FINANCING TERRORISM
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Financing Terrorism Edited by
MARK PIETH University of Basel, Switzerland
Partly reprinted from European Journal of Law Reform Vol. 4, No. 2, 2002
KLUWER ACADEMIC PUBLISHERS NEW YORK, BOSTON, DORDRECHT, LONDON, MOSCOW
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Contents
Editorial: The Financing of Terrorism – Criminal and Regulatory Reform Mark Pieth
1
Articles Globalization, Terrorist Finance, and Global Conflict – Time for a White List? Jonathan M. Winer
5
How Can Sound Customer Due Diligence Rules Help Prevent the Misuse of Financial Institutions in the Financing of Terrorism? Charles Freeland
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Financing of Terrorism – A Predicate Offence to Money Laundering? Armand Kersten
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Obstacles in Company Law to Anti-Money Laundering International Co-Operation in European Union Member States Ernesto U. Savona
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Terrorist Finance, Money Laundering and the Rise and Rise of Mutual Evaluation: A New Paradigm for Crime Control? Michael Levi and William Gilmore
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Financing of Terrorism: Following the Money Mark Pieth
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Documentation FATF Cracks Down on Terrorist Financing
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FATF Special Recommendations on Terrorist Financing
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Financial Action Task Force Guidance for Financial Institutions in Detecting Terrorism
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vi
Contents
International Convention for the Suppression of the Financing of Terrorism
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Council Common Position of 27 December 2001 on the Application of Specific Measures to Combat Terrorism
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Customer Due Diligence for Banks
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Wolfsberg Group Pledges Anti-Terrorism Support
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The Suppression of the Financing of Terrorism – Wolfsberg Statement
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Editorial: The Financing of Terrorism – Criminal and Regulatory Reform
1. The first shock of 11 September, the disbelief and the emotional turmoil, led many politicians and experts to conceptualize the events of that day as something totally new, different from anything experienced thus far. Accordingly, reactions had to be phrased in superlatives. The use of the imagery of an all-out ‘War against Terrorism’ did not immediately generate the sceptical reactions that the much abused formula of ‘War on Drugs’ is currently provoking – especially amongst Europeans. And at least for a month or so after the event, one even accepted a drastic step-up in security measures. Many legislators hastily enacted new laws, some of which have primarily symbolic value; others, however, will seriously restrict civil rights, especially those of foreigners. Gradually over time, once things had settled down and ‘normality’ had been restored, it became evident that politics and political interest groups took over the discourse on terrorism as they tend to do on all issues. It appeared logical at first to fight terrorism with all available means including controlling and blocking access to the financial markets and institutions. Eventually, it became evident that fighting terrorism was to be set apart in a different category from other topics of equal gravity. This became particularly apparent when the US and some US-inspired international fora requested international support to combat terrorism whilst, at the same time, the former attempted to block serious efforts to create a standing International Criminal Court for war crimes and crimes against humanity. Of course, all the issues at stake are much more complex, yet the public discussion in the media does beg the question why one should be tough on terrorism and rather less than consistent on genocide. Returning to our topic concerning the financing of terrorism, the cracks in the coalition against terrorism have become more and more visible over the last few months. First, the states leading the fight against terrorism refused to give an abstract definition of terrorism, instead they preferred to blacklist individuals and organizations in an ad hoc fashion and solely on the basis of information supplied by intelligence agencies, thereby by-passing any democratic discussion. National financial supervisors mirrored this abstention by refusing to give financial institutions appropriate guidance on what they regarded as terrorism: M. Pieth (Ed.), Financing Terrorism, 1–3. © 2002 Kluwer Academic Publishers. Printed in the Netherlands.
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the banks have been required to carry the risks and distinguish between freedom fighters and terrorists. To illustrate this with a complicated example, how – for instance – should the banks deal with a charity fund for family members of jailed IRA members? Is such a fund now to be considered support for a terrorist cause or a legitimate charity? Refusing to give clear guidance and then to criticize financial institutions for not having taken precautions seems unfair. The Financial Action Task Force against Money Laundering (FATF), the UN, the EU and other organizations have recently enacted binding instruments and recommendations to combat the financing of terrorism; however, professional bankers in particular are doubtful whether the ‘red flag’-lists are of any real practical assistance. Even if it is clear that money laundering and the financing of terrorism should not be confused, one post-September 11 outcome has been the political compulsion finally to enact legislation against financial crime and money laundering even in countries and territories that have so far fallen short of international standards. And here I am not only talking about the so-called ‘non co-operative countries and territories’ defined by the FATF, but also the rather reluctant countries within the FATF, like the US, who are now using the socalled ‘Patriot Act’ to fill the gaps in their ‘KYC’-policy. 2. It is therefore no coincidence that this volume, in the context of the financing of terrorism, addresses some of the traditional core issues established in 1990 to combat money laundering with the emergence of the first set of rules by the FATF. Just how far are the existing rules against money laundering helpful in preventing the financing of terrorism? Armand Kersten, Senior Compliance Officer of a bank that is active worldwide, warns us that it would be unwise to mix the issues of the financing of terrorism and money laundering. However, he does not doubt the logic of identifying funds related to terrorism, and rightly points out the difficulties of so doing when examining transactions. Charles Freeland, Deputy Secretary General of the Basel Committee on Banking Supervision and co-author of the new Customer Due Diligence guidelines of the BCBS, rightly indicates that ‘CDD’ and ‘KYC’ procedures are a key component in preventing the misuse of the financial sector by terrorists. The package offered by the BCBS – a long outstanding supplement to the AML standards – is an antidote to a broad array of risks confronting the commercial banker. Ernesto Savona, Professor at the University of Trento (Italy), founder and director of Transcrime, focuses on another issue that for an astonishingly long time was left on the back-burner: the use of ‘corporate vehicles’ (including IBC’s and trusts) as a much-used means to evade identification of beneficial ownership and a handy tool for money launderers to frustrate legal and administrative co-operation in anti-money laundering investigations. Michael Levi, Professor at the University of Cardiff (UK) and expert on
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financial crime, and Bill Gilmore, Professor at the University of Edinburgh, critically explore the mechanisms of peer pressure (monitoring) that have enabled the expansion of international standards on money laundering to the world of financial centres over the last decade. Similar monitoring mechanisms are now being used to enforce compliance with the rules against the financing of terrorism within the world community. Myself, I locate the reactions to September 11 within the development of regulations in the financial sector and raise a few critical questions regarding the direction that the most recent moves are taking. Jonathan Winer’s text, the first in this volume, could also appropriately be placed at the end. Even if the different aspects of macro-crime (e.g. organized crime, terrorism, money laundering, grand corruption and embezzlement of State funds by dictators) raise diverse legal issues, they are accurately set in context. The standards gradually developed into a global body of rules, attempting to regulate multinational financial institutions, since national regulators are no longer able to oversee the worldwide business of transnational corporations located in their territory. He offers a series of concrete suggestions to be picked up in the current discourse on banking regulation, sparked off by the BCBS, the FATF and also by a group of private banks, the ‘Wolfsberg-Initiative’. Mark Pieth
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Globalization, Terrorist Finance, and Global Conflict: Time for a White List? Jonathan M. Winer*
I.
11 September 2001: Global Financial Transparency Under Construction
When the terrorists trained by Osama bin Laden destroyed the two World Trade Center towers, their actions revealed both the globalization of terrorist finance, and the potentially Herculean task facing governments seeking to combat both it and other serious trans-border problems involving flows of money from illicit sources or for illicit purposes. Relying on a mere 500,000 USD in total expenditures, nineteen terrorists were able to enter the United States repeatedly, train as commercial pilots, engage in intercontinental air travel, rent cars, establish personal bank accounts, obtain ATM cards, and generally live adequately funded lives in the months prior to the attack. After 11 September, some of the funds involved were traced to an account in Dubai, a country that houses not only its own banks, but major US and European banks, banks from throughout the Islamic world, purely Islamic banks, alternative or underground remittance systems (hawalas), gold dealers, and myriad financial institutions handling transactions to such States as Iran and Iraq. While little had been done to implement the standards at the time, Dubai was actually one of the very few countries in the Middle East (the others being Cyprus and Israel) to have even basic money laundering legislation in place. In theory, since the previous year, financial institutions in Dubai had been prohibited from taking anonymous funds for anonymous accounts, which previously had been lawful. By contrast, if one wanted to place funds for a terrorist from Saudi Arabia, for example, or from Bahrain, Yemen, Malaysia, Indonesia, the People’s Republic of China, the
* The author was US Deputy Assistant Secretary of State for International Law
Enforcement from 1994 through 1999. He currently practices international financial services law at the firm of Alston & Bird LLP in Washington, DC and can be contacted at
[email protected]. An earlier version of this paper was undertaken in late 2001 and early 2002 with the support of the Norwegian FAFO Institute in Oslo, Norway. M. Pieth (Ed.), Financing Terrorism, 5–40. © 2002 Kluwer Academic Publishers. Printed in the Netherlands.
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Philippines, Nigeria, or Somalia, to name only a few, opportunities for anonymity would be wide-open. In these countries, there were effectively no limits on the anonymous placement of money, either in law or in practice, and indeed several of them retained a legacy of large numbers of anonymous accounts that could be freely traded as needed to practically anyone. Sources of funds for terrorism were also little constrained. For Islamic terrorists, vast sums were available to those carrying out charitable work, including militant resistance, in Islamic outposts under siege – such as Bosnia, Kosovo, Kashmir, and Chechnya – donated by wealthy Gulf State Muslims giving zakir. Further funding was made available by siphoning off donations for more ordinary charitable work in many other jurisdictions within Islamic communities. These funds merely added to the seed money available on an ongoing basis from the proceeds of narcotics. Alternatively, terrorists have had numerous opportunities to generate revenues through fraudulent conversion of social benefits, migrant smuggling, document fraud, stealing cars, gun-running, or even working for the money. Thus, money, the life-blood of all kinds of organized crime, and regardless of its involvement in terrorist deposits and withdrawals has coursed rather freely through the veins of the global financial infrastructure. Long before 11 September, other forms of financial scandal had demonstrated the ease with which criminals, drug traffickers, illicit combatants, guerrillas, and other persons and entities engaged in socially condemned behaviour have been able to launder their money. And repeatedly, governments, regulators, law enforcement agencies, and the most important and prestigious international organizations have found themselves unable to trace illicit transactions after something goes radically wrong. Thus, terrorist finance can be seen from this perspective as a subset of a larger problem, that of non-transparent movements of money in a system to which much of the world has easy access. Financial non-transparency has facilitated not only terrorism, but also many of the world’s more significant social ills, including civil war and civic instability. For example, the laundering of the proceeds of crime is a necessary means to carry out the trade in diamonds that has fuelled civil conflict in Liberia, Angola and Sierra Leone, together with their accompanying arms deals and payoffs. The narcotics trade has long been understood as a massive generator of illicit money to be laundered, as well as a generator of corruption and weakened governance. Drug trafficking is also closely associated with conflict, and one of the enduring factors in such conflict is the fact that drug funds sustain combatants in civil wars. It is no accident that each of the three countries which produce most of the world’s opium and coca crops – Afghanistan, Burma, and Colombia – have ongoing insurrections fuelled by drug money, in which terrorist acts (or their equivalents) have become a common element of daily life. The global attention focused on terrorism and terrorist finance as a result of the 11 September attacks on the United States provides a fresh vantage point on what has become an increasingly longstanding, significant problem. As an increasing number of significant global problems became linked to illicit finance, money
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laundering was recognized in the 1990s as a global problem requiring a global response. Prior to 11 September, this response included new international instruments, such as the 2000 United Nations Convention to Combat Transnational Organized Crime and the Second Money Laundering Directive, issued by the European Union in late 2001. It has also included the rapid movement of ‘name and shame’ sanction programmes. Most prominent among these has been the Financial Action Task Force (FATF) against ‘non-co-operative countries and territories’. In the first two years that the FATF threatened to limit market access to jurisdictions not meeting international standards, most of the nearly twenty targeted jurisdictions enacted new anti-money laundering laws. A similar exercise against ‘unfair tax competition’ undertaken by the Organization for Economic Cooperation and Development (OECD) is having a similar impact on ring-fencing, the strategy by which jurisdictions offer non-residents unregulated financial services, which they deny to their own citizens. Major self-regulatory organizations, such as the Basel Committee for Banking Supervision (BGBS), the International Organization of Securities Commissions (IOSCO), and the International Association of Insurance Supervisors (IAIS) also focused on extending standards for international regulation to cover transparency issues.1 The new standards were designed to respond to the major failures of existing financial regulation to provide protection against illegal activities. Each organization focused on major gaps in the international regulatory system that translated into injuries to domestic supervision and enforcement. These gaps included: Fragmented supervision within countries by sector and among countries by national jurisdiction. Exploitation of differences in national provisions for regulatory arbitrage to circumvent more stringent national laws and international standards. Secrecy laws which impede the sharing of information among countries and between regulators and law enforcement. Inadequate attention to electronic payments in existing anti-money laundering supervision and enforcement, including ‘know your customer’ rules that focus on currency, even as the world’s financial services businesses rapidly continue their move into e-money. The lack of international standards governing key mechanisms used in transnational financial transactions, such as international business companies (IBCs), offshore trusts, offshore insurance and reinsurance companies, and offshore funding vehicles, including but not limited to hedge funds.
1
See, e.g., Statement of the G-7, 18 June 1999; ‘Strengthening the International Financial Architecture’, Report of the G7 Finance Ministers, 18–20 June 1999; ‘Financial Havens, Banking Secrecy and Money-Laundering’, UN ODCCP, New York, May 1998; and numerous recent analytic documents of the Basel Committee available on the website of the Bureau of International Settlements (BIS).
