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John Walker Crime Trends Analysis

Estimating the Illicit Flows – Estimating the Illicit Flows – Asking the Right QuestionsAsking the Right Questions

John WalkerJohn WalkerCEO, John Walker Crime Trends AnalysisCEO, John Walker Crime Trends Analysis

Principal Research Fellow, Centre for Transnational Crime Prevention, Principal Research Fellow, Centre for Transnational Crime Prevention, University of Wollongong, AustraliaUniversity of Wollongong, Australia


Illicit Financial Flows Illicit Financial Flows Put simply, Illicit Financial Flows from Developing Countries consist of Put simply, Illicit Financial Flows from Developing Countries consist of

quantities of money derived from crimes committed in those countries.quantities of money derived from crimes committed in those countries.

Official definitions of crime vary between countries, although there is Official definitions of crime vary between countries, although there is consensus about most forms of crime.consensus about most forms of crime.

Contentious areas include business practices considered as fraudulent in Contentious areas include business practices considered as fraudulent in some countries but not in others (e.g. payments of bribes and false some countries but not in others (e.g. payments of bribes and false invoicing), and some areas of excise avoidance (e.g. cigarette smuggling).invoicing), and some areas of excise avoidance (e.g. cigarette smuggling).

This paper takes a broad view that acts that would be crimes or illegal This paper takes a broad view that acts that would be crimes or illegal business practices in countries with sophisticated legal systems must also business practices in countries with sophisticated legal systems must also be regarded as crimes or illegal business practices in developing countries.be regarded as crimes or illegal business practices in developing countries.

Illicit Financial Flows from Developing Countries are, therefore, part of the Illicit Financial Flows from Developing Countries are, therefore, part of the broader issue of transnational crime and moneylaundering.broader issue of transnational crime and moneylaundering.


Asking the Right Questions about Asking the Right Questions about Transnational Crime and MoneylaunderingTransnational Crime and Moneylaundering It is difficult to explain the importance of a problem without quantifying it. It is difficult to explain the importance of a problem without quantifying it. (Neil Jensen, (Neil Jensen,

Director, AUSTRAC, 2005)Director, AUSTRAC, 2005)

FinCen’s “overriding objective” under the strategic plan is the development of a FinCen’s “overriding objective” under the strategic plan is the development of a “viable model for measuring the magnitude of moneylaundering.” “No assessment of “viable model for measuring the magnitude of moneylaundering.” “No assessment of an agency’s or government’s anti-moneylaundering programs can be a true gauge of an agency’s or government’s anti-moneylaundering programs can be a true gauge of its effectiveness, unless it is based on an understanding of the breadth of the its effectiveness, unless it is based on an understanding of the breadth of the problem being addressed”. problem being addressed”. (FinCEN Strategic Plan, 2000)(FinCEN Strategic Plan, 2000)

““The government are very keen on amassing statistics. They collect them, add The government are very keen on amassing statistics. They collect them, add them, raise them to the them, raise them to the nnth power, take the cube root, and prepare wonderful th power, take the cube root, and prepare wonderful diagrams. But you must never forget that every one of these figures comes, in the diagrams. But you must never forget that every one of these figures comes, in the first instance, from the village watchman, who just puts down what he damn first instance, from the village watchman, who just puts down what he damn pleases”. pleases”. (English economist Sir Josiah Stamp, 1929)(English economist Sir Josiah Stamp, 1929)

"Striving for perfection is the greatest stopper there is... It's your excuse to yourself "Striving for perfection is the greatest stopper there is... It's your excuse to yourself for not doing anything. Instead, strive for excellence, doing your best." for not doing anything. Instead, strive for excellence, doing your best." (British actor, Sir (British actor, Sir Laurence Olivier)Laurence Olivier)

“…“…..blending dodgy data and heroic assumption and turning them into something ..blending dodgy data and heroic assumption and turning them into something particularly useful” particularly useful” (Dutch criminologist, Max Kommer)(Dutch criminologist, Max Kommer)

““Accuracy is meaningless – credibility is everything”. Accuracy is meaningless – credibility is everything”. (Me)(Me)


The Right Questions about Transnational The Right Questions about Transnational Crime and MoneylaunderingCrime and Moneylaundering

How Much Crime is there

?

HowMuchProfit

is therein theCrime

?

WhatProportion

of the Profits

isLaundered

?

How does it impact

on Society?

Where does it go for

Laundering?


These are These are VeryVery important Questionsimportant Questions

$ 1. How much crime is there around the world, and where is it based?

$ 2. How big are crime profits around the world, and where are they generated?

$ 3. What factors make crime more profitable in some countries than others?

$ 4. What factors make some countries more attractive to ML than others?

