about financial crime

8. Extract from How Not to be a Money Launderer re the Euro

For full information about "How not to be a money launderer" please click on "Books".

This extract is from the second edition published December 1998.

The American Dollar is undisputed king of international trade. US exports in 1997 were valued at USD688,697m; US imports are valued at USD870,569m in the same year and the population is about 350 million people. There seems to be little argument that the US Dollar is the most convertible currency across the globe – and the most recognised and recognisable. In recent years, the US Dollar has become the de facto medium of business even in countries where internal trade denominated in foreign currency is illegal.

The Dollar has all the characteristics of a universal product. It is as recognisable as the famed Coca Cola logo. It has intrinsic value, like a software package. It has a broadly fixed value, in the same way as a packet of Marlboro cigarettes has, at least in defined markets. That is it easily counterfeited is a bonus: the basic instinct of most people is to trust the paper they hold and the US Government is anxious that this credibility is maintained.

It is greatly in the interests of the USA to keep the US Dollar as the preferred instrument of trade: invisible earnings contributed USD89,291m to the US economy in 1997 and the US Treasury would be very upset to lose the revenues that such income turns into tax.

Yet in every blue sky a cloud lurks just over the horizon. In the case of the US Dollar it is that the almost universal recognition of the US Dollar and its transportability and convertibility, as well as the fact that there is so much of it in circulation, that has led to it being the international currency of choice for organised crime and, therefore, to its widespread use as a medium for laundering.

Money launderers know several basic truths about their activities: the bigger the sum they can accumulate to move around, the less financial organisations are likely to question it. People in banks, for example, can get their heads around the concept of a drug dealer trying to launder half a million or even a couple of million dollars but 500,000,000 or even a thousand million dollars is such a large amount of money there is a perception that it cannot, without a huge leap of imagination, be the proceeds of crime: if it were, someone would have noticed and the crime would have been stopped.

But in the case of institutionalised corruption or fraud on national budgets or aid programmes, the accumulation of such amounts is not only possible but almost commonplace. Where the offences are operated by high ranking Government officials, not only are the sums massive but they are able to combine their take and move it en masse in staggeringly large sums. Then it is only a question of finding a banker willing to turn a blind eye to the fact that it is unlikely that a leader of a country could legitimately amass such personal wealth out of an economy characterised by starving millions, potholed roads and failing medical systems where the population is dependent on international aid and private charity for the basics of survival.

And much aid is handled in US Dollars for all the above reasons of convertibility and recognition. Therefore, by definition, much of the aid which is diverted is in US Dollars.

The US Dollar has not faced any major competition from any other currency. The German Mark has a strong following but not as a currency in wide international circulation. The DM’s export trade in 1997 was 887.3 milliard DM and imports were 765.6 milliard DM, a small percentage of that for the US Dollar for the same year.

The French Franc and Sterling have largely had their day as international trade currencies. For that year UK exports amounted to GBP193.9 milliard and imports to GBP201.6 milliard and that of France was FF1,886 milliard (exports) and FF1,682 milliard (imports) for 1996, the most recent for which figures are publicly available.

In Japan, despite its industrial success, the import/export in dollars in 1997 is believed to have far exceeded that denominated in Yen but the US treasury has not been able to provide us with figures for the total of trade conducted in dollars but between parties outside the US.

Yet as from January 1999, there is a new kid on the block. The machinations of the EU’s Maastricht Treaty, seemingly lost in the mists of time and a succession of international and domestic crises, has jumped up and bitten everyone. In many cases it has taken them by surprise. In fact, preparations have been continuing for some considerable time but the difficulties in various countries meeting economic targets (known as convergence criteria) and the fact that the rules have been bent and figures massaged in order to get a large enough club to justify the launch of the project, coupled with, in the UK at least, a media supported total apathy, has meant that the meetings in May 1998 to appoint a head of the European Bank and to fix exchange rates for the Euro took many people by surprise. But within days of the fix, even though the UK is steadfastly outside the Euro zone, home loan lenders have been quick to announce mortgages denominated in the Euro as the reality of a parallel currency for trade and even salaries is recognised, as well as an acceptance that the UK will join the Euro area within the life of a typical mortgage, nominally 25 years.

280m people will, on the 1 January 1999 wake up to form the second largest currency block in the developed world.

But, against the euphoria (and trepidation) of the last stage of the launch of the Euro there is one issue which has, so far, not greatly exercised the minds of those arguing for and against.

Put simply, the Euro will be a haven for money launderers. The nature of the security it offers will change but, over a period of years, it will rival the US Dollar as an internationally accepted currency of crime.

The similarity of the economics of the current US Dollar position and the aggregate position of the members of the Euro zone are striking and, as the Treaty of Amsterdam comes into effect, bringing with it accession to the EU of several former Soviet and Eastern Bloc states, the availability of the financial systems there will permit easy access to those where counter money laundering systems have already been implemented.

