Laundering money: obscuring the link between the criminal and the crime.

Obscuring the link between the criminal and the crime

On 11 April 1996, Franklin Jurado, a Harvard-educated Colombian economist, pleaded guilty to a single count of money laundering in a New York federal court and was sentenced to seven and a half years in prison. Using the tools he learned at one of America's top universities, he moved $36 million in profits from cocaine sales in the United States, for the late Colombian drug lord Jose Santacruz-Londono, in and out of banks and companies in an enormous effort to make it appear legitimate.

Jurado purified the $36 million by wiring it out of Panama, through the offices of major financial institutions, to Europe. In three years, he opened more than 100 accounts in 68 banks in nine countries: Austria, Denmark, the United Kingdom, France, Germany, Hungary, Italy, Luxembourg and Monaco. He shifted assets between the various accounts and kept balances below $10,000 to avoid suspicion and investigation. Some of the accounts were opened in the names of Santacruz's mistresses and relatives, others using fictitious European-sounding names.

He established European front companies with the eventual aim of transferring the "clean" money back to Colombia to be invested in Santacruz's holdings, which included restaurants, construction companies, pharmacies and real estate. The scheme was interrupted when a bank failure in Monaco exposed suspicious accounts linked to Jurado. About the same time, in Luxembourg, the noise from a money-counting machine in Jurado's house prompted a neighbour to alert the local police. Empowered by new laws against money laundering, the police initiated a wiretap in April 1990, and Jurado was arrested two months later and convicted of money laundering in a Luxembourg court in 1992. Based on their investigations into Jurado's illegal activities, the United States authorities had him extradited from Luxembourg in 1994 to face federal charges for money laundering.

Jurado's case and others like it have been studied by law and drug enforcement officials, financial investigators, bankers and other experts worldwide, who are increasingly working together to clamp down on the ever-growing crime of money laundering. Jurado's case is also an example of how the high-level professional expertise is being employed in the service of crime.

The sinister nature of drug trafficking and the perpetrators of such activity cannot be overemphasized, according to Tony White, Chief of the Supply Reduction and Law Enforcement Section of the United Nations International Drug Control Programme (UNDCP). "They are neither heroes nor patriots, they are in it for the money and sometimes power. ... They do not waste a single second of their time worrying about the misery they inflict on others and upon society as a whole. ... Drug traffickers tend to be territorial by nature, whether they operate at the level of street gangs or as international organizations, but they are increasingly linking with one another to form wider networks. The vicious, treacherous nature of such criminals demand that they be dealt with by the full rigour of the law", he says.

The enormous profits made by those controlling the flow of illegal drugs are undoubtedly the lifeblood and sole end of illicit trafficking. Experts believe the illegal drug trade generates as much as $400 billion a year - worth nearly double the revenue of the global pharmaceutical industry or about ten times the sum of all official development assistance. However, money laundering is not linked exclusively to illegal drug trade, but is a necessary step in almost any criminal activity that yields profits. According to the 1997 World Drug Report, "the need to legitimize ill-gotten gains has grown in proportion to the expansion of the illicit drug industry and to the propensity of criminals to operate in the legitimate business world".

The International Monetary Fund (IMF) estimates the scale of money laundering at about 2 to 5 per cent of the global gross domestic product, and considers the crime one of the most serious issues facing the international financial community. The Executive Director of UNDCP, Pino Arlacchi, notes however that "while the global illicit funds remain modest when compared with the aggregate economies of developed countries, they can corrupt and destabilize markets and smaller economies".

The integration of financial markets into a complex, global entity has made money laundering a truly international phenomenon. Organized crime syndicates and enterprising individuals are taking advantage of open borders, privatization, free trade zones, weak States, offshore banking centres, electronic financial transfers, smart cards (for structuring deposits and transferring money) and cyberbanking (instant concealment of origins of the funds through numerous multinational interbank transactions) to launder millions of dollars in drug profits each day. The funds are manipulated and processed through banking and other financial sectors, as well as through other non-banking institutions to make them appear legitimate - they are laundered. The use of more modern banking methods is an indicator of the dynamism of the illicit drug business.

National borders present no obstacles to these international transactions. Money launderers are capable of moving money virtually anywhere in the world. As one location becomes risky, money is simply moved to a safer locale. "Money laundering can be done anywhere, so criminals pick the countries where the laws are either non-existent, or they're lax, or the police efforts are not strong enough to catch them", says Tom Brown, head of the anti-money laundering unit of the International Criminal Police Organization (INTERPOL).

When the funds are shifted to a safe haven, they are subjected to "layered transactions", says Charles Intriago, publisher of Money Laundering Alert, a monthly newsletter that is read in some 60 countries. The money, he says, is transferred "to a corporation one day in the Cayman Islands, then via wire transfer to Tokyo and back to Panama, and all the same money to different companies, different names, and then all of a sudden, boom, the money comes back in the name of XYZ Real Estate Investment Corporation of the Netherlands Antilles. Little will anybody know that the money was the proceeds of drag trafficking in Paris or Calcutta."

