MONEY LAUNDERING An Insight into the Dark World of Financial Frauds

MONEY LAUNDERING An Insight into the Dark World of Financial Frauds BHURE LAL

SIDDHARTH PUBLICATIONS 10, DSIDC Scheme II, Okhla Industrial Area Phase II New Delhi -110 020

First Edition: January 2003 Copyright Author The views expressed in this book are of the author and have nothing to do with the discharge of his official duties. ISBN : 81-7220-151-6 Price: Rs. 400.00 Published by: Siddharth Publications 10 DSIDC Scheme-II, Okhla Industrial Area Phase-II, New Delhi-110020. Phone: 26388005 Printed at: Arun & Rajive Pvt. Ltd., 10 DSIDC Scheme-II, Okhla Industrial Area Phase-II, New Delhi-110020. Phone: 26388006, 26388007

CONTENTS Preface 7 1. What is Money Laundering? 11 2. History of Money Laundering 20 3. How is Money Laundered? 25 4. Corruption at High Places and Money Laundering 37 5. Money Laundering and Terrorism 50 6. International Ramifications and Global Trends 63 7. The Walker Model on Global Money Laundering 132 8. International Fight Against Money Laundering 143 9. Magnitude, Macro and Micro Economy Effects of Money Laundering 171 10. Financial Action Task Force 177 11. Role of Technology 184 12. Role of Banks 191 13. The Capital Flight: Means and Effects 196 14. Hawala 206 15. Money Laundering Legislation in India 225

PREFACE Money laundering has an adverse impact on socioeconomic and political stability of a country and must be nipped in the bud. Governments must adopt measures to dismantle syndicates engaged in money laundering by resorting to aggressive enforcement of law. The enforcing agencies must be adequately armed and trained. Without international cooperation money laundering cannot be controlled. The criminals outsmart the enforcing agencies and deploy a team of experts like chartered accountants, attorneys, bankers, mafia, to disguise their illicit money and masquerade it as legitimate income. These experts charge fee between 10 to 15% of the sum involved. The nexus between white-collared criminals, politicians, enforcing agencies and mafias cannot be ruled out. Bankers play the most prominent role and without their connivance the operation cannot be carried out. Development of new high-tech coupled with wire transfer of funds has further aggravated the difficulties to detect the movement of slush funds. Money laundering is inseparable from large-scale criminal enterprises. It camouflages the dirty, tainted money generated by anti-social, anti-economic activities like drug trafficking, firearms smuggling, international bank and securities frauds, bribery, intellectual property theft, and other specified unlawful activity. Once criminals successfully disguise their illicit proceeds, they then can reinvest them in their criminal organisations, expand their operations, and profit from their crimes. Money laundering is also a problem of global concern.

Money Laundering: An Insight into the Dark World of Financial Frauds Criminals target foreign jurisdiction with liberal bank secrecy laws and weak anti-money laundering regulatory regimes as they transfer illicit funds through domestic and international financial institutions often with the speed and ease of faceless internet transactions. The international nature of money laundering requires international law enforcement cooperation to successfully investigate and prosecute those that instigate these complex criminal schemes. Money laundering must be combated mainly by penal means and within the framework of international cooperation among judicial and law enforcement authorities. A penal approach should, however, not be the only way to combat money laundering, since the financial system can play a highly effective role. The recommendations of the Council of Europe (1980) and the Basle declaration (1988) are major steps towards preventing the use of the financial system for money laundering. Money laundering is usually carried out in an international context so that the criminal origin of the funds can be better disguised. Measures exclusively adopted at a national level, without taking account of international coordination and cooperation, would have very limited impact. Any community action should take particular account of the recommendations adopted by the Financial Action Task Force on money laundering, set up in July 1989 by the Paris summit of the seven most developed countries. Money laundering occurs not only in relation to the proceeds of drug-related offences but also in relation to the proceeds of other criminal activities (such as organised crime and terrorism). Credit and financial institutions require identification of their customers when entering into business relations or conducting transactions. Banks must not permit any abnormally suspicious movement of slush funds. The

Preface criminals want to take advantage of anonymity to carry out their criminal activities. Banks must not provide this anonymity. Credit and financial institutions must keep for at least five years copies or references of the identification documents required as well as supporting evidence and records consisting of documents relating to transactions. They should pay special attention to transactions with third countries, which do not apply comparable standards against money laundering. Preventing the financial system from being used for money laundering is a task which cannot be carried out by the authorities responsible for combating this phenomenon without the cooperation of credit and financial institutions. Banking secrecy must be lifted in such cases. Effective supervision of banks and financial institutions both onshore and offshore, proper licensing mechanism for creation of banks and financial institutions, registration of institutions, proper safeguards preventing criminals or their confederates to acquire banks, proper customer identification, ensuring no anonymous or fictitious account, existence of law emphasizing the need to identify the account holder and the real beneficiary, making it obligatory to report suspicious, abnormal movement of funds and maintaining records for five years, sharing of information, arranging training on combating money laundering and doing away with rigid banking secrecy, will help in combating money laundering. Identification of beneficiaries, directors, international exchange of information, reporting suspicious movement of capital, international judicial cooperation will help in preventing money laundering. (Bhure Lal)

WHAT IS MONEY LAUNDERING? Money laundering allows crime to pay by permitting criminals to hide and legitimize proceeds derived from illegal activities. According to one recent estimate, worldwide money laundering activity amounts to roughly $1 trillion a year. These illicit funds allow criminals to finance a range of additional criminal activities. Moreover, money laundering abets corruption, distorts economic decision-making, aggravates social ills, and threatens the integrity of financial institutions. Money launderers now have access to the speed and ease of modern electronic finance. Given the staggering volume of this crime, broad international cooperation between law enforcement and regulatory agencies is essential in order to identify the source of illegal proceeds, trace the funds to specific criminal activities, and confiscate criminals financial assets. Money laundering means different things in different places. This is because only proceeds of crime (or criminal conduct) can be laundered. Many countries have restricted the classification of crimes that are regarded as underlying crimes for money laundering purposes such as drug trafficking. In some countries any conduct which, if a person were convicted, would lead to a sentence of imprisonment will be regarded as a predicate crime. The final point here is that in most countries having countermoney laundering laws, a person can be guilty of the offence of laundering the proceeds of someone else s criminal conduct. There are various definitions available which describe the phrase money laundering . The conversion or transfer

Money Laundering: An Insight into the Dark World of Financial Frauds of property, knowing that such property is derived from serious crime, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in committing such an offence or offences to evade the legal consequences of his action and the concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that such property is derived from serious crime. Powis (1992) asserts that money laundering is the use of money derived from illegal activity by concealing the identity of the individual who obtained the money and converted it to assets that appear to have been derived from the legitimate source. However, probably, the simplest definition is the washing of dirty money to make it appear to be legitimate. Criminals commit three basic types of crime crimes of passion or honour, crimes of violence or vandalism and economic crimes. Ignoring minor vandalism, most crime is economic crime that is this crime is committed to make money. They commit crime for two reasons one is for kicks to prove that they can get away with it; the other is because they think they can make more money from the crime than they can make from the same amount of legitimate endeavour. Simply stated, the process of money laundering basically implies cleansing of money earned through illegal activities like extortion, drug trafficking and gun running etc. The tainted money is projected as clean money through intricate processes of placement, layering and laundering. In Black s Law of Lexicon the term laundering is referred to as being used to describe investment or other transfer of money flowing from racketeering, drug transactions and other illegal sources into legitimate channels so that its original source cannot be traced. When they make money from crime, criminals use it

What is Money Laundering? for one of three purposes to invest in another crime, to hide to use later or to spend now. One of the most tried, tested and successful methods of investigating crime is to follow the money. So criminals want to move the money further and faster than investigators can follow it and from time to time they want to put it into a black hole so that investigators simply cannot follow it. Also, investigators who think that someone may have been involved in a crime may start with that person s known finances and work backwards. So, the criminal needs to get the money out of the black hole in such a way that he can explain where he got it. Tax evaders launder money so that they can lie about where money and assets came from in order to evade tax. Or they hide money in bank accounts that they think the revenue authorities think will not be found out sometimes in the names of children or elderly relatives. Or they simply operate outside that part of the economy where records are kept. How often have you been offered a discount for cash, provided you don t want a receipt? According to some estimates, some 80% of property crime, for example, theft, is committed to fund drugs habits. But in financial crime, increasingly, there is no physical representation of the crime. The money is no more than information on a computer screen, or to be more precise it is bits and bytes stored in a computer s memory. So, no one handles stolen goods because there is nothing to touch. The result of this is that criminal laws that were framed to address the physical holding of something that had been stolen did not apply (or courts found it did not apply) to non-physical money or other dematerialized assets. There is a phrase often used by those who draw up laws or have to enforce them they say that one way of reducing crime is to take the profit out of crime. This means to identify assets that represent proceeds of crime and to seize them under a Court Order or administrative power.