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Minimal due diligence by company formation agents, attorneys, and financial institutions in the process of incorporating and licensing of new financial institutions and shell companies and trusts owned by their affiliates. In response, there has been a convergence in the standards of protection in many countries against various simultaneous threats. In essence, the standards have begun to require a form of ‘know your customer’ at both the front end and the back end of any transaction. At the front end, bankers and other financial facilitators are now required to know with whom they are dealing, and at some level, what their customers have been doing with their money. At the back end, those permitting withdrawals of funds need to know not only who has been getting the money but also where it came from. That way, should something go wrong, it should be possible to trace the funds. Despite these efforts, the globalization of money makes tracing increasingly more difficult. Thus, the need to establish uniform standards, end bank secrecy, create mechanisms for the exchange of information between national regulators and law enforcement organizations with their counterparts, and the decision to ‘name and shame’ jurisdictions that failed to adopt and live by the new rules. In 1989, when the FATF was created, there was some scepticism about the ability of even OECD countries to agree on common standards, let alone to live by them. A decade later, when the FATF’s non-co-operative countries and territories initiative began, common standards became comprehensive, and the consensus existed that they should be made universal. Thus, by 11 September, the name and shame exercises were well on the way to universality. Over time, the existing international initiatives in response to these problems began to create a new global code articulating new international standards for transparency. And yet, these initiatives failed to do much to prevent the September terrorists from carrying out their plans. One could argue that these regimes are too new and incomplete to have had an impact, especially in a world where the proceeds of the world’s largest extractive industry, oil, remained largely opaque despite all of the transparency initiatives. In this view, objectives are long-term and the belated response to the globalization of the financial infrastructure cannot be expected to fix long-standing problems overnight, especially in such regions as the Middle East, which only began to adopt the regulatory standards of more established international financial services centres. However, it is also possible that the basic idea of a universal standard for all governments, given our global diversity, is inherently flawed. Each of the new initiatives has been based on the promise that national financial service regulators have the capacity to determine whether their own ‘local’ institutions meet the standards or not. Under the principle of consolidated supervision, the home-country regulator of any international financial institution is solely responsible for exercising oversight over the global operations of that institution. Over the past ten years, the principle of consolidated supervision has proven helpful but far from infallible in protecting safety and soundness by requiring multi-jurisdictional financial institu-
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tions to take at least their home regulators very seriously. In turn, these home regulators are increasingly subject to a common set of standards, such as those established by the Basel Group of Bank Supervisors (Basel Group). Over time, these standards have come to promote global financial stability by promoting good practices for banks in their lending and investment practices. However, the same system has to date demonstrably failed to do much to protect the world from money laundering or terrorist finance.
II. The Capacity Problem Can governments that stop at borders regulate financial activity that crosses borders at the speed of light amid billions of electronic ones and noughts? Even if one does not consider the special problems posed by terrorist finance and the inadequacy of financial transparency regimes in the Middle East, there is mounting evidence to justify questioning whether global banks, operating transnationally to move money instantaneously across national borders, can be readily regulated or supervised by any one country. While such financial institutions may have their headquarters nominally based in a single country – typically one of the G–7 countries, the EU, or Switzerland – they generate profits and carry out activities at a global level involving dozens of UN Member States. As a result, they are for many purposes beyond the capacity of any single state to police. The current ‘name and shame’ exercises have had the salutary effect of forcing some of the world’s least-adequately regulated jurisdictions to abandon traditional notions of bank secrecy, and to begin insisting that their financial institutions carry out due diligence and know their customers. But these exercises have not and cannot create any capacity at a national level to assess the meaning and integrity of cross-border financial transactions. It is not reasonable to expect a small jurisdiction that houses a subsidiary of a major international financial institution to fully understand the cross-border transactions engaged in by the subsidiary, let alone by its affiliates or far-away parent. In practice, even the most sophisticated and best regulated financial centres, including those of the G–7, European Union, and Switzerland, are similarly incapable of exercising adequate oversight over the global enterprises they license. In recent years, the proposed solution has been a mixture of public sector regulation and private sector self-regulation. Self-regulation has been advocated as a means by which private institutions subject to market forces will, as a matter of good business, avoid transactions that are exposed on that institution or its reputation to undue risk. However, it is not clear that this approach has been effective. Indeed, the combination of both government regulation and selfregulation has not to date effectively discouraged abuse of international financial institutions by drug traffickers, terrorists, major financial criminals, corrupt officials, arms smugglers, or sanctioned regimes, not to mention those engaged in
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local civil conflict, timber theft, or other criminal activity. Today, there is no list that evaluates whether international financial institutions have complied with basic rules of transparency or integrity. On the ‘name and shame’ side, there is no compilation ranking major international institutions according to their involvement in the laundering of proceeds from drug trafficking, corruption, terrorist finance, illegal logging, toxic waste, human trafficking, or corporate fraud, although such a ranking might be compiled from court documents, public investigations and press reports. Nor has there been a list involving a ‘seal’ or ‘certificate’ system by which an institution can be endorsed as having put into place a series of best practices to promote transparency. Every year, many billions of dollars flow from international organizations and international financial institutions through the world’s major international banks. These public funds are deposited and held in these private-sector institutions without considering if these institutions have put into place excellent transparency policies and procedures, or minimal ones. Indeed, such funds are deposited and held in private sector institutions that have had no due diligence or knowledge of a customer’s principles, if they happen to be located in jurisdictions where such principles are either not required or are minimally enforced. The value of such deposits to the private sector financial institutions is substantial, generating not only substantial fees but the ability to engage in further lending activities of their own, due to the multiplier effect of bank deposits. To date, the only limitations placed on those holding or benefiting from such international funds has been the obligation of the institutions to account for the uses of those funds adequately. Broader obligations, such as a requirement that a particular bank implement strong guarantees of financial transparency or protective measures against money laundering, have not been demanded of private sector banks by the international organizations and international financial institutions that deposit their funds in such institutions. Rewarding private sector institutions who agree to meet high standards of transparency for the funds they process on a global basis could create a significant incentive for banks, providing additional weight to existing national efforts. At the same time, access to the international financial services infrastructure by regions and institutions that have no controls on placement increases the world’s vulnerability to terrorism. The post–11 September co-operation of Middle Eastern and other Islamic countries in tracing the funds of particular terrorists represents an important development in responding to the threat posed by terrorism in the financial context. However, ‘back-end’ reconstruction of particular terrorist events after they have taken place is vastly insufficient, so long as the front-door remains wide open. Controls on placement, including rigorous ‘know your customer’ standards, are as essential as they are culturally unlikely in many countries. Thus, carrots and sticks need to be developed to ensure that private sector institutions in those regions have just as many incentives as do private sector institutions in countries such as Switzerland where, despite a history of bank secrecy, the need for financial transparency is now accepted. There is an obvious opportunity in this for world policy makers. The question is whether they can accept the fact that
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globalized money requires not only globalized standards, but also an agreement on globalized incentives for the private sector not merely to adopt but to enforce these standards as a means to ensure their own survival.
III. Structural Consequences of the Globalization of Money It may be self-evident that globalization has changed many practical elements of banking and financial services. However, the political consequences of globalized financial services are often not spelled out.
Prior to Globalization Money was local. Prior to globalization and since the days when money based on something real, like shells or gold, was replaced by state-created ‘fiat money’, money in circulation in most countries has generally been issued by sovereign states. Alternatively, it has been issued by private sector financial institutions regulated by the sovereign state in which the institution was based. The stored value that money represents has been a value determined locally by the people within the jurisdiction that issued the currency in relation to the value of other commodities traded in that individual economy. Money was trusted locally to the extent that others would accept it in the society. To the extent that the national currency was valued at a distance by other countries, that currency would tend to be discounted, given that its principal value for the purchase of goods and services was local. Banks were local. Although international finance is certainly not a new phenomenon, with international lending a substantial and familiar activity by the third quarter of the 19th century, most banking prior to the era of globalization and securitization was done at a local level by local banks. These local banks were largely dependent on their local community, and vice-versa, with the respective fates of the local banks and the local communities at least moderately interdependent. To go beyond the community was potentially dangerous for a bank, because of the substantial impediments to enforcing a financial obligation at a distance. Cross-border transactions were costly and slow. Prior to the establishment of comprehensive electronic-payment systems in the last two decades, cross-border financial transactions were largely conducted on paper that required physical transport. For most transactions, the efficiencies of conducting such transactions locally would outweigh the benefits of obtaining a broader market of buyers or sellers, depositors or borrowers beyond the particular jurisdiction. In particular, uses of the offshore sector, such as the Caribbean or the Channel Islands, were limited to very large financial institutions for tax structuring and trade finance, or alternatively to small-time operators specializing in tax and creditor avoidance schemes. Access to the offshore sector was not something available to the ordinary business or citizen.
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For corrupt heads of state, money moving abroad was typically hand-carried to Switzerland. Regulators could monitor local financial services. In an environment in which most money was generated and spent locally, and not readily substituted for by other currencies in other jurisdictions, regulators were free to develop local regulatory regimes for local purposes. Some of these regimes were minimalist, others were comprehensive, and few would have met what, today, constitute the basic standards for safety and soundness. However, subject to local politics and the corruption factor, the regulatory regimes were inherently enforceable as an expression of national sovereignty. A financial institution definitively found to have engaged in unacceptable misbehaviour could be fined, lose its license, and be closed. While bank runs, bank frauds, and bank collapses remained an enduring part of the economic life of any free-market jurisdiction, enforcement at a local level was possible, and a recognized fact likely to have a substantial impact on market behaviour within the regulated institutions. Taxes were collected at borders. Prior to globalization, the preponderant mechanism for governments to collect revenues was not by taxing income, but by tariffs, levied on goods at point of sale and, especially, when crossing borders. In such a tax regime, strong controls at the borders, including currency controls, were vital to the survival of the state, as revenue collection required the border to be a barrier before it could be a crossing. In this environment, barriers at the border, including barriers to unregulated cross-border finance, were an essential element of preserving and protecting national sovereignty.
After Globalization Money is a global commodity. Although a government can give its currency a name and a putative value, the actual value of a currency in a globalized world is determined by global markets, private sector assessments of its value in comparison with other forms of stored value. Similar valuation is given to any particular currency the world over, regardless of location, making money a commodity whose value can be affected by the actions of the government that issued it, but not controlled by it. The loss of local control over money has meant that the valuations given to it locally may be less relevant to its strength as a durable commodity – an object that stores value – than the valuations given to it by those who have no particular stake in that currency. Being a global commodity, money may also be less susceptible to local control and regulation. As Alan Greenspan, chairman of the United States’ Central Bank, the Federal Reserve, has observed: ‘In the international arena [...] no overarching sovereign exists to decree what is money. Instead, a myriad of private agents must somehow reach agreement.’ 2
2
‘The euro as an international currency’, speech given by Alan Greenspan before the Euro 50 Group Roundtable, Washington, DC, 30 November 2001.
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Banks are international. Where local banks were once dependent on local economies, international banks invest their capital wherever opportunities may present themselves, whether they are in New York, Jakarta, or Moscow. Home regulators cannot confine them, and indeed, neither can home regulation. If a local regulation appears inconvenient, it can be avoided by structuring some of the elements of the financial activity offshore. In many instances, transacting financial services offshore is more efficient and less expensive than conducting similar services on-shore. The offshore sector’s minimal regulation reduces transaction costs.3 Regulators cannot monitor international financial institutions. The principle of home-country consolidated supervision notwithstanding, home-country regulators do not in practice audit international financial institutions internationally. They more largely rely on self-regulation and reporting by the institutions they regulate. A financial institution that does not tell the truth to its regulator about its offshore activities runs the risk of eventual exposure and punishment. In the meantime, however, there is little effective supervision. As a consequence, there has been the opportunity (and perhaps the market imperative) for financial institutions with cross-border operations to behave with relative impunity, especially in the operations they carry out in smaller, less fully regulated jurisdictions. Borders do not block transactions. With tariffs largely gone and electronic money able to move across the planet at the speed of light, control of money at the border is largely anachronistic. Electronic currency is essentially incapable of cross-border monitoring. Cross-border movements of currency can be monitored, and countries can impose cross-border currency declaration requirements, but these requirements can be readily circumvented through alternative remittance systems that substitute netting for cross-border currency movements. To the extent that domestic regulations impose burdens involving obligations to maintain certain levels of liquidity, transparency, or payment of taxes, those with money may circumvent domestic regulations entirely through capital flight. The ineffectiveness of borders means flight capital need not truly flee. Russian oligarchs have vividly demonstrated that after illicit proceeds have been laundered elsewhere, they can be readily brought back into the home jurisdiction for reinvestment with no practical impediments to its integration into the formal financial system.
3
For a detailed treatment of the development of globalized finance through the 20th century, see Michael D. Bordo, Barry Eichengreen, and Doulas A. Irwin, ‘Is Globalization Today Really Different Than Globalization a Hundred Years Ago?’ in Brookings Trade Forum, vol. 2 (Susan M. Collins and Robert Z. Lawrence, eds.) (Washington, DC, Brookings Institution Press, 1999), pp. 1–50; the short answer to the question in the study’s title is ‘yes’.
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IV. Practical Impact of Globalized Illicit Finance on Political Stability and on Areas of Conflict The integration of electronic financial payments systems into a globally ubiquitous network is of remarkably recent vintage, gathering speed in the 1980s and only reaching widespread coverage at the consumer level with the rapid proliferation of internationally linked automatic teller machines in the mid-1990s. The benefits of this integrated payments system for international businesses and travellers have been immeasurable. However, these same benefits have simultaneously worked to the advantage of those exploiting the dark side of globalization. The Money Launderer’s Common Financial Infrastructure. Global banking has provided continuing technical services to a wide range of practical destabilizers. Periodic eruptions of scandal have shown that drug and arms money launderers, diamond and timber smugglers, traffickers in people, terrorists, and corrupt officials chose a similar range of institutions to move and maintain their funds. These institutions typically include (a) small international business companies or trusts, established in jurisdictions of convenience, which establish (b) bank accounts at local financial institutions, which have correspondent banking relationships with (c) major international financial institutions, which (d) move funds willy-nilly throughout the world without regard to the provenance of the funds. Thus, over time, a taxonomy of scandals shows money laundering activity to have been facilitated, at one time or another, by Bank of America, 4 the Bank of New York, 5 Barclay’s Bank, 6 Chase Manhattan (now J.P.Morgan-Chase), 7 Citibank, 8 Crédit Lyonnais,9 Crédit Suisse, (now CSFB)10 Daiwa,11 Deutschebank, 12 Swiss Bank Corporation 13 (now part of UBS-AG), and Union Bank of Switzerland (now UBS-AG). 14 In some of these cases, the financial institutions may have been acting knowingly or negligently. In other cases, the institutions themselves did nothing wrong under existing laws and
4 5 6 7 8 9 10
11 12 13 14
Handled proceeds of money laundering for a suspect Antiguan financial institution. Handled funds of Benex, which laundered billions of dollars from Russia, including some for Russian organized crime. Handled terrorist funds for Al-Qaeda. Handled proceeds of Colombian cocaine trafficking. Handled proceeds of Colombian cocaine trafficking, and drug-related funds from Mexico’s Raul Salinas. Involved in massive financial frauds in connection with French political scandal. Involved in handling stolen funds from Philippines of Ferdinand Marcos; reportedly indicted by the Swiss government in connection with its handling of the funds of Sani Abacha of Nigeria 6 December 2000. See ‘CS to be indicted in Abacha inquiry’, Financial Times, 7 December 2000. Laundered funds in the Caribbean to cover trading losses. Handling terrorist funds for Al-Qaeda. Handling stolen funds from Philippines of Ferdinand Marcos. Involved in handling stolen funds from Philippines of Ferdinand Marcos.
