Support to Law Enforcement

International Narcotics Control Strategy Report, 1996 Released by the Bureau for International Narcotics and Law Enforcement Affairs, U.S. Department of State Washington, DC, March 1997

FINANCIAL CRIMES AND MONEY LAUNDERING

EXECUTIVE SUMMARY

This chapter provides a global assessment of money laundering and other financial crimes; a review of actions taken and a listing of continuing concerns; a prescription for future action; and, subchapters on about 200 nations and territories, including comparative rankings in terms of their efforts to control/prevent money laundering. The latter include the annual priority rankings, which for 1997 contain a number of upgrades, reflecting our heightened concern about the flow of illicit money through a financial system and/or a government's failure to take the steps needed to remedy these problems.

THE YEAR IN REVIEW

There were a number of significant developments in the money laundering sphere in 1996:

United States agencies began implementing the Presidential Decision Directive announced in October 1995. US agencies drew upon numerous data sources, including the INCSR, reports from investigative and regulatory agencies, and from posts abroad, to assess which money laundering and/or financial crime situations affected US national security interests ­­ including drug trafficking but also contraband smuggling, arms sales, terrorist financing, sanctions violations and sales of weapons of mass destruction. Where deemed necessary, teams of US officials visited governments to secure agreements on actions to be taken.

There was demonstrable progress by several Western Hemisphere governments on actions taken in accord with the agreements on standards and objectives reached through the communique issued at the conclusion of the Summit of the Americas Ministerial Conference on Money Laundering in December 1995, which established an action plan for the 34 governments of this Hemisphere.

There has been continued progress by the Financial Action Task Force (FATF), including the beginning of the second round of mutual evaluations of each of its 26 members. FATF also demonstrated the political will to admonish its own members for shortcomings, notably Turkey and Greece. FATF also approved proposals to update its universally­accepted 40 recommendations to reflect new typologies and methodologies. In addition, evaluations of members of the Caribbean FATF were begun; there was further enhancement of the Asian outreach program; a common forum for major international bankers and government policy makers was organized; and an international conference of financial intelligence units in 1995 led to the establishment of a significant number of such units around the world in 1996.

In 1997, a potentially high­impact initiative external relations program begun by FATF in 1992­93 resulted in agreements with the Council of Europe, the Offshore Group of Banking Supervisors, as well as the CFATF, to secure evaluation by outside experts of many of the governments which FATF and these other groups had worked with to determine whether the majority of financial center countries were adhering to the international consensus on money laundering laws.

The year saw increased cooperation with foreign governments on major money laundering cases; as well as an increase in asset sharing with cooperative governments and an increase in the number of governments with whom the US has mutual legal assistance agreements.

As in 1995, additional financial center governments, adopted broad, new anti­money laundering policies and/or laws, while a number of governments were in the final stages of presenting/adopting new legislation.

However, as discussed more fully in the section on New Concerns, there were negative aspects to 1996, including the further penetration of financial systems around the world by organized crime groups; the use of new drug transit routes across ever more remote countries, most of which have no or few anti­money laundering laws, which may attract crime proceeds to still more easily­manipulated financial systems; the differential between the levels of compliance with international anti­money laundering standards by Asia's rapidly expanding financial centers in non­FATF member countries, as well as in Latin America, compared to the financial centers in the USA, Canada and Western Europe; and the near­polarity of interests by banking/industrial groups and criminal money laundering groups in achieving the fastest possible system for the international transfers of payments.

MONEY LAUNDERING: A CHANGING SCENARIO

International banking continues to evolve, both in terms of the worldwide connections among banks, as well as the increasing sophistication of banking methods. The constant challenge is to ensure that every bank can account for its customers, that every government has laws which ensure the prosecution of financial crimes, and that every society sets a moral and ethical standard for the conduct of commerce.

Many important financial centers have now adopted legislation to curb drug­related money laundering, and the number of governments which have ratified the 1988 UN Convention continued to increase in 1996. But, the race between criminals seeking new venues and oversight bodies seeking more widespread compliance still goes to the crooks.

In 1987, when the first INCSR money laundering chapter was published, the priority concern was with twelve leading financial centers including the United States, United Kingdom, France, Germany, Italy, Switzerland, Hong Kong, Singapore, Panama, the Bahamas, the Cayman Islands, and Colombia. When FATF was founded in September 1989, the belief was that major relief could be achieved through a congruence of laws and policies among 15 major industrialized countries: the US, UK, Germany, France, Italy, Canada, Japan, Netherlands, Australia, Switzerland, Luxembourg, Spain, Sweden, Belgium and Austria. By 1991, FATF had expanded to include all 24 members of the Organization for Economic Cooperation and Development, as well as Hong Kong and Singapore.

The 1988 INCSR noted that Cyprus, for example, was not a priority, while Mexico was treated marginally, Russia was still the heartland of the Soviet empire, and Israel, Turkey, Aruba, the Netherlands Antilles, Antigua and others did not appear on most money laundering maps. Yet, Russia, Turkey and the Netherlands Antilles were raised to High Priority in 1996, where Mexico and Aruba remain continuing concerns; Israel and Antigua are Medium­High priority and Cyprus has been raised to High Priority in 1997.

Now, new trafficking routes in Africa and in the lower regions of the old Soviet regime pose the concern whether traffickers will soon take advantage of the minimally regulated banking systems along these routes. An ever­lengthening list of Low Priority governments include several which were of no concern as recently as two years ago.

Moreover, too many priority financial centers have still not adopted needed legislation or ratified the Convention (the latter include Aruba, Colombia, Mexico, Netherlands Antilles, Nigeria, Singapore, Thailand, Turkey and Venezuela). There is also a substantial question whether the drug trafficking­oriented money laundering laws which many governments adopted in the earlier part of this decade are adequate, given recent developments in money laundering practices, the upswing in non­drug financial crimes, and the need to adapt to new technologies used in banking, as well as extending laws to include non­bank financial institutions.

Organized crime groups are increasingly a factor in major money laundering schemes ­­ and the multiple sources of their proceeds compounds the difficulty of linking the monetary transaction to a unique predicate offense like drug trafficking. Moreover, criminal organizations have distinct patterns of operation which vary from one part of the globe to the next. Russian "mafiya" groups have enlarged their presence in the Western Hemisphere, and are becoming as much a concern as the traditional Italian/Sicilian "mafia", Colombian cartels or the Asian triads and yakuza.

In its 1997 public report on typologies, the FATF noted that organized crime continues to be responsible for a large proportion of the illegal funds entering financial systems. FATF said organized crime groups in Italy, Japan, Colombia, Russia and Eastern Europe, Nigeria and the Far East (among others) were involved in a wide range of criminal activities, including drug trafficking, loan sharking, illegal gambling, fraud, embezzlement, extortion, prostitution, corruption, illegal trafficking in arms and human beings, organized motor car theft and other crimes. FATF also cited a trend in some countries where criminals who were once only engaged in drug trafficking were either broadening their activities to include other proceeds­generating criminal activities or had switched to other financial crimes carrying lower penalties.

However, FATF analysts concluded that drug trafficking and financial crimes (bank fraud, credit card fraud, investment fraud, advance fee fraud, bankruptcy fraud, embezzlement etc) remain the most frequently cited sources of illegal proceeds, with drug trafficking continuing to be the principal generator of illegal funds.

That scenario changes by regions and by countries within regions. Scandinavian experts believe their greater problem is financial crime. Contraband smuggling tends to dominate in some areas; cigarette smuggling, for example, is considered the primary generator of illegal funds in Albania.

Meanwhile, an increasing number of drug traffickers do not directly manage the laundering or conversion of their proceeds, but rely predominantly on professional money brokers. Such brokers are increasingly crafting effective schemes to evade normal monitoring, detection and reporting devices.

We are seeing a proliferation of financial crimes, not limited to drug money laundering. These include the more common types of financial frauds, but, they also include new variations, particularly the use of prime bank guarantees, phony or fictitious letters of credit, counterfeit and/or stolen bonds and other monetary instruments offered as surety for loans, and other scams.

In just the last six months, we have detected a number of offers involving such schemes in this hemisphere. However, some of the more flagrant examples are occurring in Asia. In one instance, financial "fraudsters" obtained the secret telex codes which banks use for bank­to­bank transactions and were able to take $42 million in cash out of Hong Kong and Shanghai Bank in Jakarta. A number of other alleged scams have also involved the principals of Dragon Bank, which is chartered in Vanuatu but operates in Manila and elsewhere. It has now lost its license in Jakarta.

In the wake of the Dragon Bank incident, Embassy officials in Jakarta, Hong Kong and other cities met with US banks, and learned that foreign and national banks in many Asian countries are being confronted on virtually a continuous basis by what are perceived to be financial frauds.

One attempted transfer confirms that the world of banking is truly a world without horizons. We learned that one group proposed to transfer $1.3 billion from a bank in the Caribbean to Indonesia, which heightens the concern to us. These and other attempts are notable, not only for their variation, but because of their higher probability of success.

The "fraudsters" use fake certificates of deposit drawn on other branches of an international bank, which can range from $10 million to $25 million. The "fraudsters" also use fund transfers, which involve real dollars, opening up small accounts into which they then pour millions of dollars. "Fraudsters" will also use counterfeit letters of agreement, drawn on bank letterheads, seemingly vouching for a client from another branch of that bank, or confirming a deal is been approved, etc.

Many of these proposed frauds are easily detected. A request for a loan on a US bank for $36 billion was easily refused, as were telexes which omitted the needed secret codes or had the wrong codes. But all banks in every region have to be concerned that not all of these deals are illegitimate just because they are to be made in currency or the details are thinly documented.

The problem, which creates a temptation to approve such transactions, is that these banks may be turning away legitimate business. Thus, there is concern that US banks operating overseas may be at a competitive disadvantage because they adhere to US standards for knowing your customer, identifying beneficial owners of transactions, refusing suspicious or unusual transactions etc. US banks have been advised informally that the answer is not to lower US standards, here or abroad, but to intensify efforts to ensure that all major financial centers operate within the limits of an international consensus on countermeasures.

This problem is somewhat analogous to the dilemma challenging bankers in Western Europe. As FATF noted in its 1997 report on typologies of money laundering, many European countries report that significant amounts of cash and monetary instruments were being transferred from the former Soviet Union and Eastern European countries. Two difficulties were cited: determining whether the money was capital flight or stemmed from criminal activities, and, if the latter, determining the predicate offense.

How Money Is Laundered. To understand money laundering as it is practiced today on a global basis, one has to appreciate money as a commodity. Professional money launderers differ little in this respect from corporate money managers. A corporate money manager enters the money markets of various countries where the corporation will need national currencies during the next year and buys/sells currencies in a constant effort to improve the manager's average position at the time of payment. Similarly money launderers use a bidding system to buy/sell drug proceeds, especially US dollars. Just as a sound investment portfolio will contain stocks, bonds and other monetary instruments, the money brokers vary their holdings.

Like institutional investors who put a percentage of their money into hedge funds, money brokers and the drug traffickers and other criminals who employ them collaborate to minimize risk. The Cali Cartel, for example, minimizes risk by selling a substantial portion of the drug proceeds it earns from the sale of cocaine in the United States. Mexican traffickers in heroin, cocaine and marijuana do the same, often selling to the same money brokers on behalf of Cali or for their own account. These brokers will convert proceeds for a fee, or, they will buy the proceeds at a discount. Given the high profit margins of the drug trade, discounts of 7­10 percent or even higher, depending upon risk, are common. At the end of the day, Cali and other trafficking groups may own or control 50 per cent or less of the initial drug proceeds.

