A brave new world: recent developments in anti-money laundering and related litigation traps for the unwary in international trust matters.

I. INTRODUCTION

In 1998, governments and international organizations continued their active efforts to increase regulatory and criminal enforcement of various laws to stem the tide of transnational crime. These efforts were reflected in the criminalization of various business and financial transactions, the imposition of new due diligence measures on the private sector and the concomitant weakening of privacy and confidentiality laws, strengthened penalties for non-compliance with regulatory efforts, and new law enforcement techniques, such as undercover sting operations, wiretapping, expanded powers to search homes and businesses, and controlled deliveries. So obtrusive are many of the law enforcement techniques and the privatization of law enforcement, whereby governments transfer their responsibilities to the private sector, that many professionals engaged in international transfer of wealth counseling analogized the trends to those in Aldous Huxley's A Brave New World (or perhaps the Steve Miller Band's rendition).

This discussion outlines the trends in six areas and draws some practice pointers from the trends. Section II will discuss the activities of international organizations that are driving much of the strategy, framework, and minimum standards for the development of an international anti-money laundering regime. Increasingly, international organizations, both of a universal and a more regional level, are consciously trying to build alliances and networks with each other and the private sector.

In Section III, selective elements of the substantive law of anti-money laundering are considered in the context of recent developments, such as the continued erosion of secrecy and the imposition of increased due diligence requirements. Section IV discusses major case and miscellaneous developments, such as the failure of Russian offshore banks in Antigua.

Section V highlights the growth of international tax enforcement, the increased reporting requirements and unilateral extraterritorial application of the law, the increasing bilateral and multilateral cooperation, and the new traps for the wary due to tax enforcement developments.

In Section VI, international asset forfeiture trends are highlighted. These activities pose a much graver threat to the ability of clients to do business internationally than ten years ago. The goal of immobilizing the assets of transnational criminals has become increasingly the watchword. While the rights of innocent third parties are protected in principle, it sometimes takes a lot of money and professional acumen for such persons to obtain due process.

Section VII focuses on criminal cooperation mechanisms. Section VIII discusses the use of international human rights provisions as a shield for defendants, fiduciaries, and intermediaries in the context of international anti-money laundering and financial crime cases.

As an introductory matter, the life cycle of money laundering is important to grasp. It has three cycles: (1) placement, whereby the criminal has enormous amounts of dirty money in the form usually of cash that he needs to place or initiate in a way that neither law enforcement nor the private sector will identify as the proceeds of crime; (2) layering, which involves the creation of many layers between the dirty money and the ultimately cleaned money through the use of offshore vehicles, such as trusts in secrecy jurisdictions, in tandem with multiple, entitles, such as companies, and secrecy mechanisms, such as nominees, stamen, bearer shares, and sophisticated structuring; and (3) integration is achieved when the criminal has transformed the dirty money through enough layers of the laundering cycle that a legitimate banker, lawyer, or fiduciary, even one with cutting edge due diligence, would never suspect the criminal source of the money.(1) Integration means that, in 1999, the money of the many heirs of Joseph Kennedy, the famous former bootlegger during the prohibition days, now is not questioned. Indeed, the money even finances federal elections (e.g., of the U.S. President, Senate, and House). In Colombia, the money of the Cali cartel has been integrated for two or three decades into the leading pharmaceutical companies, soccer teams, and also the financing of political elections (e.g., the United States imposed sanctions due to the financing of Samper's election).

Much of the emphasis of the politics of international anti-money laundering is to try to deprive criminals--especially transnational criminals--and organized crime of the fruits of the crimes and the means of their committing more crimes. Another goal is to allocate the seized proceeds to governments and law enforcement. Hence, the economics and politics of anti-money laundering are to redistribute economics and power of crime. To help with the fight, governments and international organizations have solicited the collaboration of the private sector to prevent money laundering through know-your-customer and identifying and reporting to law enforcement suspicious transactions.

II. DEVELOPMENTS OF INTERNATIONAL ORGANIZATIONS

Multilateral organizations have set the framework for anti-money laundering standards, mechanisms, and institutions.(2) The United Nations pioneered the 1988 Vienna Convention Against the Trafficking in Illegal Narcotic and Psychotropic Substances, which contains the requirements to criminalize money laundering and immobilize the assets of persons involved in illegal narcotics trafficking.(3)

In 1989, the G-7 Economic Summit Group established the Financial Action Task Force (FATF), which operates out of the Office of Economic Cooperation and Development (OECD) headquarters in Paris.(4) FATF has issued a set of forty recommendations (Forty Recommendations) that concern legal requirements, financial and banking controls, and external affairs.(5) FATF operates through a Caribbean FATF (CFATF)(6) and is in the process of establishing a similar group in Asia. It issues an annual report that provides an overview of progress and problems in international anti-money laundering.(7)

The G-10 Basle Group of Central Banks has actively provided guidelines for central bank supervisors and regulatory controls.(8) As mentioned below, on September 23, 1997, the Basle Group issued guidelines on supervision.(9)

Regionally, the Council of Europe's 1991 Convention on Laundering, Search, Seizure and Confiscation of Assets has become the major international convention that obligates signatory governments to cooperate against anti-money laundering from all serious crimes.(10)

The European Union, as a signatory to the 1988 Vienna Drug Convention and due to its own actions to combat financial crimes against the Communities, issued a 1991 Anti-Money Laundering Directive that it is poised to strengthen.(11) As mentioned below, it is now in the process of an initiative against cybercrimes.(12)

An important regional organization in the anti-money laundering has been the Inter-American Drug Abuse Control Commission (CICAD). At its meeting on November 4-7, 1997, CICAD anti-money laundering experts recommended an ongoing assessment of compliance with standards and the creation of national financial intelligence units (FIUs).(13) National governments and international organizations are striving to create mechanisms to monitor regularly compliance with international standards.

Because the recent FATF annual reports and topologies provide cutting-edge discussions of the status of money laundering trends, they are discussed next.

A. FATF 1997 Annual Report

In June 1997, the Financial Action Task Force on Money Laundering issued its annual report for 1996-97.(14) The report highlighted the annual survey of money laundering methods and countermeasures covering a global overview of trends and techniques.(15) These methods included the increased use by money launderers of non-bank financial institutions, especially bureaux de change, remittance businesses and non-financial professionals.(16) Special attention was devoted to the money laundering threats of new payment technologies.(17)

The work of the FATF in 1996-97 focused on three main areas: "(i) reviewing money laundering methods and countermeasures; (ii) monitoring the implementation of anti-money laundering measures by its members; and (iii) undertaking an external relations program[] to promote the widest possible international action against money laundering."(18)

1. Reviewing Money Laundering Methods and Countermeasures

A significant achievement of FATF during 1996-97 was the annual survey of money laundering methods and countermeasures.(19) The survey provides a global overview of trends and techniques, especially the issue of money laundering through new payment technologies, such as smart cards and banking through the Internet.(20) FATF reviewed the issue of electronic fund transfers and examined ways to improve the appropriate level of feedback that should be provided to reporting financial institutions.(21)

a. Trends in FATF Members

While drug trafficking remains the single largest source of illegal proceeds, non-drug related crime is increasingly important.(22) The most noticeable trend is the continuing increase in the use by money launderers of non-bank financial institutions and of non-financial businesses relative to banking institutions. The trend reflects the increased level of compliance by banks with anti-money laundering measures. The survey noted, "Outside the banking sector, the use of bureaux de change or money remittance businesses remains the most frequently cited threat."(23)

FATF members have continued to expand their money laundering laws, covering non-drug related predicate offenses, improving confiscation laws, and expanding the application of their laws in the financial sector in order to apply preventive measures to non-bank financial institutions and non-financial businesses.(24)

FATF discussed money laundering threats that may be inherent in the new e-money technologies, of which there are three categories: stored value cards, Internet/network based systems, and hybrid systems.(25) Important features of the systems that will affect this threat are: (1) the value limits imposed on accounts and transactions; (2) the extent to which stored value cards become inoperable with Internet-based systems; (3) the possibility that stored value cards can transfer value between individuals; (4) the consistency of intermediaries in the new payment systems; and (5) the detail in which account and transaction records are kept.(26)

Future issues include the need to review regulatory regimes, the availability of adequate records, and "the difficulties in detecting and in tracking or identifying unusual patterns of financial transactions."(27) Since the application of new technologies to electronic payment systems is still in its infancy, law enforcement and regulators must continue to cooperate with the private sector.(28) Then authorities may understand the issues that must be considered and addressed as the market and technologies mature.

b. Policy Issues

Electronic Fund Transfers. As a result of difficulties in tracing illicit funds routed through the international funds transfer system, the Society for Worldwide Interbank Financial Telecommunications (SWIFT) board "issued a broadcast to its members and participating banks encouraging users to include full identifying information for originators and beneficiaries in SWIFT field tags 50 (Ordering Customer) and 59 (Beneficiary)."(29) Many countries have acted to encourage compliance within their financial communities with the SWIFT broadcast message.(30)

To strengthen the body of information on identifying the true originating parties in transfers, SWIFT has devised a new optional format (MT103) for implementation after November 1997.(31) The message format will have a new optional message field for inputting all data "relating to the identification of the sender and receiver (beneficiary) of the telegraphic transfer."(32) Additionally, "SWIFT has issued guidance to users of its current system to describe where such information may appear in the MT 100 format."(33) FATF has helped SWIFT devise the new mechanism and is encouraging the use of the new message format.(34)

Providing Feedback to Financial Institutions. FATF recommends that at least the recipient of a suspicious transactions report should acknowledge receipt thereof.(35) If the report is then subject to a fuller investigation, the institution could be advised of either the agency that is going to investigate the report or the name of a contact officer. If a case is closed or completed, the sending institution should receive timely information on the decision or result. Further cooperative exchange of information and ideas is required for the partnership between units that receive suspicious transaction reports, general law enforcement, and the financial sector to work more effectively.(36)

Estimate of Magnitude of Money Laundering. Because of insufficient data, FATF has created an ad hoc group that "will consider the available statistical information and other information concerning the proceeds of crime and money laundering."(37) This ad hoc group will also "define the parameters of a study on the magnitude of money laundering and agree on a methodology and a timetable for the study."(38)

2. Monitoring the Implementation of Anti-Money Laundering Measures

As part of FATF's work, its members have pledged to monitor the implementation of its Forty Recommendations through a two-pronged approach consisting of (1) "an annual self-assessment exercise," and (2) "more detailed mutual evaluation process under which each member is subject to an onsite examination."(39)

As a result of Turkey's failure to implement FATF's recommendations, FATF issued a public statement, in accordance with Recommendation 21, that Turkey, a member country, was insufficiently in compliance with the Forty Recommendations.(40) Recommendation 21 states that "[f]inancial institutions should give special attention to business relations and transactions with persons, including companies and financial institutions, from countries that do not or insufficiently apply" the Forty Recommendations.(41) On November 19, 1996, Turkey enacted Law no. 4208 on the Prevention of Money Laundering.(42) As a result, FATF decided to lift the application of Recommendation 21.(43)

In 1995, after completing its first round of mutual evaluations of whether all members had adequately implemented the Forty Recommendations, a second round of mutual evaluations was conducted.(44) The second round focused on the effectiveness of members' anti-money laundering measures in practice. Mutual evaluations of Australia, the United Kingdom, Denmark, the United States, Austria, and Belgium occurred in 1996-97.(45)

Asset Confiscation and Provisional Measures. The FATF Secretariat conducted a study evaluating members' confiscation measures and found that an effective confiscation mechanism should encompass a range of serious offenses and should act

   in appropriate cases to confiscate proceeds of crime where it is held in
   the name of third parties. Countries should also consider widening
   confiscation laws to permit confiscation without conviction in certain
   cases, or the more limited alternative of freezing, and where possible,
   confiscation action against absconders and fugitives from justice.(46)

For most members, the crucial issue was the burden of proof upon the government and whether it can be eased or reversed.(47) Countries have enacted or considered the following measures: "applying an easier standard of proof than the normal criminal standard; reversing the burden of proof and requiring the defendant to prove that his assets are legitimately acquired; and enabling courts to confiscate the proceeds of criminal activity other than the crimes of which the defendant is immediately convicted."(48) Further options are to provide the court with discretion to confiscate a convicted drug trafficker's assets or to require the court to order the confiscation of all assets that are disproportionate to the person's legitimate income.(49)

Mutual legal assistance problems include instances arising from questionable members that have ratified the relevant international conventions or do not have the necessary domestic legislation in effect.(50) Relatively limited mutual assistance experience exists among members in the confiscation field, and asset sharing and coordinating seizure and confiscation proceedings are still emerging.