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frameworks. The fault lay not in the institutions, but rather in a system of international regulation that created neither legal norms nor regulatory mechanisms to prevent abuse. The infrastructure for non-transparent international finance has nodes that have specialized in particular kinds of services. For example, until recently, the Bahamas and the Virgin Islands have been among the world’s principal creators of anonymous international business companies (IBCs). The Channel Islands, Gibraltar, and the Dutch Antilles have been world-class centres for the establishment of trusts to hide the true ownership of funds. A single firm in Liechtenstein laundered political slush funds for ruling political parties in France and Germany; arms purchases for civil wars in Liberia and Sierra Leone; drug money for Ecuadorian cocaine trafficker Jose Reyes-Torres, and stolen funds for various West African dictators. 15 The Liechtenstein example is not unique. Financial nodes that initially provide services for one purpose, such as tax evasion, over time attract more sinister illicit purposes. Case Study: Cyprus. Since World War II, Cyprus has provided trade finance and related services for a variety of cross-border trade and commercial activities throughout the Middle East and the Mediterranean. Many operating in this region have had practical reasons to avoid regulations in their home jurisdictions, as well as high taxes, bribes, the risk of nationalization, and political instability. Accordingly, Cyprus developed a strong financial secrecy regime, available through banking services, company formation, trusts, and related mechanisms. By the 1970s, this system had come to be used by terrorist organizations, arms dealers. Middle Eastern drug traffickers, Italian mafias, the Communist Party of the Soviet Union, and Israeli criminals, among many others. By the mid–1990s, as Cyprus sought to put into place a more transparent financial regime to prepare for entry into the European Union, many of the traditional illicit interests left the jurisdiction. Even then, elements of Al-Qaeda and much of the illicit finance that sustained Slobodan Milosevic’s control of Yugoslavia and his sustained war in Bosnia and Kosovo remained embedded in Cyprus’ financial institutions. Systems for transporting illicit funds, once established, become difficult to close even for a jurisdiction with strong incentives to do so. Import and Export Fraud: Key Elements of the Financing of Illicit Timber and Conflict Diamonds. Illicit exploitation of a country’s natural resources is a common feature of jurisdictions experiencing serious failures of governance. Such cases typically involve both failures of legitimacy and of capacity. The complex political question of who has the right to control a country’s natural resources devolves into the simpler question of who has the capacity to exercise such control in practice. The power to gain access to natural resources, to strip them, to transport them out of the country, and to reap the financial benefits becomes the major practical requirements 15
See, e.g., extensive material on money laundering allegations involving Liechtenstein, including excerpts from a German government report, on website: < http://www.marcosbillions.com >.
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for those seeking to exploit them. The financial benefits are the major point of the asset stripping. Given the weakness of national currencies in such jurisdictions, obtaining money from beyond the jurisdiction, is the sine qua non of the entire enterprise. Much of the money may, in turn, remain outside the jurisdiction, functioning as a political slush or retirement fund, or returned to the jurisdiction to pay for weapons, bribes, or luxury cars. One of the most widespread mechanisms for laundering money is the use of false import and export documentation. Through the technique of under-invoicing, corrupt exporters declare a smaller quantity of the exported good, and then typically share the proceeds of the additional ‘invisible’ export with their partner, usually either the importer or the shipper. Through over-invoicing, a corrupt exporter can pretend to ship goods that do not exist, as a cover for reimporting and legitimizing previously earned profits from other illicit activities. Both techniques provide effective mechanisms for facilitating trafficking in illicit commodities, such as conflict or stolen diamonds and timber. The corrupt payments, false documentation, theft of resources and evasion of controls, domestic and international, are an integrated set of criminal activities. For example, in the logging of Burma’s frontier forests, the chainsaws and woodsmen would have no business without the simultaneous participation in the trade of corrupt officials and transnational logging companies, who make substantial payments through financial institutions to pay for the illicit timber.16 Similarly, money laundering is an integrated component of all other major cross-border environmental crimes, such as CFC smuggling and toxic waste dumping.17 Each component of the activities is essential to the success and continuation of the overall enterprise. Thus, disruption of any element of the total activity, including the ability to move funds in and out of the jurisdictions involved, becomes a substantial impediment to its viability. Case Study: Sierra Leone. It has been said that the point of civil conflict in African countries such as Sierra Leone is not to win the war, but to ‘engage in profitable crime under cover of warfare’, with the major opportunities involving
16
17
See, e.g., Bangkok Post, 26 March 1999, ‘Massive Kickbacks Alleged;’ ‘Business Indonesia’, ‘Two Sawmills owned by General Assembly Member buys Illegal Logs’, 2 February 2000. Within the US for example, smuggling of CFCs from outside the US into the US was estimated by a US government study to amount to 60 million pounds of CFCs between 1994 and 1997 from such countries as Mexico, Russia and Venezuela. In a series of cases, the US indicted the smugglers for money laundering violations, as well as environmental crimes. See EPA Enforcement Actions Under Title VI of the Clean Air Act, ‘Texas Man Arrested For Smuggling Freon Into US – Arrest Underscores Federal Crackdown on Black Market in Ozone-Depleting Chemicals’, 24 June 1999. Currently, China and India, both countries with essentially no money laundering laws, are the world’s major source of illicit CFCs, especially to countries in the European Union, in violation of the Montreal Protocol. Detailed information on the illicit CFC trade has been brought together by the London-based NGO, the Environmental Investigation Agency.
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diamonds, illicit timber, narcotics, and weapons smuggling. 18 As a consequence of the work of the British non-governmental organization Global Witness and other groups since December 1998, there has been widespread recognition that ‘conflict diamonds’ were fuelling civil wars in Sierra Leone and Angola. When international sanctions were put into place, the normal revenues from international trade for the participants in each country’s civil wars were eliminated. Diamonds became the key currency for the criminals. The value of the diamonds increased exponentially once they were smuggled out of the region and into Western Europe for processing. Thus, the laundering of the proceeds of the diamonds was an essential component in sustaining the conflicts. In response, a system has been established that requires a series of certificates to follow diamonds as they are transported, in an effort to establish a chain-of-custody that documents the legitimacy of such diamonds and thereby makes it more difficult for diamond sales to support civil war and vice-versa. Yet, while it has been recognized that the conflict diamonds have been largely purchased and processed in Antwerp, Belgium, home to numerous international banks, there is literally no public documentation on the nature of the money laundering involved in the conflict diamond trade. What is evident, even in the absence of data, is that banks in Belgium – not just banks in Western Africa – handled the proceeds of conflict diamonds without impediment, thereby making the business viable. Were financial institutions operating in Belgium effectively prohibited from laundering the proceeds of illicit diamonds, the value of such diamonds in Antwerp would be necessarily reduced, given the heightened risk to any financial institution processing the proceeds. The money flows continued unimpeded until DeBeers, the largest buyer of the conflict diamonds, determined that the risk to its reputation substantially exceeded any profits from transactions, and moved to create impediments to the illicit business. Money laundering regulation in Sierra Leone and Belgium, among other countries, was so weak that it never became a factor in the suppression of the business. Case Study: Liberia. The Liberia of Charles Taylor has sometimes been termed ‘a criminal state’, in which the president, an escapee from an American prison, presides over a series of criminal businesses that include indiscriminate logging, looting of diamond mines, systematic theft of public funds, drug trafficking, and extortion. 19 Few substantial sources of revenue in the country have remained outside the control of Taylor and his corrupt associates. Throughout Liberia’s civil war, Liberia has also remained a tax haven, offering ‘flag of convenience’ services in a variety of sectors,
18 19
Ian Smillie, Lansana Gberie and Ralph Hazelton, ‘The Heart of the Matter: Sierra Leone, Diamonds and Human Security’, Partnership Africa Canada, January 2000. There is no authoritative estimate of Taylor’s illicit wealth, although it is widely understood to come from the sale of iron ore and timber within Liberia, and diamonds obtained from Sierra Leone. See, e.g., ‘Liberia stokes African gem war’, Financial Times, 10 July 2000. The Sierrra Leone UN Expert Panel Report of 2000 describes Taylor’s use of diamonds from Liberia as a source of personal revenue.
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with the revenues being used to sustain control of the country by former dictator Samuel Doe, and currently, by Taylor. Liberia’s commercial laws allow businesses from anywhere in the world to register in Liberia, with no requirement they have any physical presence in the country. Liberia’s financial regime included corporations with no capital requirement, issuance of shares that need not be reported or recorded in Liberia, companies with no obligation to file annual reports, tax forms, or audit statements, bearer shares, and similar freedoms that in effect make the creation of an entity in Liberia a guarantee of worldwide anonymity and non-accountability. The US dollar is legal currency in Liberia. For years, Liberian diplomatic passports have been advertised (and actually made available) on the Internet, reflecting a regime that protects criminals outside of Liberia as well as within the jurisdiction.20 Liberia’s connections with the international payments system broke down during its civil war from 1991 through 1997. The most prominent non-Liberian financial institution, Citibank, left the country. Settlements among Liberian banks, and movements of funds from Liberia to other countries, were handled on an ad hoc basis. Yet throughout this period, Liberia’s armies have been able to generate and use funds from beyond the country, with President Charles Taylor accumulating substantial personal wealth in the process. This phenomenon has continued to the present. For example, in November 2001, the government of Singapore sought information from the UN regarding financial and weapons transactions involving payments for weapons deliveries that used the Chase Manhattan Bank in New York to transfer some 500,000 USD to a Singapore arms trafficking company. Significantly, the firms involved in the arms transfer have also been alleged to be involved in illegal timbering in Liberia and Malaysia.21 Separately, in looking at the impact of Taylor’s involvement in prolonging Sierra Leone’s civil war, the UN Panel of Experts discovered that Liberia secured weapons and made payments for weapons destined for Sierra Leone through accounts at the Standard Chartered Bank in Sharjah in the United Arab Emirates.22 Case Study: Cambodia. Corruption in Cambodia is pervasive and systemic, extending from low-level policemen to the top of the government. Important criminals have close links to Cambodia’s government. For example, Theng Bun Ma, Chairman of the Phnom Penh Chamber of Commerce and a major financial supporter of Prime Minister Hun Sen, has been identified by the US as a major drug trafficker. A second important criminal figure associated with the Prime Minister, Yeay Phu, is chairperson of the Phea Pimech Company, Cambodia’s biggest salt producer and most destructive logger.23 Cambodia’s own financial services sector is
20 21 22 23
Personal inquiry by the author in 1997, during his service in the US Department of State. ‘Singapore to probe alleged involvement of company in arms smuggling in Liberia’, Singapore Business Times, 6 November 2001. Sierra Leone UN Export Report, December 2000. ‘Cambodia’s Hun Sen embracing new tycoons’, Phnom Penh Moneakseka Khmer, 21 September 2001, pp. 1, 2 (Report by Chan Chamnan).
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extraordinarily weak. Some money laundering in Cambodia nevertheless goes through its rather specialized banking system: most of Cambodia’s banks are private institutions, not open to the public, existing mostly to move and launder money.24 Other funds from illegal logging (as well as other criminal activities) are laundered in Cambodia’s neighbours, particularly Thailand. Notably, Cambodian financial institutions have correspondent banking relationships with major financial institutions all over the world, including some based in Canada, France, and the United States, as well as in Korea and Thailand.25 Case Study: Thailand. The impact on the larger society of illicit finance can become broader than the illicit activity initially involved. In Thailand, illegal timber sales have for many years been a substantial source of funds for both politicians and corrupt law enforcement officials. Indeed, scandals involving such sales are frequently reported in the Thai press, and are elements in Thai political jockeying. In 1996, the government of Thailand began to recognize that non-drug money laundering was creating problems, and the government introduced comprehensive anti-money laundering legislation. For the following three years, the legislation stalled over a single issue: the inclusion of illicit timbering as a predicate offence for the prosecution of money laundering crimes. Finally, in 1999, Thailand’s government reached a compromise and passed comprehensive money laundering legislation. The price of compromise was the elimination of illegal timbering as a money laundering crime, permitting corruption involving that activity to continue without restriction. Drug Money and Civil Conflict. Areas where opium and coca are grown include regions where many of the world’s longest-enduring civil wars and internal conflicts are taking place. Opium production has fuelled destabilizing guerrilla and paramilitary movements in Afghanistan, Burma, Lebanon, Pakistan, and Turkey. Coca has done the same in Bolivia, Colombia, and Peru. In each case, proceeds from narcotics production and trafficking became a mechanism for relatively unpopular governments, militia, or rebels to control the territory where the narcotics were produced, thereby sustaining themselves and perpetuating conflict with other forces in the jurisdiction. In each of these countries, the political and military forces have systematically taken ‘tithes’ or regular payments as protection money for the illicit crops, thereby gaining a resource advantage over any force that has not similarly accepted drug protection money. 24 25
‘Paper: Banks in Cambodia involved in money laundering’, Phnom Penh Samleng Yuveakchon Khmer, 30 March 2000, pp. 1,3 (Report by Sophal). For example, the Cambodia bank Canadia, Ltd., has correspondent banking relationships with the Bank of America, Republic National Bank, Standard Chartered Bank, and Banque Nationale de Paris; the First Overseas Bank of Cambodia has correspondent banking relationships with HSBC, which in turn has branches and subsidiaries around the world. Given the absence of any controls on money laundering in Cambodia, it would be difficult to imagine how such correspondent banking accounts could be protected against laundering the proceeds of narcotics, illegal logging, and other criminal activities.
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Case Study: Burma. In Burma, opium has perpetuated the rule of an entirely nondemocratic junta, while providing the means for ethnic warlords to arm their local soldiers. At the same time, Burmese officials have used opium profits to invest in partnerships in legitimate businesses in neighbouring countries, such as Burma, Malaysia, Singapore and Thailand, reducing regional pressure for more democratic governance. Burma’s repressive government has continued to generate international sanctions and impede foreign investment. Yet Burmese banks are thriving and experiencing rapid growth, fuelled primarily by funds generated from the opium trade. Prominent among Burma’s 21 domestic banks are the Asia Wealth Bank, whose chairman and vice chairman are alleged to be former drug lords; the Mayflower Bank, established by Kyaw Win, a partner of the drug warlord Khun Sa; and the Kanbawza Bank, closely tied to the ruling junta and alleged to launder the proceeds of ruling party corruption. 26 Thus, the drug economy and the political control exercised by Burma’s unelected leadership have proved mutually reinforcing. In turn, this economy has been sustained by Burma’s ability to readily move funds to and from the rest of the world. Despite the allegations of its ownership by drug lords and its involvement in money laundering, the Mayflower Bank apparently maintains correspondent relationships with the Marine Midland Bank and American Express Bank in New York. 27 It is difficult to imagine that any US institution is not well enough situated to assess the provenance of funds from the Mayflower Bank. 28 EU sanctions against Burma were toughened in 2000, theoretically freezing the funds belonging to members of the junta and those associated with them. However, the state-owned Myanmar Foreign Trade Bank currently reports a network of over 120 correspondent banking relationships in 58 countries, so that ‘banking transactions can be made with almost any country in the world’.29 Burma’s repressive government retains access to international financial institutions, irrespective of the sources of Burmese assets or international sanctions. Case Study: Afghanistan. In Afghanistan, decades of tribal conflict have been fuelled by opium funds, with each of the major forces, including the Northern Alliance and the Taliban, taking drug money to finance their military campaigns. Opium’s impact in acting as a regional destabilizer extends beyond Afghanistan. Drug-related corruption has been an ongoing problem within the Pakistan military. According to a recent French analysis, from approximately 1983 through 1998, Pakistan’s military intelligence agency used heroin trafficking from Afghanistan to 26 27
28 29
‘Above it all, Burmese banks are thriving even as the country’s economy suffers its worst slump in years’, Maung Maung Oo, the Irrawaddy, 2 February 2001. For example, Hamsa Travels and Tours of Yanon, Myanmar, which offers tourist services for Burma, currently specifies on its web-pages the use of these institutions to make payment to its account at the Mayflower Bank from the US. Existing US sanctions against Burma prohibit new investment but do not prevent financial transactions for such purposes as tourism. Myanmar Financial Structure and Exchange Arrangements, published by the Government of Myanmar, < http:/www.myanmar.com/gov/trade/fin.html > .
