Money Laundering

Money Laundering
Phil Williams
IASOC Magazine, Vol. 10, No. 4, Summer 1997

Introduction

In recent years, the activities of transnational criminal organizations and drug traffickers have grown more extensive. Some governments and law enforcement agencies have responded by targeting the profits of these groups. The logic is impeccable: criminal enterprises are concerned with making money - and if their proceeds are removed, the incentives to continue their criminal activities will also disappear. In these circumstances, the business itself could ultimately collapse. While this is the major impulse underlying law enforcement strategies against money laundering it is certainly not the only one.

Although money laundering can have positive multiplier benefits in some economies, it also makes macro-economic management more difficult, facilitates the accumulation of criminal capital that can be used to infiltrate licit business, encourages corruption, and creates vested interests in the continued activities of criminal organizations. Not surprisingly, therefore, the increased focus both on
countering money laundering and on seizing the assets of criminal organizations has attracted widespread support.

The process of establishing a global anti money laundering regime that began with the anti-money laundering provisions of the 1988 United Nations convention on drug trafficking, has developed considerable momentum. This was evident in the International Narcotics Control Strategy Report issued by the United States Department of State in March 1996. Significantly, over 100 of 200 pages in the Executive Summary were devoted to money laundering, and states were ranked according to whether they were high,
medium or low priority.

United States leadership in this area has also been manifest in the creation and the activities of the G7 Financial Action Task Force (FATF) on money laundering. The FATF has not only developed recommendations designed to prevent, control or expose money laundering, but is also concerned with monitoring the effectiveness with which the 26 states involved are implementing these recommendations. It has recently recommended that the predicate offenses for money laundering be extended beyond drug trafficking. In short, going after the money has become a high priority in the struggle against drug trafficking and organized crime - and is seen in some quarters as offering more effective ways to attack criminal organizations than the traditional emphasis on interdiction of their products or arrests of the leadership.

The main argument of this article, however, is that in spite of this emphasis on following the money trail as a way of countering and disrupting transnational criminal organizations, the advantages remain with the criminals. The global financial system provides many more opportunities than law enforcement can ever hope to forestall or block. Consequently, law enforcement is playing a game of catch-up that it is almost certainly destined to lose.

Moreover, for a variety of reasons the advantages accruing to the criminals are likely to increase rather than decrease in the next decade. Developments such as smart cards and cyber-money will facilitate money laundering activities and provide new opportunities for money transfers that are difficult if not impossible for government authorities to monitor and detect. Although anti-money laundering efforts remain an essential part of holistic or comprehensive strategies against drug smugglers and other transnational criminal organizations, therefore, expectations about their overall effectiveness should be modest. There will be some spectacular successes and substantial inroads will be made against some criminal organizations - but the overall impact will remain limited as criminal groups find ways to circumvent new restrictions and display the kind of ingenuity that is difficult to counter.

This is not to depreciate efforts to counter money laundering. Not only is the money laundering process integral to the functioning of criminal organizations, but it is also an indicator of their success. Furthermore, money laundering ensures a continued flow of capital that enables criminal organizations to buy protection through corruption of government officials and members of law enforcement. If all this makes money laundering an attractive target for law enforcement, however, it also means that criminal organizations are likely to be both vigorous and innovative in ensuring that the profits from their illegal enterprises are transformed into usable assets.

The consequence is that money laundering provides one of the most important junctures between what Alex Schmid has termed the "upperworld and the underworld". Money laundering is one of the major ways in which criminal organizations penetrate the licit economy and often involves the co-option of supposedly reputable members of society such as bankers and lawyers. Allowing money laundering to go unchallenged, therefore, would have a corrosive impact on the integrity of financial institutions.

Accordingly, this article considers more fully the purposes of money laundering, the efforts to contain it and the difficulties that hinder this effort. The first section looks at the purposes of money laundering. This is followed in the second section by a brief description of several money laundering cases that reveal some of the techniques typically adopted by launderers. These techniques are discussed more fully in the third section which also highlights some of the major trends in money laundering. The fourth section of the paper examines the prospects for establishing an effective global anti-money laundering regime. It concludes that although important initiatives are being taken towards this end, developments in technology as well as a variety of other factors create major obstacles.

Purpose and Definition

Drug trafficking and organized crime are essentially about one thing - the creation of profits. The problem for criminal organizations, however, is that their profits are tainted by their illicit source, are vulnerable to seizure by law enforcement, and, to the extent that they are associated
directly with criminal activities, are difficult to use.
Consequently, the criminals want to hide the source of their profits, to ensure that the money is safe from seizure by law enforcement and to use those profits anonymously - whether to facilitate and extend their criminal activities, to protect themselves through corruption and bribery, to infiltrate licit business and commerce, or simply to acquire property and other assets.

Broad definitions of money laundering claiming that it is simply about turning "black money" into "green" do not fully capture all these dimensions. The definition offered by the US Customs Service in its evidence to the G7 is more complex, incorporating several crucial dimensions of the process. According to this definition, money laundering is "the process whereby proceeds, reasonably believed to have been derived from criminal activity, are transported, transferred, transformed, converted, or intermingled with legitimate funds, for the purpose of concealing or disguising the true nature, source, disposition, movement or ownership of those proceeds.

The goal of the money laundering process is to make funds derived from, or associated with illicit activity appear legitimate". While this definition encompasses the desire to hide ownership of money - because of tax regulations or because ownership could lead to questions about sources - and the desire to hide subsequent use of the funds for the infiltration of legitimate business - it does not make explicit the most fundamental component of money laundering which is the desire to put the assets that have been obtained through criminal activity beyond the reach of law enforcement. Indeed, much of what is termed money laundering can be understood simply as the movement of money away from locations where it is vulnerable to seizure to areas where it is safe.