Money Laundering: An Insight into the Dark World of Financial Frauds All this means that if money laundering could be made an unrewarding or as risky as handling stolen goods, then there would be an impact upon financial crime. Financial crime affects everyone. It results in higher costs to businesses, which means a combination of less profits and higher prices to consumers and it means the vulnerable such as the elderly are at risk from frauds such as doorstep frauds. It means shopping on the Internet or even at your local supermarket is more risky because the trader may be fraudster and it means that money flows into the hands of corrupt politicians and businessmen, including those engaged in trafficking in drugs, arms and people. Money laundering also was developed in order to facilitate trade. Nigeria is the money-laundering centre of Africa and that Nigerians around the world are engaged in large-scale crime and laundering. Money laundering techniques are restricted only by the imagination of the criminals and there are a lot of criminals trying to find ways to launder. Who launders money? Criminals launder money. Money launderers are to be found in all walks of life, many acting entirely innocently. However, anyone who helps a criminal to launder the proceeds of his crime is, in most jurisdictions, also a money launderer. This means bankers, lawyers, accountants, car dealers and others are money launderers if they allow their businesses to be used by someone else to launder the proceeds of a crime. Generally, the only defence is that the businessman was unaware of what was happening. This defence will not stand as the burden of proving innocence will be on the defendants. Persons possessing assets out of the proceeds of crime are also money launderers. A girlfriend of a criminal who knows that her boyfriend used proceeds of criminal conduct to buy her a car is a striking example in this regard. So an

What is Money Laundering? accountant who recommends a tax evasion scheme is himself a money launderer. Tax evaders launder money and hide it in banks numbered and benami accounts. Banks are regarded as safe hiding places for slush funds. How does money laundering help to fight crime? 1. Money laundering is anarchical in nature. Good governance is the death warrant of criminal activity. 2. A close scrutiny of financial transaction records leads not only to the discovery of hidden assets but also unmasks the criminals and their groups. 3. The criminally generated funds can be forfeited. This will hit the criminal hard and break the cycle of criminal activity. The governments should: 1. Make the act of money laundering a crime and enact laws for search, seizure and confiscation of criminally derived assets. 2. They should share information about criminals. 3. Bring the law enforcement and financial authorities together. Money launderers are highly imaginative criminals and circumvent governments counter-measure. A dynamic detection system must be in place. Money laundering is the process by which large amount of illegally obtained money (from drug trafficking, terrorist activity or other serious crimes) is given the appearance of having originated from a legitimate source. If done successfully, it allows the criminals to maintain control over their proceeds and ultimately to provide a legitimate cover for their source of income. Money laundering plays a fundamental role in facilitating the ambitions of the drug trafficker, the terrorist, the organised criminal, the insider dealer, the tax evader as well as many

Money Laundering: An Insight into the Dark World of Financial Frauds others who need to avoid the kind of attention from the authorities that sudden wealth brings from illegal activities. By engaging in this type of activity it is hoped to place the proceeds beyond the reach of any assets forfeiture laws. Attacking money laundering attacks the proceeds of crime; it also has the advantage of forcing those who are behind the trade in illicit drugs to fight in the open, on the same ground as the forces of law and order. Money laundering is necessitated by the requirement for criminals, be they drug traffickers, organized criminals, terrorists, arms traffickers, blackmailers, or credit card swindlers, to disguise the origin of their criminal money so that they can use it more easily. 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. These transactions typically fall into three stages: i. Placement, the process of placing, through deposits, wire transfers, or other means, unlawful proceeds into financial institutions. ii. Layering, the process of separating the proceeds of criminal activity from their origin through the use of layers of complex financial transactions iii. Integration, the process of using an apparently legitimate transaction to disguise the illicit proceeds. Through this process the criminal tries to transform the monetary proceeds derived from illicit activities into funds with an apparently legal source. Money laundering is the crime of the 90s. Money laundering is sleight of hand a magic trick for wealth creation the lifeblood of drug dealers, fraudsters, smugglers, arms dealers, terrorists, extortionists and taxevaders. It is also the world s third largest business. Though a relatively new and in vogue subject, it (money laundering) has in fact been around for centuries. Criminals throughout

What is Money Laundering? history have had to hide the source of newly acquired wealth in order to escape prosecution for the predicate crime. However, the scale of the problem has escalated out of all proportion. Today s criminals make the Al-Capone and the old Mafia look like small time crooks. Money laundering is one of the major problems facing international economy. Technology has offered a very sophisticated and circuitous means to convert ill-gotten proceeds into legal tender and assets. Measures need to ensure that legislation keeps abreast of technology in order to understand and pick up on any new techniques that professional money launderers may come up with. Money laundering is interlinked with crime. The allurement of huge profits from drug trafficking, international frauds, arms deals, trafficking in human organs, casinos and prostitution will facilitate the offence leading to huge accumulation of wealth, prestige and respectability of those in control of criminal business. Drug trafficking is the largest single generator of illegal proceeds. Robinson (1994) stated that more money is spent worldwide on illicit drugs than on food. The characteristics of organized crime are evident in money laundering. According to Billy Steel these characteristics are as below: It is a group activity, in that it is carried out often by more than one person; It is a criminal activity which is long-term and continuing; It is a criminal activity which is carried out irrespective of national boundaries; It is large-scale; and It generates proceeds, which are often made available for licit use. The serious criminal activity is highly complex and sophisticated. It is operated on a large scale and influences

Money Laundering: An Insight into the Dark World of Financial Frauds the legitimate business activity all over the world. A large number of conventions like the FATF have emerged to combat this growing menace. References 1. Ali, A.S., A Gateway for Money Laundering? Financial Liberalisation in Developing and Transnational Economies. Journal of Money Laundering Control, Vol. 1, No. 4. April 1998. 2. Beare, Margaret E. and Stephen Schneider. Tracing of Illicit Funds: Money Laundering in Candada. Ottawa: Ministry of the Solicitor General of Canada, 1990. 3. Bishwajit Battacharyya, Money Laundering , International Conference on Global Drugs Law, 1997. 4. Campbell, A. The High Street solicitor and the proceeds of criminal activity the risks. Journal of Money Laundering Control, Vol. 1, June 1997. 5. Chang, A. and Herscowitz, A. Money Laundering. American Criminal Law Review, Volume 32, No. 27, winter 1995; 499-525. 6. Ehrenfeld, Rachel. Evil Money: Encounters Along the Money Trail. Harper Collins Publishers, New York, 1992. 7. Financial Crimes and Money Laundering. International Narcotics Control Strategy Report, March 1997, Bureau for International Narcotics and Law Enforcement Affairs. 8. Fituni, L.L. Russia: Organised Crime and Money Laundering. Journal of Money Laundering Control, Vol. 1, No. 4, April 1998. 9. Florez, C.P. and Bernadette Boyce. Laundering Organizations. FBI Law Enforcement Bulletin, April 1990; 22-5. 10. Gubbay, A.R. Zimbawe: Report on Money Laundering. Journal of Money Laundering Control, Vol. 1, No. 3, January 1998. 11. Haynes, A. Securitisation, Money Laundering and Fraud. Journal of Money Laundering Control, Vol. 1, No. 2, October 1997. 12. Hinterseer, R.K. An Economic Analysis of Money Laundering. Journal of Money Laundering Control, Vol. 1, No. 2, October 1997. 13. Ian Hamilton Fazey, Setting the Context: Ten Years on from the 1998 Convention. 14. International Monetary Fund. Money Laundering and the International Financial System. Working Paper presented by V. Tanzi, May 1996. 15. Jayasuriya, D.C. Money Laundering: The Role of Legislation in Developing Economies. Journal of Money Laundering Control, Vol. 1, No. 3, January 1998. 16.

Knetch, Frederick J. Extraterritorial Jurisdiction and the Federal Money Laundering Offense. Stanford Journal of International Law, Fall 1986; 389-420.