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fund secret operations aimed at destablizing India through Muslim rebellion in Kashmir.30 While much of the opium trade at the local level is cash-based, opium money arriving to Gulf State financial institutions from Pakistan is then transformed into electronic funds, which can be used not only to pay bribes further afield but to support terrorist activity around the world. Case Study: Colombia. For many years, the Colombian terrorist guerrilla group, the Revolutionary Armed Forces of Colombia (FARC), has funded its military attack on the Colombian government by taking protection money in coca-growing areas. A map of regions controlled by FARC shows that they constitute rings just outside and around each of the major coca-growing regions, thereby placing the group in a position to exact a toll for the transit of the drugs by any route. The FARC has used the drug money for arms purchases, as have the major Colombian smuggling organizations. In turn, both the Colombian traffickers and the FARC use the weapons funded by the drug trade to protect themselves in their respective struggles against Colombia’s elected government, perpetuating the civil war in that country. The traffickers have heavily penetrated Colombia’s financial institutions and purchased a substantial number of legitimate businesses, facilitating their ability to corrupt elements of the Colombian government and reducing the efficacy of the government’s efforts to enforce Colombia’s laws. As drug influence increases and government capacity is weakened, the legitimacy of the Colombian government is further eroded, in turn providing a greater base for political support by disaffected Colombians for the guerrillas and the civil war. Again, as with drug money from Afghanistan and Burma, Colombian drug money exercises a negative political impact well beyond Colombia itself. For example, both Manuel Noriega of Panama and the military junta that ruled Haiti in the mid–1990s sustained control of their respective governments through drug-related corruption. International Money Laundering and Grand Corruption. The world’s kleptocrats, whether Marcos, Mubuto, Abacha, or Sukarto, have used a common financial services infrastructure to steal national wealth.31 Grand corruption has been a prominent feature of political and social conflict or civic breakdown in Albania, Argentina, Burma, Cambodia, Congo (Zaire), Colombia, Haiti, Indonesia, Iran, Liberia, Nigeria, Panama, Pakistan, Peru, the Philippines, Romania, Sierra Leone, Yugoslavia, and Zimbabwe, among other jurisdictions. In each case, the looting of
30
31
1998–1999 Report on Drug Trafficking in Asia published by the Observatoire Geopolitique de Drogues or OGD, a French academic institute. Separately, former Pakistani Prime Minister Nawaz Sharif told the Washington Post in 1994 that Pakistan’s army chief and the head of its intelligence agency had proposed a detailed blue-print for selling heroin to pay for the country’s covert military operations in early 1991. See ‘Heroin Plan by Top Pakistanis Alleged’, Washington Post, 12 September 1994. This phenomenon has been labelled ‘indigenous spoilation’ by N. Kofele-Kale, who defines this act as an ‘illegal act of depredation which is committed for private ends by constitutionally responsible rulers, public officials or private individuals’, in the International Law of Responsibility for Economic Crimes (Kluwer Law International 1995) at p. 10.
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government treasuries has involved funds or resources residing within these countries being moved from the countries to other jurisdictions through the world’s major international banks. In some cases, the theft of national treasuries has been accompanied by other harmful activities, whose proceeds have been laundered by the same mechanisms. These include costly or illegal arms deals (Angola, Colombia, Liberia, Sierra Leone, Somalia, Sudan), the smuggling of diamonds used to purchase arms deals in civil wars (Angola, Liberia, and Sierra Leone), grand-scale theft of oil and timber (Burma, Cambodia, Nigeria, Russia, Thailand), illegal dumping of environmental toxics (Guyana, Suriname), and embezzlement or other abuses of funds lent by international financial institutions such as the World Bank (endemic). Countries that during the 1990s saw their national wealth disappear to other jurisdictions at the direction of ruling kleptocrats include (from A to Z): Albania, decapitalized by a pyramid scheme that moved its funds to Italy and Western Europe; Angola, whose immense national resources vanished amid the ongoing civil war between President Dos Santos and Jonas Savimbi; Burma, where funds generated by narcotics, jewels, and illicit timber were exported for covert reinvestment in more business friendly environments, such as Singapore and Hong Kong, by people working with the junta; Cambodia, which featured similar characteristics of first generating illicit funds and then having them become flight capital under Hung Sen; Estonia, which found substantial amounts of its national wealth apparently transferred to Russia in the mid-1990s in a pyramid scheme arranged by a prominent banker with close ties to Latvia’s then government; Gabon, whose oil revenues were sent offshore and handled by US financial institutions on behalf of the senior leaders who had stolen the proceeds; Indonesia, where billions of dollars disappeared offshore in connection with grand corruption under former dictator Suharto, with some 9 billion USD ending up in a nominee account maintained at an Austrian bank; Kazakhstan, where funds from oil revenues were laundered offshore for the benefit of senior leaders; Mexico, where the brother of president Carlos Salinas, Raul Salinas, was found to have moved hundreds of millions of dollars, representing either stolen government funds, bribes, or the proceeds of narcotics trafficking, to Switzerland; Nigeria, where General Sani Abacha stole billions that were then stored in major banks in Luxembourg, the U.K., Liechtenstein, Switzerland and the Channel Islands, among other locations;32 32
See, e.g., ‘Swiss banks criticised over Nigerian funds’, Associated Press, 5 September 2000, describing findings of the Swiss Federal Banking Commission regarding the handling of some 670 million USD of funds stolen by Sani Abacha and his ‘entourage’ from Nigeria and held by 19 Swiss banks. According to the article, the Government of Nigeria says the total funds stolen by Abacha amounted to some 3 billion USD, some of which remained in other accounts in Belgium, Germany and France.
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Pakistan, where military rule replaced democratic civilian rule after hundreds of millions of the proceeds of corruption were found in Swiss banks, discrediting the elected Prime Minister and her family; Russia, whose financial system collapsed in 1999 amid massive money laundering overseas through the Caribbean, the South Pacific, New York, and London; Serbia, whose wealth was converted to the control of Slobodan Milosevic and his wife through such jurisdictions as Cyprus and Lebanon, while Serbia was subject to global sanctions by the United Nations; Ukraine, where substantial stolen assets of the state under the control of a former prime minister were found to have been laundered to the United States, after being handled by a number of Swiss banks; 33 Zaire (Congo), whose national wealth was exported by the late dictator Mobuto to Swiss banks. Thus, a wide variety of serious problems of governance have been facilitated by illicit finance, which in turn leads back to the problem of the 11 September terrorist attacks, where money from apparently legitimate sources, such as wealthy Muslims in the Persian Gulf seeking to support Islamic charities, was turned to horrific ends after passing invisibly through the pipes of the world’s global financial service infrastructure.
V.
Terrorist Finance and Civil Conflict
International terrorism represents an obvious threat to global security, just as domestic terrorism does to many individual nations. In every case, terrorist organizations need to generate, store, and transport funds, often across borders. While not every domestic terrorist organization needs to launder money through cross-border transfers, over time, many such organizations choose to locate portions of their infrastructure at some distance away from planned terrorist activities. To do so, they establish cells to operate in jurisdictions separate from those where their political base is or where their operations will be carried out. In recent years, multinational movements of terrorist funds, involving the use of major international financial institutions, have been traced to terrorist movements based in Afghanistan, Burma, Chechnya, Colombia, Israel, the Palestinian Territory, Kosovo, Lebanon, Northern Ireland, Pakistan, Papua New Guinea, the Philippines, Somalia, Sri
33
See US v. Lazarenko, Northern District of California, superceding indictment, 23 July 2001, describing Lazarenko’s use of SCS Alliance, Banque Populaire Suisse, Crédit Suisse, Crédit Lyonnais (suisse), and European Federal Credit Bank in Antigua to launder 21 million USD stolen from Ukraine.
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Lanka, Sudan, and Turkey. Although the terrorist organizations based in each of these countries have some level of minority popular support, their power and effectiveness have been leveraged by their ability to hide, invest, and transport their funds through the world’s international financial institutions. A summary of the nations whose banks have been used to handle funds for Al-Qaeda’s attacks on the US is instructive in this regard. Available public sources show Al Qaeda and related groups to have been able to move funds to institutions in the following countries: Albania, Australia, Austria, the Bahamas, Belgium, Canada, the Caymans, Cyprus, France, Germany, Greece, Hong Kong, Indonesia, Iraq, Italy, Kosovo, Kuwait, Libya, Macao, Malaysia, Malta, Mauritius, the Netherlands, Nigeria, Panama, Pakistan, the Philippines, Poland, Qatar, Saudi Arabia, the Seychelles, Singapore, Somalia, South Africa, Sudan, Switzerland, the United Arab Emirates, the United Kingdom, the United States, and Yemen. Significantly, where these jurisdictions are used by Al Qaeda, they also tend to be used by other criminals and corrupt officials, as the case of the United Arab Emirates demonstrates. Case Study: United Arab Emirates. The UAE houses the Middle East’s most sophisticated financial services sector, which is intensely competitive and lightly regulated. It is also a cash-intensive society, with Dubai constituting the regional gold centre. Cash transactions at restaurants, hotels, nightclubs, money-exchange houses, and investment firms remain common and effective mechanisms to launder money throughout the world from the UAE.34 Trading in precious metals, especially gold, has been simultaneously implicated in tax frauds, money laundering, organized crime, and the smuggling of stolen cargo from the UAE. 35 Islamic banks, once a conservative mechanism for relative low-cost entry into the international financial system, have expanded rapidly, remaining little regulated beyond the requirements of Islamic shari’a. Alternative remittance houses, such as hawalas, have been abundant, and scarcely regulated. The results for global security were evident in the 11 September terrorist attacks. One hawala based in Somalia, Al Barakaat, with major offices in the UAE, was found to have been heavily involved in funding Al Qaeda’s global operations. Another unnamed money changer was found to have transferred funds to Marwan Al-Shehhi, a UAE citizen who was the suspected pilot of United Airlines Flight 175, the second plane to hit the World Trade Center on 11 September.36 In addition, funds were allegedly wired between three of the terrorist attackers and one of Bin Laden’s financial chiefs, Shaykh Said, also known as Mustafah Muhammad Ahmed, who resided in Dubai until 11 September, according to numerous press accounts.37 Subsequent press accounts traced the funds to the Al 34 35 36 37
‘Dubai Police Study on Money Laundering’, Khalij Times, December 10, 1999. ‘Duped banks get wise to crime’ Lloyd’s List, January 8, 2001. ‘UAE Central Bank Withdraws License of Money Changer’, Wall Street Journal, 2 November 2001. See, e.g., ‘In Emirates, An Effort to Examine Bank System’, New York Times, 15 October 2001; ‘$100,000 trail links hijackers to Al-Qaeda, sleuths say’, Dubai Gulf News, 12 October 2001.
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Ansari Exchange branch in Abu Dhabi.38 Another account cited an unnamed US intelligence official as stating that two of Bin Laden’s sisters used the UAE as a transit point for shuttling cash to Bin Laden and his hide-out in Afghanistan.39 Long before the 11 September terrorist attacks, the UAE’s financial system was repeatedly linked to terrorist finance. Al Qaeda also used the Dubai Islamic Bank as a mechanism to process funds used in the bombings of the US embassies in Kenya and Tanzania in 1998.40 UAE financial institutions were central to the 11 September terrorist attacks on the US financed by Osama Bin Laden and Al-Qaeda. UAE institutions were also reportedly used by other Bin-Laden terrorist finance operations based in Malta. 41 This terrorist finance infrastructure overlaps substantially with other money laundering operations. For example, the same networks in the UAE have been used to launder drug money42 and to handle the proceeds from Russian criminal activity, in one account, laundering some 300 million USD in Russian funds in the month of January 1999 alone.43 The UAE has been home to the Russian arms merchant Viktor Bout, implicated in black market weapons sales to Rwanda, Sierra Leone, and Angola. False end-user certificates were delivered from the UAE to provide a veneer of legality to Bout’s illicit arms sales, according to a United Nations report. Bout’s illicit arms shipments were carried out from the UAE through his UAE-based air transport company, Air Cess, whose operations would clearly require financing through the UAE.44 Even as Bout engaged in smuggling activities to these jurisdictions in conflict, UAE financial institutions handled the proceeds to finance terrorist and criminal activity. For example, Al Qaeda used diamonds purchased in Sierra Leone, the Democratic Republic of the Congo (DROC, the former Zaire) to fund its activities, in turn laundering these commodities through Dubai.45 Ironically, throughout this period the UAE had one of the Middle East’s best anti-money laundering regimes, as well as a good reputation for co-operation in particular cases arising from investigations in other countries, including the US. Yet
38 39 40 41 42 43 44 45
‘UAE Central Bank Withdraws License of Money Changer’, Wall Street Journal, 31 October 2001. ‘United Arab Emirates emerges as key link in money trail that led to attacks’, Knight Ridder Washington Bureau, 2 October 2001. ‘UAE Bank Sources Deny Knowledge of Bin-Ladin Dealings’, London Al-Sharq al-Awsat (in Arabic), 9 July 1999, p. 5. ‘Malta’s Central Bank Asked to Investigate Possible Bin-Ladin Financial Assets’, London Al-Sharq Awsat, 16 November 2000. Financial Times, 24 February 2001. ‘Capital Flight, Money Laundering Eyed’, Moscow Noryye Izvestiya (in Russian), 5 March 1999. ‘The Great Small-Arms Bazaar’, Cox News Service, 6 July 2001; ‘UN Report: Former Russian KB Officer Arming African Rebels’, London Guardian, 23 December 2000. ‘Al Qaeda’s Road Paved With Gold, Secret Shipments Traced Through a Lax System in United Arab Emirates’, Washington Post, 17 February 2002 (Douglas Farah), citing US and European intelligence sources and investigators.
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the rules had proven to be largely helpful in reconstructing money laundering or terrorist finance after a crime had taken place, rather than deterring it in the first place. Moreover, the UAE had a wide range of financial links to other jurisdictions, from Pakistan to Iran, that had essentially no anti-money laundering regimes in place, making it easy for illicit funds to be placed elsewhere before moving through the UAE and into Western Europe, North America or Asia. Further, Dubai, the most developed financial centre in the UAE, was the world’s centre for trading in gold, as well as a central component of the hawala alternative remittance system. With gold trading, drug-money launderers and terrorist financiers alike could move funds through the UAE. With hawalas, the same interests could move money to wherever they needed it without the funds ever having to move across international borders.