In many cases, it is about repatriation of profits from the host state of transnational criminal organizations to their home state. In other cases, such as Russia, it can involve movement outside the home country combined with conversion into a more stable currency. In this connection, banks in Cyprus have become a very important recipient of money from Russian criminal organizations. Whatever the direction of the transfers they are designed to ensure the security of the funds, a priority that can be traced back to Meyer Lansky who is often described as the godfather of modern money laundering.

Jeffrey Robinson, in an otherwise excellent account of money laundering activities, suggests that Lansky does not deserve his reputation in this area since he was only interested in protecting money from the IRS and therefore did nothing more than "come up with some basic procedures for capital flight". He argues that there is little evidence that Lansky "ever intended to repatriate any money in order to declare it and legally spend it".

In a strict sense he may be right. Nevertheless, the idea of moving funds offshore so that law enforcement and tax authorities are not able to seize the profits of illegal enterprises is one of the most fundamental aspects of what is generally termed money laundering. If Lansky was not formally interested in cleaning money, as opposed to having it out of the reach of law enforcement, many of today's transnational criminal organizations have the same concern. If money obtained in the United States by Nigerians engaged in drug trafficking or credit card fraud, for example, is transferred back to Nigeria, then it is relatively safe.

Although anti-money laundering decrees have recently been passed in Nigeria it is far from clear that they are being vigorously implemented. In practice, therefore, there is no distinction between clean and dirty money. Simply by transferring money from one jurisdiction to another the money is de facto made legitimate - even if it is not de jure. In a "safe haven" for the transnational criminal organization - whether it is a home base with a weak or acquiescent government or an offshore banking country that places a premium on bank secrecy rather than transparency - all money, by definition, is "clean". Some of the ways in which criminals have tried to obscure the origin and subsequent ownership of criminal profits, and to minimize the prospects of seizure are the theme of the next section.

Case Studies in Money Laundering

In recent years there have been several very successful cases in which law enforcement has uncovered money laundering schemes or in some cases facilitated money laundering for drug traffickers as a means of obtaining information that was subsequently used to disrupt the organization. A closer but brief look at these cases highlights the ingenuity with which money laundering schemes are devised - as well as the weaknesses of some of these schemes.

"Operation Dinero"

Operation Dinero was a joint law enforcement operation involving the Drug Enforcement Administration, the Internal Revenue Service, the Immigration and Naturalization Service and the Federal Bureau of Investigation as well law enforcement agencies in Italy, Spain, Canada and Britain. Directed against the Cali Cartel the operation resulted in 88 arrests, the seizure of about 9 tons of cocaine and over $50 million in cash and property.

The key to success was the DEA establishment and operation of an offshore bank in Anguilla that appeared willing to launder money for drug traffickers. Towards the end of 1994, the bank, which had increasingly been used by traffickers, was hired to sell a Reynolds, a Rubens and a Picasso for members of the Cali group - a development that revealed how drug trafficking organizations sometimes use acquisitions of art and antiques as a means of money laundering . In the event, the paintings were seized.

Even more significant, however, the operation revealed a money laundering network that included Mexico, Southern California and Colombia; a scheme involving money movements between New York, Canada and Colombia; links between the Cali Cartel and the Pasquale Locatelli organization which was active in France, Romania, Spain, Greece, Italy and Canada; and the activities of the Severa organization in Italy which laundered money using three supermarkets and a car rental business.

"La Mina"

The "La Mina" operation involved 2 jewelry companies, Andonian Brothers and Ropex Corp. which successfully laundered hundreds of millions of dollars ostensibly obtained from gold and jewelry businesses in New York, Los Angeles and Houston. The cash was deposited in a variety of accounts and then wired to Latin America "under the guise of legitimate business transactions". The cover for the operation was provided by fictitious jewelry sales and also by what were presented as a series of gold purchases from Uruguay. In some instances lead bars painted gold were actually imported; in others the
transactions were simply on paper.

The extent of the money laundering scheme was revealed in Department of Commerce statistics: "in 1985 the US Commerce Department had no records of any Uruguayan gold trade with the United States. ... Yet by 1988, US Commerce department statistics indicted that Uruguay had become the second largest exporter of gold to the United States" - even though the country had no operating gold reserves. Although the scheme relied on the cover of apparently legitimate business, the Well Fargo Bank in Los Angeles reported to the FBI that the Andonian Brothers were making cash deposits on a much larger scale than most jwelry businesses.

Around the same time an air shipment from New York to Ropex Corp in Los Angeles described as "gold scrap" broke open to reveal large bundles of cash. This too was reported to the authorities. The scheme, which was undertaken, for the Medellin Cartel, involved Banco de Occidente (which subsequently forfeited $5 Million) and extended to both Canada and Switzerland.

"Bausch and Lomb"

In October 1995 Business Week provided details of what appeared to be a money laundering scheme that had succeeded through the tacit acceptance by some officials at Bausch and Lomb, the large pharmaceutical company, of dubious payment practices. In the mid-1980s Bausch and Lomb established
Lamex, a new Latin American export unit near the Miami airport. Reportedly, the division grew rapidly and by 1990 had sales of nearly $25 million. Yet some of the income that was generated was of suspicious origin.

"Latin American and Caribbean customers would arrive with up to $50,000 in cash to pay for Ray-Ban sunglasses; and in 1990 Lamex reportedly received $5.6 million-23% of its total sales-in cash, cash equivalents, and third-party checks. Although some questions were raised about the form of payments, "an urgency to meet the numbers" overrode all other considerations. This is not atypical. When money is flowing, expediency often overcomes both prudence and principle.

"The Bicycle Club"

Another example of an elaborate money laundering scheme involved a marijuana trafficker called Ben Kramer who transferred his drug proceeds through a bank in Liechtenstein to another offshore institution and eventually to something called the LCP Partnership (LCP) which, along with another California business established and ran a gambling club known as the Bicycle Club. This club was used for laundering and was eventually seized by the authorities, although not before over 10 million dollars of marijuana trafficking proceeds had been laundered through LCP.