The US fight against money laundering focuses on the Treasury where FinCEN receives reports from all over the USA on a federal level. But there is no federal equivalent in the EU. Suspicious transactions will remain domestic reports, at least for the foreseeable future. Europol’s powers remain emasculated, largely because of the reluctance of the UK to permit any more transfer of power (as it sees it) to the EU. As a result, Europol, which could, if adequately funded and staffed, satisfy the EU wide function which is available in the USA via FinCEN.

The creation of a large geographical block with considerable cultural diversity is a weakness of the EU as well as one of its strengths. The USA has developed a cultural diversity under a system of largely common Government rather than the EU model of trying to impose common Government on millennia of divergent development. Thus one of the problems likely to be faced by financial institutions operating within the Euro zone is that of different approaches to financial management. This problem has arisen on a global scale – it is not uncommon for western bankers to be told by Asian businessmen “You don’t understand how we do business” nor for advisers to be taken aback by the use of cash by South East Asian businessmen for significant value transactions – a common occurrence for them but rare in European transactions. As mobility of capital is increased by the fact that businesses will be able to go tax band shopping, or to avail themselves of more favourable banking terms in another state, the financial institutions will for the first time be faced with routinely dealing with accounts denominated in what has become their local currency but which is held in a different country.

Wherever there is uncertainty, there is risk. Where there is risk it will be exploited by the criminals who will recognise that many bankers will automatically assume that transactions in their own currency have already been validated.

Where organised crime has already infiltrated the banking industry either by administrative or even financial take-over of a bank or other financial institution, there is a risk that those dealing with that organisation will regard the fact that it is regulated as sufficient recommendation as to its bona fides. This is to deny the wildly different nature of banking across Europe: Ireland, the UK and France and to a lesser extent Italy and Spain have a small number of large retail banks. There are other banking organisations but they tend not to be retail banks. Germany, Austria and Switzerland, however, have few major retail banks and rely on a host of small regional or even single branch banks. It is not fallacious to include the UK and Switzerland within this analysis as both will be sucked into the Euro zone as the currency becomes commonly traded and widely used. Neither country will deny willing depositors the chance to put their money into a bank nor will the traders in precious metals of other commodities decline to make a market priced in Euro. In fact, it will merely be treated as another foreign currency, albeit one which has rapidly, even miraculously, achieved a huge critical mass.

The confusion will continue as there will be a period of parallel running in those European states which do join early. And, as before, any confusion will provide an opportunity for abuse. This is because bank staff will be under more pressure caused by trying to deal with two currencies simultaneously, perhaps even within the same banking transaction.

The speed of acceptance of the Euro in commerce will take many people by surprise. Many shops have plans to quote dual prices at the borders of the Euro area. And in France in Mid 1998, supermarkets had posted prices in both FF and Euro.

There are those who doubt that the Euro will have any major impact. There may be some validity in the argument that rural areas will resist – as they do over all manner of consumer protection measures seen as interference by City folk in their local economies. But, when the local shopkeeper has to pay for his supplies in Euro and the large companies buying milk from the farmer insists on paying in Euro, the integration will be rapid.

Sterling will join the Euro: to fail to do so will see it relegated to a third rate currency in the manner of the Mexican Peso. A small volume currency from a border state will have such falling influence that it will soon become inconsequential. Even in Mexico, business and ordinary people use the US Dollar in preference to their domestic currency. The critical mass of the Dollar gives it, and its economy, relative stability.

But, frankly, even if the Government does not take active steps towards the UK joining the Euro, commerce will move into it, opening and operating Euro bank accounts as they currently operate US Dollar accounts. More than anything else, small businesses in the UK will find themselves having to use the Euro because the EU is the major trading partner for most small UK business which has any international trade.

The conversion to a single currency block, including Britain even if the Government does not agree, may take as little as five years. In all that time, big business and big criminals will use the fragility of the systems to move lumps of currency around, the latter camouflaged by the former.

There are, of course, issues which will be both caused and solved by the transitional phase.

As of 1st January 1999, the Euro will be a currency with value but no form. It will be the first wholly electronic currency. The notes and coin will not be in circulation until 2002. However, payments made by cheque (which is nothing other than an instruction to a bank to make an electronic transfer) and credit or debit cards plus all forms of inter-account transfer (such as standing orders and direct debit) will be conducted in Euro.

Thus, for cash transactions, these will, confusingly, continue to be handled in the local currency. Everyone going into the smallest cheese shop will have to work out whether the FF value is a true representation of the Euro value and decide whether to pay with cash or a card. Given the fact that card payments are generally subject to a card issuers commission, there is a possibility of shops quoting a lower price for local currency transactions.

In countries where there is relatively high use of cash, for example Greece, the Euro will have less of an impact than countries where bank transfer payments are the norm, such as Germany and France. Cash will maintain its own attractions for reasons of convenience. But there is another, perhaps more worrying conclusion.

My view is that the transitional period will lead to a growth in the parallel economy in relation to smaller transactions. People like familiarity. Many people do not trust Governments or banks. The Euro is widely seen as a Government and / or bank initiative and is unfamiliar. Had there been no transitional period, there would have been no incentive for ordinary people to continue with cash transactions. This will have the effect of concealing illicit cash transactions. There will be a rush to convert currency to the Euro in 2002.

