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When the walls come tumbling down.

THE ERASING OF BORDERS IN THE European Economic Community (EC) in 1992 will allow freer circulation of goods and freer movement of workers and capital. It will also allow criminals to move cash profits derived from criminal activity-including drug trafficking, organized crime, and terrorism throughout the EC more easily. Europeans fear that the conjunction of 1992's single market, drug trafficking, and money laundering could undermine the financial system's integrity and disrupt financial markets.

Narcotics traffickers, for example, often seek to change large amounts of cash from street level sales into an ostensibly legitimate form, such as business profits or loans, before using those funds. The Mafia has billions of dollars waiting to be laundered and invested, according to Bank of Italy Governor Carlo Agzelio Campi.

On one hand, the EC ambitiously wants to liberalize and unify its financial markets with the goal of establishing a single market in banking and securities. On the other hand, the EC needs strong legislation to trace suspicious money and tougher laws to control the more liberal flow of money. Complicating the picture further are the efforts of some countries with strong international financial centers, such as Luxembourg, to strengthen their legal regime on financial privacy and to oppose stronger measures to control currency transactions.

A political will for uniform action on currency transaction reports and money laundering laws is beginning to take shape. EC institutions have made concerted efforts to tackle drug trafficking and money laundering problems. This article summarizes the efforts of European institutions, including the EC Council of Ministers, the EC Commission, the European Parliament, and the Council of Europe, to combat those crimes and discusses the legislation of selected countries to

* control, monitor, and detect money flow;

* criminalize money laundering; and

* assist in identifying, tracing, and seizing money laundering proceeds and instruments.

The EC Council of Ministers has already begun to enforce regulations against money laundering, and it could continue to be a key entity in the future. In October 1986, the council issued a "Resolution on Concerted Action to Tackle the Drug Problem. " In the resolution, the council proposed amending existing customs regulations on the seizure of drug trafficking goods and establishing practical guidelines for extraditing drug traffickers and freezing and confiscating their assets.

The council also decided to establish effective measures for dealing with money laundering by drug traffickers and their accomplices by introducing a community directive on currency transaction reporting. Difficulties may arise, however, from another directive, adopted June 24, 1988, that will completely liberalize capital movements.

Difficulties may be further compounded by European monetary union if EC member states fail to coordinate their activities. Criminal individuals and organizations will withdraw their funds from countries restricting currency transactions and deposit them in European centers, such as Luxembourg, that have stricter financial privacy regulations. The council appears ready to use its power to establish new mechanisms for combating money laundering, drug trafficking, and other crimes.

The EC commission has taken action in 1977, 1979, 1984, and 1989 by proposing and promulgating directives requiring enhanced cooperation to combat international tax evasion. One proposed directive not only precludes member states from refusing to cooperate with each other on the basis of their administrative practices, but also requires member states to take the necessary action by July 1, 1990. In view of the more liberal flow of capital among EC member countries, the commission clearly realizes it must more actively mandate cooperation or risk a deterioration of ability of law enforcement officials to implement EC laws.

On January 26, 1989, the commission proposed that the Council of Ministers sign the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances concluded in Vienna on December 20, 1988. This convention includes provisions on asset forfeiture and establishes money laundering as a criminal offense. The EC and four member countries already have signed the convention.

The European Parliament issued a September 1986 report on the drug problem within the EC that urged the community to review bank secrecy laws and allow banks to provide information and freeze accounts. In the report, the parliament also recommended that

n the country sentencing a drug trafficker from another member state keep any seized assets,

n a system for reporting all cash transactions above a certain amount to be established, and

a information on money laundering investigations and prosecutions be centrally collected and made accessible to relevant agencies of the member states.

In essence, this arrangement would establish in Europe the International Currency Control Authority (ICCA) proposed in Section 4701 of the AntiDrug Abuse Act and in the Interpol working group resolution of April 21, 1989. However, each EC member country has voiced concerns about implementing the laws in the Interpol resolution, and the resolution may fail.

For instance, Italy has not collected information on the largely unregulated finance corporations" throughout the country in part because they can be formed with a minimum capital of 20 million lira ($15,000) and can engage in financial services that attract money launderers. The Italian banking association estimated that about 1,000 such institutions are operating. Neither the association nor the central bank dares estimate the volume of money laundered through these "finance corporations. " C MOVES AGAINST MONEY LAUNdering must be seen against the backdrop of recent discussions about eventual European monetary union. At their July 1989 summit, the EC Council of Ministers endorsed the evolution of the European Monetary System (EMS) into a European monetary union, which would include a European central bank.

In the effort to combat money laundering, a European currency and central bank would facilitate the control of money flow due to improved cooperation between the banks of member states. Additionally, freezing or forfeiture of assets within the community would be possible through cooperative efforts, such as a common policy task force. Freezing and forfeiture powers are controversial, however.