$ 5. How much money is laundered each year around the world?

$ 6. How much harm is caused by crime and ML, and who suffers most?


So who is asking them?So who is asking them?

Up to the 1980sUp to the 1980s

Most countries compile crime statistics. Only measures recorded crime. Accuracy Most countries compile crime statistics. Only measures recorded crime. Accuracy

doubts; rigging by police, politicians; counting rules.doubts; rigging by police, politicians; counting rules.

Interpol collects crime data from member countries – no consistency, no analysis, not Interpol collects crime data from member countries – no consistency, no analysis, not

even computerised until the late 1990s. Only measures recorded crime.even computerised until the late 1990s. Only measures recorded crime.

Crime Victims Surveys developed in the 1970s (USA, UK) to capture data on a Crime Victims Surveys developed in the 1970s (USA, UK) to capture data on a

common set of definitions and on unrecorded crime. Limited crime types, costly, common set of definitions and on unrecorded crime. Limited crime types, costly,

political risk, little interest in other countries.political risk, little interest in other countries.

In the 1980s, the U.N. attempted to compile international crime and justice statistics In the 1980s, the U.N. attempted to compile international crime and justice statistics

on a common set of definitions – very problematic, poor response, little consistency, on a common set of definitions – very problematic, poor response, little consistency,

poorly resourced.poorly resourced.

Transnational crime analysis mostly country-specific, offence specific or confined to Transnational crime analysis mostly country-specific, offence specific or confined to

studies of mafia, yakuza, drug gangs etcstudies of mafia, yakuza, drug gangs etc

Transparency International experimenting with corruption and bribery indexes.Transparency International experimenting with corruption and bribery indexes.


Measuring the Risks posed by Measuring the Risks posed by Transnational Crime and MoneylaunderingTransnational Crime and Moneylaundering19881988

United Nations Convention against illicit traffic in narcotic drugs and psychotropic substances; United Nations Convention against illicit traffic in narcotic drugs and psychotropic substances; EU decides to conduct Europe-wide crime survey. Australia, USA, Canada join in. Questions EU decides to conduct Europe-wide crime survey. Australia, USA, Canada join in. Questions

include “did you report it to police?” and “how much did it cost you?”include “did you report it to police?” and “how much did it cost you?”

19891989 FATF Working Group on Statistics and Methods, “Narcotics ML – Assessment of the Scale of FATF Working Group on Statistics and Methods, “Narcotics ML – Assessment of the Scale of

the Problem” notes the lack of reliable data to measure ML.the Problem” notes the lack of reliable data to measure ML.

1990 1990 EU Convention on laundering, search, seizure and confiscation of the Proceeds from Crime. EU Convention on laundering, search, seizure and confiscation of the Proceeds from Crime. FATF’s “Forty RecommendationsFATF’s “Forty Recommendations“ on the prevention of money laundering.“ on the prevention of money laundering. U.N. Rome conference agrees to pilot Business Crime survey, including reporting and costs U.N. Rome conference agrees to pilot Business Crime survey, including reporting and costs

questions. Australia, UK, Netherlands, South Africa.questions. Australia, UK, Netherlands, South Africa.

1991 1991 EU Directive on prevention of the use of the financial system for purpose of money laundering.EU Directive on prevention of the use of the financial system for purpose of money laundering.

1992 1992 Estimates of the Costs of Crime in Australia Estimates of the Costs of Crime in Australia – a model for the U.N.– a model for the U.N.

1995 1995 Estimates of the Extent of money laundering in AustraliaEstimates of the Extent of money laundering in Australia – a model for the FATF. – a model for the FATF.

1996-20001996-2000 UN Office on Drugs and CrimeUN Office on Drugs and Crime

Refinement of International Crime and Justice Surveys, International Crime Victims Surveys, Business Refinement of International Crime and Justice Surveys, International Crime Victims Surveys, Business Crime SurveysCrime Surveys

““Global Report on Crime and Justice” attempts to bring together data on economics of transnational crimeGlobal Report on Crime and Justice” attempts to bring together data on economics of transnational crime Attempts to survey the characteristics of organised crime groups in different countriesAttempts to survey the characteristics of organised crime groups in different countries


Measuring the Risks posed by Measuring the Risks posed by Transnational Crime and MoneylaunderingTransnational Crime and Moneylaundering

June 1997June 1997 FATF creates “Ad Hoc Group on Estimating the Magnitude of Money Laundering”FATF creates “Ad Hoc Group on Estimating the Magnitude of Money Laundering”

Sept 1997Sept 1997 Ad Hoc Group’s Chair agrees to draft a paper to suggest methodologies to measure ML – calls for Ad Hoc Group’s Chair agrees to draft a paper to suggest methodologies to measure ML – calls for

papers from member countries.papers from member countries.