VI. The Commingling Problem The world’s networks of non-transparent financial services not only commingle licit with illicit funds, thus rendering the illicit funds more difficult to detect, but also provide vessels for the intermingling of different forms of illicit activity, which have the common element of being both destabilizing and involving similar persons and institutions. The ubiquity of offshore havens such as the Caymans, Channel Islands and Liechtenstein for common use by drug, arms, and people traffickers as well as kleptocrats is reasonably well understood. The interconnections between Al Qaeda’s terrorist finance and the illicit sale of diamonds mined by rebels in Sierra Leone is less obvious, although increasingly well-documented and tied to other terrorist finance of groups such as Hezbollah. Within the region, the diamonds are transferred to the terrorists in return for weapons or for cash. The terrorists then transport the diamonds to diamond processing centres such as Belgium, and thereby launder their funds anew for further terrorist activity. 46 Neither the diamond dealers of Antwerp nor the financial institutions that serve them currently have in place any trip-wires that would alert them to the possibility that either the diamonds, or their owners, were involved in funding destabilizing conflict in western Africa or global terrorism. The problem is not necessarily one of witting intention on the part of the parties who populate the vast infrastructure supporting many of the world’s most destabilizing illicit activities. Rather, the global money-laundering problem is a structural consequence of globalization, putting bankers, banks, and banking accounts in constant contact with people and businesses that they do not know.
46
‘Al Qaeda Cash Tied to Diamond Trade’, Washington Post, 2 November 2001 (Douglas Farah), citing US and European intelligence officials.
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Instead of having relationships with people they trust, these institutions have accepted the notion that they should trust only in the money itself, with no further obligation. Twenty years ago, the risks posed by ‘no-questions asked’ banking practices were not universally evident. Now the need for greater transparency, accountability, and traceability of financial transactions, regardless of their provenance, destination, or the mechanics of their movement, is widely accepted. Within the past two years many countries, in some cases threatened with possible loss of access to major financial centres, have enacted comprehensive measures to combat money laundering and to promote financial transparency. These countries have included Antigua, Austria, the Bahamas, the Channel Islands, Israel, Japan, Liechtenstein, Panama, Russia, and the United Arab Emirates. The 11 September terrorist attacks on the United States have led to a further wave of legislation and regulation. The result has been closer financial scrutiny of many Gulf States, a number of countries in Southeast Asia, and of the placement of funds in jurisdictions in the Americas and Europe. This new scrutiny has included the first comprehensive efforts to understand, register, and regulate alternative remittance systems or hawalas. Yet, governments whose jurisdictions begin and end at their own borders may be poorly placed to exercise effective oversight of private sector financial institutions whose activities may extend through many dozens of jurisdictions. If individual nations are incapable of exercising authority over the global operations of the financial institutions they license, there is an obvious question as to who is in a position to exercise such authority. One answer – the market shall rule – is clearly incompatible with other important social, economic and political goals. A second answer, that the institutions will regulate themselves, has to date not proven very effective. Soft standards (typically guidelines), imposed by self-regulatory organizations such as the BCBS, IOSCO, and the IAIS, have given national regulators responsibility to decide on sanctioning cases of institutional misbehaviour, and this too has not proven very effective. Each of the many exercises seeking to improve international financial regulation and to oppose illicit finance has adopted one core principle, a principle of particular import in an age of globalization. This principle, sometimes summarized as ‘know your customer’, suggests merely that the obligation of knowing with whom you are doing business, a matter of prudence in a local economy, becomes even more essential in a global economy. There is no disagreement on this core standard, only a clear failure to date to impose it on a universal basis. Assessing the existing and potential mechanisms for implementing this principle take up the remainder of this paper.
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VII. Existing Initiatives As Brookings Institution economist Robert Litan has recently stated, successful international efforts to regulate cross-border finance generally only emerge in response to crises.47 The sheer scope of the existing anti-money laundering initiatives provide some evidence of the depth of the global financial transparency crisis. The major financial services jurisdictions, including the countries of the G–8, the EU and Switzerland, have already begun to implement financial regulatory regimes based on the premise that the best possible protection against being victimized by financial crime of any kind is to know the true identity and business of any party to whom one is exposed in a transaction, from one’s customer to one’s correspondent bank. This principle is embedded in the work of the G–7 Financial Stability Forum, of the EU’s Second Directive on Money Laundering, agreed to in October 2001, and in the USAPATRIOT Act, enacted by the US to counter terrorism and terrorist finance in the wake of the 11 September attacks. These new legal regimes no longer treat all bank accounts as inherently equal, but require those who handle the funds of others to know who the beneficial owner of an account is, regardless of the nature of the account. In cases where an account is established through a jurisdiction that is inadequately regulated or designed to hide beneficial ownership, these regimes would shut off access entirely, as the new law in the US has required them to do since the end of 2001. Know Your Customer. The principle of ‘know your customer’ is now true not only for banks but for all financial intermediaries engaged in transnational financial activity, especially that which is electronic. In the age of the Internet, no other approach is workable. If merely banks are regulated, and their non-bank competitors are not, the competitors will engage in unregulated bank-like activity. To be effective, the ‘know your customer’ requirements of the original Basel Committee recommendations of a decade ago are now slowly being updated and broadened to cover those who offer banking-like services. Jurisdictions that lag behind in undertaking this approach, either through self-regulation, government regulation, or a mixture of the two, are finding themselves and their financial institutions at risk of having reduced access to other jurisdictions. The result has been a jurisdictional regulatory ‘race to the top’, instead of a race to the bottom. Nevertheless, the emerging new international instruments, standards, and initiatives have yet to have a substantial impact in reducing global conflict. Naming and Shaming Jurisdictions. A common feature of the major initiatives undertaken to date by governments, international organizations, and non-governmental organizations, such as Transparency International, has been a focus on reforming governments, and through the reform of the governments, enhancing regulation and oversight of the private sector. Existing international instruments to combat money laundering include the 1988 United Nations Vienna Convention 47
Litan, id, p. 197.
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Against Illicit and Psychotropic Drugs, the 2000 United Nations Convention Against Transnational Organized Crime, the 1998 OECD Convention Against Illicit Payments (covering bribery), and numerous instruments enacted by the Council of Europe, the Organization of American States, and other regional groupings. Over time, these international instruments have come to create a body of international standards, embedded in the increasing number of mutual assessment mechanisms. The first and most successful of these remains that undertaken by the FATF and its progeny. In recent years, failures to meet these standards have even come to have consequences, as specific jurisdictions have been named, shamed, and in effect forced to change their laws in order to avoid risks to their economies, political regimes and reputations. However, in many countries, governments simply do not control the private sector, and globalization has made cross-border control inherently impossible even for the most powerful governments. International regimes that direct governments to regulate private sector institutions that may be more sophisticated, more international, wealthier, and larger than the governments purporting to regulate them have inherent practical limits. The nature of these limits is already visible, as the name and shame exercises have taken hold. While individual jurisdictions have been forced to change their rules, individual institutions have been able to continue to engage in regulatory arbitrage, pushing their riskiest and least attractive transactions to jurisdictions that require the least transparency. For example, during the last half of 2001, the tiny Channel Island of Jersey was found to house millions of dollars stolen from investors in the Gulf States by a Hong Kong-based investment company;48 200 million USD allegedly looted from Brazil in a major political scandal, deposited in a branch of Citibank; 49 and some 300 million USD in accounts belonging to the late Sani Abacha, his family and entourage. Jersey was in compliance with all of the FATF anti-money laundering criteria, and most of the obligations required by the OECD tax haven exercise. Yet the persistence of Jersey’s use to conceal financial crime reflected the reality that anyone who deliberately structured their transactions across multiple jurisdictions was still able to protect their illicit activities from scrutiny for a very long time. The problem may not in fact be with Jersey’s ability to enforce its antimoney laundering regime, but with the inadequacies of regulators and law enforcement agencies the world over to keep track of the transnational activities of the private sector entities that they purport to oversee. Just as globalization has caused even the smallest, local financial jurisdiction, such as that of Jersey or Liechtenstein, to be accessible for use by any and all of the world’s businesses, legitimate and illegitimate, the same phenomenon has required the extension, bit by bit, of regulation from its initial application to limited problems in limited sectors to universal problems in all sectors, as the evolution of the FATF and the OECD Harmful Tax Practices initiatives have demonstrated. 48 49
‘UAE: Investment Firms Defraud Investors’, Dubai Khalej Times, 21 August 2001. ‘Brazil scandal hits Citibank’, The Observer,9 September 2001.
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The Financial Action Task Force. The FATF was established during the French presidency of the G-7 in 1989 in response to the G-7’s recognition of the threat posed to banking and financial systems by drug money laundering. At the time, drug money laundering in the Americas emanating from Colombia were fresh in the minds of policy-makers, following the crisis between the US and Panama that ended with the removal and arrest of General Manuel Noriega. The FATF’s initial mandate was to examine the methods used to launder criminal proceeds and to develop recommendations for combating them. These 40 Recommendations, developed during the FATF’s first year, in turn, became the basis for what was then an innovative system for implementation. The FATF, which had a tiny secretariat and was not a chartered international organization but only a voluntary association, initiated a system for self- and mutual assessment. Under this system, each member of the FATF would first assess its own compliance with the FATF’s 40 recommendations. Then, other FATF members would visit the jurisdiction, question authorities from the assessed jurisdiction, and reach their independent determination of where the jurisdiction was failing to meet the standards of the 40 recommendations. This approach had several ground-breaking aspects. First was the notion that technical experts could develop standards which over time would bind their countries in practice even in the absence of their entering into a formally binding international agreement. Second was the concept of mutual evaluation, in which a country would submit to peer review as a means of improving its domestic capabilities. Each of these developments faced potentially substantial risks. For example, the withdrawal of any FATF member from consensus on the standards could have had the impact of undermining both the legitimacy and effectiveness of the entire initiative. Similarly, the politicization of the mutual assessment process, either to exculpate unfairly or to criticize unfairly any jurisdiction, could also have fatally impaired the FATF’s legitimacy. Both risks were avoided largely because of the technocratic nature of the staffing of the FATF by member governments. The FATF process was driven by technocrats from finance ministries, regulators, and law enforcement, not by foreign ministries or political figures. Its standards were neutral, and its judgments, initially confidential, were recognized to be fair. Moreover, the FATF proceeded slowly, first evaluating jurisdictions with robust regulatory and enforcement regimes, criticizing them, and only then moving to jurisdictions that diverged further from the 40 recommendations. The FATF moved forward steadily but slowly during the 1990s, in the process taking on two major changes to its original mandate. In 1996, under the US Presidency of the FATF, the organization expanded its mission beyond reviewing capacities against narcotics money laundering to cover all money laundering involving all serious crimes. It also agreed to take on new developments in money laundering trends, especially those involved with electronic fund transfers. Secondly, the FATF decided that the ability of its member jurisdictions to protect themselves against money laundering would be undermined if non-member jurisdictions did not adopt and implement its 40 recommendations as well. Accordingly, it chose to move beyond its initial mandate to assess its own members to develop a ‘black list’ of other
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countries whose practices were deemed to facilitate money laundering and therefore be ‘non-cooperative’ with the objectives of the FATF. The development of a black list reflected a dramatic change in approach by the FATF, necessitated by the growing recognition of the interdependence of the global financial infrastructure, and the inability of any jurisdiction to protect itself in the face of bad practices in other jurisdictions. Both the FATF’s standards and its selection of non-cooperative jurisdictions illustrate the nature of transnational money laundering and the practices most likely to facilitate it. Core FATF standards include:
1. 2. 3.
4. 5.
Criminalizing the laundering of the proceeds of serious crimes and enacting laws to seize and confiscate them. Obliging financial institutions to identify all clients, including all beneficial owners of financial property, and to keep appropriate records. Requiring financial institutions to report suspicious transactions to competent national authorities and to implement a comprehensive range of internal control measures. Putting into place adequate systems for the control and supervision of financial institutions. Entering into agreements to permit each jurisdiction to provide prompt and effective international co-operation at all levels, especially with regard to exchanging financial information and other evidence in cases involving financial crime.50
In general, these standards have been little changed since their development in 1990. Nevertheless, they remain incompletely implemented internationally, prompting the FATF to develop in 2000 its list of ‘Non-Cooperative Countries and Territories’. Four of the countries on the original list, Bahamas, Cayman Islands, Liechtenstein, and Panama, enacted comprehensive money laundering regimes rather than face the risk of possible loss of market access to FATF Member States if they failed to take action. Others, such as Israel and Russia, enacted legislation, but failed to put in place an anti-money laundering system sufficient to meet FATF standards. To date, the FATF has threatened a number of jurisdictions with the sanctions of facing enhanced scrutiny or greater regulatory barriers, but has imposed them on none. The simple threat has been enough to cause any country targeted with immediate action to change its laws, as Austria, the Seychelles, and Turkey demonstrated even prior to the Non-Cooperative Countries and Territories initiative. Currently, 19 countries and territories are on the FATF black list, facing the risk of potential sanctions, termed ‘countermeasures’ by the FATF in the near future. The list of these jurisdictions, with annotations by the author about the type of money laundering involved, is as follows: 50
The full text of the FATF’s 40 Recommendations is available at the FATF’s website online at
.
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1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.
17. 18.
Cook Islands, used by Russian criminals to loot Russia. Dominica, providing false identities, passports, and banking services to Russian criminals and drug traffickers. Egypt, a centre for financial fraud and possibly terrorist financing; has had no transparency or anti-money laundering laws, so data is extremely limited. Grenada, false identities and banking services to financial criminals and drug traffickers. Guatemala, exploitation by drug money launderers. Hungary, comprehensive banking secrecy exploited by Russian organized crime involved in trafficking of women, alien smuggling, and contraband smuggling. Indonesia, money laundering for illicit timber, massive corruption and fraud. Israel, money laundering for Russian organized crime, including trafficking in women. Lebanon, laundered funds for sanctioned regimes including Libya and Serbia, as well as for various terrorist organizations; handles proceeds of drug trafficking from Middle East. Marshall Islands, used by Russian criminals. Myanmar (Burma), wide open to narcotics money laundering, arms trafficking, illicit timbering, precious gems smuggling, and the funding of private armies. Nauru, principle launderer for theft of Russian national resources. Nigeria, drug money laundering, major financial crime, terrorist finance. Niue, handled Russian money laundering. Philippines, laundered funds for Al Qaeda. Russia, wide open to money laundering by Russian, Colombian, and Italian organized crime, including the proceeds of corruption, theft, drug trafficking, trafficking in women, people smuggling, stolen motor vehicles, intellectual property crime, extortion, and massive fraud. St. Kitts and Nevis, handled drug money laundering. Ukraine, laundered proceeds of corruption, trafficking in persons, theft of national resources, drugs.