Within the Council of Europe, the work of the European Committee on Crime Problems has enhanced cooperation in criminal matters within its 21 member countries, which has resulted in 18 European treaties on international criminal cooperation. Important Council of Europe initiatives include a Convention in Respect of Search, Seizure, and Confiscation of Proceeds of Crime; the preliminary draft of a Comprehensive (European) Convention on InterState Cooperation in the Penal Field (1986), which will govern cooperation in criminal matters among the contracting parties; provisions for broad cooperation in the fields of extradition, mutual assistance, prosecution, enforcement, and supervision; and the Cooperation Group to Combat Drug Abuse and Illicit Trafficking in Drugs, known as the Pompidou Group of the Council of Europe.

The Pompidou Group, named after former French President Georges Pompidou, was formed in 1971 to examine the problems of drug abuse and illicit drug traffic from a multidisciplinary point of view. Twenty countries are represented in the group, including all 12 EC member states.

The Pompidou Group has made commitments to act on the drug problem. At a meeting in London on May 18 and 19, 1989, the group dealt with, among other matters, the laundering of drug money. The Committee of Ministers is waiting for the Council of Europe to prepare a European convention on the seizure of drug money to serve as a framework for international cooperation.

Significantly, Gioachino Polimeni, the chair, and many members of the Committee of Experts on this topic chaired and were members respectively of the UN Drug Convention. That convention commits signatories to adopt comprehensive legislative powers to trace, freeze, and confiscate the proceeds and instruments of drug trafficking; respond to requests from other states; and outlaw money laundering.

The European Community has exercised its authority under Article 229 of the Treaty of Rome to establish links with third states. The EC led the negotiation and signing of the United Nations drug conventions and the establishment of a financial task force on the exchange of currency flow information relating to money laundering in the Group of Seven (G-7) economic summits.

The 1988 UN Convention against I1licit Traffic in Narcotic Drugs and Psychotropic Substances will require the EC to fulfill the commitments of the convention to the limit of its authority. Several important provisions of the convention pertain to money laundering. For instance, Article 3 sets forth and requires the signatory to criminalize certain offenses, such as laundering money from drug crimes and acquiring or using property derived from such crimes.

Article 5 provides for confiscating proceeds from any of the offenses established in Article 3, which include not only money laundering but a broad range of other drug and drug-related offenses. Since the EC does not have authority to enact criminal laws binding on the states, a council directive requiring member states to enact at least quasi-criminal provisions and other sanctions is the way it will implement the UN convention.

The EC is a participant distinct from the EC member states in the G-7 summits and is participating in a financial action task force. The task force will assess cooperative steps already taken to prevent the use of the banking system and financial institutions for money laundering and to consider additional preventive efforts.

The EC participates in or coordinates policies of its member states in other intergovernmental organizations that have a role in combating money laundering.

The EC has also participated in the Basle Committee on Banking Regulations and Supervisory Practices, which consists of central bank governors of major industrialized countries. The Basle committee adopted a statement of principles in December 1988 that establishes a code banks can use to verify the true identity of the beneficial owners of accounts, refuse transactions, avoid suspicious transactions, cooperate fully with law enforcement authorities, and adopt policies to ensure their employees comply with the code.

All the organizations in which the EC participates require the EC to act on the commitments. As these agreements are implemented, the EC will begin to use its authority as central banker and policymaker in enforcing cooperation to combat illicit money movement, especially when it is connected to proscribed activities.

THE EFFORTS TO COMBAT MONEY laundering in the EC have not yet binding at this time, and have only been adopted in the United Kingdom and France. Here's a look at what steps several member states are currently taking to combat money laundering.

The Federal Republic of Germany (FRG). Despite provisions to adopt currency transaction legislation, Germany has not enacted such provisions and the FRG criminal code does not criminalize money laundering. However, Germany signed the recently concluded UN Drug Convention and formed a special task force with leaders of the G-7 to propose methods for improving cooperation in national, bilateral, and multilateral efforts against drug trafficking. Hence, Germany is obligated to enact money laundering laws.

France. France is one of the few European member countries that have enacted legislation to combat money laundering and drug trafficking. Law No. 87-1157 dated December 31, 1987, ("Loi Chalondon") establishes money laundering as a criminal offense. The penalties provided by Article 627, paragraph 3, of the Code of Public Health include imprisonment from two to 10 years and fines ranging from 5,000 to 500,000 francs ($800 to $80,000) for those who knowingly contribute to the laundering of proceeds from a drug law violation.

That provision allows for legal action against those who do not directly participate in trafficking but play a part in the financial or investment operations involving its proceeds. Other sections of this law cover confiscating traffickers' goods.

France has also strengthened its customs laws against money laundering. A 1989 finance law (No. 88-1149) dated December 23, 1988, made it a criminal violation knowingly to conduct financial operations between France and foreign countries involving funds from drug law violations. The sanctions require two to 10 years imprisonment, confiscation of the amounts involved, and proportional fines ranging from one to five times the sum involved in the violation.

Further, Article 415 of the Customs Code applies to all across-the-border fund transfers, financial operations, imports, exports, or offsets. Applying this law to the international financial sphere allows legal action against those who knowingly try to

n withdraw drug trafficking assets and conceal them abroad to avoid the effects of conviction,

n finance new illicit narcotics trafficking in France from abroad with such assets, or

n create more complex drug money laundering circuits through international financial operations.