Feb 1998Feb 1998 Interim report from ChairmanInterim report from Chairman

Identifies AUSTRAC study as a landmark study, examines four macro-economic methodologies identified by Identifies AUSTRAC study as a landmark study, examines four macro-economic methodologies identified by FINCEN-sponsored studies, and concludes that future studies should be FINCEN-sponsored studies, and concludes that future studies should be

[a] confined to FATF members, [b] focused on a wide range of crimes that generate criminal proceeds.[a] confined to FATF members, [b] focused on a wide range of crimes that generate criminal proceeds.

Dec 1998Dec 1998 FATF International Meeting of Experts on Estimating the magnitude of MLFATF International Meeting of Experts on Estimating the magnitude of ML

Disappointing level of participationDisappointing level of participation Most countries’ contributions focused on official statisticsMost countries’ contributions focused on official statistics Discussion of relationship between underground economic activity and MLDiscussion of relationship between underground economic activity and ML Switzerland attempts to have the work focus on ML from drug crimes, arguing that crimes Switzerland attempts to have the work focus on ML from drug crimes, arguing that crimes

involving theft, fraud and corruption are “regarded as simply transfers of wealth”.involving theft, fraud and corruption are “regarded as simply transfers of wealth”. Finland paper focuses on fraud.Finland paper focuses on fraud. Australian paper presents complete methodology.Australian paper presents complete methodology. Conclusions:Conclusions:

Need for greater participation from all FATF member countriesNeed for greater participation from all FATF member countries Initial focus to be on estimating “the supply and demand for illegal drugs”Initial focus to be on estimating “the supply and demand for illegal drugs”


The Rich Countries’ Club fails to DeliverThe Rich Countries’ Club fails to Deliver

FATF efforts to “estimate the magnitude of ML” failed on FATF efforts to “estimate the magnitude of ML” failed on 5 key counts:5 key counts: Focus on incomplete range of crime types – drugs onlyFocus on incomplete range of crime types – drugs only Focus on incomplete range of illicit drugs - Cocaine, Marihuana, Focus on incomplete range of illicit drugs - Cocaine, Marihuana,

Heroin onlyHeroin only Focus on incomplete range of countries - rich north-Atlantic Focus on incomplete range of countries - rich north-Atlantic

countries onlycountries only Focus on statistical “purity”Focus on statistical “purity” Avoidance of “proceeds of crime” logicAvoidance of “proceeds of crime” logic

Intended to fail………….?Intended to fail………….?

Need to provoke more constructive discussion.Need to provoke more constructive discussion.


What next?What next?

Need to provoke discussion, in the Need to provoke discussion, in the absence of any real progress within the absence of any real progress within the UN or FATF. UN or FATF.

Can the Australian model be used for Can the Australian model be used for other countries around the world?other countries around the world?


TE = Total

Economy

TC = Total Costs of Crime

TP = Total Proceeds of Crime

KP = Known Proceeds of Crime TM = Total

Money Laundering

Costs of crime are part of the Economy. Proceeds of crime are a subset of costs. Some proceeds of crime are laundered, but some laundered money also comes from outside the economy. Terrorist finance may not have criminal origins and is

not necessarily laundered. “Known” components are very small subsets of their respective estimated totals. [Not to scale]

The 1996 Australian ModelThe 1996 Australian Model Identifies Upper and Lower BoundsIdentifies Upper and Lower Bounds

KM = Known Money Laundering

TT = Total Terrorist Financing

KT = Known Terrorist FinancingIncoming Money Laundering


Estimates of ML in and through Australia (1996)Estimates of ML in and through Australia (1996)

Estimated Proceeds of Crime Implied ML Estimates for Australia ($mill)

Crime Category/ Min Mid1 Mid2 Max

Homicide Max $2.75m <1 <1 <1 <1

Robbery & Extortion $74.4m <1 22 22 45

Other Violence Min $3.31m <1 <1 <1 <1

Breaking and Entering $714.4m 14 71 71 500

Insurance Fraud $1530m 38 77 153 306

Business Fraud $375 - $900m 56 225 540 900

Other Fraud $750m 38 113 188 600

Motor Vehicle Thefts $533.6m 27 53 187 480

Other Thefts $462- 8 82 116 347

Environmental Crime $5.21- <1 <1 2 8

Illicit Drugs $1500m 300 750 1050 1350

Total $5951 - $7661m 402 1394 2328 4536

• Estimates based on Costs of Crime and Expert Survey


Estimates based on Costs of Crime and Expert Survey compared to:

• Estimates based on Proceeds of Crime Monitoring

• Estimates Based on Understatement of Income Data

• Estimates Based on Suspect Financial Transactions

• Estimates Based on Flows of Finance through Australian

Banks and International Transfers

Importance of Triangulating with Other DataImportance of Triangulating with Other Data


ML

P.o.C.