What is Money Laundering? 17. Levi, M. Pecunia non olet: cleansing the money-launderers from the Temple , Crime, Law and Social Change, Vol. 16, 1991; pp. 217302. 18. Nara Srinivasana and Roderic Underwood, Money Laundering: International Efforts and Recent Development in the Movement of Drug Related Money , International Conference on Global Drugs Law, 1997. 19. Parlour, R (ed). The International Handbook of Money-Laundering. Butterworths, London, 1994. 20. Pino Arlacchi, Global Programmes Against Money Laundering, Attacking the Profits of Crime: Drugs, Money and Laundering, June 1998. 21. Possamai, Mario. Money on the Run. Penguin, Toronto, 1992. 22. Shaap, C.D. Money Laundering: A Public Prosecutor View Point. Journal of Money Laundering Control, Vol. 1, No. 3, January 1998. 23. The US 2001 National Money Laundering Strategy . 24. United Nations. Money Laundering and Associated Issues: The Need for International Cooperation. UN Document E/CN./15/1992/4/ Add.5; 23 March 1992. 25. United States General Accounting Office. Money Laundering: A Framework for Understanding U.S. Efforts Overseas. Washington, DC: May 1995. 26. What is Money Laundering? United Nations Global Programme against Money Laundering. 27. Wiener, J. Money Laundering: Transnational Criminals, Globalisation and the Forces of Redomestication . Journal of Money Laundering Control, Vol. 1, June 1997. 28. William, Phil. Money Laundering. Paper presented at the South African Institute of International Affairs workshop on The Illegal Drug Trade in Southern Africa. 5-6 June 1997. 29. Zeldin, M. Money Laundering. Journal of Money Laundering Control, Vol. 1, No. 4, April 1998.

HISTORY OF MONEY LAUNDERING Money laundering is interwoven with the history of trade and banking as it hides money and assets from the state from confiscation and taxation. The money usually results from crime. Its origin is unknown but it has been going on for several thousand years. In Lords of the Rim Sterling Seagrave explains how, in China, merchants some 4000 years before Christ would hide their wealth from rulers who would simply take it off them and banish them. In addition to hiding it, they would move it and invest it in businesses in remote provinces or even outside China. With the passage of time there emerged the offshore industry and tax havens culminating in money laundering and investment abroad and deposits in secret bank accounts. Money laundering has been used to move money resulting from crime, to hide and move it out of the reach of governments including oppressive regimes and despotic leaders. Many minorities like the Jews have taken steps to preserve wealth from rulers, both un-elected and elected, who have targeted them simply because of their beliefs or colour. It is happening even today. The term money laundering is often said to have originated at the time of the infamous American gangsterism that arose originally out of prohibition the banning of alcoholic drinks. Several mechanisms were used to disguise the origins of the large amounts of money generated by the import and sale of alcohol and other rackets such as gambling, some of which were illegal. The term Money Laundering is said to have originated from Mafia ownership of Laundromats in the

History of Money Laundering United States. Gangsters there were earning huge sums in cash from extortion, prostitution, gambling and bootlegging. They needed to show a legitimate source for these monies. One of the ways in which they were able to do this was by purchasing outwardly legitimate businesses and to mix their illicit earnings with the legitimate earnings they received from these businesses. These gangsters chose Laundromats because they were cash businesses and this was an undoubted advantage to people like Al Capone who purchased them. Al Capone, however, was prosecuted and convicted in October, 1931 for tax evasion. It was for this that he was sent to prison rather than the predicate crimes that generated his illicit income. He states : Money laundering is called what it is because that perfectly describes what takes place illegal, or dirty, money is put through a cycle of transactions, or washed so that it comes out the other end as legal or clean, money. In other words, the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income. Ironically, one of the methods of concealing the source of the money was legal gambling. The major headache that gangsters faced was that the money was in cash, often in small denomination coins. If the coins were put into the bank, questions would be asked. The storage of large amounts of money in low value coins is a storage nightmare. So they created businesses, one of which was slot machines, and another was laundries. It is thus, that the term money laundry was born. The abuse of merchants and others by rulers led them to find ways to hide their wealth, including ways of moving it around without it being identified and confiscated. Money laundering in this sense was prevalent 4000 years before

Money Laundering: An Insight into the Dark World of Financial Frauds Christ. Proceeds of criminal conduct are laundered. Many countries have specified the criminal activities regarded as crime for money laundering purposes. It was several thousand years ago that assets often assets with no intrinsic worth but with time increasingly assets that were recognizable and convertible separated money and value. So, gold coins were literally worth their weight in gold and it was immaterial which country issued them the only thing that mattered was the quality and quantity of the gold. Once gold is melted down, it does not lose its value, only its shape. It can be refashioned and having arrived in one place as one thing, it can live there as something else and that need not even be the same amount of gold. Gold remains one of the main noncurrency means of holding money including laundered money. Diamonds are a particular favourite too. There have been instances of holy men carrying laundered funds by concealment. Prohibition and a restriction on gambling made large amounts of cash for those prepared to break the embargoes. The most important fact about that time was that it caused a dramatic increase in financial crime. Money laundering is the process by which criminals give the colour of legality and legitimacy to slush funds. An illusion is created that the money they are spending is genuine, legal money. Financial crime is a crime that gives direct access to the proceeds of the offence. Sanctions busting was a financial crime because for every offence committed, the criminal immediately received cash in his hand. Thus it created an immediate problem over what to do with that money. Opening a cash business was the obvious thing to do and money laundering came handy. Criminals moved into businesses where the cash crop was higher including drugs. They formed law firms, accountancy practices, bought banks, film studios, engineering concerns, even governments. They have always

History of Money Laundering used criminal money to fund the education of the children of the more senior members. Money laundering also was developed in order to facilitate trade. Nigeria is the money-laundering centre of Africa and that Nigerians around the world are engaged in large-scale crime and laundering. The criminals create an illusion that the money they are spending is actually theirs. Many countries have restricted the classification of crimes that are regarded as underlying crimes for money laundering purposes. Such as offences relating to drug trafficking are to be regarded as creating dirty money . Some countries will allow a person to be prosecuted for laundering the proceeds of criminal conduct overseas, provided the conduct would have been criminal conduct in both countries. A person can be guilty of the offence of laundering the proceeds of someone else s criminal conduct. Meyer Lansky (affectionately called the Mob Accountant ) was particularly affected by the conviction of Capone for something as obvious as tax evasion. Determined that the same fate would not befall him, he set about searching for ways to hide money. Before the year was out he had discovered the benefits of numbered Swiss Bank Accounts. This is where money laundering would seem to have started and according to Lacey, Lansky was one of the most influential money launderers ever. The use of the Swiss facilities gave Lansky the means to incorporate one of the first real laundering techniques, the use of the loan-back concept, which meant that hitherto illegal money could now be disguised by loans provided by compliant foreign banks which could be declared to the revenue and a tax-deduction obtained into the bargain. Money laundering as an expression is one of fairly recent origin. The original sighting was in newspapers reporting the Watergate scandal in the United States in 1973. The expression first appeared in a judicial or legal

Money Laundering: An Insight into the Dark World of Financial Frauds context in 1982 in America. Since then the term has been widely accepted and is in popular usage throughout the world. Money laundering as a crime attracted interest in the 1980s only, essentially in a drug trafficking context. This formed an increasing awareness of the huge profits generated from this criminal activity and a concern at the massive drug abuse problem in western society which created the impetus for governments to act against the drug dealers by creating legislation that would deprive them of their illicit gains. Governments also recognized that criminal organizations, through the huge profits they earned from drugs, could contaminate and corrupt the structures of the state at all levels. Money laundering is a truly global phenomenon helped by the international financial community, which is a 24 hours a day business. When one financial centre closes business for the day, another one is opening or open for business. As a 1993 UN Report noted: The basic characteristics of the laundering of the proceeds of crime, which to a large extent also mark the operations of organized and transnational crime are its global nature, the flexibility and adaptability of its operations, the use of the latest technological means and professional assistance the ingenuity of its operators and the vast resources at their disposal. References 1. Gilmore, William C. Dirty Money: The evolution of money laundering counter-measures. Council of Europe Press, Strasbourg, 1995. 2. Graycar, A & Grabosky, P. (eds). Money-Laundering in the TwentyFirst Century: Risks and Countermeasures. Australian Institute of Criminology, Canberra, 1996.

HOW IS MONEY LAUNDERED? To understand money laundering as it is practised today on a global basis, one has to appreciate money as a commodity. Professional money launderers differ little in this respect from corporate money managers. A corporate money manager enters the money markets of various countries where the corporation will need national currencies during the next year and buys/sells currencies in a constant effort to improve the manager s average position at the time of payment. Similarly, money launderers use a bidding system to buy/sell drug proceeds, especially US dollars. Just as a sound investment portfolio will contain stocks, bonds and other monetary instruments, the money brokers vary their holdings. The Cali Cartel, for example, minimizes risk by selling a substantial portion of the drug proceeds it earns from the sale of cocaine in the United States. Mexican traffickers in heroin, cocaine and marijuana do the same, often selling to the same money brokers on behalf of Cali or for their own account. These brokers will convert proceeds for a fee, or, they will buy the proceeds at a discount. Given the high profit margins of the drug trade, discounts of 7-10 per cent or even higher, depending upon risk, are common. At the end of the day, Cali and other trafficking groups may own or control 50 per cent or less of the initial drug proceeds. The textile trade is a typical cover. For example, a South American clothing manufacturer working with Cali obtains a permit to export $20 million in drug proceeds in New York and returns it to Colombia, covered by an export licence.

