From Moscow to Buenos Aires, money laundering scandals sap economies and destabilize governments. Policymakers blame crime cartels, tax havens, and new techniques like cyber-laundering. But dirty money long predates such influences. Without unified rules governing global finance, outlaws will always exploit disparate legal systems to stash the proceeds of their crimes.
"Money Laundering Is a Modern Phenomenon"
No. Protecting legitimate or illegitimate wealth from the unwanted attentions of government has a long history. In his excellent book "Lords of the Rim", historian Sterling Seagrave describes how, more than 3,000 years ago, merchants in China hid their wealth for fear that rulers would take the profits and assets they had accumulated through trade. The techniques he describes — converting money into readily movable assets, moving cash outside the jurisdiction to invest it in a business, and trading at inflated prices to expatriate funds — are used today by sophisticated money launderers.
Illegal money can be moved by all manner of means. Individuals have been convicted of laundering for transporting diamonds bought with the proceeds of crime and destined for criminal groups; cash deposited in a current account can be withdrawn worldwide with debit cards; even simple methods, such as inter-bank transfers, can facilitate money laundering. Economic and financial globalisation has also made the life of a launderer easier. The high volume of legal funds circulating around the globe makes the movement of dirty money less conspicuous. And the globalisation of financial-services companies means that money placed in a bank branch in a less regulated jurisdiction is easily transferred internally within the organization to a branch in a more regulated jurisdiction.
There are various estimates of the global scale of money laundering. The Financial Action Task Force on Money Laundering (FATF) — a 31-member intergovernmental organization under the auspices of the Organisation for Economic Co-operation and Development (OECD) — cites the common estimate that the aggregate size of global money laundering is 2 to 5 percent of world economic output, or, using 1996 statistics, equal to anywhere from USD590 milliard to USD1,500 million. But such numbers are little more than guesswork. It is impossible to tell whether money is being counted for the first or 21st time as it passes through financial centres. And, of course, it is impossible to tell how much money is successfully laundered and therefore left out of account completely. But, whatever the exact scope, money laundering is an enormous problem endemic to any financial system.
"Money Laundering Is Criminal and Immoral"
Not always. By definition, money laundering involves hiding, moving, and investing the proceeds of criminal conduct. Even legal money can become illegal, for example, if moving it breaches a country’s foreign-exchange controls or other financial regulations. For instance, all foreign-exchange transactions out of Malaysia must be reported to Bank Negara Malaysia, the central bank. Failure to do so renders the exported money illegal. Clean money can also generate dirty money through tax evasion. The U.S. Senate subcommittee report titled "Correspondent Banking: A Gateway for Money Laundering," published in February 2001, cited examples of people who placed sums of more than USD100,000 in a Cayman Islands bank without paying tax on that money. Even if the money itself was lawfully earned, the sums that should have been paid in taxes are considered laundered.
But legitimacy often resides in the eyes of the beholder. What may be illegal in one country represents a moral victory in another. For example, white Zimbabwean farmers who have expatriated wealth because President Robert Mugabe recently labelled them "enemies of the state" may have committed a crime against that regime but they have been regarded elsewhere as acting sensibly. Similarly, regimes operating a closed economy will drive legitimate businesspeople to operate on the fringes of the law. For a number of years, Nigeria was such a case. The national currency was not convertible, exchange controls were extremely strict, and goods were subject to stringent inspection, making those who could circumvent the system wealthy through both the premiums they could command and, in other cases, simply by corruption. Nigerian businesses created a parallel economy operating outside Nigeria conducted in hard currency (usually U.S. dollars) and developed banking and commercial contacts in all manner of industries. Unfortunately, a number of Nigerian traders used these external mechanisms to commit theft, fraud, and money laundering, hiding behind Nigeria’s tortuous and uncertain enforcement proceedings.
Such instances notwithstanding, money laundering generally harms society by oiling the wheels of financial crime, and financial crime affects everyone. As a result of insurance fraud, we all pay more for insurance. As a result of robberies and fraud, we all receive less interest on bank deposits and pay more interest on loans. Because of fraud on social security, other benefits, and in government grants for welfare and education, we pay more in taxes. We also pay more taxes for public works expenditures inflated by corruption. And those of us who pay taxes pay more because of those who evade taxes. So we all experience higher costs of living than we would if financial crime — including money laundering — were prevented.