Notably, none of these jurisdictions is as yet isolated from the world’s major financial markets, although a few, especially those in the South Pacific, no longer have relationships with some large international financial institutions since the exposure of the Bank of New York/Benex scandal in the fall of 1999. The OECD Harmful Tax Practices Initiative. As of the late 1990s, the growing recognition that lack of transparency was creating substantial problems even for the most affluent countries as a result of globalization began to embrace the area of taxes. Finance ministries of the OECD countries had come to conclude that they were losing exceptionally large amounts of revenue due to individuals and companies engaging in systematic tax evasion through structuring their activities cross-border and taking advantage of banking secrecy regimes. Previously, the OECD had
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focused on eliminating regulations that could impede international trade or impose market distortions. Its senior officials came to see what it termed ‘tax poaching’ as a practice increasingly undermining the revenue base of governments throughout the world, reducing their ability to raise revenues and provide fundamental services. In short, the OECD saw that globalization led to tax evasion and, in turn, undermined fundamental governmental capacities to govern. As the OECD studied the problem, it also came to recognize that international tax evasion was linked to a host of other serious threats to the global system. In the words of OECD’s Secretary General, Donald J. Johnston, ‘there are strong links between international money laundering, corruption, tax evasion, and other international criminal activities. These illegal activities are widespread and involve such sizeable sums that they can pose a threat to the stability of the global system of finance and even the global trading system’.51 Notably, the OECD was not focused on weaker jurisdictions involved in civil conflict, but on the impact of financial secrecy in the tax arena on the world’s strongest jurisdictions. In May 1998, the OECD governments issued a report on ‘Harmful Tax Competition’, which led to the creation of a ‘Forum on Harmful Tax Practices’, a set of ‘Guidelines for Dealing with Harmful Preferential Regimes in Member Countries’, and finally, a series of Recommendations For Combating Harmful Tax Practices. The initiative was built, in many ways, on the parallel work of the FATF, and, in particular, three elements of FATF’s approach. First, the OECD developed a set of agreed standards to combat a set of agreed problems; secondly, the OECD put into place a system for the multilateral assessment of each jurisdiction’s implementation of the agreed standards; thirdly, the OECD adopted a ‘name and shame’ approach, creating a black list of jurisdictions that would face loss of market access or other sanctions if they did not take action. Despite vigorous protests from smaller jurisdictions that had been engaged in ‘ring-fencing’, the practice of promising little or no regulation and taxation of funds from overseas, as distinct from the regulation and taxation of the funds of their own citizens, targeted jurisdictions rapidly enacted new regimes. To avoid being placed on a prospective black list, six prominent tax avoidance jurisdictions, Bermuda, Cayman Islands, Cyprus, Malta, Mauritius, and San Marino, committed themselves in June 2000, in advance of their assessments, to embrace international tax standards for transparency, exchange of information and fair tax competition prior to the end of 2005. It may be useful to list the fundamentals of the OECD standards, as each of them applies to the lack of transparency common to all money laundering, not merely those pertaining to tax crimes: 1.
51
Ensuring that information is available on beneficial (that is, actual) ownership of companies, partnerships and other entities organized in the jurisdiction.
‘Introductory Remarks of the Honourable Donald J. Johnston, Secretary-General of the OECD, High Level Symposium on Harmful Tax Competition’, 29 June 2000.
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2.
3. 4.
Requiring that financial accounts be drawn up for companies organized in the jurisdiction in accordance with generally accepted accounting standards, and that these accounts be appropriately audited. Putting into place mechanisms so that the jurisdiction is able to share information pertaining to tax offences with corresponding authorities in other jurisdictions. Ensuring that its regulatory and tax authorities have access to bank information that may be relevant for the investigation or prosecution of criminal tax matters.
The OECD’s insistence that such fundamental, common sense principles be adopted has produced substantial controversy in many historic tax havens, including a number of smaller jurisdictions in the Caribbean and South Pacific. The resistance to their universal adoption is itself evidence of how badly their adoption is needed, and of the degree to which basic elements of financial transparency have yet to be put into place at the international level. The Wolfsberg Principles: A Private Sector Alternative. Abuses of private banking by corrupt officials became substantially exposed in the late 1990s, in the course of changes of government and exposures of individual kleptocrats as described above. In each of these cases, highly-placed political officials were found to have laundered inexplicably large sums of cash through major international financial institutions that had been, at the least, incurious as to whether the sources of the funds involved were legitimate. In response, twelve of the largest international banks and the anticorruption organization Transparency International (TI) undertook an initiative in 2000 that led to their development and adoption of ‘Global Anti-Money Laundering Guidelines for Private Banking’. These guidelines, endorsed by the participating global banks in October 2000,52 were intended only to apply to private banking, that is, to the accounts of the extremely rich, those with deposits of 3 million to 5 million USD. Lacking any oversight mechanism, they were to be self-regulatory guidelines to which each subscribing institution would adhere. The lack of an oversight or assessment mechanism for the Wolfberg Principles has led to some criticism. However, the eleven Wolfberg Principles established for the private banking sector by the twelve international banks are themselves of great significance, illustrating both potential solutions and aspects of the nature of the continuing problem in discouraging the criminal and the corrupt from taking advantage of world’s global financial infrastructure. They are: 1.
52
Adopting client acceptance procedures so that the banks accept ‘only those clients whose source of wealth and funds can be reasonably established to be
The participating banks, known as the Wolfsberg Group, consist of ABN Amro N.V., Banco Santander Central Hispano, S.A., Bank of Tokyo-Mitsubishi, Ltd., Barclays Bank, Citigroup, Crédit Suisse Group, Deutsche Bank AG, Goldman Sachs, HSBC, J.P. Morgan Chase, Société Générale, and UBS, A.G.
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legitimate’. These procedures are supposed to include: (a) taking reasonable measures to establish the identity of its clients and beneficial owners before accepting money; (b) demanding adequate identification before opening an account; (c) determining the source of wealth, the person’s net worth and the source of the person’s funds; and (d) requiring two persons, rather than just one, to approve the opening of an account. 2. Engaging in additional diligence or attention in cases involving the use of numbered or alternative name accounts, high-risk countries, offshore jurisdictions, high-risk activities, or public officials. 3. Updating client files when there are major changes in control or identity. 4. Identifying unusual or suspicious transactions, following them up, and then deciding whether to continue the business relationship with heightened monitoring, ending the relationship, or advising authorities. 5. Monitoring accounts through some means. 6. Developing and implementing a ‘control policy’ to insure compliance with bank rules. 7. Establishing a regular method of reporting on money laundering issues to management. 8. Training bank employees involved in private banking on the prevention of money laundering. 9. Requiring the retention for at least five years of bank records that might be material to anti-money laundering matters. 10. Establishing an ‘exception and deviation procedure that requires risk assessment and approval by an independent unit’ for exceptions to the previous nine principles. 11. Establishing an anti-money laundering unit at the financial institution. The head of TI, Peter Eigen, introduced the principles at the time of their adoption in terms that highlighted the historic problem of bankers being willing to handle the proceeds of corruption, describing the creation of the Wolfsberg Group as a ‘unique event’ because ‘few would expect the leading anti-corruption organization and the leading banks to be standing on the same platform’. Dr. Eigen further stated that the Wolfsberg Principles ‘state unequivocally that banks agree they should not be used by corrupt crooks and that it is fully incumbent on individual banks to put into place fully effective systems to ensure that their institutions are not money laundering vehicles. The language is blunt. The burden for monitoring the implementation and day-to-day operations of the guidelines rests squarely on the banks. Their reputations are at stake’. 53 In short, the Wolfsberg Principles would have an impact because an institution that had subscribed to it would have its reputation hurt if it failed to then meet its public commitments.
53
Opening Statement, Dr. Peter Eigen, Chairman, Transparency International, 30 October 2000, available at < http://www.transparency.org > .
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The universal adoption of each of the above principles, with the exception of number 10, would contribute to making it harder for corrupt officials or drug traffickers to establish accounts with funds of unknown provenance. Yet in specifying their agreement to adopt these principles, the signatory international banks are necessarily implying that, previously, such principles may not have been adopted by them on a universal basis, although each has already been either expressly or implicitly required by the 40 recommendations of the FATF. Notably, the banks subscribing to the Wolfsberg Principles did not commit to applying them to all of their accounts, but only to their private banking departments. Moreover, principle number 10, exceptions and deviations, contemplates the possibility that such principles as knowing the customer, reporting suspicious transactions, or maintaining records might not be followed if the bank decided there was an appropriate reason for ignoring the rule. Left outside the parameters of the Wolfsberg Principles entirely are such other areas as correspondent banking involving high-risk jurisdictions. Also left outside the parameters of the Wolfsberg Principles are the hundreds of large international banks that have yet to endorse them, as well as the thousands of mid-sized financial institutions with multijurisdictional operations. Important components of the world’s financial services sector are also missing from the members of Wolfsberg Group, which does not include a single institution based in China, Russia, Latin America, Africa or the Middle East. The absence of outside assessment or oversight for the Wolfsberg Principles and its members, illustrates the limits of this initiative, and the distance yet to be traveled before there is general acceptance of universal anti-money laundering standards among the world’s interlinked financial institutions. 54 Nevertheless, the Wolfsberg Principles remain an important development: lacking the mutual assessment mechanism and the comprehensiveness of the FATF mechanism. They demonstrate that, in the absence of globally-applicable agreements by private sector institutions, even widely accepted principles such as those of the FATF may remain incompletely adopted. So long as regulatory arbitrage remains available on an international basis, general agreement among most countries to adopt standards does not prevent private institutions from adhering to the standards
54
See, e.g., editorial of the Financial Times, 30 October 2000, ‘Banks Clean Up’, stating that ‘it may be surprising that 11 of the world’s biggest banks should find it necessary to declare that they are opposed to the use of their networks for criminal purposes. Yet a series of scandals has shown how corrupt politicians and other criminals have found it easy to launder their loot through the international banking system[. . .]The bad publicity stemming from such disclosures has persuaded the 11 signatories that the damage to their reputations of becoming involved, however inadvertently, in money-laundering is greater than any financial benefit[. . .]but ending the flows needs the involvement of the whole financial services industry including the host of other institutions whose transactions can help hide criminal plunder. The next step is for the financial regulators to adopt the Wolfsberg principles for the organizations they supervise and closely monitor their enforcement’.
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only in those jurisdictions that require them. Broader, global adoption of the standards requires commitments from the private sector institutions that these standards apply everywhere, not merely where there is a good local regulator. A set of mandatory rather than optional principles, adopted by the world’s major financial institutions on a global basis, would have the potential of transcending the limits of individual national regulators, especially were it to become applicable to all financial service sector operations, rather than only to private banking, and to become subject to assessment and oversight mechanisms by outsiders on a global basis. Indeed, the UN already relies on the principal of private sector implementation and co-operation in its handling of sanctions. 55
VIII. Global Standards for the Private Sector: Adopting A White List Regime The largest financial institutions of the world operate in dozens of jurisdictions. Even smaller financial institutions are networked in practically all jurisdictions. This networking appears to be largely viable, even when countries face international sanctions, as either sympathetic jurisdictions or financial institutions provide ongoing financial services to those theoretically sanctioned and off-limits. The largest international financial institutions remain the most important nodes in the world’s financial service infrastructure. Yet to date these institutions and those competing with them have continued to take advantage of the substantial regulatory and enforcement arbitrage afforded by the differences in government laws and capacities to launder the illicit proceeds of the world, and thereby to facilitate the circumvention of national laws. Each of the major existing initiatives to promote financial transparency fails in part to address this problem. The FATF and OECD exercises focus on jurisdictions, not institutions, and create black-lists, but no ‘white lists’ of jurisdictions that have met the highest standards of best practices. Even if every country and territory in the world were to agree upon their standards, local failures of governmental capacity to regulate or to enforce would preserve the ability of private sector financial institutions who were so inclined to circumvent the standards. The Wolfsberg Principles focus directly on financial institutions, but are limited in scope to private banking, in membership to twelve banks, in principles to basics only, and in enforcement to self-regulation. The Wolfsberg Principles create an implicit ‘white list’ of subscribing institutions, but without any mechanism for outside audit or assessment, reducing the pressure for comprehensive implementation. 55
The Targeted Financial Sanctions Project of the Watson Institute for International Studies at Brown University, < http://www.WatsonInstitute.org/tfs > contains extensive evidence for this proposition, as a member of the research team on the project, Professor Sue Eckert, has observed.
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The foregoing initiatives have been innovative and recent. The question remains whether they will be sufficient, or whether additional mechanisms should be developed that combine their best features into a regime which further attenuates regulatory and enforcement arbitrage, holds the private sector financial services infrastructure accountable, and provides incentives to institutions that adopt best practices. The World Bank, and the other International Financial Institutions (IFLs) are each among the most important international institutions operating in the world today, controlling many billions of dollars in resources that are, in turn, allocated for lending around the world. These institutions each have a large number of correspondent banking relationships and deposit funds for use in recipient countries, not only in central banks but in commercial ones. Similarly, the United Nations and its constituent elements direct substantial sums in development assistance, which also are necessarily deposited in banks in the countries where the activities are carried out. Trade finance activities undertaken by government-sponsored entities such as export/import banks also rely on private sector banks to handle the funds. National and international development programmes place their funds in private banks. And government and international organizations alike, when they borrow and issue notes, also select international banks to act as agents and issuers. Today, financial transparency is not a criterion for the selection of one financial institution over another to be the holder, processor, or handler of the funds of governments, development organizations, international financial organizations, or the United Nations. An international bank that is involved in numerous money laundering scandals or terrorist financial transactions has approximately the same chance of obtaining a lucrative source of government resources as does an international bank that has imposed the highest standards of transparency and anti-money laundering policies and procedures. Despite the existence of the FATF, OECD, and Wolfsberg models, there is no ‘white list’ to which governments, international organizations, or non-governmental organizations that wish to foster transparency can turn as a principled means of selecting a bank to handle their funds. The lack of such a white list may constitute a missed opportunity. As Robert Litan has observed, these institutions, especially the IFIs, have ‘accumulated power akin to a domestic sovereign government’, and have the means to enforce terms of their agreements with other countries.56 With such power in relationship to sovereign states, these institutions surely have equal power should they care to exercise it in relation to private sector institutions. Creating an additional incentive for financial institutions to adhere to a comprehensive, global code of conduct to combat money laundering and protect against illicit finance would seem to be a logical goal for an international community increasingly focused on the risks created by financial
56
Litan, id, at 199.