The Euro will be, with immediate effect, one of the world’s largest commercial currencies – with an estimated one-fifth of global Gross Domestic Product.

By definition, then, much international trade will be conducted in Euro. Countries outside the Euro block zone will find it convenient to retain deposits in the new currency, in the same way as they do with the US Dollar.

These then are the issues as I see them:

1. Big criminals will have already taken steps to put large cash sums which were previously held in domestic currencies into the banking system in order that they will be automatically converted into Euro on 1 January 1999. Indeed, they already have taken control of banks and cash generative businesses within the Euro area.

2. Small time criminals will continue to launder in the same way as before in their domestic currency. They will use the usual means of purchase of assets for cash and sale of those assets for cheques.

3. Over the transitional period, there will be an acceleration of the placement of remaining cash stocks in obsolescent currencies and this will be done in smaller values as the time towards the final replacement of domestic currencies. The parallel economy referred to above will conceal the placement of the last stocks of dirty money in criminal hands.

4. There will be a degree of panic as the final replacement of domestic currencies approached and some criminals will make increasingly desperate attempts to place currency somewhere in the financial system. They will use friends and relatives to place small amounts of money into the banking system or to buy relatively low value cars or even, in very inexpensive areas, property.

5. Less sophisticated criminals will not recognise the advantages to them of the transitional period and will try to move money into non-Euro currencies in early 1999. They will do this where regulation is weakest and will use banks in poorly regulated areas but also less well regulated sectors of the financial industry in those jurisdictions where there is considerable regulation: this will include the purchase of property and bureaux de change.

6. Where currency transactions are undertaken, the purpose will be to put the money into US Dollars to hedge against uncertainty with the Euro and because the international drugs and arms trade will continue to be conducted in US Dollars for the foreseeable future.

7. I know that there is an argument that Sterling will be the main beneficiary for this flow of illicit money but this is an over-simplification. It is certain that some money will be converted into Sterling but this will be a very small proportion of the proceeds of crime which moves around. Those who suggest that Sterling will be a major haven for money laundering are, I think, mixing two very different concepts: they are making, it appears to me, a mistaken connection between the City of London as a financial centre and the UK’s domestic currency. Sterling is not a currency of choice for international criminals. It is less likely to become so because it is a dead-end currency. The refusal of the UK to join the Euro seems to me to be a political not an economic decision and I think it unlikely that criminals have not worked out the same conclusion. Criminals are not going to want to hold cash in Sterling because they will only have to convert it again in the future and every time they do that they come to the interface with money laundering prevention procedures. The fact is that money in the City is not cash but electronic blips and the camouflaging effect of lots of good money is camouflage for bad money. So the criminals will use the UK because of the amount of Euro passing through it, not because its domestic currency is attractive.

8. The sheer fact of uncertainty will aid the criminals to launder more money in the first few years of the Euro.

9. I know that there is a school of thought that says that high value Euro notes will be a boon to the money launderers. I disagree. Placing cash in to the financial system is a matter of value not a matter of denomination. Placing e500,000 is going to be the same challenge in both high and low denomination notes. Indeed, as large denomination notes will be in relatively short supply they will rarely be the proceeds of crime. Criminals selling, e.g., cars want cheques not cash so they will, generally, not get them as part of the laundering process. The only way to get them will be to change smaller notes for large ones. This really does not help the launderer. The only merit in the argument, it seems to me, is that, if cash is to be stashed or shipped, then high value notes have less bulk. Frankly, if I wanted to move a large amount of money, I would do it with a purchased asset.

The only saving grace is perhaps one of the most bizarre: in purely historical terms, the problem may be relatively short lived. Although the ASEAN economies have said that they do not intend to create an EU style economic and political zone and that a single ASEAN region currency is not planned, there may be a naivety in this view. There are already three times the population of either the EU or the US using a single currency – the Chinese Yuan. Many of the states in South East Asia are culturally linked to China (including Japan, although it seeks to deny it) and the paranoia shown by, for example, some Indonesians, towards the Chinese merely underlies the strength of the Chinese influence. A freely convertible Yuan, in which international trade can be conducted, would easily swamp local currencies. The freeing of controls on the Yuan would militate against the arguments for those Central Banks who have for several years been reluctant to permit the opening of offices of Chinese controlled banks in leading financial centres.

The end result would be that the Yuan would become the dominant global trading currency.

And of course, the South East Asia region is one of the principle drugs producing areas and a part of the world where corruption is endemic notwithstanding that some States have strict laws and severe penalties.

Within twenty years, the predominance of the US Dollar may well be challenged by the Euro and it seems highly likely that both will have been superseded by a China dominated South East Asia currency. In the meantime, the Euro will have been a currency of choice for every type of criminal who wants to move money freely and cheaply between States because a single currency will not also mean a single enforcement agency or a single body charged with receiving and acting upon intelligence relating to financial movements.