Customer Identification. Because of the comparatively weaker regimes for customer identification in non-bank financial institutions and bureaux de change, these institutions have become more attractive routes for money launderers.(51) Refinements are required for overseas and nominee accounts. In addition, refinements are required for the structuring of large non-financial business intermediaries and situations in which no face-to-face contact between the customer and the financial institution exists. The issue of customer identification arises in the context of rapid development of electronic transactions and financial services through new technologies.(52)

3. External Relations

In external relations, FATF encourages countries to adopt and implement the FATF Recommendations and monitors and reinforces this process.(53) FATF also cooperates and coordinates with all the international and regional organizations concerned with counter-money laundering measures.(54) Finally, it pursues a flexible approach, "tailoring external relations activity to the circumstances of the region or countries involved."(55)

FATF will embark upon more initiatives to encourage the adoption and implementation of the Forty Recommendations. FATF is working to develop a long-term strategic plan in collaboration with other relevant international organizations.(56)

In 1996, FATF adopted both a policy and rules for "assessing the implementation of anti-money laundering measures in nonmember governments."(57) The development of a mutual evaluation procedure should encourage countries and jurisdictions not only to develop anti-money laundering laws, but also to improve countermeasures already in existence. Hence, FATF has worked with other international organizations such as CFATF, the Council of Europe, and the Offshore Group of Banking Supervisors (OGBS) to develop countermeasures.(58)

In 1996 and 1997, important counter-money laundering developments included the establishment of the Asia/Pacific Group on Money Laundering and the Southern and Eastern African Money Laundering Conference.(59) FATF has supported existing bodies rather than starting new initiatives. The new global project of the U.N. Drug Control Programme/U.N. Crime Prevention and Criminal Justice Division (UNDCP/UNCPCJD) on money laundering will help implement these measures through training and technical assistance.(60)

In the Caribbean, FATF supported the endorsement of the Memorandum of Understanding (MOU) at the 1996 Ministerial meeting of the CFATF.(61) CFATF finalized mutual evaluation reports of the Cayman Islands and Trinidad & Tobago, and planned six evaluation visits for 1997.(62) CFATF also started its typologies exercise, whereby it will "develop and share among its members the latest intelligence on money laundering and other financial crime techniques used in the Caribbean region and elsewhere."(63)

In April 1997, the Finance Ministers of the Asia Pacific Economic Cooperation (APEC) issued a ministerial statement welcoming the establishment of the Asia/Pacific Group on Money Laundering.(64) FATF stated that the endeavor required urgent funding from FATF members and those of the Asia/Pacific Group on Money Laundering.(65)

Finally, from October 1-3, 1996, representatives of thirteen African countries attended a conference on anti-money laundering and agreed on a proposal to establish a Southern and Eastern African Financial Action Task Force.(66)

B. FATF 1998 Annual Report

In June 1998, the Financial Action Task Force on Money Laundering released its annual report for 1997-98.(67) The ninth round of FATF was chaired by Belgium and was marked by the elaboration of a five year plan for 1999-2004, highlighted by a decision to broaden the FATF network and the scope of its work, and to strengthen the review of money laundering trends and countermeasures.(68)

1. Trends and Future Mission of FATF

The most noticeable trend is the continuing increase in the use by money launderers of non-bank financial institutions and of non-financial businesses relative to banking institutions. The trend reflects the increased level of compliance by banks with anti-money laundering measures. Outside the banking sector, the use of bureaux de change or money remittance businesses remain the most frequently cited.

In 1994, five years after the 1989 G-7 Summit established FATF, its members decided that the Task Force--which is not a permanent international organization--should continue its work for a further five years until 1999. Moreover, it was agreed in 1994 that no final decision on the future of FATF would be taken until 1997-98.(69)

By mid-1999, it is expected that every FATF member will have experienced two evaluations of their anti-money laundering systems.(70) While the first round of evaluations dealt with the issue of whether all members had adequately implemented the Forty Recommendations, the second round concerns the effectiveness of the anti-money laundering system in each member country.(71) FATF organized "missions and seminars in nonmember countries to promote awareness of the money laundering problem" and encourage countermeasures.(72) Although FATF's Forty Recommendations have gained some international recognition, a large number of countries still have not implemented anti-money laundering systems.(73)

FATF has succeeded in achieving an international consensus on the money laundering countermeasures, in persuading many countries to implement the measures, and in establishing a "network" of money laundering experts in each of the FATF members.(74) FATF has improved the flow of information both at the domestic level and internationally.(75)

The first major task in the future that the report outlined is "[t]o establish a world-wide anti-money laundering network and to spread the FATF's message to all continents and regions of the globe."(76) To accomplish the task, FATF will expand its membership to "strategically important countries which already have certain key anti-money laundering measures in place ... [and] are politically determined to make a full commitment towards the implementation of the [F]orty Recommendations, and which could play a major role in their regions in the process of combating money laundering."(77) FATF will also develop regional bodies emulating FATF, and will cooperate closely with relevant international organizations such as the U.N. bodies and the International Financial Institutions.(78)

The second major task will be to improve the implementation of the Forty Recommendations in FATF members. The focus will be to "ensure that all members have implemented the revised [F]orty Recommendations in their entirety and in an effective manner."(79) Hence, the existing monitoring mechanisms will receive a renewed assessment focusing on the 1996 Recommendations. This assessment will involve

   [a]n enhanced self-assessment process; and a third round of simplified
   mutual evaluations for all FATF members starting in 2001, focusing
   exclusively on compliance with the revised parts of the Recommendations,
   the areas of significant deficiencies identified in the second round, and
   generally the effectiveness of the countermeasures.(80)

The third main task will be to strengthen the review of money laundering trends and countermeasures.(81) Because money laundering is an evolving activity, FATF members must follow laundering trends and techniques and assess the effectiveness of the FATF recommendations. The geographical scope of the future typologies exercises must be extended. The close monitoring of trends will enable FATF to anticipate and react to the trends by elaborating countermeasures.(82)

2. Monitoring the Implementation of Anti-Money Laundering Measures

Much of FATF's work consists of monitoring the implementation by its members of the Forty Recommendations. FATF members are committed to the discipline of multilateral surveillance and peer review. Member countries have their implementation of the recommendations monitored through a two-pronged approach comprised of (1) "an annual self-assessment exercise," and (2) a "more mutual evaluation process under which each member is subject to an on-site examination."(83)

The 1997-98 self-assessment process consisted of each member providing information concerning the status of their implementation of the Forty Recommendations.(84) The information is then compiled and analyzed, providing the basis for assessing to what extent the Forty Recommendations have been implemented.

With respect to legal issues, all members have enacted laws criminalizing drug money laundering.(85) All but three FATF members have criminalized laundering of the proceeds of range of crimes in addition to drug trafficking.(86) The report notes that "[t]he overall level of compliance will improve considerably when Japan, Luxembourg, and Singapore have extended their drug money laundering offenses to serious crimes,"(87) which all three are in the process of doing.

"A number of members still must take measures in relation to confiscation and provisional measures, both domestically and pursuant to mutual legal assistance."(88) In regard to domestic confiscation, nineteen members are in full compliance, and six in partial compliance.(89) For mutual legal assistance, seventeen members are in full compliance, five in partial compliance, and three are out of compliance (Canada, Greece and the United States).(90) Urgent action by some FATF members is required to bring themselves into compliance with the relevant recommendations.(91)

Slight improvement occurred in the 1997-98 implementation of the FATF recommendations on financial issues.(92) Major improvements occurred in relation to two new recommendations that were introduced in 1996, namely Recommendation 13 dealing with the need to monitor laundering using new technologies, and Recommendation 25 on shell corporations.(93) However, non-bank institutions still are not properly implementing the recommendations at the same level as the banking sector.

While nearly all FATF members "comply fully with customer identification and record-keeping requirements for banks ... some persistent gaps in coverage with respect to certain categories of non-bank financial institutions" still exist.(94) Serious concerns exist regarding the anonymous passbooks for residents in Austria that FATF is pursuing through the FATF noncompliance procedures.(95)

The requirement for financial institutions to report suspicious transactions and related measures has received "very satisfactory" implementation in relation to banks and almost as good for non-bank financial institutions.(96) However, improvement is required with respect to non-bank financial institutions, especially in countries such as Canada, Iceland, and the United States.

The report also discusses the mutual evaluations of Canada, Switzerland, the Netherlands, Germany, Italy, Norway, Japan, and Greece.(97)

A section of the report concerning the application of the FATF policy for non-complying members covers, inter alia, the failure of Austria to abolish anonymous passbooks for Austria residents and a series of concerns on Canadian countermeasures.(98) The proposed Canadian countermeasures include mandatory suspicious transaction reporting, penalizing failures to file a report and filing a false report, as well as a "tipping-off" offense, the establishment of a new financial intelligence unit, protection from criminal and civil liability for any person or body that makes a report, and establishing a cross border reporting system for currency and monetary instruments.(99)

3. Reviewing Money Laundering Methods and Countermeasures

FATF performed a further survey of money laundering methods and countermeasures that provides a global overview of trends and techniques.(100) The issues of money laundering through new payments technologies--smart cards, banking through the Internet--and of the non-financial businesses and remittance companies were discussed.(101) The survey also considered the issues of how to "improve the appropriate level of feedback which should be provided to reporting financial institutions, and the continuation of work on estimating the magnitude of money laundering."(102) Moreover, FATF convened a second meeting with representatives of the world's financial sector trade institutions.