The following hypothetical example illustrates the options available. Assume that the Cali Cartel is moving $100 million over the rather porous border from the United States to Mexico and operating on a 75 per cent profit margin (earnings minus costs). Just $25 million must reach Colombia to replenish the operating budget. Cali wants to net $60­65 million from the bulk of the cash, or $85­90 million in total. Brokers have a bid or discount range of 10­15 per cent. Cali agents will attempt to sell $25 million on the gray market ­­ supported by Latin and even US businessmen who want to convert pesos or other currencies into dollars ­­ and go into the gray market to avoid exchange rates, or avoid taxes, or, when profit margins are narrow on US goods which can be sold in their countries, to realize higher profits. These currencies, especially pesos, can be readily returned to Colombia. The amounts over which Cali or Mexican traffickers retain actual control will be influenced by prevailing discount rates, investment opportunities, current risk dynamics, and gray market demand, more than it will by the presence or absence of laws. At the same time, the need for fluidity and convertibility, influenced by the strength/weakness of the Mexican peso and the status of US investor confidence, among other factors, will leverage the rate at which Mexican banks will do business with brokers.

Perhaps $25 million more will be "consigned" to allegedly licit importers who use various invoice schemes, at a discount, to legitimize the return of dollars to their countries. The textile trade is a typical cover. For example, a South American clothing manufacturer working with Cali will obtain a permit to export $20 million worth of suits to New York. The manufacturer actually ships $6 million worth of suits to the Aruba Free Zone, where they are repackaged and sent back to Colombia, and sold at discount. Meanwhile, the manufacturer's agent picks up $20 million in drug proceeds in New York and returns it to Colombia, covered by an export license.

The bulk of the $100M will be deposited in Mexican banks, after which a number of schemes can be used. Commonly, the money will be wire­transferred to accounts in the United States. The Mexican banks will then issue checks drawn on its US accounts, payable to individuals or corporations. These checks can be batched for resale in Latin America, or deposited into foreign bank accounts. Enforcement officials believe that as much as $10 billion in Mexican bank drafts is laundered through such schemes each year in Panama alone. While some of the trade is in contraband goods, these checks, certificates of deposit, and other financial instruments have also been used to pay for legitimate shipments. Gold trade in the Aruba Free Zone amounts to more than $200 million a year. The Mexican banks will also issue their own dollar­denominated checks, up to a level which they think will not cause inquiries.

Such brokers offer as much as $500 million to a bank or another broker at a point or two below the official exchange rate. The offer is probably not for a single transaction, but reflects the amount of money this broker has at his disposal. However, transactions are increasing in size. One recent transfer reportedly involved $78 million which went through a US bank in a single transaction.

Why then don't US reports and economic indicators reflect this volume of money transfer? The answer is that these kinds of transactions are designed to fall outside the scope of Treasury and other reporting. For example, US banking law does not require reports on bank to bank transfers (nor are we suggesting it should), let alone transfers from one branch to another of the same bank. Transactions in bulk conducted outside traditional foreign exchange venues are probably escaping conventional monitoring systems.

However, there is also a reverse flow of physical currency back to the US. Flows from Latin America, especially Panama, Paraguay and Mexico, to commercial banks in the US as well as dollars returned to Federal Reserve Banks are in fact in excess of the levels which can be explained by traditional commerce. Research is ongoing as to whether surplus currency at Federal Reserve Banks can be associated with illegal activities, such as money laundering. Currency surpluses in the US are not, in and of themselves, necessarily indicative of money laundering. However, currency does not have to leave a placement site physically. Banks are at least one generation or more beyond the period in which physical money was moved to settle accounts. Dollar settlements are accomplished through reciprocal balances. For example, a Mexican bank wires $50 million to a bank in New York, which gives the Mexican bank instant credit on the latter's New York account because the Mexican bank has simultaneously given the New York bank credit for $50 million at the latter's Mexican facility. Rather than moving physical cash to New York, the Mexican outlet is more likely to transfer physical cash south, as individual checks wind their way through various payment schemes. However, some cash does move back to the US in bulk, carried by Mexican transfer agents who are not required to declare currency when crossing the US border north.

The US economy is one unintended beneficiary of the kinds of swaps and schemes carried out in Mexico. The gray market enables Latin businessmen to buy US goods and services here, or in a free zone like Colon, and pay for it in dollars (or dollars converted to checks and other monetary instruments) which originated in the US drug market.

The use of non­bank financial institutions is not confined to the Western Hemisphere. The 1997 FATF report cited a continuing trend of money launderers moving away from banks to non­banks in many sections of the world. Yet, there has not yet been a parallel effort in many countries to subject these non­bank financial institutions to the same kinds of regulations as banks. In effect, when the money "hits" a bank, the money broker has already achieved first­stage placement, and is now in the process of layering his funds through banks and ultimately integrating his funds into legitimate businesses.

Are the Laws Being Implemented? In the seven years since the 1988 UN Convention was adopted, and particularly since FATF issued its 40 money laundering recommendations in April 1990, dozens of governments have statutorily enacted various countermeasures, as indicated by the charts in this chapter.

The pace of implementation of these laws, and the scope of their application varies. A review of results reported by key financial centers relative to the generation of suspicious transaction reports indicates that several such centers have reporting ratios which are disproportionately small, given the volume of financial activity and diversity of enterprises in their systems. Such minimal results could be an accurate reflection of a low level of suspicious activity, but, such results could also indicate a law which is drawn too narrowly or a banking system which is not giving a good faith compliance.

In addition, it has been difficult to assess the degree to which newer electronic banking practices may render banks more or less vulnerable to money laundering. Few governments have control mechanisms adequate to identifying and tracing such transactions should they occur.

Apart from financial institutions in which officials are complicit in the money laundering transaction, financial institutions are rendered most vulnerable by the combination of correspondent banking relations and electronic transfers. In 1995 the twin problems of regulating wire transfers and tracing wire transfers in pursuit of an investigation were on the threshold of some containment because FATF had reached agreement with the dominant system (SWIFT) and its key members on including in each message critical information needed to identify transmitters and receivers and especially beneficial owners of transactions. Recordkeeping may have improved, however, over the past year there has not appeared to be any diminution of electronic transfers of illicit proceeds. Control efforts are being sorely challenged by the creation of new, independent wire transfer services, some which service small clusters of banks.

CHALLENGES POSED BY A CHANGING BANKING WORLD

Four aspects of modern­day banking are particularly challengingto governments seeking to stop money laundering: correspondent banking, offshore banking, private banking and cybercurrency.

Correspondent Banking. Regulators, money laundering investigators, and international policy making bodies like FATF are facing profound challenges from a banking world which not only knows no geographic horizons and is open 24 hours a day, but is increasingly inter­connected, as large multinational banks extend their reach not only through branch and subsidiary networks but through correspondent relationships that cross the globe.

The concern is not with the growth or dominance of the largest banks, or the extension of their networks, but, whether standards of prudential supervision are met at every juncture in this web of correspondent banking. The emergence of active financial service industries in every jurisdiction capable of becoming active players on the electronic highway of super­banking, places ever more emphasis on vetting transactions at the bank of origin. There is not the confidence today that the scope of current know­your­customer policies are sufficient to actually cover most financial transactions at origination.

The scope of international banking was made clear at the winter meeting in 1995 of the International Bank Security Association. The world's 12 major financial centers except Japan have one or more banks or financial institutions among IBSA's 52 voting members and six associate members, and these banks include many of the world's largest international banks.

An IBSA survey showed that 27 of these 58 banks have headquarters offices and or branches in 146 countries. A separate survey showed that 19 of the 58 members own percentages (and sometimes controlling interest) in 144 other banking institutions. The actual "reach" of these big banks, both in terms of branches and holdings, is far greater as only 27 of the 58 responded to the surveys on branches.

While FATF has conducted an extensive external relations program, which has engaged an estimated 65 governments outside its own 26­member roster, no single agency, not even the UNDCP, has accepted the responsibility for ensuring uniform standards of anti­money laundering enforcement, or bank regulation, among all nations and territories.

Offshore Banking. An agreement of potentially far­reaching consequences on offshore and cross­border banking was made by banking supervisors from 140 countries at the June 1996 International Conference of Banking Supervisors. Their agreement, incorporated into a report by the Basle Committee on Banking Supervision, issued in October, contains 29 recommendations designed to strengthen the effectiveness of supervision by both home and host­country authorities of banks which operate outside their national boundaries.

The report states that, as a starting point, home supervisors must be able to make an assessment of all significant aspects of their banks' operations, using whatever supervisory techniques are needed including on­site inspections. The paper proposes means by which home­country supervisors can obtain the information they need for effective consolidated supervision of an international banking group. The paper addresses impediments to effective consolidated supervision and suggest ways to overcome these barriers. The paper also contains guidelines for determining the effectiveness of home country supervision, for monitoring supervisory standards in host countries, and for dealing with corporate structures which create potential supervisory gaps. There are also guidelines for host country supervision.

The supervisors recognized that some of the recommendations are in conflict with bank secrecy or similar legislation in certain countries. Where there is conflict, the supervisors have agreed to use best efforts to have the conflicting legislation amended. It was agreed that the compliance of individual countries with these recommendations would be reviewed prior to the next international meeting which is scheduled for October 1998.

The Offshore Group of Banking Supervisors (OGBS) has reached agreement with FATF on a protocol for evaluating the effectiveness of the money laundering laws and policies of its members. This is a positive development but OGBS includes only about half of the known offshore banking centers among its members, and there is a continued belief that OGBS remains the best available vehicle for reaching out to these centers, hopefully with an expanded membership.

However, there is also a concern about different kinds of charters for financial facilities being issued in various parts of the world, facilities which are structurally different from the banking houses represented by OGBS. These International Business Corporations, or IBCs, are being chartered with much the same kind of operational latitude enjoyed by offshore banks, but, in many instances, with even less regulatory oversight. Nowhere is the concern about IBCs more prevalent than in the Caribbean. The US has urged governments around the Caribbean Rim and elsewhere to apply more rigorous oversight to these non­bank financial institutions.

Private Banking. Major national and international banks are engaged in fierce competition to attract wealthy individuals and companies as private banking clients. The very term implies that transactions will be confidential, and indeed that private banking customers will be treated differently. Private banking departments are also prepared to offer a seemingly wide range of personal services. The concern here is not that a major bank's officers might secure hard­to­get entertainment tickets, or facilitate high­ticket shopping; those kinds of services have long been traditional with advertising agencies, management consultant services, etc.

The concern is that bank officers, who rely on private banking commissions for their income, will suspend the rules on transactions ­­ not just failing to report transactions as required by various banking and anti­money laundering laws, but, disregarding basic tenets of sound banking and thus negating the transparency which is essential to a bank's prudential supervision of its business.

Cybercurrency. The use of microchip­based electronic money for financial transactions, via smart cards and the internet, has the potential to assume an important place in the future domestic and worldwide payments system. These chip­based electronic cyberpayments systems are emerging very rapidly.

Currency­­paper notes and metal coins­­has always been of particular importance in payments involving illicit activities. Currency attributes include ease of use, wide acceptability, and most importantly from the standpoint of law enforcement ­ anonymity. A significant feature of the new cyberpayments systems is that some systems are being engineered to be an electronic emulation of paper currency. Cybercurrency includes the attributes of conventional currency: a store of value, a medium of exchange, a numeraire, potential anonymity and convenience.

But there are added features: transfer velocity (almost instant electronic transfer from point to point) and substitution of electrons for paper currency and other physical means of payment. Obviously this is an innovative addition to the payments system, but it also requires close attention since the use of microchip and telecommunications technologies adds some significant new dimensions for law enforcement.

Yet currency is not the only monetary instrument innovation. Cyberpayments also comprise other payment components. Already in use or design are cyberchecks, an emulation of paper checks, cybercredit, cyberdebit, etc. The common element is that these systems are designed to provide the transacting parties with immediate, convenient, secure and potentially anonymous means by which to transfer financial value. When fully implemented, this technology will impact users world­wide and provide readily apparent benefits to legitimate commerce; however, it may also have the potential to facilitate the international movement of illicit funds.