Money Laundering: An Insight into the Dark World of Financial Frauds Supposing Cali Cartel is moving $100 million from the US to Mexico. The bulk of the $100 million will be deposited in Mexican banks, after which a number of schemes can be used. Money will be wire-transferred to accounts in the United States. The Mexican banks will then issue cheques drawn on its US accounts, payable to individuals or corporations. These cheques can be batched for resale in Latin America, or deposited into foreign bank accounts. Enforcement officials believe that as much as $10 billion in Mexican bank drafts is laundered through such schemes each year in Panama alone. While some of the trade is in contraband goods, these certificates of deposit, cheques and other financial instruments have also been used to pay for legitimate shipments. Gold trade in the Aruba Free Zone amounts to more than $200 million a year. The Mexican banks will also issue their own dollardenominated cheques upto a level which they think will not cause inquiries. One recent transfer reportedly involved $78 million which went through a US bank in a single transaction. These transactions are designed to fall outside the scope of Treasury and other reporting. For example, US banking law does not require reports on bank to bank transfers. Transactions in bulk conducted outside traditional foreign exchange venues are probably escaping conventional monitoring systems. Dollar settlements are accomplished through reciprocal balances. For example, a Mexican bank wires $50 million to a bank in New York, which gives the Mexican bank instant credit on the latter s New York account because the Mexican bank has simultaneously given the New

How is Money Laundered? York bank credit for $50 million at the latter s Mexican facility. The grey market enables Latin businessmen to buy US goods and services here, or in a free zone like Cologne and pay for it in dollars (or dollars converted to cheques and other monetary instruments) which originated in the US drug market. Financial institutions and gambling operations face the loss of licences and significant financial penalties if they are caught. All financial transactions of US $10,000 and above must be reported, and the Treasury Department s GTO programme attempts to monitor suspicious transactions. In New York, limits of US $750 have been placed on small exchange offices, which have in the past transferred money for the drug cartels. Enormous size of American financial markets and the high volume of transactions make any effort to eradicate this activity impossible. More than anything else, banks and big business are keen to get their hands on the proceeds laundered of organised crime. Apart from the traditional activities of drugs, racketeering, kidnapping, gambling, procuring (women and children), smuggling (alcohol, tobacco, medicines), armed robbery, counterfeiting and bogus invoicing, tax evasion and misappropriation of public funds, new markets are also flourishing. These include smuggling illegal labour and refugees, computer piracy, trafficking in works of art and antiquities, in stolen cars and parts, in protected species and human organs, forgery in arms, toxic and nuclear products, etc. Every country has its criminal underworld. The biggest organisations and the ones that have been active the longest can be found in the hubs of capitalism: the United States (Cosa Nostra), Europe (the Sicilian Mafia) and Asia (the Chinese triads and Japanese yakusas). Others have also emerged over the last few decades, such as the Colombian

Money Laundering: An Insight into the Dark World of Financial Frauds cartels in Latin America and the Russian Mafia. Hundreds of rival groups share the national and international criminal markets. They enter into alliances and subcontracting agreements, tending to break up into small, flexible, mobile units specializing in a market sector or a profitable niche. 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). 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. Transactions cross several national borders. The money has moved beyond their jurisdiction and might be termed as trans-jurisdictional money. This 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. The money launderers tend to seek out areas in which there is a low risk of detection due to weak or ineffective anti-money laundering programmes. Because the objective of money laundering to get the illegal funds back to the individual who generated them launderers usually prefer to move funds through areas with stable financial systems. At the placement stage, the funds are usually processed relatively close to the underlying activity. In the layering phase, the launderer might choose an offshore financial centre, a large regional business centre, or a world banking centre any location that provides an adequate financial or business infrastructure. In the integration phase, launderers might choose to invest laundered funds in still other locations if they were generated in unstable economies or locations offering

How is Money Laundered? limited investment opportunities. Three Stages in Money Laundering 1. Placement Stage: The first stage is the physical disposal of cash. The launderer introduces his illegal profits into the financial system. This placement is accomplished by depositing the cash in domestic banks or in other types of formal or informal financial institutions. This is done by breaking up large amounts of cash into less conspicuous smaller sums that are then deposited directly into a bank account, or by purchasing a series of monetary instruments (cheques, money orders, etc.). The cash is usually siphoned off across borders for deposit in foreign financial institutions, or used to buy high-value goods, such as artwork, aeroplanes, and precious metals and stones, that can then be resold for payment by cheque or bank transfer. 2. Layering Stage: The second stage in money laundering is known as layering. The launderer engages in a series of conversions or movements of the funds to distance them from their source. The funds might be channelled through the purchase and sale of investment instruments such as bonds, stocks, and traveller s cheques or the launderer might simply wire the funds through a series of accounts at various banks across the globe, particularly to those jurisdictions that do not cooperate in anti-money laundering investigations. In some instances, the launderer might disguise the transfer as payments for goods or services, thus giving them a legitimate appearance. A number of rotations to slush funds are given through banks and this complex layers of financial transactions are carried out to divorce the illicit proceeds from their source and mislead the investigating agencies. The high-value goods and monetary instruments are resold and the proceeds are invested in real estate and legitimate businesses, particularly in the leisure and tourism industries. Shell companies (paper companies/bogus

Money Laundering: An Insight into the Dark World of Financial Frauds companies) serve as front and are registered in offshore havens. They are a common tool in the layering phase. These companies whose directors are often local attorneys act as nominees to obscure the identity of beneficial owners through restrictive Bank secrecy laws and attorney-client privilege. 3. The Integration Stage: The funds re-enter the legitimate economy. The launderer might choose to invest the funds into real estate, luxury assets, or business ventures. Techniques and Trends Drug trafficking and other criminal organisations 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. The conducive conditions are: 1. Multiple entry points in the global financial system. 2. Rapid transmission of funds making the task of investigators difficult. 3. Lack of proper monitoring of movement of huge funds through banks and other financial transactions. 4. Temptation of bribery and corruption in the illicit financial world. 5. Existence of parallel/informal economies outside the control of government. In many cases, 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. Using 1996 statistics, these percentages would indicate that money laundering ranged between US Dollar (US$) 590 billion and US$ 1.5 trillion. The lower figures is roughly equivalent to the value of the total output of an economy

How is Money Laundered? the size of Spain. Currency smugglers use a variety of techniques to take money out of the country. However, four main avenues have been identified as being most favoured by the smugglers, viz. air, sea, land and mail. Air Airlines are used for currency smuggling because: i) the smugglers can stay close to their money during the transportation process; ii) destinations can be reached quickly and easily; and iii) pre-planning is kept to a minimum Passengers can smuggle currency concealed on their persons, in hand luggage or in unaccompanied baggage. Colombian economists conservatively estimate that about US $4.5 billion is repatriated annually to Colombia by drug traffickers. It is also known that Colombian traffickers have purchased a fleet of large planes, such as Boeing 727s, Caravels and the Turboprop Lockheed Electra. They use these planes to transport tonnes of cocaine to Mexico, Canada, Portugal and West Africa for sale in the United States and Europe. In September 1992 federal and state authorities performed an outbound currency search of a commercial carrier s crew members departing from New York, inbound to Colombia. A flight attendant was stopped and informed of the currency-reporting requirement. She declared a total of $1000. Upon examination of her hand-carried crew bag, a customs inspector found $2,600 in a roll of a toilet paper, $12,400 in an envelope, $20,000 in a wooden box, $1,627 in her wallet, $5,000 in a carry-on garment bag, $40,000 in a box of laundry detergent and $13,300 in her jacket pocket. In total she was carrying $95,541. In October 1996, Mexican authorities found $12 million inside suitcases taken from a private plane that is believed to belong to the CarrilloFuentes drug organization.