With respect to new technology--for example, e-cash--the report concluded that much work remains before all the related money laundering dangers can be clearly identified and before any possible specific countermeasures can be considered.(103) FATF has also directed its attention toward money laundering in sectors such as insurance or money changing.(104) In connection with the latter, consideration is given to the consequences of the conversion of European currencies into the Euro.(105)

With respect to providing feedback to financial institutions, the FATF guidelines are not mandatory because they recognize "that ongoing law enforcement investigations should not be put at risk, that secrecy laws in some countries may prevent their financial intelligence unit from disclosing significant feedback, and that general privacy laws can also limit feedback."(106) Hence, the guidelines are designed to assist financial intelligence units, law enforcement and other government bodies involved in the receipt, analysis, and investigation of suspicious transaction reports, and in the provision of feedback to reporting institutions on those reports.(107) The guidelines suggest that at least regulatory authorities make available sanitized cases to reporting institutions, and "each case could include a description of the fact, a summary of the result, a description of the inquiries made by the FIU if appropriate, and a description of the lessons to be learn[ed] from the reporting and investigative procedures that were adopted in the case."(108) Additionally, new money laundering methods, as well as trends in existing techniques, are described and identified and the guidelines provide that institutions are advised of such trends and techniques.(109)

The guidelines also consider means for providing general feedback, such as "annual reports, regular newsletters, videos, electronic information systems such as websites, electronic databases or message systems, meetings with institutions, conferences and workshops, and working or liaison groups."(110)

The report notes that specific feedback is more difficult to provide than general feedback due to legal and practical concerns, such as potential jeopardy to ongoing law enforcement investigations and resource limitations, and secrecy laws relating to the financial intelligence or general privacy laws.(111) Still, whenever possible, specific feedback should include acknowledgment by the FIU of receipt of the report and advice to the institution that a particular agency will investigate the report when this occurs and if the investigation would not be adversely affected.(112) "[I]f a case is closed or completed, whether because of a concluded prosecution, because the report was found to relate to a legitimate transaction or for other reasons," the institution should be notified of that decision or result.(113)

4. FATF's External Relations and Other International Initiatives

As the third component of its mission, FATF undertakes external relations actions designed to raise awareness in nonmember countries or regions on the need to prevent or combat money laundering, and offers the Forty Recommendations as a basis for doing so.(114)

In September 1997, FATF's external relations included a mission to Cyprus, resulting in Cyprus undergoing a joint Council of Europe/Offshore Group of Banking Supervisors (OGBS) mutual evaluation of Cyprus' money laundering system in the spring of 1998.(115) In October 1997, FATF helped organize a conference in St. Petersburg to complement a high-level mission to Moscow in 1996.(116) Various new and proposed countermeasures are in place and in the works in Russia.(117)

FATF-style regional bodies are active. CFATF has grown to twenty-four states and has instituted measures to ensure the effective implementation of, and compliance with, the Forty Recommendations.(118)

   The CFATF Secretariat monitors members' implementation of the Kingston
   Ministerial Declaration through the following activities: self-assessment
   of the implementation of the [R]ecommendations; an on-going programme of
   mutual evaluation of members; coordination of, and participation in,
   training and technical assistance programs; biannual plenary meetings for
   technical representatives; and annual Ministerial meetings.(119)

The report notes that "[s]upported by, and in collaboration with UNDCP, the CFATF Secretariat has developed a regional strategy for technical assistance and training to aid effective investigation and prosecution of money laundering and related asset forfeiture cases."(120) In 1997-98, three mutual evaluation reports were discussed and six on-site visits occurred. A timetable was set for the remaining mutual evaluations.(121)

In July 1997, the Working Party meeting of the Asia/Pacific Group on Money Laundering (APG) made progress. It currently consists of sixteen members(122) that "have started to exchange information and to examine the strengths and weaknesses of their systems through the mechanism of jurisdiction reports."(123) Measures have been proposed to improve technical assistance and training, strengthen mutual legal assistance and improve cooperation with the financial sector.(124)

FATF adopted a policy for assessing the implementation of anti-money laundering measures in non-member governments.(125) The procedure will encourage countries and territories not only to implement anti-money laundering measures, but also to improve the countermeasures already in place. In this regard,

   the FATF assessed the CFATF, the Council of Europe and the OGBS's mutual
   evaluation procedures as being in conformity with its own principles. As
   the latter is comprised of representatives of banking supervisory
   authorities, the FATF has sought formal political endorsement of the
   procedures and the forty Recommendations from those governments of the
   members of the OGBS that are not represented in either the CFATF or the
   FATF.(126)

FATF cooperates with other international organizations. In this regard, the U.N. Office for Drug Control and Crime Prevention (UNODCCP) has started the Global Programme Against Money Laundering (GPML), a research and technical cooperation program. In the context of the GPML, the UNODCCP organized several important international anti-money laundering events in 1997-1998, including awareness-raising seminars for West Africa in Ivory Coast, and for South Asian countries plus Myanmar and Thailand.(127) On June 8-10, 1998, the U.N. General Assembly on international narcotics trafficking adopted a political declaration in which U.N. members undertake to make special efforts against the laundering of money linked to drug trafficking. The declaration recommends that states that have not yet done so adopt by the year 2003 national anti-money laundering legislation and programs in accordance with relevant provisions of the 1988 Vienna Convention Against the Traffic in Illicit Narcotic and Psychotropic Substances, and a package of countermeasures that were adopted at the same session.(128)

The Commonwealth Heads of Government recently has held summits calling for concerted anti-money laundering actions. At its June 1998 London meeting, it considered four main items:

(1) improving domestic coordination through national interdisciplinary coordinating structure;

(2) the special problems of dealing with money laundering in countries with large parallel economies;

(3) strengthening regional initiatives for more effective implementation of anti-money laundering measures; and

(4) self-evaluation of progress made in implementing anti-money laundering measures in the financial sector.(129)

The Inter-American Development Bank has held meetings and is starting to become involved in anti-money laundering activities, such as training, supporting dialogue with the private sector, and funding programs).(130)

The Organization of American States (OAS)/Inter-American Drug Abuse Control Commission (CICAD) has a group of experts that meets twice a year. In May 1998, it "approved a training program for judges, prosecutors, FIU personnel and law enforcement. It also undertook to amend the model regulations to expand the predicate offence for money laundering and to provide for the establishment of national forfeiture funds."(131) It finished a directory of contact points to effect information exchange and mutual legal assistance that would be accessible through OAS's webpage.(132)

5. Summary and Conclusion

The expansion of the FATF network and of the scope of its countermeasures will mean that launderers will use their power and know-how to try to take advantage of globalization and new technology, and to identify and exploit jurisdictions whose systems are vulnerable. For a five-year assessment, noticeably absent in the discussion is the use of international relations and particularly international-regime theory, including the rise and fall of linkages that make regimes rise and fall, and the targeting of key elements within such regimes. Additional limitations that exacerbate the absence of this element of its strategic planning are the temporal--its existence is limited to five years--and informal commitments--FATF is still not a formal entity. Given the threats arising from money laundering, one would think the world community would make commitments commensurate with the threats, but then progress in evolving international enforcement regimes can be slow.

During 1996-97, progress was made in combating money laundering, both within and outside the FATF membership. Implementation of the Forty Recommendations by FATF has again improved and the monitoring mechanisms have been further strengthened and refined. The international anti-money laundering activities undertaken by FATF and other international organizations have increased.(133)

C. The Egmont Group Agrees on Harmonization Measures and Cooperation Among Financial Intelligence Units

On June 23-24, 1997, the Egmont Group, composed of specialists in financial investigation from thirty-six countries and seven international organizations, including Interpol and Europol, approved at its fifth meeting a declaration of principles to harmonize policies and intensify its efforts in combating money laundering.(134) The Spanish Executive Service of the Commission to Prevent Money Laundering and Financial Offenses (Servicio Ejecutivo Espanol de la Comision de Prevencion del Blanqueo de Capitales e Infracciones Monetarias, or Sepblac) organized the meeting at the Bank of Spain.

Among the principles agreed upon were the following: (1) the stimulation of exchanges among various FIUs; (2) the adoption of a program of communication among FIUs through the Internet; (3) the holding and development of regional workshops or seminars for their members and their units and sub-units; and (4) the study of a formal structure to maintain the continuation and consolidation of the Egmont group and the articulation of procedures for FIUs and their counterparts.(135)

The Egmont Group was established on June 9, 1995, at the palace of Egmont-Arenberg in Brussels as a result of an international movement directed at the promulgation in all countries of a norm pertaining to the prevention of money laundering and the establishment in each state of an organization to fulfill the obligations imposed on FIUs. The Egmont Group does not constitute an international organization or set forth hard law obligations under an international agreement, but rather provides an informal means for interested entities to meet and cooperate voluntarily.

The conclusions of the meeting indicate that Spanish norms on preventing money laundering and collaboration among credit entities, banks, and savings and loan associations, have gained momentum. Sepblac took action during 1989 on 1,530 cases on various fronts.(136) In the matter of international business transactions, Sepblac verified the fulfillment of requirements of enterprises owned by foreign shareholders. In so doing, it discovered the manipulation in the formation of stock exchange prices. Furthermore, Sepblac observed foreign loans that hide increases of capital in Spanish affiliate enterprises abroad.(137)

In the matter of money laundering, Seplac transmitted and finalized 412 cases in 1998, 58 of which were referred to the antidrug prosecutor, 54 to the special anti-corruption prosecutor, 10 to different judicial authorities, and 43 to police authorities.(138) The remaining cases were shelved without further investigation or prosecution. Sepblac also investigated, among other activities, suspicious dealings in sectors such as jewelry and precious metals, the importation of vehicles, contraband tobacco, hotel businesses, the industry of information technology and products, value added tax fraud, and casinos.(139)

The work of the Egmont Group and Sepblac indicate the emergence and coalescence of a financial enforcement regime, of which money laundering is an important component. The cooperation within the Egmont Group exemplifies the role of informal cooperation and its impact on the formation and growth of national enforcement activities. The achievement of a financial enforcement regime has occurred within the goals and activities of both formal organizations and obligations--such as the U.N. Drug Programme, the 1988 U.N. Vienna Convention Against the Traffic in Illicit Narcotic and Psychotropic Substances and the European Union, and the 1991 EU Anti-Money Laundering Directive--and informal organizations and undertakings--such as FATF and its Forty Recommendations, and the Caribbean FATF and its additional recommendations.