Many issues are raised by this new technology, including the issue of whether such payments constitute legal tender and are therefore subject to monetary reporting and supervision measures. There is a question whether reporting regulations must be completely redesigned to include the reporting of currency in electronic form moving to other countries via the Internet or across the border in a smart card or electronic purse. Law enforcement issues likely to arise in this area include fraud, counterfeiting and computer hacking. Moreover, high speed, worldwide transfers that are a facet of the cyberpayment technology add complexity to law enforcement's ability to trace criminal activity and recover illicit proceeds. And there are important international jurisdictional issues. Some cyberpayments systems are being designed to operate internationally and use multiple currencies. Thus, one of the challenges facing law enforcement and the international community will be determing jurisdictional authority in a global economy. The current regulatory/law enforcement framework relies on defined financial and geographic borders. The diminishing of such borders makes enhanced cooperation and coordination among nations critical to ensure that there are consistent policies.

All of these issues were the focus of a conference sponsored by the U.S. Department of the Treasury in September 1996. Addressing key public officials and representatives of the private sector, Secretary Robert Rubin announced the formation of a consumer electronic payments task force composed of the principal agencies in the federal government involved in payments.

Continued Examination by the International Community

The application of these new technologies is still in its infancy. How these systems develop and with what features will depend on the effectiveness and efficiency of these technologies, the market, and consumer acceptance. Therefore, while it may be premature to consider prescriptive solutions to theoretical problems, it is important and timely for governments and the private sector to continue to identify issues that need to be considered and perhaps implemented as markets and technologies mature. Many governments have come to recognize the need for greater and sustained cooperation to explore these issues.

At its June 1996 plenary, the FATF adopted a new recommendation (#13) stating that "countries should pay special attention to money laundering threats inherent in new or developing technologies that might favor anonymity, and take measures, if needed, to prevent their use in money laundering schemes." At its October 1996 plenary, the FATF agreed to call on SWIFT (the international messaging system for financial transactions) to provide additional information on the originator of financial messages between legitimate financial institutions.

In November 1996 in Paris, FATF, under the chairmanship of the United States, held its annual typologies exercise to identify recent trends in money laundering in FATF member countries as well as non­FATF regions. The meeting was attended by delegates from each of the 26 member nations as well as Interpol and the Organization of American States. This year, it was determined that a discussion of current technology developments in alternative payment methods would be beneficial and appropriate as many of the FATF 40 Recommendations could also apply to cyberpayment systems. This meeting served to continue a dialogue among FATF members and leading international developers and providers of electronic banking and cash payment systems. The meeting was an outgrowth of a FATF meeting held in January of 1996, called the Financial Services Forum, where representatives from governments and the private bank and nonbank sectors met to discuss anti­money laundering measures, in particular the issue of alternative payment systems.

Private sector experts invited by the FATF at the typologies meeting presented an overview of the current technology developments in these payment systems and discussed the issues raised by law enforcement with respect to money laundering. The goals were to increase the knowledge of the FATF about the operations of these systems, advise the industry of law enforcement's potential concerns, and ascertain what steps FATF and the industry could take together to ensure the development of these systems while protecting them from abuse by criminals.

Several other international organizations such as the Organization for Economic Cooperation and Development (OECD) which has recently issued Cryptography Guidelines, the Bank for International Settlements (BIS), the Basle Committee as well as others are involved in the study of cyberpayments.

In addition, at the G­7 Summit in Lyon last June, Heads of States and Governments called for a cooperative study to investigate the implications of recent technological advances that make possible the creation of sophisticated methods for making retail electronic payments. In response the Group of Ten (G­10) countries deputies formed a Working Party in Autumn of 1996 to develop a broad understanding of the international dimensions of policy issues resulting from the development of electronic payment systems.

Money Laundering Simulation Exercise

FinCen is using an automated exercise­based approach to assess the implications of emerging Cyberpayment technologies. It is developing a simulation exercise which will serve to: (1) educate exercise participants on the nature and key characteristics of these emerging technologies; (2) raise general awareness regarding the potential vulnerabilities emerging Cyberpayment technologies to financial crime; (3) explore various avenues for potential criminal applications of these technologies: (4) generate and identify a draft set of potential response strategies for dealing with these key vulnerabilities and (5) consider potential legal, regulatory, and educational action plans associated with selected strategies. The exercise, which is tentatively planned for April of 1997, is to include participants from government, academia, and industry both domestically and abroad.

Other Challenges. Other challenges include counterfeiting of currencies and other monetary instruments, especially bonds; the boom in contraband smuggling; the buying of banks and other financial institutions by suspected criminal groups; the resort by criminals to the use of smaller, less­monitored banks; and the sophisticated use of such new phenomena as direct access and pass­through banking, and electronic cash systems. There is continuing concern, given that financial crimes and money laundering are occurring with varying degrees of regularity in more than 125 jurisdictions, that some governments still have not criminalized all forms of money laundering. Some have not given sufficient regulatory authority to central banks and other institutions; many do not have adequate data systems to monitor trends and methods used in their territories; and many have not made adequate provision for mutual legal assistance.

OTHER NEW CONCERNS OCCASIONED BY THE EVENTS OF 1996

Beyond institutional concerns with correspondent banking, offshore banking, private banking and the use of cybercurrency, other new or more intensified concerns emerged in 1996. Combined with the continuing concerns (see below) which we carry from year to year, and those institutional concerns, the events of 1996 persuade that the international law enforcement and financial communities are still at a considerable distance from bringing this problem under control.

The imperative need to engage financial centers in every corner of the world in the campaign against money laundering is emphatically demonstrated by the events in nations and territories whose financial centers are rapidly expanding and in some other countries well outside the traditional circle of major financial centers.

In 1996, we raised the priority rankings for several governments, coupled with expressed concerns about their lack of laws, their vulnerability, etc. The upgraded countries included Russia, Turkey, the Netherlands Antilles, Antigua, Austria, Cyprus, Israel, Dominican Republic, Cambodia, the Czech Republic, South Africa, the Seychelles and Slovakia.

These concerns have not abated, except perhaps in the Seychelles which repealed its law which would have permitted large­scale deposits with few questions asked. Several governments including Antigua, Austria the Czech Republic, and the Netherlands Antilles adopted new laws which have yet to be effectively tested, while legislation in Russia and Turkey has not yet been brought into force. There are political concerns commanding the attention of Israel and its neighbors, but the financial crime situation has deepened every year for the last several years and must be addressed soon. Like Austria, Cyprus, and even Antigua, Israel has been penetrated by money laundering schemes of Russian criminal organizations.

The Dominican Republic, Cambodia and Slovakia, however distinct and unalike they may be in most respects, are just three among a too­large group of governments which present a sharp challenge to the efforts of the major financial center governments to achieve an effective, working global consensus on anti­money laundering laws and policies. Notwithstanding questions of political will, many governments do not have comparable cadres of trained personnel to draft and implement these kinds of laws, even in commercial banking sectors. Training is indispensable to that international initiative, and, as noted elsewhere in this report, FATF, the United Nations, the European Union, the Council of Europe, as well as individual governments like the US and UK, are increasing their commitment to financial crime­related training.

Some Latin and Asian banking sector representatives have expressed concerns that their existence can be imperiled by cooperating with law enforcement authorities unless they are given immunity from civil and criminal prosecution. The Dragon Bank case in Indonesia demonstrated that these concerns may be well founded, unless appropriate legislation is in place. While the UK's Standard Chartered Bank maintained that it provided banking data at the request of the government, there is no "safe harbor" provision in Indonesian law and SCB was found in violation of that government's strict bank secrecy laws. While 15 of the 20 High Priority and 9 of the 16 Medium High Priority countries have laws providing disclosure protection, only 8 of the 22 Medium priority and only 7 of the remaining group of more than 150 governments provide a "safe harbor." In sum, bankers who cooperate with law enforcement are safe from bank secrecy prosecution in less than one­fourth of the world's financial community.

There are also cultural barriers to overcome. Secrecy has been a hallmark of Asian banking for centuries, and Asian bankers and businessmen are simply not accustomed to asking or answering the myriad personal questions which routinely fill American data banks. Criminal enterprise aside, quite upstanding Asian businessmen are accustomed to dealing in large sums of currency, and to moving their funds quite freely around Asia without government oversight. Some governments, like Indonesia, not only lack money laundering laws, they have only the most rudimentary forms of banking regulation. Concerned parliamentarians and government officials in Thailand have tried for the last four years to muster the political support to pass anti­money laundering legislation and success is not yet in sight.

The bounds which governments have self­imposed on their ability to prosecute money laundering cases stemming from a proliferating list of crimes by requiring prior conviction on a drug trafficking offense were evident in many countries.

New or newly­expanded drug trafficking routes through the Asian sectors of the former Soviet Union, including Azerbaijan, Kazakstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan, and similar new routings through the nether regions of Africa, such as Zimbabwe, Swaziland, and Mozambique raise concerns that the primitive banking systems in these countries are quite vulnerable to exploitation by narcotics traffickers and other criminals.

The year saw a proliferation of financial crimes, beyond drug money laundering, continuing a trend of the 1990's which prompted FATF in 1996 to amend its 40 recommendations and advise governments that reporting of suspicious transactions should be mandatory.

Several European officials are voicing concern about the European Monetary Union and the conversion to a single currency, the Euro. The concern is whether sufficient controls have been put into place to prevent or at least diminish conversions of stocks of currency held by crime groups, from national currencies into the Euro and/or the US dollar or even dollars into Euros. Some Dutch officials, for example, prefer that all guilder conversions take place in Holland to reduce such conversions and speculation.

Much of the focus of experts and bodies like FATF has really been on the so­called placement stage, the initial point of entry into the financial system, and, of late, into the layering stage at which funds are moved from non­banks to banks and/or into other monetary instruments. The evidence is that organized crime groups, drug traffickers, and money brokers are now engaging the integration stage, at which they invest their now laundered proceeds into legitimate businesses. Such business can not only generate additional profits and serve as additional conduits through which to move the proceeds of crime, but, in the form of bank acquisitions, give criminal elements great leverage on a given financial system.

Continuing Concerns

Over one hundred governments have ratified the 1988 UN Convention, including the majority of high to medium priority governments. However, inconsistent enforcement of its anti­money laundering provisions is an important factor in the continued high level of global financial crime.

Sixteen of the 64 eligible governments ranked as High, Medium­High or Medium Priority money laundering concerns by the US Government in 1997 have not ratified the 1988 UN Convention. Thus, one­fourth of the world's important financial center countries have not ratified this universal accord six years after its entry into force.

Too many affected or vulnerable governments have not criminalized all forms of money laundering and financial crime, nor given sufficient authority to banking regulatory bodies. There is need for an intensified education and persuasion effort by the world's major financial institutions and organizations, some of which have been allies in the fight against money laundering, to ensure a higher level of compliance on a global basis.

Too many governments continue to place limitations on money laundering countermeasures, particularly the requirement that the offense of money laundering must be predicated upon conviction for a drug trafficking offense.

Too many governments still refuse to share information about financial transactions with other governments to facilitate multinational money laundering investigations.

There is need for enhanced bilateral and multilateral international communications to inform governments and financial systems in some systematic and ongoing way about the methods and typologies of drug and non­drug related money laundering and financial crime.

The layering and integration stages of money laundering are using more sophisticated money laundering techniques. Cash is now being held in bulk or placed into the financial system through exchange houses and other non­bank financial institutions. Not only is it moved through wire transfers but also through innumerable varieties of licit and illicit financial instruments, including letters of credit, bonds and other securities, and prime bank notes and guarantees, without a parallel increase in the capability of the far­flung elements of the world's financial system to verify the beneficiaries or authenticity of such instruments.

The electronic highway now links banks and non­bank financial institutions (NBFIs) worldwide to facilitate expanding world trade and financial services, placing ever­greater priority on banks of origin to establish the identity of beneficial owners and their sources of funds. There are few controls on electronic transfers, and, compounding the problem, the bank or non­bank of origin is increasingly based outside major financial centers in jurisdictions which do not adequately control money laundering and other financial crimes.