The Spence Money Laundering Network in New York

A fascinating example of money laundering was uncovered in New York in 1994. It involved a network of 24 people including the honorary consul-general for Bulgaria, a New York city police officer, 2 lawyers, a stockbroker, an assistant bank manager in Citibank, 2 rabbis, a firefighter and 2 bankers in Zurich.

A law firm provided the overall guidance for the laundering effort while both a trucking business and a beer distributorship were used as cover. The Bulgarian diplomat, the firefighter and the rabbi acted as couriers picking up drug trafficking proceeds in hotel rooms and parking lots., while money was also transported by Federal Express to a New York trucking business. The two lawyers subsequently placed the money into bank accounts with the assistance of a Citibank assistant manager. The money was then wired to banks in Europe including a private bank in Switzerland, at which two bankers ensured that it was remitted to accounts designated by drug traffickers. During 1993 and 1994 a sum of between $70M and $100M was laundered by the group.

In all these cases, the laundering process was uncovered, but not before significant amounts of money had been washed or put beyond the reach of United States law enforcement. Moreover, even though these schemes were ultimately unsuccessful, at least one or two of them displayed considerable ingenuity. They also reveal the kinds of techniques that are typically used to launder money.

Tchniques and Trends

Drug trafficking and other criminal organizations have developed a series of highly specialized techniques and methods designed to remove the taint from the money and to place it out of the reach of law enforcement. They are able to exploit the existence of a global financial system with multiple points of entry, the capacity for extremely rapid transmission of funds, major disparities among nations in the degree to which banking and other financial transactions are monitored and controlled, the susceptibility of members of the licit financial world to bribery and corruption, the existence in many countries of parallel or informal economies that are outside government control, and the vast mass of financial transactions that hampers discrimination and, therefore, the prevention and control of illicit
activities.

The standard view of money laundering is that it involves three distinct stages: placement (putting it in the system), layering (actions to obscure the paper trail), and integration (where illicit money is mingled with licit finance). There is also broad agreement that, in some countries at least, the placement stage is the most risky for the criminal or money launderer. In the layering stage, an effort is made to ensure that the laundered money is difficult to differentiate from licit funds. This is done by exploiting the "frequency, volume or complexity" of transactions.

Layering is also accomplished by ensuring that the transactions cross several national borders. Following the money becomes much more difficult for law enforcement agencies when the money has moved beyond their jurisdiction. Indeed, what might be termed trans-jurisdictional money movement is a central component of most money laundering schemes. It ensures that illicit money is impossible to differentiate from money obtained through legitimate means, and that integration can, therefore, be achieved.

This framework is useful for understanding the dynamics of many money laundering schemes. Yet it should not be regarded as immutable. In many cases, for example, money has already been layered and even integrated before it goes into the financial system - it is already disguised as licit proceeds of legitimate business. This can be done through import-export schemes in which there is an over-invoicing for the goods, cash-based businesses such as restaurants, casinos, and card clubs. In the La Mina case discussed above, there was a major and initially very successful effort to provide what appeared to be a legitimate source for the money. To the extent that such efforts are successful then there is a short circuiting of what are widely regarded as the standard money laundering stages.

Another reason the three stage conceptualization of money laundering is not entirely adequate stems from the fact that some illicit money does not enter the formal banking system but is instead transmitted through underground or 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". They work without a paper trail.

As Malhotra notes, a "Hawala banker issues neither written receipt for the sum received nor an order for payment of rupees in India. What he does make is a firm verbal commitment to the seller of dollars to make an equivalent rupee payment, at the agreed rate of exchange, through his agent in India; he then sends a coded message to his partner containing the designated recipient's name and the time,
date, and address for the payment". For such services the dealer can charge up to 15 per cent of the sum exchanged.

In spite of the significant commission charges the hawala system handles large amounts of money. In 1992, for example, British authorities arrested a London-based Pakistani who had moved nearly $13 million a week, while in 1993 police in Delhi arrested a hawala banker who, over a two year period, had reportedly handled $1.45 billion in payments for his clients in Dubai. One of the reasons that these schemes work so effectively is that they are protected through bribery and corruption. As one hawala banker claimed: "It is very easy to purchase protection by bribing police, politicians, local governments".

The Chinese have a similar system that is known as "fie chien" or flying money. This is based on trust, family ties, local social structures, and the threat of ostracism for any breach of good faith. The result is that "a banker who breaks a trust effectively commits economic suicide". This system, which is also sometimes described as the chit system, generally involves depositing money in one country in exchange for a "chit" or a "chop" (ie. a seal) and the remittance of this money in another country on presentation of the chit. It is fast and convenient, does not involve the transportation of bulk cash, leaves little trail for investigators, has the virtue of anonymity, and the costs, apart from the commission to the banker, are fairly low.

Major Trends in Money Laundering

Money laundering involves a constant struggle between the launderers - who seek the paths of least resistance and lowest risk - and governments and law enforcement authorities who seek to detect, disrupt, and prevent the completion of the laundering cycle. As a result, the money laundering industry is both innovative and highly dynamic. Launderers constantly seek new ways to circumvent regulation and minimize the likelihood that the funds from drug trafficking and other illicit enterprises will be subject to seizure. This does not mean that one method is necessarily superseded by another; simply that there are constant efforts to expand the repertoire of available and effective options. Methods that work tend to be replicated elsewhere - and even those schemes that are uncovered are sometimes used again in different locations or with slight modifications. Nevertheless, it is possible to discern a number of broad trends in money laundering:

The Employment of Specialists

As criminal activities have become more extensive and the profits from drug trafficking and other criminal enterprises have increased, there has been a recognition that laundering activities require specialists. Although some of these specialists can be found within the ranks of the criminal organizations themselves, there has been a growing recognition of the need to employ or co-opt specialists who operate in the licit financial and legal worlds, who can provide increasingly sophisticated methods of laundering and various other financial services, and who represent what Bosworh-Davies and Saltmarsh describe as an "emerging criminal class".