D. G-8 Group Agree on Cooperation Against Cybercrimes

On December 10, 1997, at a meeting in Washington, D.C., ministers from eight industrialized governments agreed to combat cybercrime with enhanced technology and a harmonized crime legislation.(140)

The arrangements to cooperate against cybercrime result from the ongoing discussions among the G-7 nations, that is, the G-7 Economic Summit countries--plus the European Union and Russia. In particular, the governments agreed to cooperate in investigations and enforcement actions involving cyber criminals.(141)

The G-8 countries agreed on a series of principles, such as denying a safe haven to abusers of information technology.(142) Just as important will be the establishment of a network and contacts to assist in investigating and arresting perpetrators of cybercrimes, including computer hackers, online peddlers of child pornography, drug traffickers, organized crime, and people who use computer networks to perpetrate illicit activities.(143)

The ministers agreed on the following steps:

(1) ensuring that law enforcement is properly staffed and trained to fight cybercrime;

(2) developing improved means to quickly trace attacks coming through computer networks; allocating the same time and resources to the prosecution of cybercriminals who have attacked other countries as would be allocated for domestic attacks, if extradition is not possible due to nationality;

(3) ensuring the preservation of electronic evidence and developing solutions for transborder searches and computer searches involving data whose location is not known to officials;

(4) cooperating with the private sector to develop new solutions for preserving and collecting critical evidence;

(5) accelerating the process by which traffic data from communications carriers can be obtained;

(6) ensuring expeditious responses to mutual assistance requests, in appropriate cases, by voice, fax, or e-mail communications followed by written confirmation, if needed;

(7) encouraging, the development of international standards for reliable and secure telecommunications and data processing technologies;

(8) using compatible forensic standards to retrieve and authenticate electronic data; and

(9) including cybercrime issues when negotiating mutual assistance agreements or arrangements.(144)

A 1996 survey of the Computer Security Institute revealed that forty-two percent of Fortune 500 companies had experienced an unauthorized use of their computer systems during the last year.(145)

While U.S. Attorney General Janet Reno has said that the action plan does not require new legislation by the United States, wiretap laws must be adjusted to accommodate the digital era.(146) All ministers promised to review their legal systems, "to ensure that [their laws] appropriately criminalize abuses of telecommunications and computer systems and promote the investigation of high crimes."(147)

During the week of the meeting, the vulnerability of the Internet to such crimes was emphasized when hackers broke into computers at Yahoo!, one of the most popular sites on the World Wide Web, and threatened to infect users' computers with a damaging computer virus unless an alleged hacker was released from jail.(148)

Many cybercrimes involve fraudulent pyramid schemes distributed by electronic mail.(149) Another fraud includes tricking Internet users into relinquishing passwords that can be used to access their accounts.(150) The G-8 agreement is an effort by national governments to enable international criminal cooperation developments to keep pace with technology and its use by transnational criminals.

E. G-10 Basle Committee Issues Final Guide on Supervision

On September 23, 1997, the Basle Committee on Banking Supervision, the central bank organ of the G-10 countries, agreed on a final version of supervision principles to strengthen the supervisory regime.(151) While the new guide contains no substantive changes, the text has gained support. For example, delegates attending the Denver Summit endorsed it.(152)

The Committee also obtained comments from many countries outside the group, including Chile, China, the Czech Republic, Hong Kong, Mexico, Russia, and Thailand. In addition, bankers and banking regulators from Argentina, Brazil, Hungary, India, Indonesia, South Korea, Malaysia, Poland, and Singapore contributed to the summit.(153)

Major financial countries have been asked to endorse the two principles by no later than October 1998. The principles "outline the basic elements of a banking supervisory system including licensing and structure, prudential regulations and requirements, methods of ongoing banking supervision, information requirements, the formal powers of supervisors and cross-border banking."(154) A compendium of laws accompanies the regulations that banks are requested to update on a regular basis.(155)

The Basle Core Principles aim to provide a basic reference with which supervisory and other public authorities worldwide may supervise all of the banks within their jurisdictions. Central banks that endorse the principles will review and update their own current supervisory arrangements in accordance with the principles.

The Committee urged national legislators to ensure that required changes in the law be enacted quickly. Since the measures outlined in the principles took one and a half years to coordinate, and since they are minimum requirements, the Committee observes that many countries may want to tighten their own rules further than the principles require.(156) The Committee pledged technical assistance and training for regulatory agencies from non-G-10 countries that want to take advantage of the principles.(157)

The continued review and strengthening of global and domestic financial supervisory mechanisms has become more urgent in a globalized world in which transnational crime and organized groups operate. Increasingly, international organizations and groups, such as the Basle Committee, the FATF, the World Bank Group, and Interpol, are exchanging information and cooperating among themselves to complement their regulatory and enforcement frameworks.

F. European Union Takes Initiative Against Cybercrimes

On April 24, 1997, members of the European Parliament (MEPs) proposed to enact legislation against certain cybercrimes, namely pornography, paedophilia, and racist material.(158) The measures will include establishing teams of cyberpolice to monitor the Internet, requiring industry self-regulation, and concluding international enforcement cooperation agreements. The European Union also scheduled for July 6-8, 1997 a ministerial conference on global information networks that was intended to lead to a declaration on regulatory principles.(159)

The MEPs will try to strike a balance between protecting the public from obscenity and respecting an individual's right to free speech and privacy. The United States, Germany and France have regulated the Internet, but with limited success.(160) The French and German authorities have focused on Internet service providers. For instance, Karlheinz Moewes, the chief officer of the Munich police, heads the first German force to combat Internet crime. His team of five Internet police investigated 110 cases of child pornography worldwide in 1996.(161) They patrol the Internet on a regular basis, searching for child pornography and trying to follow and penetrate groups of paedophiles.

In Belgium and the United Kingdom, similar law enforcement groups operate. For instance, in the United Kingdom the teams cooperate with the Internet Service Providers Association, which blocks access if illegal sites are discovered.(162) The difficulty is that the persons responsible for perpetrating the crimes may be outside the European Union and in remote parts of the world where law enforcement cooperation is not effective.

MEPs have called on the European Commission to propose a common framework for self-regulation and to agree on a code of good behavior.(163) According to EU Industrial Affairs Commissioner Martin Bangemann, the EU must introduce binding measures on service providers, with penalties.(164) MEPs believe that service providers must be liable for illicit material on their systems.(165)

In April 1997, German authorities charged the managing director of CompuServe in Bavaria with providing access to pornographic and racist material.(166) The situation is seen as a test case. Service providers contend that they should be treated like telecommunications companies, who are not prosecuted when criminals use their lines.(167)

French MEP Pierre Pradier wants to make users responsible because families can use software devices to screen criminal and harmful material.(168)

One problem is the classic issue of whether the law can keep up With the technology. Undoubtedly, the European Union and other major powers will need to update their laws constantly. Meanwhile, criminal organizations are likely to search for, identify, and utilize the states that intentionally or accidentally have the lowest law and regulatory regime.

G. CICAD Experts Recommend On-Going Assessment of Compliance with Standards and Creation of National Financial Intelligence Units

At its meeting on November 4-7, 1997 in Lima, Peru, CICAD, a branch of the OAS, made several decisions and recommendations of importance to international enforcement, including steps to undertake an ongoing assessment of money laundering in the hemisphere, the creation of national FIUs, and measures to strengthen the training of officials and the exchange of information and reciprocal judicial assistance.(169)

1. Creation of Financial Intelligence Units

The CIAD recommended to CICAD the amendment of the Model Regulations as follows:

   In accordance with the law, each member state shall establish or designate
   a central agency responsible for receiving, requesting, analyzing and
   disseminating to the competent authorities, disclosures of information
   relating to financial transactions that are required to be reported
   pursuant to these Model Regulations or that concern suspected proceeds of
   crime.(170)

The recommendation explains that the objective is to receive and analyze information so that it can be utilized by the competent authorities.(171) The entities can be referred to variously as Financial Intelligence Units, Financial Investigation Units, Financial Information Units, or Financial Analysis Units.(172)

Depending on its location in the governmental structure of a country, FIUs may assume one of the following modes as identified by the Egmont Group: a police model; a judicial model; a mixed police and judicial model; or an administrative model.(173)

2. Ongoing Assessment of the Plan of Action of Buenos Aires

After discussing the results of responses to a questionnaire on the status of anti-money laundering regulations in twenty-one CICAD countries, the CICAD Group of Experts determined that the top two priority areas on which to focus their efforts for the immediate future would be (1) the training of officials, and (2) strengthening the exchange of information and reciprocal judicial assistance.(174)

Training should focus on officials who work in FIUs or in other entities--whose purpose is to receive and analyze information, investigate on the basis thereof, or both--transactions that appear to involve money laundering.(175) Training also is required for investigators on the applicable investigation methods and techniques for money laundering offenses and on methods of presenting evidence regarding money laundering before the courts or other competent entities.

Moreover, training is required for prosecutors and judges to ensure full understanding of the offense, the importance of stringent conviction and . prosecution, evidence in money laundering cases, international cooperation among judges for mutual legal assistance purposes (especially in exchanging the probative elements of the offense), the importance of seizure, confiscation pending trial, ultimate forfeiture of laundered assets and instrumentalities, and the difficulties in securing convictions.

Training also is required for officials of supervisory and regulatory agencies responsible for overseeing financial institutions. In this connection, training should be focused on the development and application of the appropriate control systems over financial institutions. It should also include training with respect to reporting systems for required cash and suspicious transaction reports, on the authority and law under which the agency operates, and on comparative approaches in other countries.

The Group of Experts will organize an informal working group for the purpose of identifying a training program based on the priority areas identified in the Group's discussion and the replies to the questionnaire.(176)

The Group discussed the difficulties in investigating and proving money laundering, especially due to its transnational nature that complicates, in particular, investigation and issues of proof.(177) These aspects require a high level of international cooperation, formal and informal, that must be efficient and effective. There must exist a reciprocal capability to seize and freeze assets as well as to provide for their confiscation when they are situated in a country other than where the investigation and trial are occurring.

The Group noted the importance of studies to facilitate the compilation, systematization, and diffusion of information on applicable national and international norms to identify the appropriate central authorities to give effect to the intended cooperation.(178)

For their next meeting, the Group of Experts agreed to consider the applicability of developing a manual on these matters that would set out the applicable laws and contact points in the various administrations in CICAD member states.(179) The Executive Secretariat will develop a model outline for such a manual for the next meeting of the Group. To assist in this work, CICAD members will provide an explanatory report on these measures and identify the competent authorities.

The Group of Experts agreed that a typologies exercise will become part of their ongoing agenda.(180) For the next meeting certain countries would prepare, on a voluntary basis, a report on their experience in detecting money laundering typologies.

3. Amendments to Model Regulations, Manual, and Mutual Evaluations

On May 12-14, 1998, the OAS-CICAD met and agreed to strengthen anti-money laundering enforcement efforts.(181) This section outlines the Commission's initiatives.

a. Training

The Group approved a training plan based on modules for the training of judges, prosecutors, FIU personnel, and law enforcement officials. Wherever possible, the training plan would be implemented on a sub-regional basis, following a needs assessment and diagnosis to determine the priorities of each country or region.

b. Amendments to the Model Regulations

To bring the model regulations approved in May 1992 in line with the broad international policy guidelines, especially those contained in the Summit of the Americas Plan of Action of Buenos Aires of 1995, the model regulations will incorporate the concept of "serious offenses," so that anti-money laundering laws and regulations are designed to counteract serious crimes rather than just drug violations.(182) As a result, the title of the regulations was modified to read Model Regulations Concerning Laundering Offenses Connected to Illicit Drug Trafficking, Related and Other Serious Offenses. As defined, "serious offenses" means "those defined by the legislation of each country, including, for example illegal activities that relate to organized crime, terrorism, illicit trafficking of arms, persons or body organs, corruption, fraud, extortion and kidnapping."(183)

Another change is that under new Article 7(d) CICAD members will "facilitate the sharing of the objects of the forfeiture or the proceeds from their sale, on a basis commensurate with participation, with the country or countries that assisted or participated in the investigation or legal proceedings that resulted in the objects being forfeited."(184) In addition, new Article 7(f) obligates members to "promote and facilitate the creation of a national forfeiture fund to administer the objects of forfeiture and to authorize their use or allocation to support programs for judicial management [and] training," as well as for counterdrug efforts and related programs.(185)

The group adopted a proposal by St. Lucia to amend Article 10, [sections] 1(b) to broaden the definition of financial institutions to include businesses authorized to conduct "offshore" financial activities.(186) The group deferred until the next meeting action on proposals of St. Lucia to add collective investment funds, such as mutual funds and unit trusts, to Article 9(2).

c. Manual on Information Exchange for Anti-Laundering and Mutual Assistance

Consideration was given to the information page that could become a valuable tool for all countries in facilitating points of contact for information exchange and mutual legal assistance.(187) The pages would be accessible through CICAD's webpage and would be kept current.