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secrecy. It would supplement the work of nations by asking institutions that operate in many jurisdictions to adhere to the same standards in all of them, even in cases where the governments themselves have little ability directly to regulate or enforce these standards. To make a white list system work, the United Nations could, for example, take the recommendations previously made by the FATF, OECD and Wolfsberg Group and ask financial institutions to agree to adopt them on a global basis throughout their institutions. Such institutions could further agree to be assessed by a multinational team of experts who would make reports on the implementation of the principles by those institutions they assess. An institution that has agreed to an assessment and passed it would be credentialed and rewarded with a preference for selection in processing the funds controlled by the UN and by other international organizations. Other, non-white listed institutions would not be denied the opportunity to handle the funds of international organizations. However, they might well be limited to handling such funds in areas where there is no ‘white list’ institution available. To insure the integrity of the system, the white list would need to be updated regularly, with periodic inspections and reviews of any institution placed on such a list. Such a system would retain the mutual assessment and oversight elements of the FATF and OECD exercises, while adding the universality promised by the Wolfsberg Principles, and combating the problem of regulatory arbitrage. Each white-listed institution would be required to agree to maintain its know-yourcustomer and other anti-money laundering policies and procedures regardless of whether it was located in a well-regulated jurisdiction or one with a lax regime. It would accept the principle of having others conduct period external assessments of its compliance with the standards and the publication of comprehensive reports describing how it had met the standards. To ensure fairness and the opportunity to improve anti-money laundering programmes over time, white-listed institutions would be given a period allowing them to correct following each evaluation before being placed at risk of losing white-list status. Other institutions, not white listed, would be given the ability to sign up to the white list at any time by providing a public specification of their methods of complying with the standards, and agreement to submit to an outside assessment at the earliest convenience of the multilateral experts group. Given the magnitude of the potential commercial benefit to white-listed financial institutions, it would be important to have the standards appropriately tailored by sector, size of operation, and nature of risk. This approach would be similar to that currently undertaken by the Basel Group in the area of risk-based capital standards for financial institutions. To be effective, anti-money laundering regimes need to be structured so as to account for the actual mechanisms by which failures of transparency are most likely to be exploited. Effective tailoring of a white list would require further development of money laundering typologies by the FATF and other organizations. However, even a base-line set of standards, based on those already adopted by the FATF, the OECD, and reflected in the Wolfsberg Principles, might
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provide a suitable place to begin. A white-listed institution might still find itself being used to transport terrorist funds. But it would have powerful incentives for preventing such use in the first instance and for swiftly responding to abuses upon discovery incentives that today, with all of the name and shame exercises and the terrible costs of financial crime (including the financing of terrorism) to civilization, nevertheless remain largely absent.
How Can Sound Customer Due Diligence Rules Help Prevent the Misuse of Financial Institutions in the Financing of Terrorism? Charles Freeland*
When the author first joined the Basel Committee Secretariat in 1978, the idea that bank supervisors had a role to play in the prevention of money-laundering would have been greeted with astonishment. Some ten years later, when Basel first discussed the topic in earnest, there was still a body of opinion that this was a matter for law enforcement and supervisors should stick to the core tasks they were charged with. Nonetheless, the Basel Committee (BCBS) agreed, principally at the insistence of the United States, to issue a statement alerting banks to their ethical responsibilities in the prevention of the criminal use of the banking system. At that time the principal concern was to make it more difficult and costly for drug gangs to launder the proceeds of their crimes. That statement, 1 relatively short by today’s standards, laid down four principles that banks should follow: Identify their customers Refuse suspicious transactions Co-operate with law-enforcement agencies Train their staff and introduce compliance procedures. This statement exerted quite wide influence at the national level in the major industrialized countries and was additionally one of the triggers for the formation of the Financial Action Task Force (FATF). With the creation of the FATF, the BCBS took the view that the baton could be passed over to a body with the necessary wider competencies. Although invited to participate in the FATF, the BCBS declined on the grounds that its views could be adequately represented by the individual bank supervisors who became members. But times change. In 2000, one of the BCBS’s specialist task forces, the working
*
1
Deputy Secretary General, Basel Committee on Banking Supervision. Charles Freeland is writing here in his personal capacity. The views expressed in this article do not necessarily represent the views of the Basel Committee or the Bank for International Settlements. The prevention of the criminal use of the banking system (1988).
M. Pieth (Ed.), Financing Terrorism, 41–48. © 2002 Kluwer Academic Publishers. Printed in the Netherlands.
41
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group on cross-border banking, decided to revert to the issue principally as a result of a series of scandals involving banks' relationships with corrupt dictators such as Abacha and Salinas (now termed ‘Politically Exposed Persons’ (PEPs)) as well as with the Russian Mafia. The working group on cross-border banking is something of a hybrid animal – it was originally created as a joint working group of the BCBS and the Offshore Group of Banking Supervisors (OGBS) to discuss issues relating to the implementation of the Basel Concordats that govern the responsibilities of bank supervisors in their supervision of international banking groups and their cross-border establishments. As a result, it is co-chaired by the OGBS chairman, Colin Powell, and the author. Its deliberations focus mainly on practical issues such as exchanges of supervisory information, cross-border inspection rights and corporate structures that impede banking supervision. A key product of this work, which will be reconsidered at the end of this article, is the creation of a platform for information exchanges between bank supervisors that is designed to improve supervisory coordination and enable home-country supervisors to exercise consolidated supervision. Such information exchanges have always been impeded by bank secrecy legislation and practices that are regarded by some private banking centres as a competitive necessity in order to prevent information on customer accounts in cross-border entities from being passed to home-country tax authorities. Hence, the supervisory Concordats developed by the Basel Committee have had to balance the need for adequate gateways with the need for adequate protection of information received. The reason why the cross-border group became concerned about the risks to banks in this area was not only its concern about PEPs (initially called ‘potentates’). A survey of know-your-customer (KYC) standards around the world revealed that, despite the FATF’s successful initiatives in its member countries, many countries still had no KYC standards at all. The BCBS has the ability to set rules for banks and bank supervisors that, through its influence as a standard-setter and with support from the IMF and World Bank, can have a much broader reach than the FATF. In addition, the FATF’s focus is on criminal activity, in its early years especially those activities involved in laundering the proceeds of drug sales, whereas the BCBS is concerned with the risks to banks from a much wider range of unsuitable customers – the PEPs issue is a case in point. Moreover, the BCBS saw a need to respond to the call by the G-7 to strengthen defences against abuse of the financial sector by producing a benchmark for Customer Due Diligence (CDD) standards for banks, as well as a need to act on requests from many emerging market supervisors for guidance in this area. The BCBS’s working group on cross-border banking’s expertise in offshore centres and international banking meant that it possessed the qualifications for identifying the risks being posed to international financial institutions. Several of its members are FATF participants. The BCBS therefore agreed with the group’s proposals that it address KYC rules for banks. This title was subsequently amended to Customer Due Diligence (CDD) standards to reflect the wider and continuous duties of the banker in protecting a bank’s good name. The working group was producing a draft set of standards at exactly the time that
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the Wolfsberg Group‘s first document was being prepared. In each case, the principal trigger was the Abacha affair. The BCBS’s consultative paper2 did not address money-laundering or suspicious transaction reporting directly. Rather its focus was on risk management for banks in their customer relationships. The paper focused on four specific risks; reputation risk, legal risk, operational risk and concentration risk (essentially liquidity/funding risk). Plainly, the most sensitive of these is reputation risk. A key distinction was drawn between initial identification of each new customer and ongoing monitoring of existing account activity. The reaction of the supervisory community to the BCBS’s draft was wholly supportive, including enthusiasm from some countries that one would not have put high on the list of those interested in probity. The FATF was also supportive and the Wolfsberg Group provided constructive comments. But some banks and banking associations were less enthusiastic. They raised two principal concerns that we sought to address in the final version of the paper that was issued in October 2001. One was the regulatory burden issue – and that is a very justifiable concern. We tried to respond to that by introducing a risk-based approach – identifying higher-risk customers or customer activities that merit heightened due diligence, and reducing the burden of monitoring the identities and activities of ‘ordinary’ retail clients. Indeed, the paper makes clear that while customer identification procedures are needed, they should not be so restrictive as to deny banking services to people who are financially or socially disadvantaged – and the same for ongoing monitoring. A second concern related to the clause requiring banks to backdate their customer identification procedures to existing clients. This could be very burdensome for banks serving small retail customers. Although there is still in the final version a requirement to undertake regular reviews of existing records and to monitor the activities of long-standing clients, there is now no obligation for banks to demand customer identity documentation from existing customers. So what has all this to do with the fight against terrorist financing? Well, first, the bank needs to know who its customers are if it is to be able to respond to requests from law-enforcement or intelligence authorities concerning accounts in the names of known terrorists or terrorist organizations. By definition, however, terrorists may be reluctant (and that reluctance is likely to be greater in the future) to open an account under their true names. They will thus try to hide behind anonymous accounts or ‘fronts’ making use of trusts, charities, nominees, corporate vehicles, profession intermediaries, and so on. The CDD paper gives clear guidance to banks on how to prevent such fronts from being used by criminals, including of course terrorists. This is a complex area in practice, but the principle itself is clear: the bank must make every effort to establish the beneficial owner(s) of all accounts and persons who conduct regular business with it.
2
Customer Due Diligence for Banks, January 2001. Although the document was targeted at banks, it expresses the view that similar guidance needs to be developed for all non-bank financial institutions.
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The key to preventing terrorists from using banks has to be in the initial customer identification process. Once an account is open, it will rarely be feasible for a bank to identify unusual account activity by a terrorist. The patterns of account activity by the Al-Qaeda perpetrators of the 11 September tragedy are by no means abnormal for a person with an irregular source of income such as a consultant, or a student with occasional parental support. Account profiling is therefore unlikely to identify a terrorist customer. What would of course help would be a tip-off from another source, maybe an intelligence source, or the observation by an alert staff member that the customer's behaviour is suspicious. Another pointer could be that the origin or destination of funds is a terrorist organization. However, one cannot expect banks to monitor every transaction of what would likely be classified as a low-risk customer. What one can do, and what the BCBS’s CDD paper does, is to insist that banks maintain account and transaction records for at least five years so that the audit trail can be followed and the origins or source of funds followed if required. The BCBS paper lays down clear guidelines for customer acceptance and customer identification procedures to be followed by banks in the opening of new customer accounts. It advises individual supervisors to establish strict standards for the documentation that should be required – and prohibits the use of anonymous accounts. It does not specifically list the categories of documents that banks should demand to see. There was an annex attached to the January consultative paper that gave examples of the types of documentation that could be admitted. However, the working group excluded this from the final October version because it felt that more attention was needed to the issue. It is now planning to provide more detailed guidance on customer identification procedures in due course, and to use that opportunity to update the October paper with any further guidance on CDD that has emerged from consultations in other bodies. To take one example, the FATF and the Wolfsberg Group have made certain proposals for the completion of the field for the originator‘s name in the transmission of wire transfers. The BCBS will probably want to establish a best practice guideline for that issue in due course. Nobody should be under any illusions that conducting customer due diligence is a simple task – it is one that is full of contradictions. The culture of banking is engrained in the desire to attract customers and profit from providing banking services. As with retailers selling products that are not suitable for all, there needs to be a highly-developed social conscience to prevent banking services falling into the wrong hands. Ex post, it can be relatively easy to judge that a customer should not have been accepted – ex ante, with the pressure on to welcome and even reward new customers, the task is more challenging. There are behavioural differences to respect, for example, in relation to well-heeled customers from other countries. The compliance officer or risk manager in charge of customer due diligence will be in constant conflict with the incentives provided to customer service units dedicated to personal, private or offshore banking. There may also be conflicts of culture with regard to what may or may not be regarded as acceptable behaviour by foreign customers. This may go way beyond the bank – for example the UK is currently grappling with the diplomatic ramifications of the freezing of an account linked to a
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Qatari Minister who received ‘facilitation payments’ for a UK defence deal. The UK’s Treasury and Home Offices are apparently in favour of the freeze, while the Defence and Foreign Ministers oppose it. One can only sympathize with a bank that gets involved in such a tug of war. Fortunately, conflicts of this kind are not likely to arise with regard to terrorist financing. However, there are other aspects that complicate the issue for the financial sector. One of the difficulties in providing guidance to banks in the fight against terrorism is to define what is a terrorist or a terrorist organization. There is often a thin line between terrorists and freedom fighters and a good number of current and recent Heads of State were once regarded as terrorists. The EU definition is more subtle ‘persons who finance, plan, facilitate or commit terrorist acts’, and it goes on to define a terrorist act. Nonetheless, it is a difficult issue on which the private sector needs guidance from the authorities, and it is not guidance that the supervisors can easily provide. Rather, the financial sector needs to receive information from police and intelligence as to the terrorists and terrorist organizations on the ‘black list’. This is even more true in the case of charities and foundations. Many innocent-sounding organizations that may raise money from legitimate sympathizers who believe they are contributing to a humanitarian cause have, in the past, been channelling at least a portion of the funds they have raised to terrorist uses. Much has been made by the media and by professional writers of the fact that terrorism is different from money-laundering because it is the use of the funds that is criminal not their source. However, it may be wrong to place too much emphasis on this factor to explain why banks are unable to identify customers engaged in terrorism. There has not, to the author’s knowledge, been a significant terrorist organization to date that has funded itself wholly from legitimate means. Al-Qaeda has been heavily involved in the marketing of drugs as well as other lesser crimes such as credit card fraud. Terrorist organizations are certainly not beyond robberies, kidnapping, extortion, and so on as a means of financing their illegal activities. Building and maintaining an effective terrorist organization costs a great deal of money – in the case of Al-Qaeda hundreds of millions. Hence, successfully denying all criminals access to the financial system will hit the terrorists too. What may be more challenging will be the identification of charities and other fund-raising organizations that support terrorism. Many of the contributors to what are usually set up with innocent sounding titles may not be aware that their money is being channelled into a terrorist organization. One concern that arises in the present hunt for Al-Qaeda money is that the terrorists will turn increasingly to parallel underground banking systems. Attention has been focused on the Hawala system – but it is by no means the only one for money transmission. Western Union type transfer systems, travellers cheques, even credit cards can be an effective means of financing individual terrorists if not whole terrorist cells. Much has also been made of the need to crack down on correspondent banking relations. Effectively, a respondent bank is relying on its correspondent to have conducted due diligence of each of its customers, because there is no way the respondent bank can monitor the probity of all transactions originating from sources
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that it does not know. The principles enacted in the USA PATRIOT Act prohibiting a bank from maintaining a correspondent relationship with a bank located in a ‘noncooperative’ jurisdiction appears to be a sound – if not necessarily watertight – precaution. But there is a risk that countries without developed banking systems, whose banks need their correspondent relationships to link with the principal world markets or whose (innocent) citizens are active users of Hawala to transmit funds abroad, may be harshly penalized through no fault of their own. Indeed, there are countries, such as Somalia, that have no banking infrastructure and whose banking system is based entirely on Hawala-type relationships. The BCBS paper does not go so far as to ban correspondent banking relationships (except with so-called ‘shell banks’). But it says that banks must decide whether they can rely on a correspondent to conduct adequate due diligence of its customers in the same manner as an introducer3 – and hence it must apply the criteria that are laid down for eligible introducers in determining whether to enter into or to sustain a correspondent relationship. It is a legitimate question to ask what the BCBS itself has been doing since 11 September to support the anti-terrorism efforts of the US government and others. First, it accelerated the issue of its CDD paper and, in doing so, took pains to ensure that it represents a response to the newly-identified threat (though, in truth, few changes were made to the document). Second, the BCBS’s Secretariat has been assisting the authorities in the transmission of the US ‘Control List’ of suspected terrorists to banks in the major countries. It has not been creating the list directly, but has acted as a conduit in taking the initial US list, adding additional names identified by non-US authorities and circulating a consolidated list to the authorities that make up its members. Those authorities have then passed on the list at their discretion to the financial institutions within their jurisdictions. The lists were also made available via the European Central Bank to countries in the European Union that are not members of the Basel Committee. Not all supervisors have been enthusiastic about this process – some have expressed doubt about the accuracy and comprehensiveness of the list, and have voiced fears that circulating lists will create complacency among banks about customers that do not appear on the list. An important issue in this context and one that is of considerable interest to the working group on cross-border banking is the extent to which the monitoring of customer due diligence needs to be applied on a global basis. The four risks identified in the CDD paper apply to a bank wherever it is operating – certainly to its overseas branches and very probably to subsidiaries under its effective control. There is a section in the paper that addresses the need for banks to be able to implement the CDD standards imposed by their home-country regulator on a global basis, and for home-country supervisors to be able to ensure that the standards are being adequately applied through on-site examination on equivalent verification procedures.