As the International Narcotics Control Strategy Report noted, an increasing number of drug trafficking organizations "do not directly manage the laundering or conversion of their proceeds, but rely predominantly on professional money brokers. Such brokers are increasingly crafting effective
schemes to evade normal monitoring, detection and reporting devices". Although this means some loss of profits to the traffickers - who pay hefty commissions that can range from around 6 or 7 per cent of the money laundered to over 20 per cent - this is deemed worth it because it reduces the risks both to the money and to the criminals themselves. Specialists are able to obtain a relatively high fee for their services because they are an additional buffer between the criminal and law enforcement. In some cases, they also
accept liability in the event that the money is seized.

Additionally, specialists provide good financial advice to the drug traffickers or other criminals. The 1996 State Department report noted that in treating money as a commodity, professional money launderers differ little from corporate money managers.

Movement of Bulk Cash

For all the use of specialists and highly sophisticated money laundering schemes, considerable amounts of money are still moved through bulk cash. The weight and size of large amounts of paper money poses problems but has not prevented the proceeds of drug deals being smuggled back to Mexico or Colombia in household goods such as washing machines or stereos or in general merchandise. On April 17, 1995, for example, police at Benito Juarez international airport discovered 6.2 million dollars in small bills stuffed inside air conditioners.

In some cases, traffickers develop elaborate schemes to facilitate the movement of cash. Reno International, a firm in Springfield, New Jersey was set up specifically to produce large fiber glass rolls with special compartments in which up to $700,000 in cash could be secreted. Indeed, 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". On occasion, concealment has been ignored in the hope of eluding the authorities. One such scheme which went awry occurred in October 1995 when Mexican soldiers seized over 12 million dollars brought in from the United States by plane.

In other cases, money has been intercepted when being sent through Federal Express or other delivery and postal services The increased emphasis on the physical transportation of the profits of drug trafficking and other crimes is highlighted by the increase in seizures, which in fiscal year 1994 totaled $314.4 million - up from $250.4 million in fiscal 1993.

Use of Trade and Free Trade Zones

As US Assistant Secretary of State Robert Gelbard noted in October 1995, in response to the tightening up of regulations in the financial sector, the Colombian drug cartels moved into trade using a variety of import-export schemes and front companies. A relatively simple way to do this is through over-invoicing for products, thereby providing an apparently legitimate reason for the movement of funds. The cartel, however, exploited trade on a massive scale, and has helped turn the United States balance of trade with Colombia from deficit to surplus.

As the New York Times noted: "In the new schemes, cartel intermediaries typically contact companies in Colombia that import goods from the United States. The intermediaries offer to pay for the imported goods with dollars that go to the American exporters. In return, the importers pay intermediaries an equivalent amount inside Colombia. For participating in the scheme, the importers pay intermediaries slightly less than the true exchange rate". The difficulty for United States law enforcement is that the laundering operations are "cloaked within what appear to be legitimate businesses, with legitimate inventories, sales and customers".

Reportedly, among the firms that inadvertently sold goods to Cali front companies were General Electric, Microsoft, Apple computer, and General Motors. In fact at least 105 American companies unknowingly accepted drug money for their products. The United States has responded to this by intensified efforts to identify the Colombian drug traffickers' front companies, and in Fall 1995 President Clinton signed an order invoking the International Emergency Economic Powers Act to freeze the assets of these Colombian companies.

In other cases, goods are purchased within free trade zones such as those in Panama and Aruba and subsequently imported into the United States where they are sold at or below market prices. The loss on the goods cuts slightly into the profits but is a price worth paying for proceeds that appear to be completely legitimate. Such schemes could become even more important in the future. "The implementation
of free trade agreements and regional compacts creating trading and economic zones which transcend national borders could increase the use of international trade as a mechanism for laundering the proceeds of criminal organizations. The impact of the liberalization of border and other customs controls, liberalized banking procedures and freedom of access within those zones creates additional potential risks for the future".

Use of non-bank Financial Institutions

Recent legislation in the United States has attempted to clamp down on money laundering through non-bank financial institutions. This dimension of the problem has been visible for some time. As long ago as 1989, the New York Times reported that in New York, California, Florida, and Texas, "check-cashing establishments and "store-front" money-transmitting businesses, which wired money to other countries, were flourishing, even though most of them were "unlicenced, unregulated and illegal". Almost seven years later the INCSR noted a continued problem with "non-bank financial institutions" including "a wide variety of exchange houses, check-cashing services, insurers, mortgagors, brokers, importers, exporters, trading companies, gold and precious metal dealers, casinos, express delivery services and other money movers of varying degrees of sophistication and capability". In short, even in the United States tightening up on money laundering has been a slow and hesitant process.

Use of Cash Business

Cash business such as restaurants and food delivery establishments have long provided excellent fronts for money laundering - and will continue to do so. Much the same is true of casinos. While these have been used by organized crime from the time of Lansky onwards, there is growing concern about the opportunities they offer for money laundering. Recent trends have included the growth of river boat gambling and the spread of Indian tribal casinos, and with 48 states now permitting legal gambling the amount of cash taken in casinos has increased from 117 billion dollars in 1984 to 407 billion dollars in 1994.

While there are clear regulations that apply to many transactions in casinos, oversight has been limited, especially in the case of tribal casinos. And although the money laundering suppression act of 1994 imposed reporting requirements on some tribal casinos that had hitherto been relatively free of restrictions, the spread of legal gambling continues to provide new opportunities for launderers. This is particularly the case with California card clubs which, according to some reports, have become fronts for money laundering by Asian criminal organizations.