The United States discussed the operation of the Egmont website system as an example of how secure information exchanges are occurring among the FIU Egmont members. Eventually, the CICAD system may be set up for secure information exchange.

d. Cooperation with the CICAD Working Group on the Multilateral Evaluation Mechanism

The Group of Experts agreed that they would offer their assistance and technical capabilities to the CICAD Working Group on the Multilateral Evaluation Mechanism. The assistance would permit the experts can help with anti-money laundering evaluation, so that once the OAS members agree to undertake multilateral evaluations of the member's counterdrug policies.(188)

e. Permanent Council Working Group

The Group of Experts reviewed the draft resolution to the OAS General Assembly of the Permanent Council Working Group--that was established to consider the desirability of an Inter-American convention against money laundering.(189) The Experts will advise the working group of their own views on a convention from its technical perspective.

4. Analysis

The expansion of the anti-money laundering efforts in the Western Hemisphere to include serious crimes rather than just drug trafficking brings this group current with practice in the rest of the world. The consideration of a multilateral evaluation mechanism, the exchange of information, training, and even a convention are all efforts to strengthen compliance and indicate broader political agreement and acceptance of the purposes of anti-money laundering.

The ongoing assessment,(190) the establishment of FIUs, and the typologies exercise are small steps towards cooperation in hemispheric anti-money laundering enforcement. Meaningful and effective cooperation, harmonization of laws and standards, and effective establishment of an anti-money laundering regime must await the establishment of a proper network. A solid legal infrastructure with funding for professionals is needed for intensive and daily work on compliance with conventions and resolutions, harmonization of laws, collaboration on common approaches to mechanisms and technology, and common approaches to operational problems.

At present, the governments and international organizations in the Western Hemisphere are searching for ways to develop ad hoc solutions to individual criminal problems, such as anti-money laundering.

III. SUBSTANTIVE LAW OF ANTI-MONEY LAUNDERING

Since the initiation of international anti-money laundering efforts in the mid-1980s, various substantive requirements have been established: the requirement to criminalize money laundering activities; the requirement that covered persons must know-their-customer; the requirement to identify and report to authorities suspicious transactions; the requirement to freeze, trace, seize, and ultimately forfeit the proceeds and instrumentalities of money laundering crimes; the requirement of covered persons to have a compliance officer and to train employees; the requirement for covered persons to have outside audits the compliance of their organization with anti-money laundering standards; and the prohibition of secrecy as a reason for a country and covered persons to refuse to follow any of the anti-money laundering obligations.(191)

In U.S. law, the main provisions of anti-money laundering are found in Titles 12, 18 and 31 of the U.S. Code.

The Bank Secrecy Act of 1970 (BSA)(192) was a precursor to anti-money laundering. It was intended to deter laundering and the use of secret foreign bank accounts. It established an investigative "paper trail" for large currency transactions by establishing regulatory reporting standards and requirements, such as the Currency Transaction Report requirement (CTR Form 4789). This requirement early distinguished the United States from other countries' approach to anti-money laundering. The BSA imposed civil and criminal penalties for noncompliance with its reporting requirements. It was designed to improved the detection and investigation of criminal, tax, and regulatory violations. A unique aspect of U.S. anti-money laundering laws that other countries are starting to emulate is the simultaneous use of anti-money laundering, tax, regulatory, and even criminal, --especially organized crime--goals.

The Money Laundering Control Act of 1986,(193) which was part of the Anti-Drug Abuse Act of 1986, created three new criminal offenses for money laundering activities by, through, or to a financial institution: (1) knowingly helping launder money; (2) knowingly engaging--including by being willfully blind--in a transaction of more than $10,000 that involves property from criminal activity; and (3) structuring transactions to avoid the BSA reporting.

The Anti-Drug Abuse Act of 1988(194) strengthened anti-money laundering by: significantly increasing civil, criminal and forfeiture sanctions for laundering crimes and BSA violations, including forfeiture of "any property, real or personal, involved in a transaction or attempted transaction in violation of laws" relating to the filing of Currency Transaction Reports, money laundering, or structuring transactions; requiring stronger and more precise identification and recording of cash purchases of certain monetary instruments; allowing the Treasury Department to require financial institutions to file additional, geographically targeted reports; requiring the Treasury Department to negotiate bilateral international agreements covering the recording of large U.S. currency transactions and the sharing of such information; and increasing the criminal sanction for tax evasion when money from criminal activity is involved.

In 1992, the Housing and Community Development Act of 1992(195) made changes in anti-money laundering laws. It strengthened penalties for financial institutions violating anti-money laundering laws, and allows regulators to close or seize institutions by appointing a conservator or receiver or terminating the institution's charges. Regulators can suspend or remove institution-affiliated parties who have violated the BSA or been indicted for money laundering or criminal activity under the BSA. It forbids any individual convicted of money laundering from unauthorized participation in any federally insured institutions.

Under the Annunzio-Wylie Act, the Treasury must issue regulations requiring national banks and other depository institutions to identify which of their account holders--other than other depository institutions or regulated broker dealers--are non-bank financial institutions, such as money transmitters or check cashing services. Treasury, along with the Federal Reserve, must promulgate regulations requiring financial institutions and other entities that cash checks, transmit money, or perform similar services to maintain records of domestic and international wire transfers that are useful in law enforcement investigations. Under the Act, the U.S. Government has established a BSA Advisory Group that includes representatives from the Departments of Treasury as well as Justice, and the Office of National Drug Control Policy and other interested persons and financial institutions. The group was created for the purpose of developing a harmonious private-public cooperation on anti-money laundering.

Under the Annunzio-Wylie Act,(196) Treasury can require financial institutions to adopt anti-money laundering programs that include: internal policies, procedures, and controls; designation of a compliance officer; and continuation of an ongoing employee training program; and an independent audit function to test the adequacy of the program.

Treasury can require any financial institution, or any financial institution employee, to report suspicious transactions relevant to possible violation of law or regulation under the protection from civil suit arising from such reports by virtue of a "safe harbor." The American Bankers' Association and the banking industry had long sought such a safe harbor.

Under the Act, a financial institution or employee may be prosecuted for "tipping off"--that is, if they disclose, to the subject of a referral or a grand jury subpoena, that a criminal referral has been filed or a grand jury investigation has been started concerning a possible crime of money laundering and BSA laws. Officers who improperly disclose information concerning a grand jury subpoena for bank records are subject to prosecution.

A. The 1998 U.S. Money Laundering Act: Fostering Partnerships and Better Targeting

Before adjourning in 1998, Congress considered and almost enacted the Money Laundering Deterrence Act of 1998.(197) On October 5, 1998, it passed in the House, but died in the Senate. Because it has the support of the Administration and many other people, the bill is worth considering. It would amend title 31 of the U.S. Code to improve methods for preventing financial crimes, and for other purposes. It amends Title 31 of the U.S. Code to improve methods for preventing financial crimes.(198)

Section 2 notes that organized crime groups are continually devising new methods to launder money, "including the use of financial service providers that are not depository institutions, such as money transmitters and check cashing services, the purchase and resale of durable goods," and the exchange of black market foreign currency.(199) The involvement of international criminal enterprises engaged in money laundering is complex, diverse, and fragmented. Many foreign gangs and groups have financial management and organizational infrastructures that are highly sophisticated and difficult to track because of the globalization of the financial service industry.

Section 2 lists as the purposes of the Act to provide the law enforcement community with the necessary legal authority to combat money laundering, to broaden the law enforcement community's access to transactional information already being collected" in a non-financial trade or business, and "[t]o expedite the issuance by the Secretary of the Treasury of regulations designed to deter money laundering activities at certain types of financial institutions."(200)

Section 3 amends the suspicious activity reporting requirements in the Bank Secrecy Act to facilitate the flow of financial regulatory agencies.(201) Subsection (a) broadens the "safe harbor" provisions of 31 U.S.C. [sections] 5318 to independent public accountants who file Suspicious Activity Reports (SAR).(202) It is hoped that accountants conducting audits and routine examinations of a financial institution's books and records will report wrongdoing. Subsection (b) limits the circumstances under which the filing of a SAR may be disclosed.(203) Subsection (c) "provides financial institutions with immunity from liability when making employment references that include suspicion of a prospective employee's possible involvement in a violation of law or regulation," unless the financial institution knows such suspicion "to be false or if the institution acts with malice or reckless disregard for the truth in making such a reference."(204) Subsection (d) makes SARs available to self-regulatory organizations as defined by the Securities and Exchange Act of 1934.(205)

Section 4 expands the scope of the summons authority under 31 U.S.C. [sections] 5318(b)(1) from merely "investigations for the purpose of civil enforcement" of the Bank Secrecy Act to "examinations to determine compliance with the Bank Secrecy Act, as well as investigations relating to reports filed pursuant to the Act."(206) The expanded summons authority will help in the case of non-depository institutions whose activities are not subject to regulatory oversight.

Section 5 "clarifies existing statutory language making it illegal to violate reporting requirements mandated by a geographic targeting order issued by the Secretary of the Treasury or the funds transfer record-keeping rules."(207)

Section 6 eliminates Treasury Secretary's obligation "to report to Congress on the status of states' adoption of uniform laws regulating money transmitters."(208) The Treasury Department's recently promulgated regulations for Money Services Businesses, which include money transmitters, has rendered this directive unnecessary.(209)

Section 7 "exempts Bank Secrecy Act reporting requirements, including those imposed by geographic targeting orders, from consideration under the Paperwork Reduction Act."(210)

Section 8 "transfers from the Internal Revenue Code to the Bank Secrecy Act the requirement that any person engaged in a trade or business (other than financial institutions required to report under the Bank Secrecy Act) file a report with the Federal government on cash transactions in excess of $10,000."(211) Reports made pursuant to this requirement "provide law enforcement authorities with a paper trail that can help identify a lifestyle that is not commensurate with an individual's known sources of legitimate income."(212)

Under prior law, non-financial institutions had to report cash transactions exceeding $10,000 to the Internal Revenue Service (IRS) on IRS Form 8300.(213) Because such reports must be filed pursuant to the Internal Revenue Code, Form 8300 information is considered tax return information.(214) As such, it

   may not be disclosed to any persons or used in any manner not authorized by
   the Internal Revenue Code. Authorized disclosures of Form 8300 information
   are subject to the procedural and recordkeeping requirements of Section
   6103 of the Internal Revenue Code. For example, Section 6103(p)(4)(E)
   requires agencies seeking Form 8300 information to file a report with the
   Secretary of the Treasury that describes the procedures established and
   utilized by the agency for ensuring the confidentiality of the
   information.(215)

The IRS requires that agencies requesting Form 8300 information file a "Safeguard Procedures Report," which must be approved by the IRS before such information can be released.(216)

While the IRS uses Form 8300 to identify individuals who may be engaged in tax evasion, the information collected on the form can also be useful to other law enforcement agencies investigating other financial crimes, including money laundering. Form 8300 information can be instrumental in helping law enforcement authorities trace cash payments by drug traffickers and other criminals for luxury cars, jewelry, and other expensive merchandise. However, Form 8300s are not accessible to law enforcement authorities and, as a result of the above-mentioned restrictions under Section 6103, they cannot be retrieved electronically from a database maintained by the Treasury Department.(217) The change will make the reports much more accessible.