"Banks Are the Primary Agents of Money Laundering"
Yes and no. All laundered money passes through the financial system and therefore, by definition, passes through banks. Hence, the banking sector is often the focal point for counter-money-laundering initiatives. But banks are nothing more than the pipes through which money flows. Consider this analogy: Pour a glass of water and release a drop of ink into it. Gradually, the ink will mix with the water, dissolving to the point of invisibility. That is the problem banks face. They know dirty money is in their system, but they cannot separate it from the clean money.
Dirty money generally is most visible when it is first introduced into the financial system. As a result, counter-money-laundering laws often require bankers to identify money that may be tainted — based on so-called know your customer (KYC) rules. KYC goes further than simply knowing the names and addresses of customers; it also involves knowing something of their background and activities. If transactions passing through an account are inconsistent with what the bank would expect from what it knows of a customer, then the bank may be required to report such transactions to supervisory authorities. Reports are based either on a specific trigger figure (in the United States, transactions of USD10,000 or more) or on the more subjective standard of a "suspicious" transaction. The European Union (EU) and much of the rest of the world employ suspicion-based reporting; after some initial resistance, the United States adopted it as well, in addition to transaction-based reporting.
However, banks and other financial-services businesses remain reluctant to release information about their customers. In late 1999, public concern — or, in some cases, public hysteria — over attacks on privacy forced U.S. legislators to back down on KYC requirements for banks. Such instances reflect widespread public resistance to allowing personal financial information to fall into state or commercial hands.
The irony of this debate is that the ability of launderers to move and conceal money once it has already penetrated the financial system is at least as important as the initial role of the banks. Criminals move money between banks, between different financial instruments and in and out of tangible assets such as businesses or property. They try to change the shape and size of the financial holding by using different currencies and by adding to and subtracting from the amount so that it is more difficult to identify. Criminals also use "shell companies" (entities that have no physical presence or staff and exist purely to create invoices and to receive money for non-existent services) to launder money. The obsessive focus on banks displays a fundamental lack of understanding of the mechanisms of laundering.
"Obscure Island Nations Dominate the Money Laundering Industry"
No. In an October 2000 speech, then U.S. Treasury Secretary Lawrence Summers boasted that the Treasury Department has exerted "much time and effort in working with the… FATF to ‘name and shame’ those jurisdictions who allow money laundering activity to flourish." But it is a fallacy to single out any one place as "the money laundering capital of the world" and it ill behoves the United Kingdom, the United States, and other advanced economies to point fingers at small countries and blame them for money laundering. Laundering is a global problem from which no jurisdiction is immune.
The common reason that so-called offshore financial centres — such as the Bahamas or the Cayman Islands — are usually cited as money laundering havens is that they have tax regimes that are structured differently from those of the so-called advanced economies. For example, they may lack personal income taxes. Some island economies have facilities that could constitute legitimate tax avoidance mechanisms under, for example, British tax law but are exploited by U.S. residents for illegal tax evasion. But these differences alone do not make such locations more likely to be involved in laundering than so-called onshore centres.
In fact, money launderers seeking a legal framework that provides them with shelter could do worse than to choose the United States. Once the money goes from cash into electronic form, the United States has many structures that can assist launderers. For instance, launderers can use the shield provided by minimal corporate reporting in, say, the state of Delaware. They can take advantage of the lack of identity checks on persons forming companies. They can use lawyers, who have no legal requirement to check the identity of any person asking to do business with them or to make reports of any suspicious transactions — and then use confidentiality to buy time in the event of an investigation.
In March 2001, a U.S. Senate subcommittee report found that several major U.S. banks (Bank of America, Chase Manhattan, Citibank, and The Bank of New York) had not paid sufficient attention to correspondent accounts held by foreign banks that were linked to money laundering, tax evasion, and fraud. "Obviously, we should have done things differently… We’re on the warpath trying to get this cleaned up," said James Christie, senior vice president for global treasury risk management at Bank of America.
"The Internet Makes Money Laundering Easier"
Not really. The popular notion that the Internet provides new and undetectable methods of money laundering ("cyber-laundering") has no place in serious consideration of the interface between money laundering and technology. In essence, the Internet is nothing more than a messaging system. To move money, banks move information by whatever messaging system available — from physically moving lumps of gold from one place to another to processing cheques. In this context, the Internet is simply an updated cheque system or a more efficient, cheaper, and more secure means of moving financial information. The FATF has pointed out that identifying customers is the primary problem arising from Internet usage and that problem is just the same in any relationship conducted at a distance.