Two features of cardrooms make them particularly appropriate for money laundering. The first is that they can exchange cash for chips without keeping records. Second, "unlike Las Vegas, where you bet against the house, in California, you gamble against the other people at the tables". In other words, there are opportunities for very large cash transactions that do not leave a paper trail. It is perhaps not surprising, therefore that card rooms have increased enormously in popularity accounting for $8.475 billion of the $13.9 billion legally wagered in California in 1994.

If there are still gaps in oversight of gambling in the United States, in many other countries monitoring and regulation are notable only by their absence. In Aruba, for example, money is frequently laundered through casinos. One participant acknowledged the ease with which this could be done: "You take a big pile of money, you buy some chips, and go to play a bit, winning or losing does not matter. Then you take the chips back and in exchange you get a bearer check from a bank in the United States The amount that is ready for you is called casino winnings. No one ever looks in the books to see where that laundered money comes from let alone the amounts concerned". The opportunities are enormous and, if anything, are becoming even greater with the proliferation of casinos in the countries of the Former Soviet Union, casinos that, in many cases, are not subject to any serious oversight or external scrutiny.

Use of Electronic Transfers

Although it is sometimes suggested that organized crime and drug trafficking groups pose a threat to the global financial infrastructure - "a system that links countries, banks and other financial institutions such as brokerage houses and stock markets, currencies and investment portfolios in a global exchange mechanism that engages in operation 24 hours a day" - the criminals are much more interested in exploiting this system than they are in disrupting it. As Joel Kurtzman has noted, the development of "megabyte money" ie. money in the form of symbols on computer screens makes it possible to move funds almost anywhere in the world with speed and ease.

The electronic transfer mechanisms operated by the Society for Worldwide Interbank Financial Telecommunications System (SWIFT) and the domestic equivalents of the US clearing systems operated by the Federal Reserve (Fedwire) and the Clearing House Interbank Payments System (CHIPS) efforts are made to ensure that transactions include information about both senders and recipients of funds. The difficulty is that the system includes not only banks but stock exchanges and other financial institutions, has many points of access, and allows anonymous trading, thereby making it possible to move money rapidly and easily, and to obscure the origin and ownership of money. Megabyte money, while it does leave a trail, is difficult to track and to control. And once the money is in the system, the capacity to move it freely and easily makes it difficult for law enforcement to catch.

The Exploitation of Offshore Banking

One factor that has made it more difficult the prevent money laundering has been the development of the offshore banking sector. As Helmut Schmidt once observed, central banks "did not see that they were losing their grip over the over markets when they allowed commercial banks to establish offshore affiliates". If this situation arose in part through a lack of both foresight and oversight, however, once the process of deregulation had started, governments tended to embrace it as synonymous with enhanced competitiveness. The result was what Philip Cerny has described as a "competition in laxity".

Competitiveness was deemed inconsistent with tight monitoring and control, and offshore banks and corporations attracted funds largely because they promised both anonymity and the possibility of tax avoidance, and in some cases, tax evasion. They continue to do so, with some offshore banks providing "gold credit cards" for their clients that debit their accounts but do not leave any record of
their transactions in the United States. The Cayman Islands, the Netherlands Antilles, Aruba, and Cyprus are all examples of offshore banking havens that have been used or continue to be used by criminal organizations for laundering the proceeds from their illicit activities. Such centers offer attractive opportunities for the transfer and secretion of funds in places where they are relatively safe from identification and seizure by law enforcement. In some cases, offshore corporations are created simply to launder and hide money.

The Use of New Financial Instruments

One of the difficulties facing law enforcement in its efforts to counter money laundering is the massive increase in the number of transactions that has accompanied the move from an investment economy to a transaction economy or what Susan Stranger has termed "casino capitalism". The increased volume of global financial business has not been matched by the development of regulatory measures. And the situation may be getting even worse. The increase in the number of monetary instruments, the increased number of financial transactions - such as futures and derivatives - that are not necessarily linked directly to real products, new banking methods such as correspondent banking, and the use of representative offices and foreign branches, all make control even more difficult.

Money can be moved not only through wire transfers, but also through innumerable varieties of licit and illicit financial instruments, including letters of credit, bonds and other securities, prime bank notes and guarantees. The new instruments make monitoring virtually impossible and undermine efforts to identify the beneficiaries. The 1996 FATF report, for example, noted that "an emerging technique is the use of single issue premium bonds of one sort or another. Launderers purchase these products and then redeem them at a discount, the balance becoming available to the launderer in the form of a "sanitized" check from an insurance company. Insurance brokers are not yet required to report suspicious transactions".

Another area of growing concern is the securities industry, which is "susceptible to money laundering, especially at the layering stage. The industry is international. Brokerage firms are often international. They transact an enormous volume of business by wire transfer through multiple jurisdictions. In addition, the securities markets are highly liquid. Purchases and sales can be made and settlements consummated within a short period of time. Securities brokers operate in a competitive environment with compensation dependent on sales commissions Hence, they may be tempted to disregard the source of client funds.

Some countries allow brokerage firms to maintain securities accounts as nominees or trustees for persons whose identities are concealed. Securities can be purchased or sold, or securities accounts manipulated to cleanse criminal profits through a series of transactions, often using shell companies, limited partnerships and front companies to mask the identities of the real partners in interest". Nor is this the only form of innovation that offers new opportunities for money laundering and makes both prevention and detection increasingly problematic. New banking practices are something that can also be exploited for money laundering.

New Banking Practices

The State Department's 1996 International Narcotics Control Strategy Report noted with concern the "new banking practices, such as direct access banking which permits customers to process transactions directly through their accounts by computer operating on software provided by the bank. This system limits the ability of the bank to monitor account activity, such as transactions involving joint accounts and pass-through banking schemes which have been a traditional method of layering. Beneficial owners of funds can now manipulate the identity of the ultimate recipient of the funds without a review by bank officers. Pass-through banking by itself poses myriad problems for regulators, by creating the ability of depositors unilaterally to create accounts within accounts, or even to provide quasi-banking services to off-line customers in a kind of bank within a bank.