Section 9 requires that within 120 days of enactment the Treasury must promulgate know-your-customer regulations for financial institutions.(218) The regulations have been under discussion and study among Federal banking and financial regulatory agencies, including the Treasury Department, the Federal Reserve Board of Governors, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation.(219) The regulations "are intended to assist financial institutions in verifying that their customers' funds are derived from legitimate sources."(220)

Section 10 extends the statute of limitations period from one to two years in forfeitable fungible property in bank accounts under 18 U.S.C. [sections] 984.(221) It provides that all bank deposits are fungible and authorizes the forfeiture of money held to prove that the money in the account on one day is the "same money" as was in the account on a prior occasion.(222)

Section 11 requires the Treasury Secretary,

   in consultation with "federal banking agencies" and within one year of
   enactment of [the law], to prepare a report on the nature and extent of
   private banking activities in the U.S.; regulatory efforts to monitor
   private banking activities and ensure that they are conducted in compliance
   with the Bank Secrecy Act; and policies and procedures of depository
   institutions that are designed to ensure that private banking activities
   are conducted in compliance with the Bank Secrecy Act.(223)

Section 12 requires the Treasury Secretary,

   to prescribe regulations requiring financial institutions to maintain all
   accounts in such a way as to ensure that the name of an account holder and
   the number of the account are associated with all account activity of the
   account holder, and to ensure that all such information is available for
   purposes of account supervision and law enforcement.(224)

Section 13 "expresses the sense of the Congress that the Secretary of the Treasury should make available to all Federal, State and local law enforcement agencies and financial regulatory agencies the full contents of the electronic database of reports required to be filed under the Bank Secrecy Act."(225)

Section 14 "directs the Secretary of the Treasury, in consultation with appropriate Federal law enforcement authorities, to develop criteria ... to identify areas outside the [United States] in which money laundering activities are concentrated, and to designate any areas so identified as foreign high intensity money laundering areas."(226)

Section 15 "authorizes the doubling of criminal penalties for Bank Secrecy Act violations committed with respect to a transaction involving a person in, a relationship maintained in, or transport of a monetary instrument involving a foreign country known to have been designated as a foreign high intensity money laundering area" pursuant to Section 14,(227) which refers to the portions of the Department of State's annual International Narcotics Strategy Control Report that identifies foreign countries that serve as safe havens for money laundering.(228)

B. Erosion of Secrecy

For professionals involved in the international transfer of wealth techniques, financial privacy is an important principle. Fiduciaries have obligations under law--both common law and statutory law in some countries--contract, and ethics to uphold confidentiality. Increasingly, in the era of globalization and since the start of the anti-money laundering regime in the mid-1980s, secrecy is sometimes overridden by obligations of banks, financial institutions, solicitors, and other covered persons to "know their customer" (or client) and identify and report suspicious transactions.

Two developments indicate the fragility and nature of exceptions to bank secrecy: the initiatives to rectify the Nazi gold losses and the intensive efforts by liquidators of a Cayman bank to recover computer bank records turned over by its former chairman and managing director to the U.S. Government.

1. Swiss Foreign Minister Reassures Swiss Bankers on Secrecy

One of the exceptions to bank and business secrecy has been the effort to ascertain the extent of wrongdoing and pay compensation to the victims of the Holocaust. The effort is sometimes referred to as the Nazi gold debacle. The various investigations, agreements, and lawsuits all have succeeded in overcoming bank secrecy in Switzerland and other countries, and demonstrate yet another exception to such secrecy. In this context, the Swiss Government has tried to assure its investors about its efforts to maintain legitimate secrecy.(229)

On September 5, 1997, Flavio Cotti, Switzerland's foreign minister, assured Swiss bankers that the Swiss Government would not buckle to international demands to dilute Switzerland's bank secrecy laws, one of the main factors for Switzerland's dominance in the private banking business.(230) His remarks were made during the annual meeting of the Swiss Bankers Association (SBA) in Berne and were designed to reassure Swiss bankers that Swiss authorities are aware of the financial risks facing the banks in the aftermath of growing criticism of the banks' wartime role in dealing with the accounts of Holocaust victims and looted Nazi gold.(231)

According to Cotti, the Swiss Government would ensure that the Swiss banking industry remains a "central pillar of the Swiss economy."(232) The banking sector generates ten percent of gross domestic product, employs 108,000 people, and contributes eleven percent of tax revenues.(233)

Cotti complimented Swiss bankers for helping improve Switzerland's international image and for the "extraordinary speed" with which they had prepared a "package of measures comparable to no other."(234) In addition, Cotti noted that the issue of "unfair tax competition" had assumed greater significance and that "Swiss banking secrecy and other laws supporting the Swiss financial centre had become frequent targets of criticism at OECD meeting."(235)

Cotti also discussed the role of the Swiss banking community in accepting assets of "dubious origin from heads of state."(236) In this connection, the Swiss Government had responded in an "active and efficient manner" in 1997 to block the Swiss bank accounts of ex-President Mobutu.(237) The lessons from this and other cases is that "[t]he efficiency of Switzerland's financial cent[er] attracts assets of criminal or dubious origin and it was in the deepest interests of the financial centre to keep such monies at a distance."(238)

Ultimately, the lifting of bank secrecy helped facilitate the agreement announced on August 12, 1998, whereby representatives of Swiss commercial banks and Holocaust survivors reached a settlement, in which the banks agreed to "pay $1.25 billion in reparations to victims of the Nazi era, in exchange for the dismissal of three class action suits ... and recommendations by the victims groups that the state and local authorities cancel plans to impose sanctions."(239)

Cotti's remarks and the lifting of bank secrecy to resolve the controversy over the claims of Holocaust victims indicate the transition that the Swiss government and private sector are undergoing with respect to bank secrecy, vetting to exclude illegitimate money, the new anti-money laundering regime concerning "know-your-customer", "identifying and reporting suspicious transactions", "criminalizing money laundering", and freezing and forfeiting illegal proceeds and the instrumentalities of the same. The transition becomes more complex when governments, international organizations, non-governmental organizations, and public opinion assess and impose moral judgments about the private sector and the government's role during World War II nearly forty years later.

2. U.S. Court Denies Cayman's Petition to Obtain Seized Bank Records

A case involving an effort by the Cayman Government to reclaim computer bank records obtained from a former managing director and target of a U.S. law enforcement proceeding provides a perspective of the practical limitations of bank secrecy in an increasingly shrinking world. On May 7, 1997, the U.S. District Court for the District of New Jersey issued an order denying a petition by liquidators of a Cayman bank seeking the return of its computer bank records that its former chairman and managing director had turned over to the U.S. Government.(240) The managing director was a target of a law enforcement proceeding when he "voluntarily" turned over the documents.(241) The liquidator then filed a petition for the return of property pursuant to Federal Rule of Criminal Procedure 41(e).(242)

On January 18, 1995, the Cayman Government appointed an interim controller to take control of the affairs of the offshore bank.(243) At the time, the offshore bank had approximately 1,000 clients, including corporations, trusts and individuals, some of which were U.S. residents.(244)

On January 24, 1994, the Cayman Government revoked the offshore bank's "category `B' Bank & Trust company licenses" and closed the bank.(245) The Cayman Government also filed a petition for an order to wind-up the affairs of the offshore bank due to "serious irregularities" identified in the conduct of the offshore bank's business.(246) On February 10, 1995, the Grand Court of the Cayman Islands ordered the offshore bank "wound up" (liquidated).(247)

On June 21, 1996, a federal grand jury in Newark, New Jersey returned a multi-count indictment charging the individual defendant and others with conspiracy and money laundering.(248) FBI agents subsequently arrested the individual defendant.

In June 1996, the individual defendant gave the FBI a tape containing "copies of certain computer back-up tapes containing detailed financial and operating records of the [Offshore] Bank."(249) The individual defendant voluntarily gave the tape to the Federal Bureau of Investigation (FBI) "without the issuance of a warrant, subpoena or other compulsory process."(250) It remains in the possession of the U.S. Government.(251)

The FBI contacted the Royal Cayman Islands Police and sought assistance in its efforts to gain access to the information stored on the tape.(252) On August 6, 1996, Christopher Johnson, the liquidator, "filed a formal, written complaint of the `theft' of the tape to the Cayman Police."(253) The petition focused on the inevitability of the eventual transferal of the tape to the IRS "for the purpose of investigating and, where appropriate, prosecuting any bank clients subject to U.S. taxation."(254)

The Advisory Committee's Report for Rule 41(e) of the Federal Rules Criminal Procedure provides "that an aggrieved person may seek return of property that has been unlawfully seized, and a person whose property has been lawfully seized may seek return of property when aggrieved by the [G]overnment's continued possession of it."(255) Moreover, Rule 41(e) allows a court to "order either the originals or copies of seized documents be returned to their owner and permit the Government access and/or use of the information."(256) Using four factors in entertaining a Rule 41(e) motion, the court denied the order.

The first factor is "whether the Government displayed a callous disregard for the constitutional rights of the petitioner."(257) The Cayman liquidator and government did not meet the test.(258) The Johnson court noted that the U.S. Government had no role in the procurement of the tape.(259) Instead, the individual defendant voluntarily provided the tape to the U.S. Government.(260) Since there was no U.S. Government involvement in the procurement of the tape, no constitutional rights were at issue in the instant case.(261) Thus, the Johnson court held that the rights afforded by the Fourth Amendment are "wholly inapplicable to a `search or seizure, even an unreasonable one, effected by a private individual not acting as an agent of the Government or with the participation or knowledge of any government official.'"(262)

Because the documents were voluntarily given to the U.S. Government, the latter's "use of the [t]ape in its investigation of the suspected tax evasion scheme and other suspected financial crimes connected to the [o]ffshore [b]ank and in future prosecutions will not violate the constitutional rights of the [o]ffshore [b]ank or any of its clients."(263)

The second factor the Johnson court considered was whether the petitioner had an individual interest in and need for the property he wanted returned.(264) The court found against the petitioner, stating that the petitioner already possessed the information contained on the tape and, hence, its return did not appear necessary for petitioner to carry on the offshore bank's business.(265) That the offshore bank was in liquidation and apparently would be defunct shortly invalidated the claim that petitioners did not need the tape to undertake their duties.(266)

The Johnson court found unpersuasive the speculative argument that the use of the tape may expose the offshore bank to "numerous complaints and claims" because U.S. nationals are in any event "required to reveal the existence of foreign bank accounts and report certain foreign transactions."(267) The reporting requirement meant that the U.S. nationals lacked a reasonable expectation of privacy in the offshore bank records.(268)

Upon consideration of the third factor, the Johnson court found that the offshore bank would not suffer "irreparable harm" if the tape was not returned, since the offshore bank's licenses have been revoked and the bank was in liquidation.(269)