Money Laundering: An Insight into the Dark World of Financial Frauds Another technique is the concealment of money inside the body itself, for example, in one case, at New York-JFK, a woman swallowed $7,500 in fifteen condoms, and concealed $47,894 in her baggage. Currency smuggling by air can also include air cargo. In one of the largest detected cases inspectors at New YorkJFK found $6,469,024 in 26 sealed metal containers. Land Smuggling currency across land, although lacking in speed and the ability to reach many international destinations, is still a relatively easy way to transport cash. US customs presence tends to be less at outbound stations. Inspections tend to be infrequent as they interfere with the flow of traffic and at times cause massive traffic congestion. Another advantage of land border crossings is that vehicles in which to conceal the currency are easy to obtain. Customs officials have found currency in obvious locations such as seats, trunks, false compartments, dashboards and door panels. Sea Although smuggling by sea can have the advantage of reaching many destinations, it can be, at times, a cumbersome exercise. For example, it may require the use of other parties such as exporters or ship personnel and the smuggler may be physically separated from the currency for long period. At the same time, however, smuggling by sea offers certain advantages. The main advantage is that ship cargo typically involves large containers within which currency is very easy to conceal and difficult to detect. In one inspection, inspectors at New York seaport seized $763,240 that had been concealed beneath the floor of a refrigeration unit in a ship bound for Colombia. They also seized $7,1785,161 from two 20-foot containers loaded with

How is Money Laundered? dried peas, again on a vessel destined for Colombia. According to US customs this seizure represented approximately one month s drug profits. Mail The US postal service and FinCEN (Financial Crimes Enforcement Network) maintain that, although, the extent of mail smuggling cannot be measured, the US mail and private couriers are being used to send currency illegally out of the country. The names on the money orders are left blank. The funds are sold to casas de cambios or money changing houses for cash that will be deposited into a trafficker s account. The money orders are then sold and resold through the network of casas and are finally redeemed outside of Colombia. In addition to the increase in currency smuggling the emergence of new payment technologies has presented new challenges. For many years the banking and financial services industry has been developing new methods of cash payments. One of these methods is generally referred to as cyberpayments . A significant feature of the new cyberpayments is that they include a new form of currency. Cyberpayments also comprise other payment components, which emulate current payment systems. For example, already in use are cyber-cheques, cyber-credit and cyberdebit. Cyber-currency, therefore, includes the attributes of conventional currency, which are: a store of value; a medium of exchange; and ease of use. However, it has one very important added feature almost instant electronic transfers from point to point. Cyber-currency is still in the experimental stage. The cash is loaded on a card containing a chip, which can be filled via telephone or bank machine which can be moved from card to card and can be used for purchases of any amount. However, the problem for government and law enforcement agencies is that there is no way to track the

Money Laundering: An Insight into the Dark World of Financial Frauds card s transactions because, unlike Visa and MasterCard, there is no registration of the transaction. The inability to trace such funds presents an opportunity for the movement of illicit funds. It is argued that within the next few years cyberpayments will, to some degree, substitute and supplement all current means of payment and a variety of monetary instruments. It is not clear who the major cyber-payment players will be in the next 5 or 10 years, it is inevitable that Cybermoney will originate outside the purview of international central banks, which are largely responsible for traditional monetary regulation. If this situation holds true, the result will have major implications for Governments and law enforcement agencies. The Financial Crimes Enforcement Network (FinCEN) points out that there are no laws that limit the balance of electronic currency that can be loaded into a smart card. This may create a major opportunity for money launderers. In addition, it has not been determined whose tax laws apply to transactions in cyberspace. However, there is general agreement that the issue must be addressed immediately. As mentioned earlier, the cyberpayment industry is still in a developmental stage, nevertheless, having regard to the speed with which the use of electronic money is growing, governments cannot afford to wait until the launderers have exploited the cybersystem. The operational principles of money laundering are a three-stage process which require, first, moving the funds away from any direct association with crime; second, disguising the trail to foil pursuit; and, third, making the money available to criminals once again while keeping its source secret. The deeper the dirty money goes into the international banking system, the more difficult it is to identify its original source. Financial criminals use legal

How is Money Laundered? tricks such as walking accounts , where banking officials have standing instructions to move accounts to another jurisdiction at the first hint of an inquiry by law enforcement officials. The cardinal rule of successful money laundering is to always approximate as closely as possible legal transactions: making this process more difficult from the outset is the key to effective financial law enforcement. Criminals even exploit the banking sector s competition for customers to obtain even more attractive services for their illegal activities. We must continue to respect the right to banking privacy, but we cannot tolerate that it should offer immunity to criminals and their money. Remain on guard against criminal exploitation of offshore centres. There are also common factors regarding the wide range of methods used by money launderers when they attempt to launder their criminal proceeds. Three common factors identified in laundering operations are: The need to conceal the origin and true ownership of the proceeds; The need to maintain control of the proceeds; The need to change the form of the proceeds in order to shrink the huge volumes of cash generated by the initial criminal activity. The layering and integration stages of money laundering are using more sophisticated money laundering techniques. Cash is now being held in bulk or placed into the financial system through exchange houses and other non-bank financial institutions. Not only is it moved through wire transfers but also through innumerable varieties of licit and illicit financial instruments, including letters of credit, bonds and other securities, and prime bank notes and guarantees, without a parallel increase in the capability of the far-flung elements of the world s financial system to verify the beneficiaries or authenticity of such instruments.

Money Laundering: An Insight into the Dark World of Financial Frauds References 1. Adler, P. Wheeling and Dealing, (2nd ed), Columbia University Press, New York, 1993. 2. Bosworth-Davis, R. Living with the Law: A Survey of Money Laundering Reporting Officers and their Attitudes towards the Money Laundering Regulations. Journal of Money Laundering Control, Vol.1, No.3, January 1998. 3. Karchmer, Cliff. Illegal Money Laundering A Strategy & Resource Guide for Law Enforcement Agencies. Police Executive Resources, Washington, DC, 1988. 4. Kramer, W. Michael. Investigative Techniques in Complex Financial Crimes. National Institute on Economic Crime, Washington, DC, 1989. 5. Thony, J.-F. Processing Financial Information in Money Laundering Matters: The Financial Intelligence Units. European Journal of Crime, Criminal Law and Criminal Justice, Volume 3, 1996, 257-282. 6. Lintner, Bertil. Washing up: Dirty money takes a tortuous path. Far Eastern Economic Review, Nov. 6, 1997. 7. Naylor, R. Thomas. Bankers, Bagmen and Bandits. Black Rose, New York, 1990. 8. Naylor, R. Thomas. Drug Money, Hot Money, and Debt. European Journal International Affairs, Winter 1989. 9. Powis, Robert. The Money Launderers. Lessons from the Drug Wars How Billions of Illegal Dollars Are Washed Through Banks and Businesses. Probus Publishing, Chicago, 1992. 10. Preston, James E. Casas de Cambio and International and Domestic Money Laundering. Paper presented at the Southwest Border Conference on Casas de Cambio, organized by the Financial Crimes Enforcement Network (FinCEN), United States Department of the Treasury. Arlington, VA, June 25-28, 1990. 11. Robinson, Jeffrey. The Laundrymen. Simon & Schuster Ltd., London, 1994. 12. United States General Accounting Office. Money Laundering: Rapid Growth of Casinos Makes them Vulnerable. Washington, DC: January 1996. 13. Villa, John K. Banking Crimes: Fraud, Money Laundering, and Embezzlement. C. Boardman, New York, 1987. 14. Rider, Dr. Barry A.K. Fei Ch ien Laundries The Pursuit of Flying Money. Journal of International Planning, August 1992.

CORRUPTION AT HIGH PLACES AND MONEY LAUNDERING In February, 1998, the OECD s Financial Action Task Force for money laundering in its Annual Report highlighted the problem in Mexico and stated, One of the most favoured technique continues to be outbound currency smuggling, along with electronic transfers, Mexican bank drafts and the parallel peso exchange market. Corruption remains the chief impediment to Mexico s antilaundering efforts. Where corruption occurs transactions there is a providers of funds from through criminalisation in international business need to tackle it at the source. The capital-exporting countries operate and bribing the authorities.

International action is needed because bribes enable criminals to escape conviction for crimes that cause global damage: money laundering, environmental pollution, drug running, terrorism, etc. Corruption often transcends the national frontiers. The Mafias are international networks. Organized crime becomes an intermediary between the Government and the business. Mafiosi elements in some countries serve as negotiators to arrange contracts and kickbacks to corrupt officials. Business people have to play along if they want to obtain the contracts or even avoid physical harm. Advances in finance and technology also contributed to increasing awareness of the global corruption problem. The death of distance described by Frances Cairncross, meant that prices of communication plunged, while speed and quality were increased drastically (Cairncross, 1997).