These new bank services can limit the utility of systems in place which allow information about both the originator and the recipient to travel with the electronic funds transfer". The difficulty with correspondent banking relationships that can be global in character is that this "places ever more emphasis on vetoing transactions at the bank of origin". Yet many of the banks of origin are in countries where little attention is given to the prevention or control of money laundering and where know-your-customer policies are totally lacking at worst and grossly inadequate at best. And even when efforts are made in this direction, it is relatively easy to provide a legitimate front that satisfies efforts to check the legitimacy of the customer.

As Bryan Burrough has noted: "to truly defeat money launderers, banks must know not only their own customers -by no means an easy task -but their customers' customers, and in many cases their customers' customers' customers".

The Use of the States in Transition

Another trend is to use the banking system and other financial opportunities of countries that are in transition towards liberal democracy and market economy. Indeed, the privatization of former communist economies and the introduction of a commercial banking sector where there was once only a state bank has added a massive obstacle to control efforts. The inexperience of regulators and law enforcement in dealing with financial crimes, the desire for foreign investment or joint ventures, as well as the growth
of organized crime in these countries make them prime targets for money laundering.

Although efforts are being made in Russia, for example, to establish a cleaner and more regulated banking sector - with many commercial banks having their licenses revoked - the difficulty is that organized crime has infiltrated the banking system and according to most assessments controls between 40 and 80 per cent of the banks. Even allowing for some exaggeration in these figures, criminal organizations
certainly exert considerable influence in the banking sector.

Moreover, the links that some of these organizations have established with criminal organizations in Italy as well as with Colombian drug traffickers suggest that the Russian banking system is vulnerable not only to domestic money laundering but also to international schemes.

A Combination of Techniques

The other trend that is becoming apparent is what might be termed an "a la carte"or "mix and match" approach to money laundering. Perhaps the single largest advantage for the money launderers is that they have the initiative - they can determine where money enters the global financial system, where there is a commingling of the profits of licit and illicit enterprise, and what the precise mix of the techniques described above should be. It is hard to avoid the conclusion that money laundering opportunities are limited only by the imagination and ingenuity of the perpetrators. The acquisition and subsequent sale of property such as art, antiques and real estate, for example, can be inserted into a much more elaborate and extensive series of transactions that make it enormously difficult to follow the money beyond its initial movements.

Prospects for the Future

All this is not to suggests that the money launderers are having things all their own way. There are several ways in which governments and law enforcement agencies are trying to level the playing field New regulatory efforts to counter money laundering have been adopted by an increasing number of states. In the United States, for example, there has been a series of measures - the Bank Secrecy Act of 1970, the Comprehensive Crime Control Act of 1984, the Money Laundering Control Act of 1986, the Anti-Drug Abuse Act of 1988, the Annunzio-Wylie Anti-Money Laundering Act of 1992, and the Money Laundering Suppression Act of 1994 - which have extended the scope of efforts to prevent and control money laundering and have imposed requirements for the reporting of large cash transactions as well as suspicious transaction reports.

Although the United States has been more active than most countries in this area, it is certainly not alone. In the 1996 UN Crime Prevention Branch report to the Commission on efforts to control money laundering it was clear that an increasing number of states are passing legislation to prevent and control money laundering. In many cases, as Kirk Munroe has pointed out, the innovation lies in the criminalization of money laundering per se: "the process itself now is a crime separate from the crime that produced the money".

These efforts at the national level have been accompanied by efforts to create a global regime against money laundering. Such measures include not only the 1988 UN Convention Against Drug Trafficking but also the Basle Committee on Banking Regulations and Supervisory Practices Statement of Principles of December 1988; the Financial Action Task Force Report of April 1990 (with its 40 recommendations for action); the Council of Europe Convention on Laundering, Search, Seizure and Confiscation of Proceeds of Crime of September 8, 1990; the 61 recommendations of the Caribbean Drug Money Laundering Conference of June 1990; the agreement on EC legislation by the European Community's Ministers for Economy and Finance of December 17, 1990; the Organization of American States Model Regulations on Crimes Related to Laundering of Property and Proceeds Related to Drug Trafficking of March 1992., and the Declaration of Principles issued by the Summit of the Americas Ministerial Conference on Money Laundering held in Buenos Aries at the end of November and beginning of December 1995.

Particularly important in all this has been the FATF which, largely under United States prompting, has been active both in trying to ensure compliance with its recommendations among its members (through a mix of self-assessments and external evaluations) and to extend the principles embodied in these recommendations to other countries and regions. In its 1996 report the FATF not only recommended that "money laundering crimes be extended beyond the predicate offense of drug trafficking" to incorporate "laundering by criminal organizations whose activities go well beyond drug trafficking", but also proposed consideration of whether additional measures were needed to prevent the unlawful use of shell corporations and to make efforts to restrict or control opportunities to use "new or developing technologies to conduct large scale transaction instantly removing remotely, anonymously and outside traditional financial institutions". Not surprisingly, these proposals were accompanied by the recommendation that the same laws and regulations that have been developed for the banking sector be extended to non-bank financial institutions.

Another way in which law enforcement is proving more effective is in the use of technology. According to some reports, the Australian Transaction Reports and Analysis Center, or Austrac has become particularly effective in using computers and specialized software to identify and track "dirty money". Originally developed by the US air force and the Mitre Corp to track incoming intercontinental ballistic missiles, the software capabilities were used to develop a system called ScreenIt which "studied patterns in money flows, sifting out the transfers that looked most suspicious against the background of normal trade patterns in and out of Australia".