Narcotics money launderers have adapted the invoicing schemes used by contraband smugglers and are similarly manipulating commercial trade practices to move and convert illegal proceeds. The vast proceeds generated by both types of crime magnify the need for control mechanisms to address non­drug­related financial crimes.

There is emerging concern about new banking practices, such as direct access banking which permits customers to process transactions directly through their accounts by computer operating off software provided by the bank. This system limits the bank's ability to monitor account activity, such as of joint accounts and pass­through banking schemes which have been a traditional method of layering. Beneficial owners of funds can now manipulate the identity of the ultimate recipient of the funds without the review by bank officers. Pass­through banking by itself poses myriad problems for regulators, by creating the ability of depositors unilaterally to create accounts within accounts, or even to provide quasi­banking services to off­line customers in a kind of bank within a bank. These new bank services can limit the utility of systems in place to have both originator and recipient information travel with the electronic funds transfer.

There is continuing concern that the need for capital of many financial systems overwhelms prudent banking practices and safeguards, with respect to deposits, loans and underwriting practices, and contributes to the increasing problem of takeovers of banks and non­bank financial institutions by criminal groups.

The concern about the concentration of economic power in drug cartels and other criminal organizations, and its potential translation into political power now embraces the Caribbean, Europe, the Middle East and Asia as well as the Americas.

Professional money laundering specialists sell high quality services, contacts, experience and knowledge of money movements, supported by the latest electronic technology, to any trafficker or other criminal willing to pay their lucrative fees. This practice continues to make enforcement more difficult, especially through the commingling of licit and illicit funds from many sources, and the worldwide dispersion of funds, far from the predicate crime scene.

Non­bank financial systems are still unevenly regulated in most parts of the world, especially at the placement stage for cash. The US, which is taking a leadership role in monitoring financial transactions through non­bank financial institutions, is still drafting the regulations that would subject them to federal regulation. Non­bank financial institutions include a wide variety of exchange houses, check cashing services, insurers, mortgagors, brokers, importers, exporters and other trading companies, gold and precious metal dealers, casinos, express delivery services and other money movers of varying degrees of sophistication and capability. Even less regulated are the underground banking systems, like the "chop" houses of the Orient, and the "hundi" and "hawala" systems of Europe, South Asia and the Middle East.

Asset forfeiture laws have not kept pace with anti­money laundering investigative authority, much less with traffickers' wide­ranging schemes. There is a conspicuous gap between the number of institutions and accounts identified by government investigations with money laundering and the authority of many governments to seize and forfeit drug and money laundering proceeds.

Many banking systems remain obliged to inform account holders that the government is investigating them and may seize their accounts, providing criminals the opportunity to move assets and leave town.

There is an urgent need to prescribe corporate as well as individual sanctions, including actions against financial institutions that repeatedly fail to take prudent measures to prevent their institutions from being used to launder money.

There is need for continuous fine­tuning of bilateral and multilateral strategies, which define responsibilities and objectives on a country­by­country basis, and set specific goals for cooperating with the varying money laundering and money transit countries.

Many governments and financial systems continue to rely on voluntary reporting mechanisms, despite the inadequacy of voluntary control systems. Reports from government after government demonstrate that the adoption of mandatory controls has not caused declines in legitimate deposits or resulted in threats from traffickers.

Prudential supervision of many domestic banking systems has improved with respect to money laundering, but foreign branch offices, subsidiaries and other foreign operations continue to figure prominently in drug and other money laundering and financial crime. There is a particular need for major international banks to ensure that governments and regulatory agencies in all jurisdictions they serve are enforcing the same high standards as home jurisdictions and governments.

Many governments seek to superimpose money laundering controls on systems which still employ loose incorporation standards and permit bearer share ownership, which vitiate the impact of these controls.

The implementation of free trade agreements and regional compacts, creating trading and economic zones which transcend national borders could increase the use of international trade as a mechanism for laundering proceeds of criminal enterprises. The impact of the liberalization of border and other customs controls, liberalized banking procedures within these zones, and freedom of access within the zones creates additional potential risks for the future.

There is a need for countries which cooperate on money laundering investigations and prosecutions to share forfeited proceeds so as to reflect equitably their respective contributions. A "finder's keepers" approach is unfair and fails to provide an incentive for multinational efforts.

WHAT WE NEED TO DO

In an electronic world in which the banking system operates through chain­linked computers 24 hours a day, there must be increased emphasis upon thorough vetting of personal, company and financial institution accounts at the bank of origin, wherever in the world it is located. There is no substitute for a thoroughly applied know­your­customer policy, especially as applied to those placing currency into the system and converting it to an account susceptible to immediate transfer outside the jurisdiction.

Considerable attention must be focused on establishing international standards, on obtaining agreements to exchange information, establishing linkages for cooperative investigations, and on overcoming political resistance in various key countries to ensure such cooperation.

Governments need laws which: establish corporate criminal liability for bank and non­bank financial institutions; apply to all manner of financial transactions not limited to cash at the teller's window; apply reporting and anti­money laundering laws to a long list of predicate offenses not limited to drug trafficking; criminalize investments in legitimate industry if the proceeds were derived from illegal acts; and enable the sharing of financial and corporate ownership information with law enforcement agencies and judicial authorities.

But governments also need strategies, end­games which project change and progress along the same continuum as the changes in both financial system procedures and the methods criminals develop to exploit them­­strategies which focus on specific governments and specific financial systems.

Over time, a number of actions can be seen as needed on a continuing basis to keep pace with the dynamics of money laundering in a high­tech world. Continuous action is needed on each category in 1996, and for the foreseeable future.

1. Constant Monitoring of Money Laundering Patterns, Trends, Typologies. More sophisticated techniques, involving both bank and non­bank financial institutions, in a wider array of traditional and non­traditional financial center countries, have complicated identification, tracing and investigation. Information exchanges have been improving, but critical gaps in know­how must be closed in tandem with improved cooperation. There is a high priority need to share data, even critical intelligence. The pervasive corruption in some systems remains a barrier to information sharing.

2. Analysis of Money Management Practices. We need improved information from more countries on what factors influence traffickers and their money managers to use particular systems in specific countries, to keep reserves in cash vs other monetary instruments, to invest rather than park funds. Interviews of arrested drug money managers are producing detailed profiles of money management schemes. The best data so far applies to the cocaine trade, but we need to develop the same level of knowledge about heroin and marijuana syndicates.

3. Analysis of Non­Drug Related Money Laundering and Other Financial Crimes. Traffickers seldom invent new methods or practices of handling and investing money. In general, they rely on techniques perfected by corporations and individuals to shelter proceeds from taxation or to avoid strict currency controls. Terrorists, arms dealers, and other criminals, similarly rely on standard measures used to shelter funds from taxation by legitimate enterprises. We need to identify the parallels between drug money laundering and financial crimes of every description and achieve an equal capability to investigate and prosecute such crimes. A number of governments are willing to impose new restrictions on drug­related financial crimes, but hesitate to apply such strictures to other forms of financial crime.

4. Equating Economic Power with Political Clout. The increasing concentrations of wealth among criminal groups in a number of jurisdictions is a concern, not only because of possible impacts on investments, real estate values, legitimate commerce and government integrity, but also because these organizations have the wealth to make large campaign contributions to candidates who in turn agree to assist the criminals. We need to assess the national security and political implications of these shifts and accumulations of wealth for all financial centers where such wealth is being concentrated. Illicit funds and corrupt officials represent a continuing threat to democracy in literally every region of the world.

5. Eliminating Systemic Weaknesses. We need banks to maintain the same kinds of records on clients which are also financial institutions, as they do for other customers, and to report suspicious transactions by such clients when the same financial institutions are named repeatedly in investigation after investigation. Some currently available but underutilized mechanisms include revocation of licenses, changes in ownership and management, levying of fines, and prosecution. But, perhaps the most intrinsic weakness is the lack of qualified personnel, not only in government regulatory agencies but also within many banking system, who are trained, not just in implementing and managing such oversight systems, but, in handling today's complex monetary transactions. The stepped­up training reported on in recent international meetings is encouraging but more must be done.

6. Assessing The Trafficker as Entrepreneur. We need to explore the extent to which criminal organizations are penetrating legitimate financial and other businesses, using their vast resources to gain control and to influence economic, financial and business decisions. More data, and systematic analysis are needed on the role played by the trafficker and money launderer in foreign exchange markets, including their use of and creation of gray markets. There is good reason to question the overt as well as covert ownership of banks and financial institutions in many parts of the world.

7. Analyzing the Impact of Money Laundering on National Governments and Economies. The interplay between political and structural factors in a country upon its receptivity to money laundering, and that of money laundering on the political life and economic life of the jurisdiction, need to be better understood. Among the questions that need to be analyzed are the extent to which structural macro­economic factors such as commodity deflation, sustained high levels of unemployment, and recession have in making a country susceptible to becoming a money laundering haven. At the sectoral level, we need to determine the influence of black markets on legitimate enterprises. At the institutional level, we need to identify the major factors that may influence bankers and other financial managers in some jurisdictions to be more likely to accept money they have reason to believe is tainted. As we better identify where money laundering is most likely to have a macro­economic or political impact, we need to evaluate the potential effectiveness of economic countermeasures. These could include limiting or excluding access to the global financial system of entities or states identified as major problems.

8. Regulating Exchange Houses and Remittance Systems. There is ample evidence that the various "hundi, hawala, and chop" remittance systems, so essential to economic life in the Middle East, South and East Asia, are being used by drug traffickers, just like the "cambios" of Latin America, and non­bank institutions of all kinds in the Western financial community. They serve vital functions for key sectors of many economies. Systems for regulating them to discourage their use to launder the proceeds of crime are essential, but will fail unless they take into account the very informality that makes them effective and desirable.

9. Concentrating Efforts for Maximum Effectiveness. Enforcement operations have proven we can disrupt cartel operations. But these organizations are resilient and recover quickly. We need to develop more effective strategies for disruption in order to achieve the destabilization of criminal organizations.

10. Pursuing A Continuously Evolving Strategy. For much of the last decade, concerned governments operated under a strategy which involved a handful of key countries whose cooperation was essential and/or which were drug money laundering centers. But the traffickers have changed tactics and moved to new locales. Banks are but one portal. They also use securities brokers, insurance companies, import and export companies. Every means the worlds of business and finance have to offer, linked by wireless and facsimile transmissions, are today used by traffickers and the managers of their illicit proceeds. Financial regulation, supervision and enforcement needs to expand both to cover transactions that transcend national boundaries and to cover the widening array of types of financial service businesses. There is a need for a more comprehensive threat assessment; e.g., just how real is the threat that money brokers will increase their manipulation of second and third­tier banking systems?

11. The United Nations Drug Control Program (UNDCP) should intensify its efforts to ensure that all significant financial center countries are implementing fully the anti­money laundering and asset forfeiture provisions of the 1988 UN Convention. As an immediate priority, UNDCP should focus on securing ratification by the significant financial center governments which have not yet ratified the Convention.

12. The Financial Action Task Force, working with the Offshore Group of Banking Supervisors and other relevant organizations, should continue to focus attention on offshore banking. FATF has been quite effective in reaching out to this group; a majority of offshore banking centers are either members of FATF or the Caribbean FATF, or, have participated in FATF/CFATF seminars which provided guidance on adopting/implementing FATF and UN guidance. The agreement in Paris in February 1997 to undertake compatible mutual evaluations of these constituencies should be given a high priority for early implementation. More analysis is needed of the methods used to move money through offshore banks, and OGBS should be supported in efforts to include as many offshore banking centers as possible within its membership, and, a parallel effort to evaluate progress by its members.

13. The adoption by governments of information standards, such as those recommended by FATF and the SWIFT banking information network is a welcome if not yet universal step. Many more governments need to cooperate in adopting regulations to help curb the misuse of electronic transfer and payment mechanisms to launder illicit funds.