Costs of Crime

Overseas Economy

Australian Money laundered in Australia

The Australian Economy$380 billion

Costs of Crime$11-21 billion

ML

$1-4.5 billion

Australian Money laundered overseas$5.5

billion?

Overseas Money laundered in Australia

$7.7 billion?

Proceeds of Crime$6-8 billion

$US20,000 billion

Overseas Money laundered overseas

$US100-500 billion?

Estimates of ML in and through Australia (1996)Estimates of ML in and through Australia (1996)


““Just do it…..!”Just do it…..!”

Is there enough basic data to construct a Is there enough basic data to construct a global model?global model?


How much Crime around the World?How much Crime around the World?

U.N. Crime & Justice Survey


Triangulate with other DataTriangulate with other Data

Source: www.kpmg.com

……Banks and Businesses rarely report crime, because they think it will Banks and Businesses rarely report crime, because they think it will adversely affect their “image”adversely affect their “image”


Measuring the Proceeds of CrimeMeasuring the Proceeds of Crime

• “Crime in Australia costs $A11-21 bn, and profits are $A6-8 bn per year”(John Walker Crime Trends Analysis, 1996)

•"Illegal grey economy in Czech Republic about 10% of GDP” (Hospodárské Noviny, 2 Apr 98)

• "$30bill illegal drugs reach the US from Mexico each year" (Chicago Tribune, 25 Mar 98)

• "Shadow business in Russia's economy may range between 25% -50%" (TASS 17 Mar 98)

• "UK black economy between 7-13% of GDP" (Sunday Telegraph, 29 Mar 98)

• "$50-250bn illegally moved from Russia to Western banks in 5 years" (Russian Interior & Economics Ministries, April 99)

• "Illicit drug sales (in the USA) generated up to $48bn a year in profits" (Congressional hearing, April 99)

• "Illegal profits total 2-5% of world GDP or $1-3trillion" (Dow Jones News, 12 Mar 98)


About Criminal IncomeAbout Criminal Income

Crime generates income in all countriesCrime generates income in all countries

Income from crime depends on the prevalence of different types of crime and the Income from crime depends on the prevalence of different types of crime and the

average proceeds per crimeaverage proceeds per crime

Sophisticated and organised crimes generate more income per crime than simpler Sophisticated and organised crimes generate more income per crime than simpler

and individual crimesand individual crimes

Crimes that trade on “forbidden goods” like drugs, arms, pornography, slave labour, Crimes that trade on “forbidden goods” like drugs, arms, pornography, slave labour,

copyrights, migration visas etc, are particularly profitablecopyrights, migration visas etc, are particularly profitable

In general, richer countries generate more income per crime than poor onesIn general, richer countries generate more income per crime than poor ones

Income inequality or corruption may support a rich criminal class even in a poor Income inequality or corruption may support a rich criminal class even in a poor

countrycountry

Not all criminal income is laundered - Even criminals have to eat, sleep, drive fast Not all criminal income is laundered - Even criminals have to eat, sleep, drive fast

cars, and pay accountants and lawyerscars, and pay accountants and lawyers

If you like algebra........If you like algebra........

Total Criminal Profits to be Laundered = Total Criminal Profits to be Laundered = Total Population times GNP/Capita times:Total Population times GNP/Capita times: 700*(TI Corruption Index)*(Bribery+Embezzlement+Fraud rates) + 700*(TI Corruption Index)*(Bribery+Embezzlement+Fraud rates) + 500*Drug Trafficking rate + 100*Theft rate + 65*Burglary rate +500*Drug Trafficking rate + 100*Theft rate + 65*Burglary rate + 50* Drug Possession rate + 20*Robbery rate + 0.2*Homicide rate +50* Drug Possession rate + 20*Robbery rate + 0.2*Homicide rate + 0.1*(Assault rate + Sex Assault rate)0.1*(Assault rate + Sex Assault rate)


About CorruptionAbout Corruption

Transparency InternationalCorruption Perceptions Index 2002Score Countries9+ Finland, Denmark, New Zealand, Iceland, Singapore, Sweden, Canada,

Luxembourg, Netherlands,8<9 United Kingdom, Australia, Norway, Switzerland, Hong Kong,7<8 Austria, USA, Chile, Germany, Israel, Belgium, Japan, Spain,6<7 Ireland, Botswana, France, Portugal, Slovenia,5<6 Namibia, Estonia, Taiwan, Italy, Uruguay,4<5 Hungary, Malaysia, Trinidad & Tobago, Belarus, Lithuania, South Africa, Tunisia,

