and a few years later extradited to the United States.

The Jurado case is an example of the increasingly sophisticated means drug cartels employ to secure assets. But it also indicates that the very profits that motivate drug organizations are an Achilles heel and that national legislators, law enforcement agencies and international bodies are stepping up efforts against money laundering. How to improve these efforts figures high on the agenda of the upcoming United Nations General Assembly Special Session on the World Drug Problem, to take place at UN Headquarters in New York from 8 to 10 June 1998.

Scope of the problem

The United Nations International Drug Control Programme (UNDCP) estimates that the illegal drug trade generates retail sales of about $400 billion a year, nearly double the revenue of the global pharmaceutical industry or about ten times the sum of all official development assistance.

Riding on the wave of globalization and liberalization, organized crime syndicates and enterprising individuals are taking advantage of open borders, privatization, free trade zones, weak states, offshore banking centres, electronic financial transfers, smart cards and cyberbanking to launder millions of dollars in drug profits each day. International wire transfers number about 70,000 a day, at the end of which some $2 trillion has criss-crossed the globe. The International Monetary Fund (IMF) estimates that about 2 percent of the global economy involves drug trafficking.

"Money laundering can be done anywhere so criminals pick the countries where the laws are either non-existent or they are lax or the police efforts are not strong enough to catch them", says Tom Brown, head of the four-person anti-money laundering unit of the International Criminal Police Organization, Interpol.

Most recently, Mexico has captured news headlines with stories of drug money laundering. According to the International Narcotics Control Board (INCB), which monitors compliance with anti-drug treaties, recent measures in Mexico have led to the arrest of over 11,000 persons, including high-ranking Government and military officials from September 1996 to August 1997 for drug trafficking and related criminal activities, including money laundering.

In countries of the former Soviet Union, the privatization of State-owned enterprises and deregulation of the banking system has facilitated the laundering of drug profits. In 1996, an expert on Russian affairs who testified before a US Congressional Committee said, "Privatized property is bought up by foreign and domestic criminal organizations to launder and hide illegal profits. Mobsters launder their ill-gotten gains by investing in gambling, luxury car dealerships in European cities like Budapest, and banks, marinas, and resorts in the Caribbean Basin. They also work with top-flight international attorneys in Frankfurt and Zurich to learn the money laundering techniques perfected by the Colombian drug lords and Sicilian mafia."

Initial deposits are usually made in States without regulations and then transferred to offshore centres, according to a former French judge who heads UNDCP's Global Programme Against Money Laundering. States with weakened governmental apparatus, like those comprising the former Soviet Union, are especially vulnerable.

Alternative and underground banking

In some parts of Asia, legal "underground banking" is used by launderers because it leaves no paper trail. Money never enters the formal banking system but is instead transmitted through alternative banking systems such as the "hawala" in India and Pakistan. These parallel banking systems are based on family or gang alliances and reinforced with an unspoken covenant of retributive violence. The Chinese have a similar system that is known as "fie chen" or flying money, which is based on trust, family ties, local social structures, and the threat of ostracism for any breach of good faith. This system generally involves depositing money in one country in exchange for a "chit" or "chop" (seal), and the remittance of this money in another country on presentation of the chit.

Increasingly, money laundering experts are focusing on Africa. "The reality is that we don't have a good handle on how much money laundering there is in Africa because money launderers tend to want their money somewhere that is safe", says Interpol's Mr. Brown. However, he does acknowledge that criminal groups are buying banks in Africa to use as transit points before wiring money to banks in more established markets. UNDCP, which sees Africa, and all developing regions of the world, as a new target for money launderers, held a December 1997 seminar in West Africa at which nine governments decided to harmonize measures and increase sub-regional cooperation.

The existence of offshore banks in tax and secrecy havens has allowed drug traffickers to develop complex international networks. The IMF applies the term "major offshore centres" to the following countries: the Bahamas, Bahrain, the Cayman Islands, Hong Kong, the Netherlands Antilles, Panama and Singapore. Smaller offshore centres include: Dublin, Cyprus, Madeira, Malta, Malaysia's Labaun Island, and Thailand's Bangkok International Banking Facility. Today nearly 40 countries in all parts of the world are considered secrecy and tax havens.

The situation in the Cayman Islands provides a glimpse into the offshore industry. With the seventh largest deposit base in the world, the Cayman Islands has 550 banks in the Territory, only 17 of which have a physical presence and are subject to money laundering laws. Total assets held by Cayman banks in 1994 were about $430 billion. The INCB warns in its 1997 report that non-bank financial institutions are increasingly being used for money laundering purposes in the Caribbean, as the banking system is being more closely scrutinized by authorities. Accordingly, it recommends that the monitoring system be extended to include "institutions and companies beyond the banking system".