14. Governments and banking systems alike must be more vigilant in efforts to detect counterfeit currency and other monetary instruments. The schemes involving counterfeit bonds and other securities, usually as collateral, suggest there is the need for an international clearinghouse to assist banking and financial systems outside the major centers in determining the authenticity of offered documents.

15. Governments and banking systems must exert greater efforts to identify and prevent a wide range of financial crimes, not just drug and non­drug money laundering, but also financial frauds, such as prime bank guarantees. Again, the history of such frauds suggests a need for a clearinghouse which can assist financial houses in identifying customers and authenticating documents.

16. Consolidated supervision of the international banking system must become a reality for the global financial community. The recent steps proposed by the Basle Committee are encouraging, and FATF, the Council of Europe, the European Union, UNDCP and key financial center governments should make every effort to see that as many barriers are lowered as possible before the world's banking supervisors meet again in October, 1988.

BILATERAL ACTIVITIES

PRESIDENTIAL DECISION DIRECTIVE (PDD) 42

The President, in his address to the United Nations General Assembly on its 50th anniversary called for international cooperation to address the threat posed by money laundering, narcotics trafficking and terrorism, noting that the forces of international crime "jeopardize the global trend toward peace and freedom, undermine fragile democracies, sap the strength from developing countries, (and) threaten our efforts to build a safer, more prosperous world." Declaring international crime a threat to the national security interest of the United States in Presidential Decision Directive (PDD) 42, the President ordered the Departments of Justice, State and Treasury, the Coast Guard, National Security Council, Intelligence Community, and other federal agencies to step­up and integrate their efforts against international crime syndicates and money laundering.

A key component of PDD­42 was the imposition of sanctions under the International Emergency Economic Powers Act (IEEPA), blocking the assets of the leaders, cohorts and front companies of identified Colombian narcotics traffickers in the U.S. and in U.S. banks overseas. IEEPA authorizes the Secretary of the Treasury to impose sanctions, including freezing assets held in U.S. financial institutions, against nations and entities deemed to pose a threat to the national security, foreign policy or economy of the United States. Executive Order 12978, signed by President Clinton on October 21, 1995 under authority of IEEPA finds that the activities of significant foreign narcotics traffickers centered in Colombia and the unparalleled violence, corruption, and harm that they cause constitute an unusual and extraordinary threat to the United States' national security and economy. In addition, U.S. individuals and companies are barred from engaging in financial transactions or trade with those identified individuals or enterprises linked to the Colombian Cali Cartel.

On January 15, 1997 the Treasury Department identified an additional 21 businesses and 57 individuals determined to be directly involved with illegal traffickers and their so­called legitimate business fronts. This brings to a total of 359 the number of businesses and individuals whose assets have been blocked since 1995 under authority of the President's Executive Order. As part of the PDD 42 process an interagency group is reviewing whether measures can be taken against other international criminal cartels.

In his U.N. address, President Clinton stated that the United States was moving to take extraordinary steps against money launderers. To implement PDD 42, U.S. agencies identified nations where money laundering has important implications for U.S. national security and where expanded cooperation would significantly strengthen U.S. anti­money laundering efforts. Several of these nations have been approached by U.S. interagency teams in an effort to increase cooperation bilaterally as well as multilaterally and to reduce the threat posed by money laundering.

In response to the President's directive a comprehensive package of legislation was formulated to substantially assist U.S. law enforcement agencies in their efforts against drug traffickers, terrorists, and other international crime syndicates as well as to counter money laundering. The International Crime Control Act of 1996 ("ICCA") was sent to the U.S. Congress on September 27, 1996. The ICCA was devised to enhance the U.S. ability to go after violent international criminals by vigorously investigating and prosecuting them, taking their money, and depriving them of their ability to cross America's borders and strike at its domestic institutions.

TRAINING AND TECHNICAL ASSISTANCE

DEPARTMENT OF STATE

The Department of State's Bureau for International Narcotics and Law Enforcement Affairs, Office of International Criminal Justice (INL/ICJ) has developed a $18.2 million program of multi­agency training to address international organized crime, financial crimes, and narcotics trafficking. Specifically the FY96 program drew on $5 million in FY96 ESF, $8 million in Freedom Support Act (FSA) and $5.2 million in Support for Eastern European Democracies (SEED) funds. ATF, DEA, DSS, FBI, FinCEN, FLETC, ICITAP, IRS, US Secret Service Department of Justice/OPDAT and the US Customs Service, in cooperation with INL/ICJ offered law enforcement and criminal justice programs primarily in Eastern Europe, the New Independent States (NIS) and Latin America.

INL­funded programs to combat international financial crimes, including money laundering, included the FBI's white collar and financial fraud program, FLETC's international banking and financial fraud institute program, IRS Criminal Investigations Division training on money laundering and financial fraud, FBI's internal controls, DEA's drug money laundering investigations, FINCEN's initiatives to establish Financial Investigative Units (FIUs), and the US Secret Service programs in credit card fraud and counterfeiting. These advanced training programs have been designed for law enforcement officers from Central Europe, the NIS and Latin America.

One of the key elements of U.S. success in drafting legislation, investigating and prosecuting international financial crimes, from money laundering to bank fraud to counterfeiting of financial documents is interagency cooperation. Several INL sponsored programs have modelled such cooperation for foreign governments. For example, INL at the request of the Central Bank of Russia has put together a team of experts from U.S. regulatory agencies (Federal Reserve Board and Office of the Comptroller of the Currency) the Department of Justice Criminal Division and federal law enforcement agencies (IRS/CID, FBI, USSS, Customs, and FINCEN) to work with the Russian Central Bank, the Ministry of Interior, the Procuracy and other responsible Russian agencies. IRS/CID has taken the lead on organizing similar interagency teams to brief foreign officials on the task force approach to investigations and prosecutions.

DRUG ENFORCEMENT ADMINISTRATION

DEA conducted training programs in asset forfeiture and money laundering at eight international sites. Officials from Malta, Albania, Cyprus, Greece, Israel, Turkey, Spain, Italy, France and Ireland participated in DEA's program in Malta. Ecuador, Bolivia, Chile, Colombia, Paraguay, Peru and Venezuela sent officials to the DEA regional program in Ecuador.

DEA trained officials from Kazakhstan, Kyrgyzstan, Tajikistan and Turkmenistan in a program within Kazakhstan.

Officials from key offshore centers ­­ Isle of Man, Guernsey and Jersey ­­ as well as officials from England, Scotland, Wales and Ireland attended the DEA London program.

Single country training programs were conducted in St. Petersburg, San Salvador, Kuala Lumpur and Interlaken.

INTERNAL REVENUE SERVICE

IRS Criminal Investigation Division special agents have developed, and continue to develop international training courses for law enforcement authorities ranging from Financial Investigative Techniques to the Utilization of Suspicious Activity and Currency Transaction Reports to Managing Multi­agency Money Laundering Investigations.

The IRS Criminal Investigation Division provided several Financial Investigative Techniques training courses in St. Petersburg, Russia, Estonia and Mexico. The IRS has also participated in eight money laundering courses at the International Law Enforcement Academy (ILEA), in Budapest, Hungary. These courses included participants from Estonia, Lithuania, Slovakia, Russia, Ukraine, Albania, Kyrgyztan, Moldova and Poland. Training materials covered basic financial investigative techniques which are designed to provide police officers with a general understanding and appreciation of financial crimes.

The Internal Revenue Service's Criminal Investigation Division conducted international money laundering training in Mexico City, Mexico. This training, which was conducted in conjunction with FinCEN, centered on the application, analysis and use of Suspicious Activity Reports (SAR's).

Three regional money laundering seminars were held in Port of Spain, Trinidad, San Salvador, El Salvador, and Brasilia, Brazil. These regional seminars concentrated on countries located in the Caribbean, Central and South America. The first of these was held in Port of Spain during the week of January 13­17, 1997. The participants included high level government and law enforcement representatives from Anguilla, Antigua and Barbuda, Aruba, the Bahamas, Barbados, Belize, Bermuda, British Virgin Islands, Netherlands Antilles, Dominica, Cayman Islands, Grenada, Guyana, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and Grenadines, Suriname, Turks and Caicos, and Trinidad and Tobago. The second seminar was held in El Salvador the week of February 3­7, 1997. The participants in this conference included high level representatives from Costa Rica, El Salvador, Guatemala, Haiti, Honduras, Mexico, Nicaragua, Panama, and the Dominican Republic. The third seminar was held in Brasilia, Brazil the week of March 17­21, 1997. The participants in this conference included similar delegations from Colombia, Venezuela, Peru, Bolivia, Paraguay, Uruguay, Chile, Argentina and Ecuador.

The focus of the Internal Revenue Service's training seminars was: a) To establish an awareness of the overall threat posed money laundering and its impact on these regions; and b) to foster an atmosphere of cooperation and exchange between these countries and the US in a joint effort to combat global laundering activities.

At the request of the governments of Guatemala and Peru, IRS­CID provided one of its Special Agents to render advice on high level investigations currently underway in these countries.

FINANCIAL CRIMES ENFORCEMENT NETWORK (FINCEN)

FinCen's international training program has two main components(1) instruction provided to a vast array of government officials, financial regulators and others on the subjects of money laundering and FinCEN's mission and operation; and (2) training on finanacial intelligence analysis and creation and operation of financial intelligence units, modeled after FinCen and other intelligence units throughout the world.

FinCEN works closely with other agencies in supporting US interests overseas. It participates in the Department of State Democracy and Law Program in Russia, the NIS, Eastern Europe as well as Ecuador and Panama. FinCEN's involvement encompasses (1) advising officials on how to establish advanced systems for detecting, preventing and prosecuting financial crimes; (2) recommending ways in which to develop a partnership between government and financial institutions to prevent money laundering, (3) offering specialized training and technical assistance in computer systems architecture and operation; and (4) providing assessments of money laundering regulations and procedures. While much of FinCEN's international training is done abroad, increasingly FinCEN is providing training and technical assistance to foreign senior officials at its headquarters in Vienna, Virginia.

In April 1997, FinCen and Interpol will co­host the '6th Meeting of the Working Group on the Analysis of Financial Records' in Buenos Aires, Argentina. Several countries will make presentations on the examination of suspicious activity reports from financial institutions.

For the first time both India and Egypt have approached FinCEN with an interest in addressing money laundering. India has expressed an interest in enacting anti­money laundering legislation, which may include the establishment of a Financial Intelligence Unit. FinCEN has responded to a request for a participant in a conference sponsored by the Indian Law Institute on drug­related issues (affiliated with India's Supreme Court) to be held in early 1997 and expects to receive additional request for support (especially for training and technical assistance) in mid­1997. In addition, Egypt has formally requested anti­money laundering training from FinCEN sometime this year. As a first step, Egypt envisions FinCEN training five members of the Administrative Control Authority in money laundering topics, including financial investigations and establishing a Financial Intelligence Unit (FIU).

During 1996, FinCEN made appreciable progress in facilitating moves by Japan and China to become more active in countering international money laundering.

Japan's National Police Agency (NPA) sent several of its officials­­from the Deputy Commissioner General to various computer experts­­ to consult with FinCEN on how to provide for communication links and a system for data storage and analysis needed to effectively work financial data. One FinCEN representative visited the NPA headquarters in Tokyo during 1996 to discuss continue FinCEN­NPA cooperation . As a result, the training and technical assistance provide by FinCEN throughout 1996 allowed the NPA to develop strong arguments for the enactment of legislation authorizing the NPA to more activley investigate financial crime in Japan.

China's Public Security Bureau accepted FinCEN's invitation for a closer relationship and sent two high­level delegations to visit FinCEN for technical assistance and briefings during 1996. Importantly, those two delegations also included representatives of the Peoples Bank of China and the Bank of China, the former having been tasked by the State Council of China to draft that nation's first laws and regulations designed to counter international money laundering. FinCEN representatives visited Beijing in 1996 for extensive discussions on money laundering matters.