Money Laundering: An Insight into the Dark World of Financial Frauds This was a bonanza for the perpetrators of public malfeasance. It became easier to hide ill-gotten assets, and now the links with organized crime became more transparent to decision-makers. In addition, loosening rules of international finance were twisted to make offshore banks with negligible accounting laws very popular. Moreover, millions of dollars could now be transferred around by a few mouse clicks and a fast modem. The effect of globalization on grand corruption are best summed up by Gadbaw and Richards when they state that, corruption had gone from an issue of ethics and human behavior to one that deals with international economic development. The problem was now on the radar screens of the rest of the world. As many officials started attesting, the issue was now one that could only be solved through international cooperation, which played right into the hands of the United States, which still reminded other countries that it held the higher moral ground. Corruption is often linked to laundering illicit proceeds. Corrupt officials use the same channels and operate in the same manner as the perpetrators of other serious offences. Doing away with bank secrecy is essential to call a halt to money laundering and thus prevent the criminals from enjoying the fruits of illicit activity. All states must enact legislation against money laundering and bribery of foreign officials should be termed as an offence. The state should plug all loopholes to plug money laundering. The role of banking and commercial institutions must be scrutinized to prevent laundering of ill-gotten proceeds. The scrutiny should include tax havens, shell companies and other cover organizations. Money laundering has an impact on the international allocation of resources and the stability of the international financial markets and thus affects the world economy. Money laundering is handmaiden of international

Corruption at High Places and Money Laundering corruption. Money laundering and corruption are interrelated. The linkage is clear those who take bribes must find safe havens where they can place their ill-gotten wealth. The bribe givers may themselves be willing to be conduit to place these funds in some far off banks. The banks come handy all over the globe in money laundering. The relation between money laundering and foreign corruption was highlighted in the US National Money Laundering Strategy for 2000. Avoid transactions that may involve the proceeds of foreign official corruption. The importance of such guidance was reinforced by the publication last year of a report by the Swiss Federal Banking Commission. The report detailed how 19 banks that operate in Switzerland handled almost $1 billion funds relating to corruption by the former ruler of Nigeria, General Sani Abacha. The report noted that Abacha case is a clear example of the international dimensions of the issue of the deposit of corruption proceeds in the financial system. The state power and authority is misused by Heads of States, Ministers and top officials for private and pecuniary gain. The skill and magnitude of operations is so vast that it amounts to corruption eruption . High-profile corruption scandals have rocked countries around the world. The breaking down of order in Russia, the financial crisis in Asia, the scandals in Italy, Venezuela and Brazil were the result of mega-scale corruption. According to Council of Europe report on globalisation, it has been pointed out that the possibilities of corruption will increase. Globalisation is the international integration of markets for goods, services and capital that is drawing nations closer to a global economy . The report further says as under: The figures speak for themselves. From the mid-1970s until the beginning of this decade, the level of foreign direct investment has risen from $50 billion to $318 billion (Time

Money Laundering: An Insight into the Dark World of Financial Frauds International, 6/22/98). With rising levels of economic interdependence, economic shocks from other countries can now affect politics at home more than ever before. Increasing contact between countries cause leakages that magnify the effects of corruption for the home audience. In effect, these problems can no longer be considered over there . The scope of grand corruption has enlarged with the growing scale of globalisation as well. Fifty years of progress in the area of international trade negotiations have resulted in the widening and deepening of trade rules that have resulted in increased world trade, as well as awareness of further impediments. Distortions in the global economy are noted quickly, and since commerce and procurement were increasingly international, it was evident that grand corruption was cutting into world trade. Countries such as the East Asian economies as well as other LDCs were planning huge development projects and now also ascribed to open procurement rules, creating new opportunities for corruption. (Role of Parliaments in Fighting Corruption). Eigen was a project analyst of World Bank posted at Kenya from 1989-91. He was pained to see widespread corruption and resigned from World Bank to launch Transparency International. Narrating an incident, he says that he evaluated and rejected a project which was environmentally harmful to the society. But he was surprised to know that the same project was approved through the backdoor, driven by an unholy alliance between the suppliers and local decision-makers who received large bribes put into their Swiss Bank accounts. Describing the role of power brokers and middlemen Eigen says, There are too many cases when the initiative for corruption comes from the Northern Middlemen. They are well known. They sit around in the capitals and on the Golf Courses: they offer to get Ministers children into

Corruption at High Places and Money Laundering Oxford and Harvard. Tiny Rowland admitted as much . During a court battle he said he needed $10 million a year to maintain his relationship with the first families of African countries. Transparency International now aims to publish a separate index to shine the light on countries where bribe-paying corporations base. Well-connected middlemen play an important role in getting a decision in a hurry without going through the rigmarole of the rules and regulations. The cumbersome administrative structure based on rules and regulations also bestow upon bureaucrats and politicians enormous discretion. This outsider the middleman performs the role of a go-between amongst industrialists and bureaucrats, politicians and bureaucrats and between politicians and politicians. Once an agreement is reached the middleman makes a good fortune for himself besides the parties involved. He is an extra-constitutional power centre and subverts the constitution. He is not accountable for his actions. At times, the legal and constitution authorities simply formalise or regularise the decision already taken by extra-legal authorities on extraneous considerations. In the case of corruption at high places there is no identified victim. The entire society is the victim. Immense social harm is done, large amount of money and huge losses occur at the cost of the tax payer. The top levels of political power, financial circles and public persons are the beneficiaries. The profits of the person interested are beyond imagination and losses to society are impossible to estimate. Goods are purchased at prices several times higher than the actual ones. The purchase of completely useless Parachutes for the Czech Army for a price ten times exceeding their value, purchase of computers incompatible with one another (transaction estimated for over 3 billion krones), very expensive modernisation of tanks, purchase

Money Laundering: An Insight into the Dark World of Financial Frauds of improperly equipped aircraft (Lidove Noviny 23.03.1999, 26.04.1999, 27.04.1999) are some of the examples of corruption at high places. (Joint Conference on Corruption, Budapest, Hungary, October 29 November 6, 1999 Malgorzata Fuszara) George Moody-Stuart in his book The Good Business Guide to Bribery , describes the circumstances of awarding the contract for the Turkwel Gorge dam, in Kenya, to French contractors in 1986 without international competitive bidding. According to the delegate of the EEC to Kenya, the price of $ 270 million was more than double of what would have been expected from competitive bids. The installed price of the turbines was listed as $ 227,000 each against a British consultant s estimate of $ 140,000 each. The EEC delegate calculated that the cost of energy from Turkwel would be 2.4 times as much as that from Kiambere on the Tana River. The Kenya Government officials who are involved in the project are fully aware of the disadvantages of the French deal but they nevertheless accepted because of high personal advantage. Grand corruption affects the quality of projects adversely. The bribe-givers often recover their money by compromising the quality of the projects at the cost of serious risks to the people. The acceptors of bribes will have no moral authority to demand quality from their paymasters. It has also been noticed that projects are approved not because the country needs them but because they provide the easiest opportunities to receive bribes. As a consequence uneconomic and inappropriate projects are selected. The confidence of people in the administration gets eroded. As corruption at high levels distorts decisionmaking the reputation of the country suffers and there will be little foreign investment. The international lending institutions will avoid such a country because they also lose confidence. This will result in rising interest rates,

Corruption at High Places and Money Laundering which will further aggravate economic problem. Corruption at high places is a serious impediment in Africa, Asia and South America. In Nigeria, as also in Pakistan, the best time to make money is during a military regime because the military is never probed. In Pakistan, the investigating agencies cannot initiate any investigation against Army officers. There is an interrelationship between business and politics. The businessmen sponsor political parties and provide them financial support. The politicians in turn take favourable decisions bringing huge profits to the business people who financed them. These webs of interconnection are based not on merit but on extraneous considerations of political funding. Political power may be acquired by means of money. Conversely money may be gained by means of political power. Politicians may sponsor businessmen of suspected integrity not running legal business. Corruption takes place at the stage of creation or implementation of law (J.C. Scott 1989). There is a definite relationship between money power and political power. Corruption at high places causes economic damage. It has been estimated that the African leaders have about $20 billion in Swiss banking system. Edmund Burke wrote about Warren Hastings, British Governor of Bengal, he formed plans and systems of government for the very purpose of accumulating bribes and presents to himself. Winston Churchill found nothing wrong with giving bribes abroad. (Noonan John, Bribes ) The investigating agencies, this is a common belief, arrest small fish but let the whales get off scot-free. Former Federal Bureau of Investigation (FBI) Director Louis Freeh talked about the pressure being exerted on Reno (Attorney General) and the Justice Department not to aggressively investigate charges of illegal fund raising