The Department of Treasury's Financial Crimes Enforcement Network (FinCEN) has also made increasing and productive use of technological developments in its efforts to counter money laundering and other financial crimes. Even so, there is considerable scope for further developments in this area. For example, two economists, Professors William W Welch and Simon J Pak, at Florida International University have developed computer software and a "global price matrix" which enables them to detect improper export and import invoicing which is a central feature of money laundering through the hawala system and is increasingly used elsewhere. With the development of increasingly fast computer systems and more sophisticated software monitoring and detection capabilities, the ability of law enforcement to identify anomalies in trade and financial flows could be significantly enhanced.

In spite of these improvements in the capacity for regulation and enforcement, the gap between the money launderers and law enforcement seems to be widening rather than closing. One of the main reasons for this is that, in spite of the efforts to develop a global anti- money laundering regime, the system as it currently stands is seriously incomplete with at least 3 very distinct tiers. Although it is difficult to disagree with the assertion by Nikos Passas that banks are "crime-enabling or facilitating institutions", this does not entirely capture the diversity involved and the fact that some banks in some countries facilitate or enable crime rather more than do other banks in other countries.

The first tier is one in which there are serious efforts at regulation. To be included in this sector states have to meet several requirements: they must have developed a legal and regulatory framework which treats money laundering as a crime in its own right, have implementing mechanisms such as
know your customer rules and due diligence requirements, thorough training and vetting schemes for personnel effective data and monitoring systems along with procedures for subsequent investigations, and legal provisions for asset seizure in the event that these investigations and subsequent trials result in convictions.

These requirements are stringent. It is not simply that there is a legal framework against money laundering but that there is both the will and the capability to use this framework for both prevention and control. Even some countries that appear to fit into this first tier are not always vigorous in their pursuit of money launderers. In France, for example, although anti money laundering legislation has been in existence for over 8 years only 10 convictions have occurred on money laundering charges - partly because of the difficulties of proving that the money had its origin in narcotics sales.

Although measures have been passed to extend the predicate offenses for money laundering, some members of the criminal justice system are not yet convinced that these steps are sufficiently serious. One Parisian magistrate expressed his frustration in the comment that "We set out against money laundering with flowers in the muzzles of our guns". This is not unusual. As suggested above, even in the United States where there are extensive anti-money laundering regulations, it took considerable time to close the gaps and extend regulations from banking to non-bank financial institutions.

If the first tier is far from foolproof in efforts to stop money laundering, the second tier in the global system - the offshore banking havens (not all of which are actually offshore islands) - remains very attractive for money launderers. Although there have been some efforts at regulation - and in some cases offshore banking countries have signed mutual legal assistance treaties with the United States and other countries in which they agree to provide information in criminal cases - offshore banks continue to place a high premium on banking secrecy. This is not surprising. One of the difficulties in dealing with offshore banking is the reliance of these banking havens on the continued inflow of funds. It is precisely because offshore banks offer secrecy to their customers that they are so attractive.

Not surprisingly, therefore, the banks themselves are resistant to pressures for greater transparency. Moreover, there has been a multiplication of both the banking havens themselves and the number of institutions that operate within their jurisdiction. Many of the bank havens also offer facilities for incorporation that are very attractive for criminals anxious to protect their anonymity and that allow them to establish front companies that can be used for money laundering. A good example of all this is Cyprus. In July 1995 the Parliament ratified the Council of Europe convention on "laundering, search, seizure, and confiscation of the proceeds from crime" (a provision which extends to all crimes and not just drug trafficking), but Cyprus continues to be an important haven because of the offshore banks as well as the 15,000 offshore companies that have been registered on the island.

The result is that there is a large gap between the legal framework and its implementation. And even where pressure to close the gap between law and implementation is effective on some of the offshore banking havens, those that are not pressured tend to be the major beneficiaries. As Switzerland has responded to external pressure for more transparancy, for example, Monaco has become a very attractive alternative. Although there is no law in Monaco that mandates banking secrecy, there is a "tradition of confidentiality" in the banking system as well as the opportunities for laundering activities provided by the casinos.

If some dubious money has migrated from Switzerland to Monaco, other money may well have gone to Austria which continues to operate anonymous accounts and has 32 million bank accounts with a population of only 8 million. In short, the "offshore" banking tier remains resistant to
incorporation within a global anti- money laundering regime.

Even so, this sector poses less of a problem than the third tier which could be described as the unregulated states. The most difficult area on which to impose money laundering restrictions encompasses the states of the Former Soviet Union as well as much of the developing world. As suggested above, in Russia, organized crime has deeply infiltrated the banking system. This will make it much more difficult for the authorities to clamp down on money laundering. Even if more stringent banking regulations are imposed it is not certain that they will be implemented effectively.

And even if they are, to the extent that criminal groups control a particular bank, then they will be better able to avoid oversight. It is not necessary to worry a great deal about meeting reporting requirements when one owns the bank. Nor are the problems confined to the banking sector. Joint ventures provide a particularly attractive avenue for money laundering by groups from outside the former Soviet Union. The desire for foreign investment is so great that concerns about the source of incoming investment are secondary to the desire to benefit from that investment.

Indeed, countries such as Belarus are not attractive for licit foreign investment but remain wide open to illicit investment. Their real concern is not money laundering through their financial systems but capital flight. In these circumstances a vigorous fight against money laundering is very unlikely. Incoming funds, particularly in the form of direct investment or joint ventures, are welcomed with few questions asked. The result of this, of course, is to attract money laundering, which moves to the place of least resistance and lowest risk. And even though Russia is developing money laundering legislation consistent with European standards in order to meet the requirements of membership of the Council of Europe, the establishment of laws does not mean that these laws will be effective.

Even where states in transition have the desire to combat financial crimes such as fraud and money laundering, their lack of knowledge and experience places them at a considerable disadvantage. It is not simply a matter of will but also of capacity. The same is true of many developing nations and it is not coincidental that, in late 1994, there were reports of Italian criminal organizations laundering money through Central America, especially Nicaragua, using various financial institutions and at least one casino.