Few countries have escaped being the links in the international money laundering chain. According to Jean-Francois Thony, a former French Judge who now heads the UN's Global Programme against Money Laundering, "initial deposits are usually made in States without regulations and then transferred to offshore centres". Weak States and countries in transition, like those comprising the former Soviet Union, are especially vulnerable.

The existence of offshore banks in tax and secrecy havens has allowed drug traffickers to develop complex international networks, with major offshore centres established in Asia, the Caribbean, Central America and Europe. Today, nearly 40 countries in all parts of the world are considered secrecy and tax havens. The situation in the Cayman Islands provides a glimpse into the offshore industry. With the seventh largest deposit base in the world, the Cayman Islands has 550 banks in the Territory, and only 17 of which have a physical presence and are subject to money laundering laws. Total assets held by Cayman banks in 1994 were about $430 billion.

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

The increased volume of global financial business has not been matched by the development of regulatory measures and, therefore, plays into the hands of criminal elements. Industries such as the securities industry, insurance and real estate, which are virtually untouched by government regulation, have the potential to be exploited in money laundering schemes.

The infiltration of dirty money into legitimate financial sectors and national accounts can threaten economic and political stability. In the early 1990s, an influx of tainted money into several banks in the Baltic States resulted in their collapse due to the high number of withdrawals triggered by customers' knowledge of dirty deals and lack of consumer confidence. "Some countries in the Caribbean are beginning to realize that taking this money can be devastating to their economies", says Mr. Brown. "Although it looks good up front and can generate jobs, the reality is that shortly you become controlled by that money."

Other common laundering schemes involve using cash-intensive businesses - hotels, bars, casinos, restaurants and construction companies, as well as non-bank financial institutions such as check-cashing stores and money exchange houses - as "front companies" to co-mingle illegal profits with legitimate revenue. Shell companies - businesses which have no commercial purpose - are also set up to disguise the true ownership of accounts and assets owned by criminal organizations.

In addition, criminal organizations increasingly subcontract the task of money laundering to specialized professionals, as in the case of Franklin Jurado. As the methods required to circumvent law enforcement officials are becoming ever more complex, these professionals are used not only to conceal the origins of the proceeds but to manage the subsequent investment into legitimate real estate and other assets, receiving fees of as much as 25 per cent of the transactions.

Legal local institutions have not escaped the outreach of the illegal funds. In parts of Asia and Latin America, legal "underground banking" is used by launderers because it leaves no paper trail. Money never enters the formal banking system, but is instead transmitted through alternative banking systems such as hundi or hawala, as they are called in some Asian countries. The well-established and commercially accepted Chinese underground banking system is also used to move traffickers' operating funds and illicit profits. Southwest Asian hundi dealers are increasingly operating in North America, laundering proceeds from the sale of illicit drugs. Such underground systems, although legal, are favoured by launderers because they operate informally, on the basis of trust and confidentially, family ties and local social structures. They only deal in cash and exist outside of the formal banking system and beyond the scrutiny of government officials. The use of these alternative banking systems for money laundering is currently being studied by INTERPOL.

Increasingly, money laundering experts are focusing on Africa. Although they have no idea of the amount of money being laundered in Africa, they are aware that criminal groups are buying banks in the region to use as transit points before wiring money to banks in more established markets. Mr. Thony says Africa and all developing regions of the world are a new target for money launderers.

"Countering money laundering remains a daunting task", according to UNDCP Executive Director Arlacchi, partly because of the global scope of the crime and the difficulty of proving it. The multifaceted nature of money laundering, however, has to be dealt with by multidisciplinary approaches. Mr. White of UNDCP says: "You are looking at the world of banking and finance; you are looking at the world of investment; you are looking at the whole way in which money moves around the world. And to be able to do something about that, we are going to have to have on board the financial institutions and national treasuries, the departments that deal with banking supervision and financial regulation."

The international nature of the crime demands effective international action. "Believe k or not, the key to making an impact in money laundering is to get all the countries of the world to enact and enforce the same laws dealing with money laundering so the criminals have nowhere to go", says Mr. Brown. The adoption of a number of international instruments, including the 1988 UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, is an indicator of the broad international support for concrete measures to combat the crime. Nonetheless, many outstanding issues remain unresolved, such as the compliance of off-shore centres with money-laundering laws, the reluctance of some countries to enact or implement appropriate legislation and relax bank secrecy, and the question of corporate criminal liability.

According to Mr. Thony of the UN Global Programme, there is a definite political will on the part of the international community to address the situation "in the sense that the issue of money laundering is very high on the agenda of most States, but there is still a need to raise awareness of the danger of money laundering to the economy, and the fact that minimal measures can be put in place without harm to foreign investment".