However, some use claims of cyber-laundering as an excuse to move toward more extensive regulation of the Internet. Even if it were possible to create effective regulation of the Internet — a dubious proposition — such an undertaking would merely raise the barriers to entry for poor nations. The Internet can benefit large parts of the world at a low cost by reducing isolation and allowing remote communities the chance to provide services and publish catalogues of locally produced goods. Tighter regulation would only exacerbate the "digital divide" between rich and developing economies.
"The U.S. Dollar Is the Money Launderer’s Currency of Choice"
Not for long. The U.S. dollar has been the currency of choice for legitimate international traders for many years because of its large domestic market, its ready convertibility, and its high recognition factor worldwide. A sign of the currency’s global usage is that more than half of the approximately USD350,000 million in U.S. dollar notes and coins circulating are held outside the United States. Since money launderers wrap their activities inside those of legitimate traders, it is conventional wisdom that the U.S. dollar, as the most widely used currency in legitimate trade, is also the most widely used currency for illegal transactions.
The euro, however, soon will rival the U.S. dollar. It will have a domestic user base of around 300 million people, it will immediately have all the international trade (other than that denominated in U.S. dollars) of its member countries, i.e. the largest EU economies excluding the United Kingdom. It will have immediate recognition in all the nations that traditionally trade with European countries in a variety of currencies. Businesses within the euro zone (and those bordering it) will use the euro because they will no longer have to risk currency exchange movements at different points in the manufacturing process.
By reasons of sheer volume usage, the euro will become a currency of choice for launderers who may have been relatively unwilling to use the individual currencies of EU member countries. If criminals are thinking ahead — and they generally do — they will have been using the two-year run-up to the introduction of euro bills to gather as much cash as they can. Once the money is in banks, it will be converted to euros on 1 January, 2002. At that point, money will become mobile across the entire EU with no control over its records. The banks will have the total responsibility for identifying suspicious transactions and, at that time, no one will know what is suspicious.
Criminals thrive on uncertainty and will exploit it in order to conduct their business. The introduction of the euro poses a significant opportunity for them. Although the U.S. dollar will remain important for money laundering activities, it will no longer be the single, dominant currency for financial outlaws.
"Only Global Regulations Can Stop Money Laundering"
Absolutely. In the absence of effective international cooperation, there will be no realistic chance of defeating or significantly curbing money laundering. The regulatory regimes operating from country to country are at best piecemeal and often are widely ignored. Lax controls in some countries permit easy access to financial-services systems in more regulated jurisdictions, making a global minimum standard necessary for an effective reduction in laundering. However, we must consider how far those global standards should go in interfering with the domestic policies of sovereign countries.
The FATF has made the best-known efforts to date toward creating such a global standard. In broad terms, its Forty Recommendations (now more of a brand name than an accurate count) on combating money laundering have formed the basis of counter-laundering legislation in its own 31 member states and in many others. FATF has spawned look-alike organizations such as the Caribbean FATF and the Asia/Pacific Group on Money Laundering.
Unfortunately, the FATF has taken on a hugely political role the last three years, attacking non-members that fail to comply with its demands and constraining the activities of small countries that depend on financial services, not just agriculture and tourism, for their livelihoods.
Governments that fail to create financial intelligence units (FIUs) — agencies that receive, analyse and disseminate information on possible laundering activities — risk being branded "non-cooperative" jurisdictions by the FATF. Regulators in FATF member countries then advise banks and other businesses under their jurisdiction to show caution in dealing with non-cooperative countries. In a rush to avoid such criticisms, some governments have created FIUs without any realistic idea of how these agencies deal with the information they receive and without allocating the financial, technological or human resources necessary to support or launch investigations. Finally, the FATF also has a deplorable tendency to place too little weight on its own members’ failings. The only members to receive significant criticism have been Austria (over anonymous passbook accounts) and Turkey.
Despite the failings of the FATF, global rule making on money laundering issues has become something of a growth industry, with a large number of non-governmental, multilateral, inter-governmental, and supranational organizations involved. The Bank of International Settlements, the OECD, the G-7, G-8, G-20, EU members’ finance and justice ministers, several departments in the United Nations, the World Bank, the International Monetary Fund, and the Financial Stability Forum are just a few examples.
Their analyses, reports, and recommendations reveal a disturbing tendency to quote each other’s work; since they enjoy substantially the same membership, this practice amounts to self-corroboration.
Moreover, at times they offer overlapping sets of rules and best practices to deal with money laundering. It is ironic that the international community would fail to produce a single, unified set of rules to take on a criminal activity that thrives precisely on exploiting differences in laws and regulations.