"There is a constant effort to get the tax havens and offshore centres to tighten up on money laundering", says Tom Brown of Interpol. "Our goal is not to shut them down because they are legal and they have a legitimate purpose. Our goal is to put some controls in place so you can regulate them, and if you are not regulating them, so you can at least have the power to continue to trace money that you know is illegal as it goes through them to somewhere else."

In early February 1998, British Foreign Secretary Robin Cook announced that Britain's 13 remaining colonies, which include several tax havens in the Caribbean including the Cayman Islands, may be offered eventual British citizenship if they enact stringent new laws to stop money laundering and the hiding of illegal profits.

Free trade zones

Trade liberalization and free trade zones provide additional money laundering venues. "We believe that it's shifting from using the banking system to using international trade to launder money", says Professor John Zdanowicz, who has developed, with a colleague at Florida International University, a computer software system that filters all United States trade data. Since 1992, they have uncovered phony invoices listing razor blades for $30 each, telephones for $2,400, and a bottle of salad oil for $720. In 1994, the professors gave a presentation to the World Bank on how the technology could be used in developing countries, as a potential complement or substitute for pre-shipment inspection, to monitor abnormal pricing as it might relate to capital flight, money laundering, tax evasion and duty fraud. According to Mr. Zdanowicz, the system could be replicated in a country for less than a million dollars, and for considerably less in smaller countries. "Our technique is like a sniffing dog. We don't know what's in a suitcase but if it's too heavy for a suitcase or if it's priced wrong, we're saying look at it and find out what it is".

Money launderers constantly seek new ways to circumvent regulation and seizure of assets. Yet along with sophisticated schemes, considerable amounts of money are still smuggled as bulk cash. According to The New York Times, drug traffickers have shipped cash to Colombia "in everything from used cars and dolls to television sets and refrigerated containers of bull semen". Other drug lords are content to simply invest at home. In Myanmar, for instance, heroin kingpins are reportedly keeping their cash in the country by investing in hotels, karaoke bars, restaurants, transport companies and real estate. An April 1997 New York Times article further suggests that large-denomination Euro notes may become a boon for launderers.

Big business

Billions of dollars in drug proceeds are laundered through major businesses such as stock brokerage and insurance firms. The increased volume of global financial transactions has not been matched by the development of regulatory measures. "The bigger a business is that has money, the easier it is to launder some other money in it", says Interpol's Brown. Attorney-client privilege often protects money launderers, "making it that much harder to pierce that veil of the company to get to it", he says. Other schemes involve cash businesses such as bars, casinos and restaurants as well as non-bank financial institutions such as check-cashing stores and money exchange houses.

Criminal organizations increasingly sub-contract the task of money laundering to specialized professionals because the methods required to circumvent law enforcement officials are becoming ever more complex. Professionals are used not only to conceal the origin of the source of the proceeds, but to manage the subsequent investment into legitimate real estate and other assets. It is believed that there has been a steady increase in the standard fees paid to money launderers, from 6-8 per cent at the beginning of the 1980s to up to 25 per cent today.

Impact of money laundering

The infiltration and sometimes saturation of dirty money into legitimate financial sectors and national accounts can threaten economic and political stability. An IMF working paper concludes that money laundering impacts financial behaviour and macro-economic performance in a variety of ways including policy mistakes due to measurement errors in national account statistics; volatility in exchange and interest rates due to unanticipated cross border transfers of funds; the threat of monetary instability due to unsound asset structures; effects on tax collection and public expenditure allocation due to misreporting of income; misallocation of resources due to distortions in asset and commodity prices; and contamination effects on legal transactions due to the perceived possibility of being associated with crime.

It is known, for instance, that in the early 1990s an influx of tainted money into several banks in the Baltic states resulted in their collapse due to the high number of withdrawals triggered by customers' knowledge of dirty deals and lack of consumer confidence.

"Some countries in the Caribbean are beginning to realize that taking this money can be devastating to their economies", says Brown of Interpol. "Although it looks good up front and can generate jobs, the reality is that shortly you become controlled by that money."

Money laundering and the law

Legislation incorporating measures to prevent, trace, freeze and confiscate criminal assets is in its infancy. Only a handful of industrialized western nations had systems in place by the end of the 1980s. Today there are an increasing number of States that are passing laws and regulations but UNDCP estimates that about 70 per cent of governments do not yet have effective legislation in place.