FinCEN provided assistance to other Asian nations, such as Hong Kong, Singapore and the Philippines. During 1996, FinCEN provided lectures and briefing material for the Royal Hong Kong Police's highly­acclaimed course, open to all Asian nations, on countering financial crime. It supported dealings of Treasury Assistant Secretary (Enforcement) with the Philippines' Minister of Finance on how to improve that Asian nation's ability to cope with increases in money laundering. And FinCEN's Director met with two Philippine officials to demonstrate the benefits of a financial intelligence unit and to advise them on how to organize such an entity.

FinCen continues to lead an effort under the auspices of the Egmont Group to develop a curriculum(a) on financial crimes and money laundering intelligence analysis and (b) on creating and operating a Financial Intelligence Unit. The objective is to have an initial pilot course offered by mid­1997 at several venues internationally. In addition, FinCEN developed a secure web site prototype for use by the FIU members of Egmont which will permit members to access information within a protected environment on FIUs (missions, organization, and capabilities), money laundering trends, financial analysis tools, and technological developments. The prototype was demonstrated and accepted at the fourth meeting of the Egmont Group in November 1996 in Rome. FinCEN experts are traveling to many of the Egmont member countries to help with the set­up and train operators in its use. It will become operational in the first half of 1997.

The Pakistani Anti­Narcotics Force (P­ANF) has requested informal discussions regarding the review of their draft anti­money laundering legislation, the FATF 40 recommendations and anti­money laundering training. A FinCEN representative will travel to Pakistan in early 1997 to comply with this request. It is anticipated that Pakistan will make a formal request to additional technical assistance. Preliminary discussions with P­ANF officials suggest that an additional visit to Pakistan to provide this assistance will take place later in 1997.

A multi­agency working group on Nigerian crime is considering a FinCEN recommendation that an assessment be made of the organization and functions of the Central Bank of Nigeria, particularly as it relates to the prevention and detection of money launderers using the banking system and non­bank financial institutions. Nigeria is currently seeking information on enforcement strategies and creation of a financial intelligence unit from the U.S. In November 1996, the Mauritania Minister of Justice visited FInCEN to discuss money laundering issues.

FinCEN participated in the Southern African Development Community Finance Ministers Workshop in May 1996, Finance Ministers from Botswana, Malawi, Mauritius, Namibia, South Africa, Zambia, Lesotho, Swaziland, Mozambique and Zimbabwe discussed the legal framework for money laundering. FinCEN also participated in the Commonwealth Southern and Eastern African Money Laundering Seminar in October, jointly sponsored by the Commonwealth Secretariat and the Financial Action Task Force.

In continuing its anti­money laundering efforts throughout the Western Hemisphere, FinCEN made presentations at the seminar "The Investigation of Money Laundering" sponsored by the Chilean National Drug Council during December 1996; and at money laundering conferences sponsored by the Private Bankers Association of Paraguay and Panama.

During 1996, FinCEN provided technical assistance and training to Panama in connection with Panama's establishment of its financial analysis unit (FAU). FInCEN assisted the FAU staff by developing installing and customizing a Local Area Database Network at the FAU. The database will aid the analyst in collecting and analyzing the financial law enforcement, public information, the FAU obtains from various sources. FinCEN implemented the new software and hardware and provided the FAU staff with the initial database training. In furtherance of its training strategy in Panama, FinCEN sent two money laundering experts fluent in Spanish to participate in a money laundering conference co­sponsored by the Panama Bankers' Association and the FAU. This conference was intended to help bridge the communications between the Panama FAU and the Panamanian banking community. In March 1997, FinCEN will provide additional "focused" analytical hands­on database training for the FAU staff.

In October 1996, FinCEN hosted a visit with officials from the Money Laundering Directorate, Secretaria de Hacienda y Credito Publico. The officials were briefed on all planned technical and training strategies for Mexico intelligence analysts. In November 1996, FinCEN hosted a meeting with Mexico's Ambassador to the U.S., who was briefed on all planned technical and training strategies planned during 1997. As a result of these visits, Mexico's President Zedillo was briefed on the progress of USG assistance to Mexico in the area of anti­money laundering initiatives. In December 1996, FinCEN coordinated with IRS in providing training related to Suspicious Activity Reporting and Financial Investigations. During the upcoming year, FinCEN plans to provide and/or assist in providing to the Mexican financial intelligence unit several components of training. These components include: Technical Services and Training: Mexican Banking and Financial Institutions and Regulatory Authority Training; and Financial Law Enforcement Analyst Training: Theory and Concepts.

TREATIES AND AGREEMENTS

Mutual legal assistance treaties (MLATs) which are negotiated by the Department of State in cooperation with the Department of Justice to facilitate cooperation in criminal matters, including money laundering and asset forfeiture, are in force with 22 governments including: Argentina, the Bahamas, Canada, Italy, Jamaica, Mexico, Morocco, the Netherlands, Panama, the Philippines, Spain, Switzerland, Thailand, Turkey, the United Kingdom, the United Kingdom with respect to its Caribbean dependent territories (the Cayman Islands, Anguilla, British Virgin Islands, the Turks and Caicos Islands and Montserrat), and Uruguay. MLATs have been signed but not brought into force with thirteen other governments: Antigua, Austria, Barbados, Belgium, Colombia, Dominica, Grenada, Hungary, Nigeria, Poland, South Korea, St. Lucia and Trinidad and Tobago. Similar treaties are in various stages of negotiation elsewhere. The US also has signed the OAS Mutual Legal Assistance Treaty.

In addition, the US has entered into executive agreements on forfeiture cooperation, including: (1) a drug­related forfeiture agreement with Hong Kong; and (2) a forfeiture cooperation and asset sharing agreement with the Netherlands which is also in effect for the Netherlands Antilles but not yet in effect with Aruba. (See below for asset sharing)

Financial Information Exchange Agreements (FIEAs) are bilateral Executive Agreements which facilitate the exchange of currency transaction information between governments. The FIEA provides a mechanism for exchanges of such information between Treasury Department and the other government's Finance Ministry. The ability to quickly exchange currency transaction information in money laundering matters aids in achieving mutual enforcement goals. The United States has FIEAs in effect with Colombia, Ecuador, Panama, Peru, Venezuela, Paraguay, and Mexico. Each FIEA requires that both parties enact or have legislation which requires the reporting or recording of large currency transactions conducted at financial institutions. The Financial Crimes Enforcement Network (FinCEN) has also signed a Memorandum of Understanding (MOU) with the Government of Argentina.

US Customs has mutual assistance agreements with Argentina, Australia, Austria, Belarus, Belgium, Canada, Cyprus, Czechoslovakia (now extended to the Czech Republic and Slovakia), Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, Italy, Korea, Mexico, Mongolia, New Zealand, Norway, Poland, Portugal, Russia, Spain, Sweden, Ukraine and United Kingdom. Customs has negotiated agreements which are not yet in force with Honduras, Ireland, Israel, Netherlands, and Turkey.

ASSET SHARING

Pursuant to the provisions of the 1988 US law, the Departments of Justice, State and Treasury have aggressively sought to encourage foreign governments to cooperate in joint investigations of drug trafficking and money laundering, offering the inducement of sharing in forfeited assets. A parallel goal has been to encourage spending of these assets to improve narcotics law enforcement. The long term goal has been to encourage governments to improve asset forfeiture laws and procedures, and undertake independent investigations.

From 1989 through December 1996, the international asset sharing program administered by Justice resulted in the forfeiture in the US of $130,964,103.72 of which $47,596,328.18 was shared with foreign governments which cooperated in the investigations. In 1996, the Department of Justice transferred forfeited proceeds to: Canada ($207,142.72), the Cayman Islands ($12,470.87), Isle of Man ($335,862.39), Luxembourg ($1,000,000), Switzerland ($2,787,077.02, and the United Kingdom ($1,002.045.53). Prior recipients of shared assets (1989­1995) include: Argentina, the Bahamas, British Virgin Islands, Canada, Cayman Islands, Colombia, Costa Rica, Ecuador, Egypt, Guatemala, Guernsey, Hungary, Israel, Liechtenstein, Paraguay, Romania, St. Maarten, Switzerland, United Kingdom and Venezuela.

To date, Canada, Switzerland, the Isle of Jersey (Channel Islands) and the United Kingdom are the only jurisdictions that have shared forfeited assets with the United States as the result of the assistance of the United States to forfeitures effected under their own laws.

MULTILATERAL ACTIVITIES

FINANCIAL ACTION TASK FORCE (FATF) YEAR IN REVIEW:

The Financial Action Task Force (FATF) was established by the G­7 Economic Summit in Paris in 1989 to examine measures to combat money laundering worldwide. In April 1990, the FATF issued a report with 40 Recommendations for establishing a framework of comprehensive programs to address money laundering and facilitate greater international cooperation. FATF membership comprises 26 jurisdictions and two regional organizations, representing the world's major financial centers. Member jurisdictions are committed to adopting and implementing the 40 FATF Recommendations and agree to have their implementation progress evaluated by other FATF members.

In 1996, the FATF focused on several major areas in its fight against global money laundering. An experts group met to assess current trends and methods in money laundering, emerging threats, and effective countermeasures. A special segment of the meeting focused on the vulnerabilities in new payment system technologies, sometimes referred to as "cyberpayment" systems. Experts from the financial sector were invited to give presentations and to participate in a discussion of this issue. A public version of the report presenting the conclusions of the experts group meeting is expected to be issued in early 1997.

In 1996, the second round of mutual evaluations was initiated, focusing on the effectiveness of each member's anti­money laundering measures in practice. Six second round mutual evaluations were conducted during 1996, with four planned for 1997.

The United States' Presidency of the FATF was successfully concluded in June 1996 with a number of significant accomplishments. During the U.S. Presidency, the stocktaking review of the 40 Recommendations was completed resulting in the following major changes: Money laundering predicate offenses were extended beyond drug trafficking to include other serious crimes as well. The reporting of suspicious transactions by financial institutions was made mandatory.

Applicable financial recommendations were extended to apply to non­financial businesses. Attention was drawn to the money laundering implications of emerging payment technologies. A new statement of support was included calling for more effective investigative techniques to aid law enforcement in following illicit proceeds from the street to the kingpins of criminal organizations.

In January 1996, the U.S. President of the FATF, former Treasury Under Secretary for Enforcement Ronald K. Noble, chaired the FATF's first­ever Financial Services Forum which included representatives of financial institutions from FATF member nations. The purpose of this meeting was to create a partnership between governments and the financial services industry in instituting global anti­money laundering measures. At the January meeting, discussion focused on changing trends in money laundering, how to best provide feedback to financial institutions, views of the industry on the 40 FATF Recommendations, and implications of new payment technology developments.

For the first time in FATF's history, the organization applied Recommendation 21 to a jurisdiction. On February 1, 1996, a press release was issued condemning the Economic Development Act passed by the Seychelles, legislation which created an environment conducive to money laundering and offered protection to criminals from prosecution, extradition, and seizure of assets. In applying Recommendation 21, the press release called for "financial institutions to give special attention to transactions" originating in the Seychelles,

At the final FATF plenary chaired by the U.S. in June 1996, for the first time, the FATF issued a public edition of its annual "Typologies Report" presenting current trends and methods in money laundering. This was one important result of the Financial Services Forum, where the financial sector requested more feedback and information on current money laundering methods identified by law enforcement.

In July 1996, Director General Fernando Carpentieri of the Italian Ministry of the Treasury assumed the FATF Presidency for the FATF's eighth round of work during 1996­1997.

In September 1996, Recommendation 21 was applied for a second time; this time to Turkey, the only FATF member which had not yet passed anti­money laundering legislation. However, following enactment of Turkey's law on the Prevention of Money Laundering on November 19, 1996, the FATF issued a press release on December 12, 1996, welcoming the new legislation and lifting the application of Recommendation 21 to Turkey. Turkey's prompt enactment of its anti­money laundering law following FATF action attests to the influence of the FATF in bringing about changes needed to counter money laundering throughout the world.