Costa Rica, Jordan, Mauritius, South Korea, Greece, Brazil, Bulgaria, Jamaica,Peru, Poland,

3<4 Ghana, Croatia, Czech Republic, Latvia, Morocco, Slovak Republic, Sri Lanka,Colombia, Mexico, China, Dominican Rep., Ethiopia, Egypt, El Salvador, Thailand,Turkey, Senegal, Panama

2<3 Malawi, Uzbekistan, Argentina, Cote d’Ivoire, Honduras, India, Russia, Tanzania,Zimbabwe, Pakistan, Philippines, Romania, Zambia, Albania, Guatemala,Nicaragua, Venezuela, Georgia, Ukraine, Vietnam, Kazakhstan, Bolivia,Cameroon, Ecuador, Haiti, Moldova, Uganda, Azerbaijan

1<2 Indonesia, Kenya, Angola, Madagascar, Paraguay, Nigeria, Bangladesh


Resulting Estimates of Money Generation by Crime Type by Resulting Estimates of Money Generation by Crime Type by

World RegionWorld Region $US bill/yr$US bill/yr

Crime Types

Offences involving

Fraud 1358 973 327 30 29 25 21 3.7 2767Drug

Offences 38 26 1 0.5 0.6 0.5 1.6 0.5 68.9Property Offences 7.2 6.3 0.4 0.2 0.1 <.1 <.1 0.2 14.6Violent

Offences <.1 <.1 <.1 <.1 <.1 <.1 <.1 <.1 <.1Total Generated 1403 1006 329 31 30 25 22 4 2850

Note: the big numbers come from fraud not drugs


Assumptions about Laundering ProcessesAssumptions about Laundering Processes Not all laundered money leaves the countryNot all laundered money leaves the country

Some countries' finance sectors provide perfect cover for local launderersSome countries' finance sectors provide perfect cover for local launderers

Countries where official corruption is common provide benign environments for Countries where official corruption is common provide benign environments for laundererslaunderers

Laundered money seeks countries with attractive banking regimesLaundered money seeks countries with attractive banking regimes

Tax HavensTax Havens

"No questions asked" banking"No questions asked" banking

Countries with stable economies and low riskCountries with stable economies and low risk

Trading, ethnic and linguistic links will determine launderers' preferred destinationsTrading, ethnic and linguistic links will determine launderers' preferred destinations

Other things being equal, "hot" money will be attracted to havens with trading, ethnic, linguistic or Other things being equal, "hot" money will be attracted to havens with trading, ethnic, linguistic or geographic links to the generating countrygeographic links to the generating country

If you like algebra........If you like algebra........

Attractiveness to money launderers =Attractiveness to money launderers = [GNP per capita] *[3*BankSecrecy+GovAttitude+SWIFTmember-3*Conflict-Corruption +15][GNP per capita] *[3*BankSecrecy+GovAttitude+SWIFTmember-3*Conflict-Corruption +15]

Where: GNP per capita is measured in US$, BankSecrecy is a scale from 0 (no secrecy laws) to 5 (bank secrecy laws enforced),Where: GNP per capita is measured in US$, BankSecrecy is a scale from 0 (no secrecy laws) to 5 (bank secrecy laws enforced),GovAttitude is a scale from 0 (government anti-laundering) to 4 (tolerant of laundering), GovAttitude is a scale from 0 (government anti-laundering) to 4 (tolerant of laundering), SWIFTmember is 0 for non-member countries and 1 for members of the SWIFT international fund transfer network,SWIFTmember is 0 for non-member countries and 1 for members of the SWIFT international fund transfer network,Conflict is a scale from 0 (no conflict situation) to 4 (conflict situation exists), Conflict is a scale from 0 (no conflict situation) to 4 (conflict situation exists),

Corruption is the modified Transparency International index (1=low, 5=high corruption),Corruption is the modified Transparency International index (1=low, 5=high corruption),And the constant '15' ensures that all scores are greater than zero.And the constant '15' ensures that all scores are greater than zero.