The court also considered and rejected the fourth factor, whether the petitioners had an adequate remedy at law.(270) Even if the petitioner was able to establish that the bank would suffer irreparable harm, the court found that the exercise of equitable jurisdiction to forbid the Government the use of the tape was not justified.(271) Generally, even when the U.S. Government improperly has possession of evidence, and when the aggrieved party's Rule 41(d) motion is successful, courts have permitted the Government to retain copies of the evidence.(272)

The Johnson court rejected the petitioners' argument that the doctrine of international comity requires the suppression of the tapes.(273) While comity is "the spirit of cooperation in which a domestic tribunal approaches the resolution of cases touching the laws and interests of other sovereign states," it must yield to domestic policy.(274) In particular, the Johnson court stated that no country will suffer the law of another to interfere with its own to the injury of its citizens.(275) Here, the court noted that the U.S. Government declared that the information on the tape constitute "significant evidence" of a "widespread tax evasion scheme" and has "initiated multiple investigations concerning suspected criminal activities by customers of the [Offshore] bank."(276)

The Johnson court rejected the arguments that disclosure of the information contained on the tape to U.S. Government agencies, such as the IRS, may expose the offshore bank to numerous complaints and claims.(277) The court noted that, notwithstanding the Cayman Government's claim that its Mutual Legal Assistance in Criminal Matters Treaty enabled the United States to obtain the information on the tapes from it on request, the U.S. Government is not able to obtain information on pure tax matters under the Cayman-U.S. MLAT.(278)

In rejecting the arguments of the petitioner under international comity, the Johnson court found the speculative arguments regarding harm that may result to the offshore bank and the banking industry of the Cayman Government insufficient to overcome the interest of the United States in its ongoing criminal investigation.(279)

The case represents a setback to Cayman secrecy and indicates the practical limitations of secrecy. Any person who relies on secrecy of one country now must factor into the equation the limitations that may eventually eliminate the confidentiality on which it seeks to rely.(280)

C. Due Diligence

Since the mid-1980s, a major component of international anti-money laundering efforts has been due diligence requirements. These requirements include: the duty to know-your-client, the duty to identify and report to authorities suspicious transactions, the requirement to appoint a compliance officer with access to the top executives of an organization, the duty to train employees on anti-money laundering, and the duty to ensure that anti-money laundering obligations are properly audited so that any violations will be detected and remedied. Increasingly, those bodies covered by due diligence include nonbank financial institutions, such as money transmitters. In addition, the requirements for bank and financial supervisors to monitor and audit continue to multiply.(281) On November 19, 1998, the release by the British Government of its report on financial services in the Channel Islands initiated a number of changes in due diligence to prevent and combat money laundering.(282)

1. U.K. Edwards Report on Channel Islands Calls for Improved Due Diligence against Anti-Money Laundering

In its November 1998 report on problems in international financial services in the Channel Islands, the British Government called for reforms, many of which presage similar reforms it will demand from other offshore territories.(283) The so-called Edwards report--named for its author, a former top official at the British Treasury--reviews financial supervision in the Channel Islands (consisting of Guernsey, Jersey, and the Isle of Man) and calls on them to strengthen restrictions on offshore companies and start cooperating with foreign financial investigations.(284) Lord Williams, a British Home Office minister, subsequently agreed to chair a series of meetings with the three territories starting in January 1999, to follow up on the list of proposed reforms in the Edwards report.

The Edwards Report applauds the efforts of the islands, which are self-governing dependencies of the British crown, to strengthen standards in their 350 million [pounds sterling] financial industry. The report notes that one-third of investments come from U.K. residents.(285) However, the report contains detailed recommendations for major reforms focusing especially on the rules for establishing offshore companies and trusts used to shelter assets from tax or from outside scrutiny.(286) While all three islands have accepted the recommendations generally, they resist a number of specific recommendations--such as requiring companies to file audited accounts, and, in the case of the Isle of Man, vetting companies established on the island--in the hope that new measures to control company agents will solve the problem.(287)

The report calls on all of the islands to improve the regulation of companies and company directors.(288) The islands' low tax rates and relatively flexible regulatory controls have attracted large numbers of international companies. Approximately 100,0000 companies are incorporated in the islands, especially in the Isle of Man.(289) Many more are administered from, but not incorporated in, the islands.(290) According to former Minister Edwards, company regulation requires tightening in all three islands.(291) The priority for the authorities in all three islands is to cooperate fully with other countries in the pursuit of financial crime and money laundering.(292)

In recent years, several high profile financial court cases have called attention to the Channel Islands' regulatory procedures. For example, in 1998 Bank Cantrade was forced to pay fines of $3 million because one of its traders had misled investors by showing profits of $15 million on foreign currency transactions when he had actually lost $11 million.(293) In 1995, when the Barings merchant bank failed, "the bank's Guernsey subsidiary had lent deposits well in excess of its capital base and was technically insolvent. However, the unit was not declared insolvent while the authorities tried to find a buyer."(294)

According to the Edwards Report, these and other cases indicate the need for more on-site inspections of financial institutions as well as the need some kind for of reform, moratorium, or administration procedures as in the United Kingdom to assist them in dealing with insolvency.(295) The report also calls for a financial ombudsman to deal with customer complaints.(296)

The Edwards Report recommends that the Isle of Man strengthen its regulation of companies.(297) Thousands of companies are incorporated in the Isle of Man and thousands more are administered from Guernsey and Jersey, if not actually incorporated there.(298) Most of the companies are private and formed by non-residents or trusts to hold assets or interests outside the islands.(299) The Isle of Man has no system to vet new companies that want to register or for persons to obtain disclosure about the companies already registered.

For Guernsey, the Edwards report calls for dealing with the problem of nominee directors--the so called "Sark lark."(300) This phenomenon involves residents of Sark, a small island under Guernsey's jurisdictions, who sit as directors on many different company boards. While the population of Sark is only 575, the total directorships held amount to approximately 15,000.(301) Three residents hold between 1,600 and 3,000 directorships each.(302)

Guernsey has started to crack down on "false domiciles," whereby islanders were responding to phone calls for companies located elsewhere.(303) However, the island has resisted divesting residents of their directorships.(304)

In general, the islands reacted positively to the Edwards report. However, bankers complained that the report's recommendations would erode client confidentiality.(305) The financial industry is likely to oppose and resist many of the detailed changes, including comprehensive customer compensation schemes in Jersey and Guernsey, and some changes in trust law.

The Edwards report recommends the establishment of a confidential hotline for whistle blowers, such as the person who reported improprieties in Cantrade, but was ignored by his superiors.(306) Jersey authorities are considering providing statutory protection for such informers.

The Jersey Bankers Associations has indicated that it favors the release of information to other authorities where the latter are investigating crimes.(307) However, they worry about "areas which potentially affect the fine dividing line between protecting [their] clients' confidentiality and the disclosure of information about customer affairs to authorities outside the jurisdiction of Jersey."(308)

The preparation and release of the Edwards report takes place in the context of the OECD Report on Harmful Tax Competition and the EU initiative towards tax harmonization and imposing minimum withholding tax, reporting requirements for the payment of interest to residents of other EU countries earned on bank deposits in the other host country, or both.(309) In fact, the United Kingdom's membership in the European Union has been a contributing element in its own initiatives to strengthen international financial supervision in its dependent and overseas territories.(310)

The Edwards report takes a balanced approach of acknowledging and applauding the comparatively favorable financial supervisory standards in the three islands, considering the dependence of each of the islands on international financial business.(311) The recommendations recognize the need to help the international financial services sector evolve rather than trying to destroy them. The pragmatic approach to improving financial supervisory standards is prudent, especially given the positive attitude of the three jurisdictions to cooperate in the implementation of the recommendations. Regulators and professionals in jurisdictions in which international financial services are an important part of the economy will recognize that many recommendations of the Edwards report will be adopted by international organizations active in the relevant subject matter areas.

2. The Proposed U.S. Know-Your-Customer Rule Will Formalize Internal Control Procedures

a. The Proposed Regulations

The proposed know-your-customer regulation contained in the Board of Governors of the Federal Reserve System's memorandum dated September 28, 1998, requires banks to develop for the first time their know-your-customer program, and continues to generate discussion.(312) The proposed rule will also apply eventually to non-bank financial institutions and will have broad implications for private banking, offshore accounts, and the imposition of responsibility on covered persons to design, implement, and regularly update and adjust their know-your-customer internal control systems.(313)

The proposed regulation will require institutions supervised by the Federal Reserve Board to develop and implement a know-your-customer program.(314) According to the proposal, the establishment of a know-your-customer program is designed to

   protect the reputation of the bank; facilitate the bank's compliance with
   all applicable statutes and regulations (including the Bank Secrecy Act and
   the Board's suspicious activity reporting regulations) and with safe and
   sound banking practices; and protect the bank from becoming a vehicle for
   or a victim of illegal activities perpetrated by its customers.(315)

Because the Board recognized that banks vary considerably in the way in which they conduct their business, the proposal permits each bank to develop its own know-your-customer program as a system designed to meet the goals of the proposal.(316) The proposed Federal Register notice will require banks to develop a know-your-customer program that at least will provide a system for handling the following tasks:

(1) determining the true identities of the bank's customers;

(2) determining the customer's sources of funds for transactions involving the bank, including the types of instruments used and the sources from which the funds were derived or generated;

(3) determining the specific customer's normal and expected transactions involving the bank;

(4) monitoring customer transactions to ascertain if such transactions are consistent with normal and expected transactions for that particular customer or for customers in the same or similar categories or classes, as established by the bank;

(5) identifying customer transactions that do not appear to be consistent with "normal and expected transactions for that specific customer or for customers in the same or similar categories or classes, as established by the bank"; and

(6) ascertaining if a transaction is unusual or suspicious, in accordance with the Board's suspicious activity reporting regulations, and reporting it accordingly.(317)

The proposal permits each bank to decide how best, consistent with its own business practices, it can identify its customers, understand the normal and expected transactions of its customers, and then monitor on an ongoing basis the transactions of its customers. Under the proposal, a bank must decide the know-your-customer program suited to its specific needs, delineate the program in writing, and demonstrate that it is complying with the program.(318) The proposal will require banks to understand to whom they are providing their services at the start of the relationship, to develop an understanding of the transactions the customers will be conducting, and then to monitor the transactions of those customers.(319)

Some banks, especially those offering private banking services, have raised concerns about identifying their clients, especially since a main tenet of such services is the confidentiality offered and demanded by these customers through the use of intermediary entities, such as private investment companies, trusts, private mutual funds, or investment advisory accounts, and since these entities are often based at offshore locations. The Federal Reserve is convinced that the beneficial owner's identity is usually well known to bank personnel or that banks can obtain waivers from their customers for any perceived restriction of the release of beneficial owner information. In this regard, the Federal Deposit Insurance Corporation (FDIC) seeks comments on whether any actual or perceived invasion of personal privacy interest is outweighed by the compliance benefit.(320)

While the proposal's requirement of identifying the true beneficial owner of each account of the bank is not intended to force a bank to disclose information in violation of foreign law, allowing any bank to avoid identification of beneficial ownership of any account would defeat the main purpose of the proposed rule--to ensure that each bank knows to whom it is offering its service. In this connection, the proposed rule responds to the criticism of a recent General Accounting Office (GAO) report that U.S. banks lacked sufficient documentation regarding the beneficial owners of offshore entities that maintained accounts in the United States.(321)

In response to concerns raised by several banks as to the severe hardship and cost of the new monitoring requirements, the Board of Governors has emphasized that the regulation will offer flexibility and require banks to develop and implement effective monitoring systems, commensurate with the risks presented by the types of accounts maintained at the bank and the types of transactions conducted through those accounts.(322) The effectiveness of the monitoring system of a bank's know-your-customer program will be based on that particular bank's ability to monitor transactions consistent with the volume and types of transactions conducted at the bank.(323) The FDIC is seeking comment on whether the benefits of implementing the know-your-customer requirements outweigh the costs involved and whether there should be a minimum account size threshold below which the requirements should be waived.