In sum, although efforts are being and will continue to be made to extend the area in which money laundering is a high risk activity aspiration and accomplishment will remain far apart. Offshore banks will resist close scrutiny, while establishing effective laws and regulations in the third tier is likely to be a long term process and one whose ultimate success remains very much in doubt. Consequently, the anti money laundering regime will remain seriously incomplete. In these circumstances, money laundering will not be stopped; it will simply move from high risk areas and countries to jurisdictions in which the risks are lower. In short, unless there is universal adherence to norms of financial transparency, and general adoption and implementation of laws and regulations directed against money laundering, therefore, laundering activities will simply continue to relocate from one venue to another.

Yet another problem arises from the fact that although regulators and law enforcement can increasingly use technology against the launderers, the overall result of technological development is likely to be to the benefit of those who want to obscure the source, ownership and movement of money. Developments in "smart cards" are one facet of this development. Another is the growing use of the World Wide Web for financial transactions, something that is likely to increase exponentially during the next few years. Although there are divergent views on the implications of electronic or cyber- money it will almost certainly add to the repertoire of options available to money launderers. As commerce develops on the web the opportunities for anonymous financial transactions are likely to increase significantly.

Furthermore, the movement of cyber- money is likely to prove more difficult to monitor than more conventional transactions. Consequently, as cyber-money and smart cards become more readily available they are likely to be exploited to the full by criminal organizations for money laundering. Indeed, the worst case from the law enforcement perspective is that electronic cash will prove to be the high technology equivalent to the Indian and Chinese underground banking systems discussed above. Although the dangers of this have been realized in some government departments, others continue to regard it as a future problem rather than one that is imminent.

The result is likely to be an increased gap between money laundering activities on the one side and control and prevention efforts on the other. Significantly, the State Department has been in the forefront of those sounding the warning. This was particularly evident in the March 1996 INCSR which noted that "chip-based electronic cyber-payments are emerging very rapidly. Cyber-payments may soon become an addition to the major means of payment - currency, cheques, credit cards, debit cards and automated clearing-house transfers that are currently used to make purchases....

A significant feature of the new cyber-payments is that they include a new form of currency, a cyber-currency that is engineered to be an electronic emulation of paper currency. Cyber-currency includes the attributes of conventional currency: a store of value, a medium of exchange, a numeraire, anonymity and ease of use. But there are added features: transfer velocity (almost instant electronic transfers from point to point) and substitution of electrons for paper currency and other physical means of payment". These features are ideal for money laundering - and although some observers feel that it will be possible to build in sufficient safeguards to prevent widespread exploitation of the new technology - it is more likely that the new opportunities will out-run the capacity of governments and law enforcement agencies to devise new mechanisms for monitoring and control.

Indeed, the contradiction between the new forms of money and the efforts to prevent money laundering could hardly be more stark. "The edicts against money laundering are attempts to make all financial transactions visible, while the aim of anonymous digital cash is to keep financial activities private." One key factor in the debate over cyber-currency, therefore, is that there will be considerable resistance to efforts at establishing closer regulation of cyber-transactions from those who believe that the citizen's right to privacy outweighs the government's right to monitor such activities.

Another difficulty in the way of an effective global anti-money laundering regime is the problem of what might be termed tacit connivance. This exists in large parts of the banking sector where, as Michael Levi has observed, "bankers can rationalize their moral blindness on the grounds that critical inquisition of potential customers -legitimate and illegitimate -will simply displace them to rival financial institutions". It is also prevalent elsewhere. In London, for example, Russians have been pouring large amounts of money into real estate. Although there has been much speculation that the money came from criminal activities in Russia, the real estate dealers, who for several years have had a declining market, have welcomed the new business regardless of the source of the wealth.

Tacit connivance in money laundering activities at the re-investment stage of laundered money is simply an extension of much of the connivance at the earlier stage. But it also represents the point at which the money re-enters the legitimate economy, has multiplier effects, and provides benefits for those who are not connected to the criminal organization or its activity. It also highlights a fundamental difficulty facing law enforcement - the fact that money laundering (except for the source of the money) usually involves a series of legitimate activities within normal banking procedures and commercial transactions.

In extreme cases, of course, connivance can become collusion as the rewards of criminal enterprise are extended to those members of the licit economy who facilitate laundering activities. Money laundering has become so lucrative that bank officials and others with access to the financial system can be corrupted.

There is a powerful analogy here from the area of nuclear strategy. Consideration has periodically been given to the possibility of developing defenses against strategic missiles. The difficulty, however, is that it is easier and cheaper for the offense to develop new ways of overcoming the defense than it is to develop more effective defenses. What was sometimes described as the cost exchange ratio between offense and defense clearly favored the offense. In the context of the present discussion money laundering is the offense while law enforcement is the defense. The asymmetries are evident, amongst other things, in the amount of time required to launder money and to investigate such activities.

In one case in Holland, the laundering took 45 seconds while the investigations required several law enforcement personnel working for 18 months. The implication of the preceding analysis is that these asymmetries in favor of the criminal are unlikely to disappear - and in fact could well become even more pronounced. Consequently, it is impossible to disagree with Nigel South who has argued "the range of interventions, strategies and international agreements developed to break the money laundering chains are wide ranging and quite sophisticated" but are not working. To put it more graphically, a system in which a Nicolas Leeson can operate without supervision is a system that is easily exploited by the successors of Meyer Lansky.

Phil Williams is Director of the University of Pittsburgh's Ridgway Center for International Security Studies and Professor in the Graduate School of Public and International Affairs at the University. He has taught at the Universities of Aberdeen and Southampton and has published extensively in the field of international security, including the recent Security in Korea: War, Stalemate and Negotiation. During the last five years his research has focused on transnational organized crime and drug trafficking. Dr. Williams is the Editor of the journal, Transnational Organized Crime. He is currently preparing a major book on transnational organized crime and coediting a volume on drug trafficking and national security.