Model Index: Most Attractive to LaunderersModel Index: Most Attractive to Launderers

COUNTRY ScoreLuxembourg 686United States 634Switzerland 617Cayman Islands 600Austria 497Netherlands 476Liechtenstein 466Vatican City 449United Kingdom 439Singapore 429Hong Kong 397Ireland 356Bermuda 313Bahamas, Andorra, Brunei, Norway, Iceland, Canada 250-299Portugal, Denmark, Sweden, Monaco, Japan, Finland, Germany, New Zealand, Australia, Belgium 200-249Bahrain, Qatar, Italy, Taiwan, United Arab Emirates, Barbados, Malta, France, Cyprus 150-199Gibraltar, Azores (Spain), Canary Islands, Greenland, Belarus, Spain, Israel 100-149

Attractiveness toMoneyLaunderers

= [GNP per capita]*[3*BankSecrecy+GovAttitude+SWIFTmember–3*Conflict–Corruption +15]


Triangulation: Attractiveness to ML: Triangulation: Attractiveness to ML: Service Exports and Incoming Money LaunderingService Exports and Incoming Money Laundering

Seychelles Grenada

St Vincent

BelizeDominica

AlgeriaIran

Egypt

China

India

Sudan

MyanmarLibya

Albania

Sw itzerlandAustria

Vanuatu

Maldives

St Kitts

St LuciaAntigua/Barbuda

Aruba

Ethiopia

C. Afr. Rep.

Luxembourg

Tonga

Barbados

Singapore

0.00

0.00

0.01

0.10

1.00

10.00

100.00

0.00 0.01 1.00 100.00Model Estimate of Incoming ML as Percentage of GDP

Serv

ices E

xport

s/G

NP


Triangulation: Attractiveness to ML: Triangulation: Attractiveness to ML: Banking Risk AnalysisBanking Risk Analysis

TRANSCRIME “Euroshore” projectTRANSCRIME “Euroshore” project1. Money laundering punished in your criminal system?2. Legislation provides for a list of crimes as predicate offences?3. Predicate offences cover all serious crimes?4. Predicate offences cover all crimes?5. Provision allowing confiscation of assets for an ML offence?6. Special investigative bodies or investigations in relation to ML offences?

1. Is there an anti-ML law in the jurisdiction?2. Banks covered by the anti-ML law?3. Other financial institutions covered by the anti-ML law?4. Non-financial institutions covered by the anti-ML law?5. Other professions carrying out a financial activity covered by the anti-ML law?6. ID requirements for the institutions covered by the anti-money law?7. Suspicious transactions reporting?8. Central authority (for instance, an FIU) for the collection of suspicious transactions reports?9. Co-operation between banks or other financial institutions and police authorities?

1. Prohibition to open a bank account without ID of the beneficial owner?2. Limits to bank secrecy in case of criminal investigation and prosecution?

1. Minimum share capital required for limited liability companies?2. Prohibition on bearer shares in limited liability companies?3. Prohibition on legal entities as directors of limited liability companies?4. Registered office exists for limited liability companies?5. Any form of annual auditing (at least internal) for limited liability companies?6. Shareholder register exists for limited liability companies?

1. Extradition (at least of foreigners) for ML offences?2. Assistance to foreign law enforcement agencies in investigation of ML cases?3. Law enforcement may respond to a request from a foreign country for financial records?4. Provision allowing the sharing of confiscated assets for ML offences?5. The 1988 UN Convention been ratified?

CRIMINAL LAW

ADMINISTRATIVE REGULATIONS

BANKING LAW

COMPANY LAW

INTERNATIONAL CO-OPERATION PROVISIONS

Old Attractiveness Index Versus New

Bermuda

Ireland

Hong Kong

U.K.Netherlands

LiechtensteinAustria

Singapore

CaymansSwitzerland

Luxembourg

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

0.0 100.0 200.0 300.0 400.0 500.0 600.0 700.0 800.0

Walker 1999 Model Attractiveness Score

Tra

nsC

rim

e B

ase

d S

core

Transcrime & Walker Attractiveness Indices


……Putting all this information together...Putting all this information together...

Rank Origin Amount ($Usmill/yr) % of Total

1 United States 1320228 46.3%

2 Italy 150054 5.3%

3 Russia 147187 5.2%

4 China 131360 4.6%

5 Germany 128266 4.5%

6 France 124748 4.4%

7 Romania 115585 4.1%

8 Canada 82374 2.9%

9 United Kingdom 68740 2.4%

10 Hong Kong 62856 2.2%

Model’s Top 10 Origins of Laundered MoneyModel’s Top 10 Origins of Laundered Money


Model’s Top 10 Flows of Laundered MoneyModel’s Top 10 Flows of Laundered Money

Rank Origin Destination Amount ($USmill/yr) % of Total

1 United States United States 528091 18.5%

2 United States Cayman Islands 129755 4.6%

3 Russia Russia 118927 4.2%

4 Italy Italy 94834 3.3%

5 China China 94579 3.3%

6 RomaniaRomania 87845 3.1%

7 United States Canada 63087 2.2%

8 United States Bahamas 61378 2.2%

9 France France 57883 2.0%

10 Italy Vatican City 55056 1.9%


Model’s Top 10 ML DestinationsModel’s Top 10 ML Destinations

Rank Destination Amount ($Usmill/yr) % of Total

1 United States 538145 18.9%

2 Cayman Islands 138329 4.9%

3 Russia 120493 4.2%

4 Italy 105688 3.7%

5 China 94726 3.3%

6 Romania 89595 3.1%

7 Canada 85444 3.0%

8 Vatican City 80596 2.8%

9 Luxembourg 78468 2.8%

10 France 68471 2.4%


Model results compared to Press reportsModel results compared to Press reports"Illegal grey economy in Czech Republic about 10% of GDP” (Hospodárské Noviny, 2 Apr 98)