By 1996, as many as 70 Governments had adopted or were considering legislation that criminalized money laundering. Such laws, however, must be complemented by legislation to allow for forfeiture of assets, as well as by conspiracy legislation, to ensure that the laws governing financial activities are interdependent and can be used in concert. But, Mr. Arlacchi states, even countries with appropriate legislation face the difficulty of keeping up with ingenious professional money launderers who always seem to stay one step ahead of the law.

During the Special Session, Governments will be called on to enact laws to criminalize the laundering of money from serious crimes, in order to prevent, detect, investigate and prosecute the crime of money laundering. They will also be called on to set up an effective and regulatory regime to prevent access of illicit funds to national and international financial systems, including removing bank secrecy impediments. Such action represents a global effort to "up the ante" in the fight against drugs by hitting drug traffickers where it hurts - in the pocket. With the marginalization of non-cooperating countries, and the application of firm political will to enact and enforce effective legislation - not always demonstrated when powerful commercial and political interests are at stake - traffickers might have considerable difficulty in finding a safe haven for their ill-gotten gains.

International action to strengthen legislation and improve monitoring systems will fortify law enforcement action to combat drug trafficking and money laundering, as part of the process of ridding our societies of those corrosive activities and the perpetrators of the crimes. As Mr. White says: "If you arrest major criminals, if you get better at targeting the organizations and the major people who are responsible, you are dealing decisive blows. It will be no comfort at all to a major trafficker who is confronted with the prospects of spending many years in a prison cell to know that at least another 19 major traffickers made it through. That isn't going to be of any great comfort to him at all."

Fact: The Asia/Pacific Group on Money Laundering, comprising 13 countries in the region, has developed a regional plan of action to combat money laundering.

RELATED ARTICLE: Money Laundering: The Process

The three stages of money laundering are:

Placement, the initial entry of funds into the financial system, serves the purpose of relieving the holder of large amounts of actual cash, and positioning these funds in the financial system for the next stage. Placement is the most vulnerable stage of the process, as the chance of discovery of the illicit origin of the money is greatest at the beginning.

Layering, the next stage, is a series of transactions designed to conceal the money's origin. At this level, money is often sent from one country to another and then broken up into a variety of investments, which move frequently to evade detection.

Integration, the final stage, is when the funds have been fully assimilated into the legal economy, where they can be used for any purpose.

- UNDCP Fact Sheet

RELATED ARTICLE: UN Global Programme Against Money Laundering

The United Nations Global Programme against Money Laundering was launched in 1977 to provide legal advice and assistance in drafting appropriate legislation and establishing the necessary administrative framework for implementing countermeasures. As part of the United Nations Office for Drug Control and Crime Prevention, the Global Programme offers comprehensive anti-money laundering services to Governments.

The Global Programme provides training for law enforcement and judicial officers; assists in establishing national financial intelligence units which monitor financial transactions and international movements of money; studies various aspects of money laundering, such as its impact on developing countries, bank secrecy and tax havens, and cyberlaundering and conducts awareness-raising workshops at national and regional levels to support Governments in their advocacy efforts. It works in close cooperation with regional intergovernmental bodies, INTERPOL and the World Customs Organization.

The Programme is currently establishing a global comprehensive database of each country's laws on money laundering. It hosts the International Money Laundering Information Network on the Internet, IMoLIN, <www.undcp.org:444/aml/imolin.htm>. The website is a cooperative effort among the world's leading anti-money laundering organizations and can be used by law enforcement agencies, prosecutors, legislators, academic institutions and individuals.

RELATED ARTICLE: The Law and Money Laundering

Action at the international level to combat money laundering began in 1988 with the Basel Committee on Banking Regulations and Supervisory Practices(1988); and the 1988 United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances.

In 1989, the Financial Action Task Force (FATF), was also set up by the "Group of 7" major industrialized countries and the President of the European Commission.

Other instruments which form the basis of a broad international consensus include:

* The 19 recommendations of the Caribbean Financial Action Task Force (CFATF), of June 1990;

* The Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime, of November 1990 (Strasbourg Convention);

* The European Directive on Prevention of the Use of the Financial System for the Purpose of Money Laundering, of 10 June 1991;

* The Model Regulations Concerning Laundering Offenses Connected to Illicit Drug Trafficking and Related Offenses of the Inter-American Drug Abuse Control Commission (CICAD) of the Organization of American States, of 15 June 1992.

* The Naples Political Declaration and Global Action Plan, adopted at the World Ministerial Conference on Organized Crime, in Naples, November 1994.

"Money laundering does not always need the banking system."

- World Drug Report, 1997

"As money laundering relies heavily on international networks, it is only a global approach which can ultimately succeed. All States must cooperate, including Governments, law enforcement authorities, the judiciary and financial institutions. The responsibility to combat money laundering must be shared and the training of law enforcement personnel will assist in building a global alliance of political, legal and operational regimes to combat this growing problem."

- From the Foreword to the Money Laundering Manual of UNDCP