Through its external relations program the FATF continues to encourage non­member countries to adopt and implement the anti­money laundering measures outlined in the 40 Recommendations. During 1996, the FATF conducted a second high­level mission to Russia to further promote anti­money laundering action there. In addition, the FATF co­sponsored a Money Laundering Seminar with the Black Sea Economic Cooperation (BSEC) in April 1996 in Istanbul, Turkey, and co­sponsored a Southern and Eastern African Money Laundering Conference with the Commonwealth Secretariat in October 1996 in Capetown, South Africa.

A second BSEC/FATF Money Laundering Seminar is planned to be conducted in April 1997 to further promote anti­money laundering measures in the Black Sea region.

In November 1996, an experts group met in Hong Kong to assess money laundering trends and methods specific to the Asia/Pacific region and counteractions indicated. The FATF Asia Secretariat has created an Asia/Pacific Steering Group on Money Laundering to encourage stronger anti­money laundering action in the region through adoption and implementation of the 40 FATF Recommendations. The FATF Asia Secretariat conducted missions to the Philippines, China, and Indonesia during 1996. During 1997, the FATF Asia Secretariat anticipates conducting missions to Viet Nam and Malaysia, as well as follow­up missions to the Philippines and Indonesia.

The FATF continues to coordinate extensively with other international organizations involved in combating money laundering and to mutually foster efforts in this area.

CARIBBEAN FINANCIAL ACTION TASK FORCE (CFATF)

The importance of the Caribbean Financial Action Task Force (CFATF) in regional anti­money laundering initiatives continues to increase. The CFATF requires its member jurisdictions to implement the FATF 40 Recommendations as well as an additional 19 Recommendations specific to the region. In addition to the principal officer provided by the United Kingdom, the U.S. Treasury Department provided staff in 1996 to the CFATF Secretariat, housed in Trinidad and Tobago.

In October 1996, the CFATF adopted a Memorandum of Understanding (MOU) which formalizes the organization by delineating its mission, objectives, and membership requirements. A total of 21 members, including several Central American countries new to the CFATF, signed the MOU and these countries now comprise the membership of the CFATF. Additional countries are expected to sign the MOU in the near future. The five FATF countries which have provided financial and other support to the CFATF since its inception (Canada, France, the Netherlands, United Kingdom, and the United States), are now referred to as Cooperating and Supporting Nations and issued a Joint Statement of Cooperation and Support at the October 1996 CFATF Council Meeting.

During 1996, the first mutual evaluation conducted by the CFATF was completed and the evaluation report was adopted by the CFATF plenary. Several other CFATF mutual evaluations are in process. In addition, the CFATF will conduct its first typologies exercise in February 1997 immediately following a CFATF technical plenary. The typologies exercise will be conducted to assess current trends in money laundering in the region and effective countermeasures. In addition to the FATF, the CFATF also cooperates extensively with other international bodies.

SUMMIT OF THE AMERICAS

In recognition of the serious threat that money laundering poses throughout the hemisphere, and as part of the Summit process, a hemispheric Ministerial Conference was held in Buenos Aires, Argentina on December 1­2, 1995, which was attended by representatives of 29 of the 34 countries of the hemisphere.

At the conclusion of the conference, the ministers in attendance, representing their respective Central Banks and Finance, Justice, and Interior Ministries, endorsed the Buenos Aires Communique. This communique sets forth a series of specific actions that each country commits to undertake in the legal, regulatory and law enforcement areas to establish an effective anti­money laundering program and, thereby, to combat money laundering on a hemispheric basis.

The Ministers who adopted the Communique in Buenos Aires recognized that only the full and effective implementation of each step of the Plan of Action embodied in the coordinated hemispheric response to money laundering can guarantee its success. Therefore, section F.1. of the Communique urged Summit governments to press ahead with the Plan of Action and to submit to ongoing assessments of the implementation of the Communique within the framework of the OAS. The OAS gave one of its specialized bodies, the Inter­American Drug Abuse Control Council (CICAD), a central role in implementing the provisions of the communique.

The CICAD Group of Experts on Money Laundering

The OAS/CICAD Secretariat agreed to a proposal by Chile to reconvene the Group of Experts who developed the OAS model regulations on money laundering to develop a plan of action that will set out the role of CICAD regarding implementation of the communique. The Group of Experts was reconvened and met in Washington, D.C. on June 17­20, 1996. The Group of Experts approved and disseminated a money laundering questionnaire, drafted by the OAS/CICAD Secretariat and based on the ministerial communique as one component of the assessment process. The experts group then agreed to make its expertise available to the Permanent Council Working Group which is studying the feasibility of a hemispheric convention on money laundering.

In addition, the experts also discussed the importance of Financial Intelligence Units, or FlUs, which serve as centers for the collection, analysis, and sharing of all relevant information related to money laundering and agreed that the role of FIUs should be studied in detail at the next meeting. The Group of Experts also discussed the possibility of conducting a typologies exercise, which involves the collation and analysis of money laundering methods, trends and patterns, in order to exchange information and develop countermeasures.

The Group of Experts will meet again this year to: a) analyze the results of the questionnaire; b) develop on­going assessment procedures; c) consider in detail the desirability of establishing FHJs and if so agreed, make a recommendation to amend the OAS Model Regulations on Money Laundering accordingly, d) to discuss development of a typologies exercise.

Joint Organization of American States/Inter­American Development Bank Training and Technical Assistance Initiative

Finance Ministers of the Western Hemisphere met in New Orleans on May 18, 1996 to address common challenges to achieve stable and sustainable growth in our countries and to move forward on a program to build more open, transparent and integrated financial markets. Recognizing the threat that money laundering presents to the integrity of financial markets, and economic and political systems, the Finance Ministers reaffirmed the shared commitment to intensified action to combat money laundering. A joint communique was endorsed in which the Finance Ministers reaffirmed their commitment, to combat financial crime as outlined in the Buenos Aires Communique. In addition, the Ministers called on the Inter­American Development Bank, in conjunction with the OAS, to establish a comprehensive training and technical assistance program to support nations in their implementation of commitments in the Buenos Aires communique.

The OAS and Inter­American Development Bank (IDB) agreed to work together on the establishment of a comprehensive training and technical assistance program under their joint Memorandum of Understanding. Shortly afterwards, in parallel to the June 1996 reconvening of the OAS/CICAD Experts Group on Money Laundering, OAS/CICAD presented a pilot project proposal to the IDB.

The objective of the proposal on technical assistance and training is to assist member ­countries in their efforts to strengthen their banking supervision, regulation and operational capabilities to control money laundering. The program detailed in the proposal focuses on training and technical assistance to the banking sector. The initial program emphasizes training in the detection of suspicious transactions, the prevention of money laundering through know your customer policies, and adherence to national laws and regulations.

As currently configured, the proposal calls for a pilot training program for five countries, Argentina, Colombia and Uruguay, Costa Rica and Mexico. The program will be funded by IDB, but managed by OAS/CICAD. Training will initially consist of a series of training seminars for banking supervisors and members of banking associations. Once trained, these officials would then initiate training programs for banking employees and other relevant officials. The goal is to help prevent the exploitation of the banking sector by money launderers. The proposal is currently awaiting final IDB approval.

FINANCIAL INTELLIGENCE UNITS AND THE EGMONT GROUP

FinCEN took a number of steps forward in the effort to create an international network of anti­money laundering agencies known as "financial intelligence units" or "FlUs". This effort has been undertaken primarily through its key role in establishing the Egmont Group as a framework for contact and coordination among these units.

In April 1996, FinCEN brought together the score of FlUs that already exist, along with several units "under development", at a meeting of the Egmont Group in San Francisco. This third conference of the group was scheduled to follow directly a FinCEN INTERPOL/FOPAC conference on FIIFJS. Holding both of these conferences in proximity to each other and within the Western Hemisphere permitted a number of countries of the region to attend (namely, Argentina, Aruba, the Bahamas, Bolivia, Chile, Colombia, the Dominican Republic, Haiti, Mexico, Panama, Trinidad, Uruguay, and Venezuela) that had not previously had the opportunity to do so. During the conferences, the participants were able to learn about the­concept of the financial intelligence unit and to meet representatives of a variety of these organizations.

Building on these conferences and the momentum started by the Summit of the Americas Ministerial communique on money laundering (signed in Buenos Aires in December 1995), several of these countries subsequently launched serious initiatives in 1996 to establish FlUs. Argentina, Colombia, Mexico, and Panama all sought and received assistance from FinCEN on how best to establish units in those countries. These same countries sent representatives to FinCEN during the year to take part in week­long FIU orientation programs for foreign counterpart agencies.

In 1996, FIUs became operational in Aruba, Panama, and the Netherlands Antilles in the Western Hemisphere. Europe saw FIUs become operational in the Czech Republic and Slovakia, while Poland worked on legislation to create such a unit. Croatia, assisted by the FIU in Slovenia, began developing a unit of its own. Switzerland worked to overcome obstacles posed by its federal system to establish a Swiss FIU by the end of 1997. Greece and Cyprus both have legislation that calls for creation of FIUS; however, by the end of the year had not yet realized their plans. Russia is considering the establishment of an FIU as part of its overall anti­money laundering program, although this measure was not included in the most recent version of the anti­money laundering legislation. Outside the Western Hemisphere and Europe, the Republic of South Africa, with the help of Australia, drafted legislation that will eventually create a unit following the Australian model. In mid­November 1996, the Baltic States signed a declaration in Riga, Latvia, that called for the coordinated establishment of anti­money laundering programs in those three countries. Included in the declaration was the mention of the creation of an FIU as an integral part of the programs. The European Union, the Financial Action Task Force (FATF), and the United Nations Drug Control Policy Office also signed the declaration. Going beyond FATF Recommendation 24, this declaration thus becomes the first truly international instrument to recognize explicitly the need for such a unit as part of an anti­money laundering program.

The fourth meeting of the Egmont Group also took place in November 1996 in Rome. With over thirty countries in attendance, along with four international organizations, the Egmont Group seemed to move one step closer to becoming the primary framework for cooperation among FlUs. The conference came to an agreement on the definition of an FIU, a definition that will likely facilitate the establishment of new units by setting a minimum standard for such a unit. FinCEN played a key role in developing this definition and furthered the effort to increase communication by presenting a prototype secure web site for use by the FIU members of Egmont. The "Egmont Secure Web" was accepted by the group and will become operational in the first half of 1997.

FinCEN continued working with the INTERPOL Proceeds of Crime Group (FOPAC) on an analytical project to assess the money laundering situation in the countries of Eastern Europe and the former Soviet Union. In 1996, FinCEN and FOPAC representatives visited four countries, including Belarus, Ukraine, Czech Republic, and Slovakia. In at least one case (Latvia), the draft report produced as part of this project caused the subject country to take significant action toward modifying and improving its inadequate system of anti­money laundering measures.

ENFORCEMENT: Significant Cases

Hawala Banking Scheme. Two Indian nationals pled guilty to the structuring of thirty­nine separate transactions totaling nearly $5 million, through corporate accounts utilizing the "Hawala" or underground banking system. In addition, one defendant pled guilty to Conspiracy to launder at least $100,000 in currency from narcotic sales. The defendants were sentenced to 37 and 21 months in prison respectively, fined $125,000 each, and ordered to forfeit $135,772 to the government. The foundation of the Hawala system is a worldwide extended family that consists of extensive Indian and Pakistani networks spread throughout Europe and the Middle East as well as South Asia. Historically used as a foreign worker remittance system, the system has been used in recent times to evade taxes, circumvent currency exchange restrictions, and to launder monies from illegal business.