Model estimates 14.8% of GDP

"$30bill illegal drugs reach the US from Mexico each year" (Chicago Tribune, 25 Mar 98)

Model estimates $26bill laundered in Mexico each year

“More than $2bill is laundered in Poland each year" (National Bank of Poland, reported on 15 Apr 98)

Model estimates $3bill laundered in Poland each year

"Share of shadow business in Russia's economy may range between 25% -50%" (TASS 17 Mar 98)

Model estimates money laundering 15% of Russian GDP

"Switzerland is implicated in $500bill of money laundering each year" (Swiss Finance Ministry, reported on 26 Mar 98)

Model estimates $59bill - including only "first-stage" laundering.

"UK black economy between 7-13% of GDP" (Sunday Telegraph, 29 Mar 98)

Model estimates total money laundering 7.4% of UK GDP

"$50-250bn illegally moved from Russia to Western banks in 5 years" (Russian Interior & Economics Ministries, April 99)

Model estimates $28bn per year from Russia to western banks

"Money Laundering in Belarus about 30% of GDP" (European Humanities University, 20 Nov 98)

Model estimates 22.2% of Belarus GDP is laundered money

"Illicit funds generated and laundered in Canada per year $5-17 bn" (Canadian Solicitor General, Sep 1998)

Model estimates $22bill generated and laundered in Canada each year,

but also that $63bn of US crime funds laundered in Canada.

"Approximately $2.7bn are laundered in Colombia each year" (BBC Monitoring Service, Nov 98)

Model estimates $2.1bn laundered in Colombia every year

"Illicit drug sales (in the USA) generated up to 48bn a year in profits for laundering" (Congressional hearing, April 99)

Model estimates $34.6bn generated and laundered by illicit drug trade in USA

"Illegal profits total 2-5% of world GDP or $1-3trillion" (Dow Jones News, 12 Mar 98)

Model estimates total global money laundering $2.85 trillion

After late 1999, it became apparent that most published estimates were based on my model


Triangulation:Triangulation:Shadow Economy, Shadow Economy, Crime and Money Crime and Money

LaunderingLaundering

““Excess” shadow economy Excess” shadow economy might be an indicator of the might be an indicator of the proceeds of crime.proceeds of crime.

GDP per capita vs. Shadow Economy

42.142.141.6

38.9

35.432.2

2116.8

UAE

Italy

Ireland

NZ

JapanUK

Austria

Switzerland

USA

BoliviaGeorgia

PanamaPeru

Colombia

Morocco

Pakistan

Thailand

Mexico

Vietnam

Uruguay

Belarus

Estonia

Russia

Lao PDRYemen

Iran

China

Mongolia

Australia

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

0 20 40 60 80

Shadow Economy as % of GDP

GD

P/c

apita

($U

S) 2

001

Source: F. Schneider and J. Walker.Source: F. Schneider and J. Walker.

Poor countries with low % shadow Poor countries with low % shadow economies are economies are mostly “command economies”mostly “command economies”

All rich countries have All rich countries have low % shadow low % shadow

economieseconomies

Many of the richest Many of the richest countries with high % countries with high %

shadow economies have shadow economies have significant transnational significant transnational

crime, illicit drug crime, illicit drug production and corrupt production and corrupt

business practices.business practices.

On this basis, the shadow On this basis, the shadow economy in Australia economy in Australia would produce around would produce around AU$20 billion per year, AU$20 billion per year, some of which laundered.some of which laundered.


Triangulation: Cross-border flow AnalysisTriangulation: Cross-border flow Analysis (Raymond Baker, 2005)(Raymond Baker, 2005)

Global FlowsGlobal Flows Low ($US bn)Low ($US bn) High ($US bn)High ($US bn)