Money Laundering: An Insight into the Dark World of Financial Frauds by the Democratic Party. Freeh s Memo was not produced before the Chairman Senate Judiciary Committee for more than three years. The story was great because of Al Gore, the ex-Vice President of America. Evidence was being gathered against him in the Buddhist Temple donation case when Reno told the Justice Department to shut this case. Some of the cases of corruption at high places are enumerated below : The Nation (July 31, 1994) Bangkok published a news item about the former Prime Minister of Italy Betteno Craxi who was sentenced to 8 years imprisonment for accepting $7 million in kickbacks. The Clean Hands Inquiry implicated about 80 MPs as well as Secretaries of political parties and ministers on bribery charges by March, 1995. Corruption was a major issue in Italian local governmental elections in 1993. The centre collapsed; parties that have ruled for more than 45 years were almost wiped off the map and this was attributed to the discredit heaped on Italy s governing parties by nearly two years of scandal. Felip Gonzales, the Prime Minister of Spain, had to order early elections than scheduled because of parliamentary journalistic and judicial investigations into financial frauds committed by the government. In Belgium two former foreign ministers were investigated for political pay-offs from military contractors and one of them Willy Claes had to lose his post of NATO Secretary-General. The Polish Prime Minister Jozef Olepsy had to resign because of his connections with the KGB. The Colombian President Ernesto Samper ordered investigation into his own campaign financing. In Japan, the governments come and go with startling frequency because of political frauds. In South Korea the two ex-Presidents were prosecuted and sent to jail. Some political executives like President Carlos Salinas of Mexico,

Corruption at High Places and Money Laundering Presidents of Peru and Venezuela and Italian Prime Minister Giulio Andreotti were investigated for corruption charges. President Joseph Estrada of Philippines was accused of receiving bribes amounting to $8 million from gambling dens. He was impeached. Ex-President of South Korea Roh Tae Woo admitted that he accumulated a personal fortune of US $ 650 million while in office. Dictators like Mobutu Sese Sako who stole hundreds of millions of dollars from the state of Zaire could no longer be tolerated by the people and international organisations. He had to go. A spot of bribery ceased to look like an acceptable means of keeping a useful man on your side. (Economist, 16.1.98) Clinton came under mounting criticism of his pardon of Marc Rich. It was alleged that Rich s former wife, Denise, made political contributions and also contributed to the Clinton Library Foundation. This was denied by Clinton although Mary Jo White has undertaken an investigation to determine whether there is any quid pro quo between the pardon and his donations. Clinton admitted procedural lapses in Rich s case because of rush of action during his last days in office. The White Water Scandal has received widespread international publicity levelling allegations against former President Clinton and Mrs. Clinton although the allegations remain unsubstantiated. In Bangladesh, former military dictator, General H.M. Ershad, was convicted in a corruption case involving millions of dollars by Bangladesh High Court. The former Philippines first lady, Imelda Marcos, is fighting for the release of frozen and sequesters assets illegally acquired by her husband President Marcos. Alberto Fujimori, President of Peru, was declared unfit by the Congress to hold office on grounds of moral incapacity. A corruption scandal ended his 10-year rule in November 2000.

Money Laundering: An Insight into the Dark World of Financial Frauds In Britain, the Tory Chief and Leader of the Opposition, Mr. William Hague claimed that proceeds from his public speaking engagement were going to the William Hague Charitable Trust, the existence of which has been denied by the Tory party leaders. The Hindujas were in the news in Britain for obtaining British passports by contributing a substantial sum for the Millenium Dome. This created uncomfortable situation for Tony Blair s Government. Robert Phillip Hanssan, a veteran FBI agent, was charged by US government for espionage and conspiracy for Moscow in exchange for cash and diamond. He also gave KGB the names of three Russian Intelligence agents working for the United States. The FBI Director, Louis Freeh said, the criminal conduct alleged represents the most traitorous action imaginable against a country governed by the rule of law. The French President, Jacques Chirac is under investigation in the use of kickbacks for personal causes according to the weekly Le Canard Enchain. The President of Russia was alleged to be indulging in money laundering. In Russia corruption is a growing phenomenon after the collapse of controlled Command Economy . A new class of wealthy private capitalists under the patronage of government has emerged in Russia. President Yeltsin of Russia was alleged to be indulging in money laundering. In Ukraine, Prime Minister Lazarenko reportedly made millions of dollars annually through his company s licence to import natural gas and oil. Motorola had to withdraw from Ukraine and cancelled a planned investment of $500 million. The Motorola announced their decision as a sequel to Ukrainian Government s decision to award a licence for mobile phones and Kyiv Star whose owners included an advisor to President Kuchama, a cabinet minister and a private Ukrainian having links with organised crime.

Corruption at High Places and Money Laundering All the 20 Commissioners of EEC were charged for corrupt practices in awarding contracts, disbursing subsidies and engaging consultants. They had to resign. All these Commissioners have held very high offices in their respective countries. All the 20 Commissioners of the European Union had to resign because of frauds and corruption in the matter of giving contracts, distributing subsidies, engaging personnel, etc. It has been estimated that European Union lost about a billion dollars because of frauds and fiscal irregularities. One Prime Minister and a few Chief Ministers were convicted for graft in India. A number of Ministers faced corruption charges. Ex-Prime Ministers of Pakistan Mrs. Benazir Bhutto and Nawaz Sharief faced corruption charges. The bank accounts of thousands of politicians were frozen. The Mayor of Beijing was sent to jail as he accepted bribe in dollars. In USA the idea of The House Bank was supported by both Democrats and Republicans. It was set up to facilitate encashment of the cheques of busy Congressmen. It was discovered that the Congressmen were issuing cheques totalling much more than their deposits. If an ordinary person was doing it he would have been subjected to criminal prosecution and fines. But the modern day feudal Lord The Politician is no different from the Kings and Dictators of the past and seems to be immune to the dictates of law. No special privileges should be accorded to them, which the government does not extend to an ordinary citizen. Scallywag magazine published from Britain levelled allegations against Mark Thatcher reported in number 29 March April 1995. The former German Chancellor, Helmut Kohl, is alleged to have accepted secret cash donations for his Christian Democrat Union (CDU) party. This high level influence

Money Laundering: An Insight into the Dark World of Financial Frauds peddling has shattered Germany s complacency. The late Nigerian Dictator General Sani Abacha systematically siphoned off funds from the Nigeria Central Bank. His Swiss Bank accounts run into hundreds of millions of dollars in assets. Corruption charges against former Prime Minister Bimyamin Netanyahu were dropped for lack of evidence and the Israel s President Ezer Weizman had to resign following criticisms for financial misleading. References 1. Ahmed, A.K.N., What are We Going to Do About Corruption? The Daily Star: Focus, March 01, 1999 prepared by Onirban. 2. Andelman, D. The Drug Money Maze . Foreign Affairs, Volume 73, No. 4. July/August 1994. 3. Bassiouni, M.C., E.G. Lee, M. De Feo, F.A. Keating, III, E. Nadelmann; Discussion. International Drug Trafficking and Money Laundering. American Society of International Law Proceedings, 1988, 444-55. 4. Ehrenstein, Michael David. Tracking Narco-Dollars: The Evolution of a Potent Weapon in the Drug War . University of Miami InterAmerican Law Review, Summer 1990; 637-677. 5. Evans, J. The Proceeds of Crime: Problems of Investigation and Prosecution. Paper presented to the United Nations International Conference on Preventing and Controlling Money Laundering and the Use of the Proceeds of Crime: A Global Approach, Courmayeur Mont Blanc, Italy, 18-20 June 1994. 6. Financial Scandal Threatens to Engulf French Presidency An article levelling allegations against Alain Juppe and Jacques Chirac by Gerard Naville, September 1998. 7. Greasing the Wheels Allegations of High-level International influence peddling have shattered Germany s Complacency. Time Magazine, February 7, 2000. 8. Hagizur Rahman, Corruption in High Places . 9. Needleman, Martin L. New Approaches for Controlling the Narcotics and Money Laundering Trades in the United States. Bryn Mawr, PA, 1988. 10. Organization of American States. Narcotics Money Laundering in the Caribbean Region: A Vulnerability Assessment Coopers & Lybrand, 1994. 11. Pheiffer, Marcel. Financial Investigations and Criminal Money. Journal of Money Laundering Control. Institute of Advanced Legal

Corruption at High Places and Money Laundering Studies. Volume Two, Number One, Summer 1998. 12. Political scandals shake European capitals an item from News and Observers giving brief details of financial scandals involving politicians in several European countries. 13. Smith, Harold E. Transnational Crime: Investigative Responses. University of Illinois, Chicago, 1989. 14. The Growing Threat of International Corruption by Henry Bosch of T.I. Australia. 15. The Paul Van Buitenen Report a suspended official of European Union about the Multi-million Pound Fraud. 16. The White Water Scandal is a part of a much wider Scandal J. Orlin Grabbe s Home Page. 17. World Bank, the World Development Report 1997: the State in a Changing World , Oxford University Press, 1997. 18. Yahoo! Search Results for Corruption at High Places. Corruption in High Places http://www.apbnews.com/newscenter/oreilly/2000/05/03/ oreilly0530_01.html Transparency International deeply concerned over arrest of officials who fight corruption in high places. http.//www.transparency.de/documents/press releases/1999/ .html Looking for Corruption in all High Places http.//www.aei.org/oti/oti6367.htm ICR Press reaction. . effective in combating corruption in high places http.//www.gwdg.de/-uwvw/press/dap.htm Conference on Corruption http.//www.coc.ceu.hu/sik.html. CIET corruption, system leakage, transparency in government http.//www.ciet.org./www/image/theme/corruptiontheme. html