A further problem is the absence of transparency in the corporate law of certain countries, which enables launderers to hide behind shell companies.

Action at the international level to combat money laundering began in 1988 with two important initiatives: The Basel Committee on Banking Regulations and Supervisory Practices, which issued a 'Statement of Principles' covering the three cornerstones of money laundering controls ù avoidance of suspicious transactions, cooperation with law enforcement authorities, and 'know your customer' rules; and the United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, which has now been ratified by over 140 countries.

The Convention is the first multilateral, legally-binding instrument to address the issue of money laundering. Its provisions encourage international cooperation to identify, trace, seize and confiscate the proceeds of drug trafficking and to prosecute those responsible for laundering illicit profits. It also encourages parties to contribute such proceeds to international organizations specializing in drug control. In March 1998, Luxembourg contributed over $1.7 million from funds derived from money and assets confiscated from drug criminals to UNDCP.

Another important initiative came in 1989 when the Financial Action Task Force (FATF) was established by the Group of 7 major industrialized countries and the President of the Commission of the European Communities. FATF membership now includes the countries of the Organization of Economic Cooperation and Development, Hong Kong, Singapore, the Co-operation Council for the Arab States in the Gulf, and the European Union. The cornerstone of FATF's efforts are the 40 Recommendations, first elaborated in 1990 and updated in 1996, which lay down measures to counter money laundering including ratification of the 1988 Convention, criminalization of money laundering, strengthening of international cooperation, and the abolition of most bank secrecy laws. In 1995 the International Narcotics Control Board urged all governments to implement the FATF 40 recommendations.

"The key to making an impact in money laundering is to get all of the countries of the world to enact and enforce the same laws dealing with money laundering so the criminals have nowhere to go", says Interpol expert Brown.

According to the UN Commission on Narcotic Drugs, there is broad international support for a number of concrete measures to combat money laundering including the application of the "know-your-client" rule and the banning of anonymous accounts; the maintenance of detailed records of financial transactions for a minimum of five years to be made available to investigators; the mandatory reporting of suspicious transactions; and the desirability of more closely monitoring and controlling cross-border movements of currency.

However, many outstanding issues remain unresolved ù such as the compliance of off-shore centres with anti-money laundering laws, the reluctance of some countries to enact or implement appropriate legislation and relax bank secrecy, and the question of corporate criminal liability.

UN anti-money laundering programme

Established in 1997 by the Vienna-based UN Office for Drug Control and Crime Prevention, the Global Programme Against Money Laundering provides Governments with legal advice and assistance in drafting appropriate legislation and establishing the necessary administrative framework to counter money laundering. Operating on a $5 million budget for 1997-99, the Programme also offers training for law enforcement and judicial officers and assistance in establishing national financial intelligence units.

In its first year of operation, the Programme assisted 20 countries and initiated a global comprehensive database on national money laundering legislation and IMoLIN ù the International Money Laundering Information Network on the Internet. The website is a cooperative effort among various anti-money laundering organizations and can be used by law enforcement agencies, prosecutors, legislators, academic institutions and individuals.

An international plan of action

The General Assembly Special Session on the World Drug Problem, to take place at UN Headquarters in New York on 8-10 June 1998, aims to increase international cooperation to combat money laundering. "We are proposing a bold initiative for the abolition of bank secrecy worldwide for every investigation on organized crime, not just narcotics", says Pino Arlacchi, Executive Director of the UN International Drug Control Programme (UNDCP). "There should be no obstacles. There are still countries where bank secrecy exists and, in fact, has been strengthened in the last several years so this is a very important point."

UNDCP foresees a strengthening of political will due to growing realization of the harmful economic impact of money laundering and the fact that reasonable measures can be put in place without harm to foreign investment.

The political declaration expected to be adopted at the three-day meeting calls on all Governments to enact laws to prevent, detect, investigate and prosecute the crime of money laundering by the year 2003. The special session's action plan represents a global effort to up the ante in the fight against drugs by hitting drug traffickers where it hurts ùin their bank accounts.

Contact:

UN Department of Public Information
Bill Hass, tel. (212) 963-0353,
Ann Marie Erb, tel. (212) 963-5851, or
Tim Wall at (212) 963-1887.
Fax: (212) 963-1186
E-mail: vasic@un.org
UN web site: http://www.un.org

Sandro Tucci, Spokesman
UN International Drug Control Programme
Vienna International Centre, Room E 1448
P.O. Box 500
A-1400 Vienna, Austria
Tel: (431) 21345-5629;
Fax: (431) 21345-5931