DrugsDrugs $120$120 $200$200

Counterfeit goodsCounterfeit goods $80$80 $120$120

Counterfeit currencyCounterfeit currency $3$3 $3$3

Human traffickingHuman trafficking $12$12 $15$15

Illegal arms tradeIllegal arms trade $6$6 $10$10

SmugglingSmuggling $60$60 $100$100

RacketeeringRacketeering $50$50 $100$100

Crime SubtotalCrime Subtotal $331$331 $549$549

MispricingMispricing $200$200 $250$250

Abusive transfer pricingAbusive transfer pricing $300$300 $500$500

Fake transactionsFake transactions $200$200 $250$250

Commercial SubtotalCommercial Subtotal $700$700 $1000$1000

CorruptionCorruption $30$30 $50$50

Grand TotalGrand Total $1061$1061 $1599$1599

From “Capitalism’s Achilles Heel”, Baker 2005. Based on a review of studies of transnational crime


Triangulation: the Economics of the Global Triangulation: the Economics of the Global Illicit Drugs TradesIllicit Drugs Trades

By 2005 UNODC researchers were convinced they had sufficient data in By 2005 UNODC researchers were convinced they had sufficient data in their Annual Reports Questionnaires to develop a global model of the illicit their Annual Reports Questionnaires to develop a global model of the illicit drugs market.drugs market.

ARQs received from most countries around the world – all continents; ARQs received from most countries around the world – all continents; rich/poor; developed/less developed countries.rich/poor; developed/less developed countries.

We developed mechanisms for testing the credibility of ARQ data from We developed mechanisms for testing the credibility of ARQ data from different countries by comparing them with other ARQ data and other different countries by comparing them with other ARQ data and other studies.studies.

We developed mechanisms for filling the gaps in the data, by classifying We developed mechanisms for filling the gaps in the data, by classifying different countries and “interpolating”.different countries and “interpolating”.

We identified the economic logic of the illicit drugs trades.We identified the economic logic of the illicit drugs trades.

We identified ways to deduce the “trade routes” of the illicit drugs trades, by We identified ways to deduce the “trade routes” of the illicit drugs trades, by comparing “mentions”, and developed this into a “tracking model” that can comparing “mentions”, and developed this into a “tracking model” that can explain corruption levels in transit countries.explain corruption levels in transit countries.


The Economics of the Illicit Drugs TradesThe Economics of the Illicit Drugs Trades


General Conclusions from the ModelGeneral Conclusions from the Model

Global money laundering may be as much as $US3 trillion per annumGlobal money laundering may be as much as $US3 trillion per annum

Business Fraud exceeds illicit drugs as a source of laundered moneyBusiness Fraud exceeds illicit drugs as a source of laundered money

Attacking the economics of crime can be an effective transnational crime Attacking the economics of crime can be an effective transnational crime

prevention strategy.prevention strategy.

Economists can play a valuable role in monitoring and combating Economists can play a valuable role in monitoring and combating

transnational crime and money laundering.transnational crime and money laundering. Does AML reduce crime? – Probably not by much.Does AML reduce crime? – Probably not by much. Does AML reduce ML? – Probably not much, but it diverts it from the Does AML reduce ML? – Probably not much, but it diverts it from the

finance sectors to more costly avenues. finance sectors to more costly avenues. Does AML help catch criminals? – Probably only a few, but sometimes very Does AML help catch criminals? – Probably only a few, but sometimes very

important ones.important ones. Does AML protect the economy? – Probably a massive boost to the Does AML protect the economy? – Probably a massive boost to the

economy by ensuring that the finance sector is seen as honest, wary and economy by ensuring that the finance sector is seen as honest, wary and supervised.supervised.


Model Estimates of ML Flows from Model Estimates of ML Flows from Developing CountriesDeveloping Countries

Region……………………………………………………………………………………. Total US$ Million

Caribbean 6,452

Central America 2,525

Central Asia and Transcaucasian countries 15,201

East Africa 3,559

East and South-East Asia (Excl. Brunei, Japan, Singapore, Rep of Korea) 444,536

East Europe 176,963

Near and Middle East /South-West Asia (Excl Israel) 12,213

North Africa 4,178

Oceania (Exc Australia, NZ) 209

South America 30,361

South Asia 3,465

Southeast Europe 129,512

Southern Africa 14,321

West and Central Africa 3,278

Total Developing Countries 846,773


Model Estimates of ML Flows from Model Estimates of ML Flows from Developing CountriesDeveloping Countries

Caribbean

6452Central America

2525

C Asia/Transcaucasus

15201

E Africa

3559

E & SE Asia

444536

E Europe

176963

Near & Middle East/SW Asia

12213N & W Africa

4178

South America

30361

South Asia

3465

Southern Africa

14321

W & C Africa

3278Oceania

209

SE Europe

129512

C & S America total $39.3 bn; Africa total $25.3 bn; Europe total $306.5bn; ME & Asia total $475.6bn

Global total $846.8 bn

Download - John Walker Crime Trends Analysis Estimating the Illicit Flows – Asking the Right Questions John Walker CEO, John Walker Crime Trends Analysis Principal

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