MONEY LAUNDERING AND TERRORISM Terrorism Funding: According to the Monitoring Committee of the Security Council which observes the implementation of the UNSC Resolution Number 1373, terrorists assets and funds worth $ 112 million have been seized/frozen in the aftermath of September 11, 2001. It is estimated that the Al-Queda and its allies in the International Islamic Front (IIF) have about $ 300 million at their disposal. Funds continue to flow and the organisation is engaged in the acts of terror in different parts of the world. Similarly, funds continue to flow from Pakistan s ISI to the operatives of Harkat-ul-Mujahideen (HUM), the Harkat-ul-Jehad-alIslamic (HUJI), the Lashkar-e-Toiba (LET) and the Jaish-eMohammad (JEM) to carry out terrorist acts against India. Flow of funds from abroad has considerably increased in Pakistan after September 11, 2001. In Pakistan the Foreign Exchange Reserves have swelled to $ 7.5 billion in December 2002 from $ 1.5 billion in September 2001. Likewise, ISI is channelling more funds to these terrorist organisations. The incentive to ISI operatives to carry out terrorist acts has been doubled. The Pan-Islamic and Pro-Wahabi members of the PAK religious coalition want to step up assistance to Jehadis in Kashmir, Palestine, Chechnya, Myanmar and Southern Philippines. Transaction history of money laundering for funding terrorism is of little predictive use as the accounts are opened for very short duration. Transaction analysis is retrospective and therefore will give little information about

Money Laundering and Terrorism the purpose of a transaction. This impedes efforts to provision early warning that an account is likely to be used for funding the activities of terrorists. Moreover the amount involved is small which does not fall within the ambit of cash transaction reporting nor suspicious transaction reporting system. Even the enforcing agencies will not be geared into action as they would hardly have any time before terrorist act to respond to a withdrawal of money for terrorist purposes. A great deal of thinking has been done in USA since September 11, 2001 about the ways in which Al-Qaeda and other groups finance their terrorist activity. Investigations have revealed that much of the funding for the September 11 attacks came from Arab Emirates and few other countries. The hijackers had ordinary US bank accounts into which they deposited funds received by wire transfers and other means. After the operation the balance amounts were remitted back to the families of dead hijackers of AlQaeda through the same methods. Terrorists transfer millions of dollars into untraceable accounts. They also finance and smuggle commodities like diamond and gold to avoid seizure abroad. Diamonds can be smuggled across borders without detection. An article was published in the Washington Post on December 30, 2001 quoting a US official as saying, We are beginning to understand how easy it is to move money through commodities like diamond. One thing we are learning is not to ignore the obvious. Our intelligence community must operate at a higher level than these statements indicate. The security of our nation depends on it. The US government has listed more than thirty groups as foreign terrorist organisations. It has now been realized that Narco-Terrorism is a serious threat to the security of a country. The terrorism is funded by drug money. Ultimately it leads to a situation which results in anarchy. A parallel administration is set up to govern and the power

Money Laundering: An Insight into the Dark World of Financial Frauds is exercised by the mafias holding the state to ransom. Narcotics have become the foundation of organised crime and terrorism. Funds beyond imagination are generated. Helicopters, aeroplanes and private armies are deployed to challenge the might of elected governments. Enormous funds are used to bribe and destroy the state machinery. All kinds of illegal activities such as distribution of territory to pickpockets, to extort, flesh trade, bootlegging and the like are effectively controlled by the Narcoterrorists. Cigarette smuggling is another method the terrorists have used to raise funds. In June two men were convicted of running millions of dollars of cigarettes from North Carolina to Michigan and sending some of the proceeds to Hezbollah. In South Asia, the Taliban were engaged in drug and opium smuggling. The value of trade was about dollar four hundred million which was shared between the Taliban and Inter-Services Intelligence (ISI) of Pakistan. It is well known that the Taliban had made Afghanistan a safe haven for international terrorists, particularly Osama bin Laden. They were harbouring terrorists from Islamic countries from all over the world including Egyptians, Algerians, Palestinians and Saudis. Afghanistan was used as a training ground and a base of operations for their worldwide terrorist activities. The Taliban, which controlled most of the territory in Afghanistan, facilitated the operation of training and indoctrination facilities for nonAfghans and provided logistical support and sometimes passports to members of various terrorist organisations. The fundamentalists have established a network of front companies in London/Birmingham/Manchester/Crowley and Leicester operating on behalf of Al-Mujahideen meaning voice/eyes/ears of Muslims. It urges Fifth Column for spread of Islam. Sheikh Omar Baksi Mohammad is the head. These front companies are the source of finance of these organisations.

Money Laundering and Terrorism BCCI (Bank of Commerce and Credit International) was conduit to transfer funds for narco-terrorism for the fundamentalists to carry out all clandestine activities. It has since failed and closed. It is also a fact that the entire money intended for use in terrorism does not arise out of crime. It may be legal money and people may use it for terrorist purposes as they believe their cause to be genuine. The money may not come to the financial system as dirty money . Money meant for terrorism does not pass through the layering stage between accounts and across borders. It behaves like ordinary money and is almost impossible to identify. This is how the terrorists fund their activities and add new dimensions to the already complex problem, muddying the water further . Laundering money and financing terrorism may have certain common characteristics but they are different activities. The general perception about money laundering is that it originates with a crime but the money used by terrorists may come from legitimate sources. Although it cannot be denied that drugs, kidnappings, bank robberies, extortion and other crimes are also sources of terrorist funding. Charities may be abused to act as conduits for terrorist funding. In the UK and USA after the September 11 attacks Islamic charities have become suspect. These charities are protesting that they are unjustly being accused and this accusation is preventing them from serving the needy they want to help. It is a fact that all the smuggled money does not have to pass through the banking system in Western countries. Organised crime in the Middle East, South Asia and China has operated on informal money transfer networks. This informal banking system provides a safe haven to crooks and terrorists and poses a serious problem for those who try to catch them. The major terrorist operations financed through money laundering and hawala are :

Money Laundering: An Insight into the Dark World of Financial Frauds 1. The Bombay bomb blasts of 1993 killing a large number of innocent persons. 2. The September 11, 2001 attack on the World Trade Center killing a large number of innocent persons. 3. The October 1, 2001 attack on J&K Assembly in Srinagar. 4. The attack on Indian Parliament on December 13, 2001. 5. The October 12, 2002 attack on nightclubs in the resort island of Bali that killed 192 people, mostly foreign tourists. 6. The October 24, 2002 attack on Moscow theatre by Chechen guerrillas armed with guns, grenades and explosives who held about 600 hostages at gunpoint. There are other terrorist acts also of very serious nature perpetrated by terrorist organisations all over the world. The Islamic fundamental terrorists want to take on their opponents on land, air and sea and destroy them. Osama bin Laden and his terrorist organisation is the moving force behind these terrorist acts. The Al-Qaeda has financed these heinous activities through money laundering, hawala and smuggling of narcotics and diamonds. It has been gathered that Al-Qaeda transferred a sum of $ 73,000 for the Bali massacre. It is believed that Jemaah Islamiyah, an extremist network with alleged AlQaeda ties, is behind the Bali attack, a foiled plot to blow up the US Embassy and other targets in Singapore last year and a string of other bombings in the region. Al-Qaeda the mother of all Islamic terrorist organisations has a sound financial base. Bin Laden s own personal fortune runs in hundreds of millions dollars. Money also comes from sympathetic wealthy Muslims who own assets in global financial centres. They have set up their own companies which can easily camouflage their transfer of money to Al-Qaeda. Al-Qaeda also resorts to kidnappings, smuggling, extortions, drug trafficking and trading in diamonds and precious metals. It is said that the Yemeni honey trade was

Money Laundering and Terrorism used to raise funds and also serve as a cover for transporting drugs, weapons and operatives for Al-Qaeda. Charities from unsuspecting people and diverting funds to terrorist organisations through donations is also a source of funding. In the United States 30 groups of foreign terrorist organisations have had their financial assets frozen, and funds transferred to them are supposed to be blocked. The Bush administration has called for identifying, tracking and interfering with the flow of money to Al-Qaeda and other terrorist groups as a part of the war on terrorism. So serious is the problem that one of the senators advocated the offence of money laundering to be an offence under the USA Patriot Act. Section 1770 provides a new crime, 18 U.S.C. 2339C, with a 20 year prison term for anyone who provides or collects funds with the intent that such funds be used in full or in part to carry