France has also established a new Office for Repression of Large-scale Financial Crime in the Interior Ministry, which will track money laundering.

Italy. On July 1, 1989, the Italian banking association's antimoney laundering codes became operational. Customers of member banks must identify themselves for every cash or capital transaction in excess of 10 million lira (approximately $7,500). In addition, member banks must register bearer savings passbooks and refuse service if customers fail to cooperate. Although this new policy is a response to the Italian government's call to counter organized and general white-collar crime with national and EC-wide measures, the banking association's voluntary action has been critcized as insufficient.

The criticism emphasizes that the Italian government has been reviewing measures against money laundering without taking serious steps to criminalize offenses. Under Section 648 of the Italian criminal code, money laundering is a criminal offense only if the funds are associated with kidnapping, robbery, or blackmail. Section 648 is directed against so-called "classical crimes" of the Mafia and similar organizations, including organized crime groups such as the Camorra and the Andrangheta.

United Kingdom. While the European Parliament tried to draft a mutual resolution on the drug problem and other crimes, the United Kingdom enacted the Drug Trafficking Offenses Act in 1987. The most important provisions are aimed at those who assist traffickers and benefit from their crimes by laundering the proceeds. A person commits such an offense by facilitating the retention, control, or investment of another person's drug trafficking proceeds while knowing or suspecting that the other person is a drug trafficker.

The provisions cover activities in England and Wales relating to proceeds abroad, as well as drug trafficking that has taken place anywhere in the world. Since these violations are drug trafficking offenses, those convicted will also be subject to confiscation and freeze orders. In addition, the Prevention of Terrorism (Temporary Provisions) Act 1989 requires bankers and others to disclose their suspicions that money or property is derived from terrorist funds or else suffer criminal liability. These laws apply equally to professionals engaged in tax work and banking.

Luxembourg. At a time when most governments are enacting laws to erode banking and business confidentiality, Luxembourg has enacted new provisions forbidding its bank to disclose information to local and foreign tax authorities. As the EC moves toward European monetary union, the community will not allow EC member countries to deviate from collection and exchange of currency transaction information unless the member countries have conflicting national legislation or formal administrative regulations. The administrative practice in Luxembourg has been not to honor requests from foreign governments for information on bank depositors unless the request is made by foreign police officials during a criminal investigation.

The measure adopted by Luxembourg shows that EC members and other countries with large offshore financial sectors will fight to preserve confidentiality. Although Luxembourg cooperates on criminal investigations, especially where drug-related crimes are at stake, it draws the line there. Luxembourg plans to enact legislation later in 1989 criminalizing money laundering.

FOR THE NEXT FEW YEARS, THE EC and its member countries will have less stringent laws on currency transactions and money laundering than the United States and Australia. As a result, financial institutions in the EC will be able to do business more economically and with fewer regulatory burdens than their US counterparts. Similarly, business persons and, of course, organized crime groups should find the EC market easier for currency and other financial transactions due to the removal of barriers to travel and movement of trade and capital.

At the same time, the danger from organized crime is heightened. In addition to traditional organized criminal groups, such as the Camorra and the Andrangheta in Italy and the Yakuza in Japan, hundreds of new groups originating from the international narcotics trade are operating throughout Europe.

As a result of their obligations to combat money laundering, the EC and member states will begin to take action that will significantly affect the operations of financial institutions, businesses, and individuals. In particular, cooperative international criminal enforcement and international regulation of money laundering will lead to new rules. Participation of the EC and its members in universal intergovernmental organizations (IGOs) such as Interpol, the United Nations Fund for Drug Abuse Control, the G-7 Summit, and the Basle Committee ensure the implementation of IGO decisions.

In the next few years, an EC-wide customer identification requirement will likely be established. Perhaps uniform currency transactions reports (CTRs) that are easily readable elsewhere, criminal referral reports for suspicious transactions, CTR monitoring by a central EC authority, and mandated assistance to requests by both EC and nonEC countries on criminal and certain non-criminal cases will be required. These regulations will undoubtedly have some exemptions, such as businesses that deal necessarily or customarily with cash and monetary instruments.

Similarly, laws on financial privacy, bearer instruments, and identifying, tracing, freezing, seizing, and forfeiting assets will be adopted. Initially, countries with vested interests in international financial center business and countries concerned about constitutional and international human rights protections will oppose certain initiatives.

Existing jurisdictional battles will continue between the Council of Europe and the European Economic Community. Turf skirmishes will also occur within the EC, since no centralized authority has jurisdiction over international narcotics trade. In the end, however, the simplified majorities possible under the Single European Act and the grave crises brought about by money laundering from narcotics trafficking, terrorism, and organized crime will produce agreement.

Meanwhile, in the transitional stage, lobbyists will make their presence felt and thereafter business planners and litigators will be called on to respond to the new regime. Business groups in particular should participate to ensure that regulations to combat money laundering do not unduly restrict legitimate transactions and that overly aggressive regulations in one country are not implemented extraterritorially.
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Title Annotation:a united Europe will allow criminals to move cash profits throughout Europe more easily
Author:Zagaris, Bruce; Bornheim, Markus
Publication:Security Management
Date:May 1, 1990
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