The design of a monitoring system should correspond to the risk associated with the types of accounts maintained and types of transactions conducted through those accounts. Hence, the design of such a system

   could involve the classification of accounts into various categories based
   on such factors as the type of account, the types of transactions conducted
   in the various types of accounts, the size of the account, the number and
   size of transactions conducted through the account, and the risk of illicit
   activity associated with the type of account and the transactions conducted
   through the account.(324)

For certain categories of accounts, it may be sufficient for an effective monitoring system to establish parameters for which the transactions within these accounts will normally occur. Instead of monitoring each transaction, an effective monitoring system may involve monitoring only for those transactions that exceed the established parameters for that particular category of accounts.(325)

The proposed know-your-customer rule asks for the public to provide input on specific questions.(326) The Federal Reserve wants comments to focus on the proposed definition of "customer" to ensure, at a minimum, that the definition is not overly broad and adequately covers "beneficial" ownership-related issues. Respondents are asked whether the proposal creates an uneven playing field for non-bank financial institutions, such as money transmitters and broker-dealers.(327)

The proposed rule arises out of the Congressional hearings that have produced the enactment of the Money Laundering Deterrence Act of 1998, which requires that the Secretary of the Treasury implement know-your-customer regulations within 120 days of passage of the legislation.(328) Congressman Leach's staff informed the Federal Reserve that the primary reasons for the provision in the draft legislation is to ensure that legal enforceable regulations exist to require that financial institutions adopt know-your-customer procedures and that similar regulations are developed for the non-bank financial sector, including broker-dealers and money transmitters. The Federal Reserve will continue to work with FinCEN and will start to coordinate with the staff of the SEC in helping program such rules for non-bank financial institutions.

The Federal Reserve is awaiting feedback from other regulatory agencies, especially the Office of the Comptroller of the Currency (OCC) and the Office of the Thrift Supervision (OTS), before submitting the proposal to the Federal Register. It is also awaiting input from the Board of Directors of the FDIC on whether know-your-customer standards should be issued as regulations or guidelines.

The Federal Reserve believes that the proposed know-your-customer rule will enable financial institutions to obtain information from their customers regarding the identity, the types of transactions to be conducted, and the source of funds, among other things.(329) Obtaining and reviewing such information will assist financial institutions in making a risk-based determination on various matters--including the extent of identifying necessary information and the amount of monitoring required--by permitting institutions to categorize their customers into different groups based on the types of services being requested and the magnitude and extent of the transactions being conducted.(330) Effective know-your-customer programs will require that banking organizations develop "customer profiles" to understand their customers' intended relationships with the institution and, thereafter, to determine realistically when customers conduct suspicious or potentially illegal transactions.(331)

Legally, the Federal Reserve's proposal will revise 12 C.F.R. pts. 208, 211, and 225 by requiring state member banks, certain bank holding companies and their non-bank subsidiaries, U.S. branches and agencies and other offices of foreign banks, and Edge and Agreement corporations to develop and implement a know-your-customer program within their institutions.(332).

The proposed rules define "customer" as "the person or entity who has an account involving the receipt or disbursal of funds at a bank and any other person or entity on behalf of whom such an account is maintained."(333) The term encompasses direct and indirect beneficiaries of the account when the activity in the account involves the receipt or disbursal of funds.(334) "It also includes a person or entity who owns or is represented by the customer."(335) Hence, a customer would include an account holder, a beneficial owner of an account, or a borrower. A customer could also include "the beneficiary of a trust, an investment fund, a pension fund or company whose assets are managed by an asset manager, a controlling shareholder of a closely held corporation or the grantor of a trust established in an offshore jurisdiction."(336)

The proposed rule underscores the need to target private banking operations, since these customers utilize such account vehicles as personal investment companies (PICs), trusts, personal mutual investment funds, or are clients of financial advisors.(337) Such accounts help protect the legitimate confidentiality and financial privacy of the customers that use such accounts. However, the need to identify properly the beneficial owners of such accounts, through an effective know-your-customer program, is required to continue safe and sound operation of the bank. Hence, know-your-customer procedures for identifying the beneficial owners of private bank accounts should be no different than the procedures for identifying other customers of the bank. By developing special protections to limit access to information that would generally reveal the beneficial owners of these accounts, a private bank can address any needed confidentiality.(338)

Once the proposed rule is published in the Federal Register, the public will have sixty days from that date to comment on the rule.(339) The final rule may take effect at the start of the year 2000. Once the rule becomes final, the Federal Reserve will allow covered financial institutions a six-month grace period to fully implement know-your-customer programs, after which time bank examiners may bring disciplinary action against institutions that violate the rules.

During the annual American Bankers Association/American Bar Association conference on money laundering, Susan Tucillo, Vice-President and Senior Compliance Officer of Citibank, N.A., noted that the know-your-customer rules will generate a substantial amount of new employment because of the complexity of issues raised, thereby requiring "a fundamental retooling of the branch operation process."(340) The proposed rules cover virtually every product line and will particularly cause problems for attorney trust accounts, escrow accounts, other high-turnover attorney accounts, letters of credit, and other banking and lending transactions.(341)

The know-your-customer rule would require that banks ensure that all documentation on accounts domiciled in the United States. be made available to Federal Reserve examiners within forty-eight hours of a request.(342) U.S. banks are concerned that these rules will limit their ability to do business in offshore jurisdictions where they compete with foreign banks from jurisdictions with less restrictive know-your-customer rules.(343)

An important issue raised is the definition of customer.(344) The preamble explains that "customer" includes "direct and indirect beneficiaries" of the account, as well as "a person or entity who owns or is represented by the customer." The proposed regulation specifically the beneficial owners of PICs, trusts and "personal mutual investment funds," clients of financial advisors, and "borrowers."(345) The Federal Reserve and FDIC maintain a customer also could include the beneficiary of an investment fund, a pension fund, a company whose assets are managed by an asset manager, or a controlling shareholder of a closely-held corporation.(346) The regulations and preambles are conspicuously silent on what a customer does not include, for example, shareholders of publicly-traded corporations or of widely-held non-publicly traded businesses. Further, the regulators state that in some cases persons with the know-your-customer obligation might need to obtain information about the controlling owners of a business or other legal entity.(347) Hence, the definition of customer may have significant impact on many fiduciaries. In this connection, the Federal Reserve and FDIC are seeking comments on whether the proposed definition of "customer" is adequate to include all persons who "benefit from the transactions conducted at the bank, such as persons who establish off-shore shell companies ... or otherwise conduct business through intermediaries."(348) In addition, they seek comments on whether the proposed definition of customer is too wide and will unnecessarily include persons that pose minimal know-your-customer risk, that is, whether additional regulatory exceptions are appropriate.(349)

At present, the proposed regulations do not have exceptions for foreign banks, foreign broker-dealers, or foreign investment advisors that are regulated in their home countries or in certain home countries that have sufficient anti-money laundering countries. Similarly, no exceptions exist for foreign open-ended collective investment funds such as mutual funds, which may have thousands of investors. However, the regulators would expect banks to identify the shareholders of a mutual fund established in an offshore jurisdiction that has a limited number of shareholders.(350) In the case of accounts opened by mail or Internet, banks and other covered persons must give special attention to verifying addresses and telephone numbers, and to use commercially available data sources to verify the customer's date of birth and social security number.(351)

The regulations require the bank to identify the beneficial owners of account holders that are offshore private investment companies, trusts, "private mutual funds," or investment advisors--in other words, high-risk customers--and to maintain data about the beneficial owner to the same extent as for U.S. persons.(352) In the event that banks maintain the documentation about the identity of foreign beneficial owners, such as customers of a foreign investment advisor or the principal of a personal investment company outside the United States in a foreign branch or holding company, regulators would require that the bank furnish the documentation to a bank examiner in the United States within forty-eight hours of the examiner's request.(353) No exceptions exist if bank secrecy or other law, such as the EU privacy directive, would preclude providing the documentation in the United States, especially with respect to existing customers.(354)

b. Opposition from Private Sector and Congress

On February 3, 1999, a dozen members of Congress introduced four pieces of legislation:

(1) H.R. 220- Freedom and Privacy Restoration Act of 1999 to prohibit the federal government from creating a national ID and medical ID by repealing sections of the laws passed in 1996 and would prohibit the use of social security numbers as an identifier.

(2) H.R. 516- Know-Your-Customer Sunset Act of 1999 would bar agencies from following through on proposed Know-Your-Customer regulations.

(3) H.R. 518- Bank Secrecy Sunset Act would repeal the law that gives federal bank regulators monitoring authority and devolves the power to the states unless Congress passes a better version of the law.

(4) HR 517- FinCEN Public Accountability Act of 1999 would let bank customers check their own files and challenge information they believe to be false or inaccurate.

On March 4, 1999, Comptroller of the Currency John D. Hawke, Jr. testified that federal banking regulators' proposed know-your-customer rules should be withdrawn at the end of the public comment period.(355) Hawke said any marginal advantages for law enforcement would be strongly outweighed by its potential for inflicting lasting damage on the banking system.

Christie Sciacca, associate director of FDIC's division of supervisor, also testified that his agency believes the "proposal cannot become final in its current form, if at all."(356) Sciacca explained that most comments from the banking industry involved concerns about "the cost of compliance, customer privacy, and the competitive disadvantage if all financial institutions are not subject to the same requirements."(357)

At present, the status of the know-your-customer regulations are uncertain and controversial.

3. International Standards for Accounting in Anti-Money Laundering Campaigns

An important development is the establishment of international standards for accounting in anti-money laundering and financial crimes.(358) The goals of accounting, as defined by the American Accounting Association, are to make decisions on the use of limited resources, including crucial decision areas, determine goals and objectives, direct and control effectively an organization's human and material resources, maintain and report on the custodianship of resources, and facilitate social functions and controls.(359)

Auditing encompasses the following three major categories: (1) financial statement audit; (2) operational audit; and (3) compliance audit.(360) In particular, a compliance audit has as its principal goal determining whether the entity under audit is following procedures or rules established by a higher authority.

Both accounting and auditing include within themselves certain fundamental notions on conformity with, and obedience to, applicable legal authority. These basic concepts involve the intersection of accounting and money laundering.

In every jurisdiction, accountancy contains long-standing and deeply rooted requirements of impartiality, objectivity, and accuracy, using uniform standards and principles, and a code of mandatory professional ethics to support those obligations. These obligations entrust accountants with the

responsibility for determining whether financial statements are free from material misstatements, and for auditing internal controls and procedures relevant to the production of those internal controls. The "core competence" of accountancy in the area of internal controls an