The case originated with a tip from a local bank which indicated that a number of suspicious currency deposits were being made into two corporate accounts. The investigation revealed that the two defendants had been utilizing a number of personal bank accounts to move currency. However, they had recently switched over to corporate accounts after banking authorities had questioned their banking activity. The defendants would transfer monies between the United States and India without regard to the source of the funds. The unique aspect of the case was the method in which funds were transferred to India. Monies were given to the defendants in increments greater than $10,000. These funds would then "structured" into their bank accounts in amounts less than $10,000. A facsimile would be transmitted to India bearing the names and addresses of the persons in India who were to receive the monies. Their respective counterparts in India would then arrange the delivery of the requisite amount of rupees to the designated individuals. On occasion the defendants would periodically wire transfer the deposited monies to one of any number of accounts located in Hong Kong, or Singapore. Once these transfers were made, individuals would travel from India to Hong Kong or Singapore, withdraw the funds in currency, and purchase gold. The gold was smuggled back into India where it would be sold on the black market for a substantial profit.

The Milkman. A major marijuana trafficker and seventeen other co­defendants pled guilty to narcotic and money laundering offenses in a case concluded in 1996. The major trafficker, nicknamed "lechero" or "the milkman" because he also delivered milk, as well as bundles of marijuana to his customers. The operation expanded to the point the "milkman" was transporting tons of marijuana; he admitted distributing more than 200,000 pounds of marijuana, which was transported via trailers, using produce and aluminum cans to cover the illicit cargo. The marijuana was obtained from sources in Colombia and Mexico.

The trafficker is now cooperating with US authorities, and provided information leading to the identification of the Mexican supplier, who maintained an extensive network of bank accounts in the US and Mexico. The supplier also owned a Mexican currency exchange house, used to launder drug proceeds. The Mexican supplier and eight other defendants were indicted for importing more than 100,000 pounds of marijuana and 2.5 tons of cocaine into the United States. The supplier was also indicted on charges of laundering approximately $12 million in narcotic proceeds; he pled guilty to both trafficking and money laundering charges, and was sentenced to 240 months in prison.

Information provided by the supplier led to the investigation of a Hidalgo County, Texas, sheriff, who was alleged to have provided high­level narcotics traffickers with special treatment while they were incarcerated. After bribing jail employees to provide favors, the Mexican supplier was paying the sheriff a fee of $5,000 per month and $1,000 for every visit by his family or girlfriend. The sheriff, who also received sports cars, watches and a flat­bed trailer, was given about $200,000 total, part of which was used to construct a pavilion on the sheriff's cattle ranch. The sheriff and three other personnel were indicted on charges of racketeering, bribery, money laundering and other charges, and, found guilty, the sheriff was sentenced to 84 months in prison and fined $20,000, in addition to paying a judgment of $151,000 on the racketeering conviction.

Radio Station Owners Convicted of Drug and Money Laundering Charges.

Two owners of a Tucson Spanish­language radio station were convicted of conspiracy to sell marijuana and laundering drug money, and, on January 16, 1996, were sentenced in Federal Court to terms ranging from 192 to 300 months in prison. The Tucson jury further determined that the father and son should forfeit their interest in a real estate parcel, and $500,000 laundered through the radio station's bank account. The two were also ordered to forfeit $3.13 million and $1.45 million respectively in narcotics proceeds. In addition, they were sentenced to terms of incarceration of 300 months and 192 months in prison respectively. The conviction resulted from a joint investigative effort which involved agents of IRS Criminal Investigation Division, US Customs Service, FBI, as well as state and local law enforcement agencies. The investigation, which was initiated in 1992, disclosed that the owners were major suppliers of marijuana to the Columbus, Ohio area. Estimates are that sales exceeded 12,000 pounds of marijuana valued at over $5.6 million. Analysis of the radio station's bank account revealed the owners to have deposited $750,000 into the accounts in cash and cashiers checks.

The three week trial began on May 16, 1995. During the course of the trial employees of the radio station testified that the owners would bring in large sums of cash, at least once a month. The employees were directed to purchase cashiers checks in amounts under $10,000. The cashiers checks would then be deposited in the radio stations bank accounts. An Accountant testified that he had personally prepared and filed income tax returns with the Secretary de Hacienda (Mexican Tax Authorities) on behalf of the radio station owners. These statements were made in an effort to show that the large sums of cash received by the owners were proceeds of legitimate economic activity in Mexico on which taxes had already been paid. The accountant further testified that bank records were records that came from his files and were authentic. A representative of the Mexican Secretary de Hacienda was called to testify and refute the accountant's testimony. The Mexican official testified that no documents had been prepared and filed by the accountant on behalf of the station owners. The official also found the Hacienda tax stamps to be fraudulent, and the bank records were not authentic. The accountant was ordered arrested following his testimony. The accountant was indicted and later found guilty on seven counts of false declarations. He is currently awaiting sentencing.

Retired Bank Executive Convicted of Money Laundering. A Detroit jury convicted a retired bank executive and his son on money laundering and drug charges, and, on November 8, 1996, they were sentenced to 186 months and 54 months respectively. In addition, the bank executive was ordered to forfeit his home valued at $400,000 and $2.0 million in cash. This was a joint investigation which included DEA and IRS Criminal Investigation Division agents.

The case involved a Jamaican cocaine, heroin, and money laundering organization based in Detroit, Michigan. The principal defendant had been employed as a bank executive at the Gulf Bank of Kuwait at their New York City branch. Between the years 1984 and 1992 the bank executive, while acting in that capacity is believed to have laundered approximately $7.0 million. The moneys were deposited into secret bank accounts located in the Cayman Islands, and Kuwait. Both defendants are awaiting sentencing.

In 1993, a cooperating individual assisted law enforcement officials in arranging a money laundering 'sting" operation with the bank executive. An undercover agent posing as a narcotics dealer needed to move $3.0 million in cash out of the country. During the course of several undercover meetings the defendants agreed to transfer monies abroad in increments of $100,000. Assurances were made by the defendants that the transfers would be kept secret. In addition, the defendant offered to sell his home to undercover agents for $425,000 in cash. He also offered to sell his Rolls Royce automobile for $199,000 in cash.

In April, 1994 undercover agents made a delivery of $100,000 in cash to the defendant. The defendant arranged the deposit of the funds into a Michigan bank account of his automobile export corporation. Automobiles were purchased with the monies and shipped to the country of Kuwait. The Kuwait customers were instructed to wire transfer their payments to Barclays Bank in London, England. Once the balance was over $90,000 the defendant gave the undercover agent a power of attorney over the account.

MONEY LAUNDERING COMPARATIVE CHARTS

Each year, a committee of officials from each of the United States agencies meets on a weekly basis, from December through February, to consider assessments of the drug and non­drug money laundering situations in more than 200 nations and territories, including steps taken or not taken to address those situations; conformance of laws and policies with international standards; the effectiveness with which the government has acted, and, whether the government has the political will to take needed actions. The evaluation criteria are cited below.

The INCSR assigns priorities to more than 200 nations and territories, using six differential categories ranging from High Priority to No Priority.

INCSR rankings draw upon a number of factors which indicate (1) the nature of the money laundering situation in this nation/territory, i.e., drugs, contraband, etc., (2) why the US regards this situation as having international ramifications; (3) the situation's impact on US interests; (4) whether the government taken appropriate legislative actions to address specific problems; (5) whether the laws are being effectively implemented; and (6) where US interests are involved, the degree of cooperation between the government and USG agencies. There are about two dozen subfactors which are considered. Those factors are explained below.

A government can have comprehensive laws on its books and conduct aggressive enforcement efforts, but still be ranked a high priority if the volume of money laundering continues to be substantial and/or continued vigilance and effective enforcement by a government is essential to the effectiveness of the overall international effort.

When the severity of the money laundering problem places a government in the top three categories, and other deficiencies exist, the rankings indicate that these governments should take immediate action and will receive near­term priority attention from the USG. As one goes down through the rankings, remedial actions have less impact upon the US.

Ranking a government High Priority or Medium­High reflects a USG belief that near­term remedial action by that government is needed to deal with the problems cited in the individual summaries which follow the charts.

SELECTION CRITERIA

As any financial system can be penetrated, every country and territory has the potential of becoming a money laundering center. There is no precise measure of vulnerability for any financial system, but a check list of what drug money managers reportedly look for provides a basic guide.

• Failure to criminalize money laundering from all serious crime or limiting the offense to narrow predicates, such as conviction of a drug trafficking offense, thus abetting efforts to commingle funds.
• Rigid bank secrecy that cannot be penetrated for authorized law enforcement investigations.
• Minimal or no identification requirements to conduct financial transactions, or widespread or protected use of anonymous, nominee, numbered or trustee accounts.
• No required disclosure of the beneficial owner of an account or the true beneficiary of a transaction.
• Lack of effective monitoring of currency movements.
• No recording requirements for large cash transactions.
• No mandatory requirement for reporting suspicious transactions, or a pattern of inconsistent reporting under a voluntary system, or a lack of uniform guidelines from which to identify suspicious transactions.
• Use of monetary instruments payable to bearers.
• Well­established non­bank financial systems, especially where regulation and monitoring are lax.
• Patterns of evasion of exchange controls by nominally legitimate businesses.
• Ease of incorporation, especially where ownership can be held through nominees or bearer shares, or where off­the­shelf corporations can be acquired.
• Limited or weak bank regulatory controls, especially in countries where the monetary or bank supervisory authority is understaffed, underskilled or uncommitted.
• Well established offshore or tax­haven banking systems, especially countries where such banks and accounts can be readily established with minimal background investigations.
• Extensive foreign banking operations, especially where there is significant wire transfer activity or multiple branches of the foreign banks, or limited audit authority over foreign­owned banks or institutions.
• Limited asset seizure or confiscation capability.
• Limited narcotics and money laundering enforcement and investigative capabilities.
• Countries with free trade zones where there is little government presence or other oversight authority.
• Patterns of official corruption or a laissez­faire attitude toward the business and banking communities.
• Countries where the dollar is readily acceptable, especially countries where banks and other financial institutions allow dollar deposits.
• Well­established access to international bullion trading centers in New York, Istanbul, Zurich, Dubai and Bombay.
• Countries where there is a significant trade in or export of gems, particularly diamonds.

ECONOMIC FACTORS

The strength, vitality and freedom of economies can serve as indicators of the relative vulnerability of a financial system to penetration by money launderers.

The 1996 data base introduces the element of relative black market activity, ranking virtually all sovereign governments on a scale of 1­5, with percentage of GDP as the defining factor.

Analysts assessing vulnerability can also use the existence of parallel economies as a measure, i.e., whether the parallel economy is seen as a major or minor factor in a given money laundering situation or is not significant.

There have been no empirical studies of this element, but, confirmed information on money laundering practices indicates that the parallel economy is a major factor in money laundering in a number of areas, including: Burma, Dominican Republic, Poland, Colombia, Hong Kong, Mexico, Nigeria, Panama, Russia, Thailand, Venezuela, Pakistan, India and the United States (the fungible economy which operates on both sides of the border with Mexico). Parallel economies are considered a minor factor in the money laundering situations in: Bolivia, Chile, China, Ecuador, Greece, Guatemala, Hungary, Korea, Kuwait, Lebanon, Macau, Taiwan, Italy, Netherlands, Turkey, United Kingdom, Argentina, Brazil, Costa Rica, Cyprus, Japan, Paraguay, Uruguay, Cote D'Ivoire, and St. Vincent and the Grenadines. Parallel economies were not considered a significant money laundering factor in the other governments in the High, Medium­High, Medium and Low­Medium categories. There were not sufficient data to draw conclusions about the governments in the Low and No Priority categories.

1997 CHANGES IN INCSR RANKINGS

UPGRADES

Cyprus--Medium­High to High

China, PR--Medium to Medium­High

Dominican Republic--Medium to Medium­High

Taiwan--Medium to Medium­High

Peru--Medium to Medium­High

Australia--Low­Medium to Medium*

Indonesia--Low to Medium

South Africa--Low­Medium to Medium

Vanuatu--Low­Medium to Medium

Jamaica--Low to Low­Medium

St Kitts & Nevis--Low to Low­