3
An introducer is an entity that channels suitable customers to a bank. In some countries, this is a regular and frequent source of new customers. The BCBS paper sets out strict criteria for the acceptability of introducers.
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Since the Control Lists began to circulate, this debate has become more pertinent because it has raised questions about a bank’s ability to respond on behalf not only of its head office and domestic banking network, but also of its offices abroad. Some banks seek to ensure that they maintain a centralized customer database – if only to save on IT costs – and hence are in a position to ‘search’ for identified customer names across their global customer base. Some do not make that attempt – and, even if they do, there will be individual units which for various reasons may not wish their own customer base to be accessible from the head office. Others may use a numbered account system to disguise the names of, say, their private banking clients in offshore centres or their high net-worth clients in a private banking centre such as Switzerland. It is clear, however, if a CDD principle is to be effective, that a bank should be in a position to respond to an official request as to whether it has the account of a named customer in any of the locations in which it operates. This means that its offices abroad must be capable of responding to enquiries from head office about named account holders. In the specific case of the Control List, many banks have circulated the List to their offices abroad and asked for notification of any matches. This means that the Lists have reached some outlying countries whose supervisors/central banks have not received them. Another issue relates to the ‘search’ capability. One of the lessons learnt since the Control Lists have been circulating is that, while all banks would normally have their account-holders in an electronically searchable form, relatively few banks have the beneficial owners so recorded. It seems that many banks have the supporting documentation to identify the recorded beneficial owner separately from their principal customer base. Hence a search of the Control List can be extremely timeconsuming if banks are to search, as they should do, the beneficial owners of accounts that they hold. There is also a question about the means by which banks should react with respect to matches with the Control Lists. This involves the legal area, because in most cases some form of confidentiality legislation will apply and any exchange of information will be subject to treaties or Memoranda of Understanding (MOUs). Where there are suspicious transaction reporting rules and Financial Intelligence Units (FIUs) to which suspicions can be reported, the gateway would seem to be clear-cut. However, some FIUs may not have the powers to communicate directly with FIUs in other countries, such as FINCEN in the United States. It may, in such cases, be more efficient if the banks respond to their own supervisor, who can communicate suspicions to the Federal Reserve Bank of New York. This channel may also be required in the case of countries which have not yet established FIUs (though these are becoming fewer). However, as a general rule, the supervisory information channel is not well suited to suspicious transaction reporting, since it is designed for the communication of problems concerning the bank’s own activities and is often subject to a series of criteria designed to protect the confidentiality of any information transmitted concerning individual customers and accounts. As often in the case of information-sharing, the most sensitive issue, as mentioned earlier, is the matter of tax confidentiality and the need to protect information about customer
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accounts from being passed to home-country authorities. But that protection can, at the same time, inhibit the bank supervisor from passing information to other official bodies, such as the FIU. The author’s view on the prospects for success in the fight against terrorist financing is that co-operation is needed on an unprecedented scale, not only between the private and public sectors, but within the public sector too. It is no secret that different official entities within the United States had information which, if pooled, would have alerted them to the 11 September terrorist attacks. Such information was not shared with others who could have added to it, partly for reasons of professional jealousy between the different agencies. Now, in the United States and elsewhere there is unprecedented collaboration at the official level with at least two major US inter-agency task forces. This effort is leading to intelligence successes, which have thankfully, at the time of writing at least, contributed to the absence of further terrorist events, though there have been some close calls. But, at the financial level, it seems that success has been more limited. While some quite substantial sums have apparently been frozen, many of the audit trails have petered out in impenetrable areas in the Middle East or in financial centres, often at a high political level. It is not surprising that the financial trail is not a simple one – Osama bin Laden reputedly went to Afghanistan originally to advise the Taliban on the best means of marketing and laundering the proceeds of their opium crops. He is known to operate a sophisticated financial machine and to have associates well versed in underground banking methods. In the future, it is going to be even more difficult to identify or to track the financing of terrorism, for the perpetrators have now been warned. Only so much can be done by the private sector – it needs to develop closer links with and receive tip-offs from the public sector on an ongoing basis. It has been said that customer privacy will not be the same again after 11 September, and this trend is being reinforced by initiatives by the OECD and others to increase fiscal transparency and force offshore financial centres to adopt stricter prudential and disclosure standards. Banks must certainly remain alert to terrorism – just as they must remain alert to all forms of criminal activity by their customers – but they can only supplement the efforts being made by the intelligence and police authorities, and not substitute for them. If there is to be real coordination, the public sector needs to share information more readily with the private sector than it has traditionally been willing to so. It has in the past been very much a one-way information flow and banks making Suspicious Transaction Reports (STRs) to FIUs have often wondered whether they have ever been investigated. The sharing of Control Lists with the financial institutions is an encouraging sign that the public sector is willing to be more open, and appreciates that it needs assistance from the banks and other financial institutions if it is to defend properly its people against these terrible threats. It is necessary, though, to close on a sombre note. Banks and bank supervisors have rarely faced a responsibility as grave as they do now. Failing to conduct due diligence in present circumstances could have deadly consequences, putting thousands or conceivably hundreds of thousands of lives at risk. There is no place to hide on this issue.
Financing of Terrorism – A Predicate Offence to Money Laundering? Armand Kersten
1.
Introduction
On 30 October 2001, the Financial Action Task Force on Money Laundering (FATF) agreed to a set of Special Recommendations on Terrorist Financing.1 Recommendation II provides: ‘Each country should criminalise the financing of terrorism, terrorist acts and terrorist organisations. Countries should ensure that such offences are designated as money laundering predicate offences.’ (emphasis added, AJK) These Special Recommendations were agreed upon at a FATF ‘extraordinary Plenary’, at which the FATF extended its mission beyond money laundering. 2 The 11 September 2001 attacks on America triggered drastic legislation aimed at suppressing the financing of terrorism, 3 appearing to depart from the legal apparatus, classically used in the fight against money laundering. For instance, the significant part of the USA PATRIOT Act package is the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001. In the Act, the American Congress finds that money laundering permits transnational criminal enterprises to conduct and expand their operations to the detriment and safety of American citizens, and that money launderers subvert legitimate financial mechanisms and banking relationships by using them as protective covering for the movement of criminal proceeds and the financing of crime and terrorism. By making a brief tour d’horizon of relevant source materials from international (institutional) organizations, this paper shall address whether, from a methodolo-
1 2 3
FATF news release of 31 October 2001, FATF cracks down on Terrorist Financing (available on the web at . See the news release mentioned in ibid. Two of the highest profile laws in this category being the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (‘the USA PATRIOT ACT’) and the UK Anti-Terrorism, Crime and Security Act 2001.
M. Pieth (Ed.), Financing Terrorism, 49–56. © 2002 Kluwer Academic Publishers. Printed in the Netherlands.
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gical perspective, it makes sense to legislate to suppress financing of terrorism on the basis of analogies with money laundering.
2.
Money laundering
Whilst the United Nations Convention against illicit traffic in narcotic drugs and psychotropic substances of 19 December 1988 (‘the Vienna Convention’) created momentum for the attention to money laundering as a global phenomenon,4 it only required the prohibition of the ‘laundering’ of drug proceeds.5 Note that the FATF, in its initial 40 Recommendations of 19906 took the‘definition’ of money laundering from the Vienna Convention. The Council of Europe7 Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime of 8 November 1990 (the Strasbourg Convention), takes this a step further, by giving its Article 6 the title: ‘Laundering offences’. Whilst repeating constituent elements already contained in the Vienna Convention, it widens the circle of ‘predicate offences’ beyond drug trafficking. In so far as is relevant for the purposes of this article, it provides that the parties must establish as offences under their domestic laws: a.
b.
c.
4 5 6 7
8
the conversion or transfer of property, knowing that such property is proceeds, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in the commission of the predicate offence to evade the legal consequences of his actions; the concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to or ownership of property, knowing that such property is proceeds and subject to its constitutional principles and the basic concepts of its legal system; the acquisition, possession or use of property, knowing, at the time of receipt, that such property was proceeds. (emphasis added)
The term ‘money laundering’ as such seems to have been introduced in the US Money Laundering Control Act of 1986. It is noted that the Vienna Convention does not explicitly refer to (the term) money laundering. Later in this article, it will be seen that the 1996 revision aimed at widening the scope. The Council of Europe should not be mistaken with the European Council. The Council of Europe is an international institutional organization, whereas the European Council is an organ of the European Union. Available on the web at .
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The Strasbourg Convention defines ‘proceeds’ as: any economic advantage from criminal offences.9 It goes on to define ‘predicate offence’ as: any criminal offence as a result of which proceeds were generated that may become the subject of an offence as defined in the ‘laundering article’.10 This yields an entirely open-ended range of predicate offences, hinging on the definition of ‘proceeds’ as any economic advantage from criminal offences. Perhaps the only limitation is hidden in the fact that it is left to the Member States to incorporate the convention’s requirements in their domestic criminal laws, which leaves them discretion to draw the circle themselves. The Commission of the European Communities labelled the methodology of the Strasbourg Convention: ‘an approach to combating the laundering of the proceeds of a wider range of criminal offences than required by the Vienna Convention’ (emphasis added).11
I now turn to the European Union (and the European Communities) itself. The Council of the European Communities Directive of 10 June 1991 on prevention of the financial system for the purpose of money laundering 12 provides: ‘Whereas for the purposes of this Directive the definition of money laundering is taken from that adopted in the Vienna Convention; whereas, however, since money laundering occurs not only in relation to the proceeds of drug-related offences but also in relation to the proceeds of other criminal activities (such as organized crime and terrorism), the Member States should, within the meaning of their legislation, extend the effects of the Directive to include the proceeds of such activities, to the extent that they are likely to result in laundering operations justifying sanctions on that basis.’ (emphasis added) The 1991 Convention thus envisages and recognizes that terrorism is a criminal activity potentially resulting in proceeds in relation to which money laundering may occur. From a logical perspective, however, it seems that this approach presumes the criminal activity preceding the laundering of the proceeds. In 1996, the FATF strengthened its 4th Recommendation to state that ‘each country should extend the offence of drug money laundering to one based on serious offences’, done so as to extend the ambit of the predicate offences beyond that of the Vienna Convention.
9 10 11
12
Article 1, sub a. Article 1, sub e. Commission of the European Communities, Proposal for a European Parliament and Council Directive, amending Council Directive 91/308/EEC of 10 June 1991 on prevention of the use of the financial system for the purpose of money laundering, Brussels, 14 July 1999, COM (1999) 352 final, explanatory memorandum. OJ 1991 L 166, p 77 et seq.
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In 1998, under the auspices of the UN Office for Drug Control and Crime Prevention,13 the report Financial Havens, Banking Secrecy and Money Laundering 14 was published. Under the header ‘issues for consideration’, this report addresses ‘predicate offences’15: ‘The time may have come to end the artificial division of criminal money into categories depending on the nature of the crime. . . . One possible approach would be to have member countries agree that any funds that are derived through criminal activity are funds that can give rise to a charge of money-laundering.’ From the context of the report, it can be inferred that the term ‘artificial division’ is used to point to distinctions sometimes made between criminal tax offences and tax offences classified otherwise. On 9 December 1999 the General Assembly of the UN adopted the International Convention for the Suppression of the Financing of Terrorism. 16 Article 2 provides, in so far as is relevant here: ‘1
Any person commits an offence within the meaning of this Convention if that person by any means, directly or indirectly, unlawfully and wilfully, provides or collects funds with the intention that they should be used or in the knowledge that they are to be used, in full or in part, in order to carry out:
[...] (b) Any other act [subparagraph (a) refers to acts constituting offences under a list of treaties] intended to cause death or serious bodily injury to a civilian, or to any other person not taking an active part in the hostilities in a situation of armed conflict, when the purpose of such act, by its nature or context, is to intimidate a population, or to compel a government or an international organization to do so or to abstain from doing any act.
[...] 3. For an act to constitute an offence set forth in paragraph 1, it shall not be necessary that the funds were actually used to carry out an offence referred to in paragraph 1, subparagraphs (a) or (b). 4. Any person also commits an offence if that person attempts to commit an offence as set forth in paragraph 1 of this article.’ (parentheses added) Article 1 paragraph 3 defines ‘proceeds’ as: any funds derived from or obtained, directly or indirectly, through the commission of an offence set forth in Article 2.
13 14 15 16
Based in Vienna, this office created the UN Global Programme against Money Laundering (GPML) and the GPML Forum. See the website mentioned in footnote 14. Available on the web at . At pages 73 and 74 Available on the web at – entry into force was 10 April 2002.
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In its Article 8, the Convention refers to ‘proceeds’ by providing, in so far as is relevant here:
‘1.
2.
Each State Party shall take appropriate measures, in accordance with its domestic legal principles, for the identification, detection and freezing or seizure of any funds used or allocated for the purpose of committing the offences set forth in article 2 as well as the proceeds derived from such offences, for purposes of possible forfeiture. Each State Party shall take appropriate measures, in accordance with its domestic legal principles, for the forfeiture of funds used or allocated for the purpose of committing the offences set forth in article 2 and the proceeds derived from such offences.’ (emphasis added).
The Convention does not make any explicit reference to money laundering. The closest it comes to an analogy (if it is one) is in Article 18, which provides: ‘1. States parties shall co-operate by adapting their domestic legislation, including: [...] (b) Measures requiring financial institutions and other professions involved in financial transactions to utilize the most efficient measures available for the identification of their usual or occasional customers in whose interest accounts are opened, and to pay special attention to unusual or suspicious transactions and report transactions suspected of stemming from a criminal activity. For this purpose, States Parties shall consider: [...] iii) Adopting regulations imposing on financial institutions the obligation to report promptly to the competent authorities all complex, unusual large transactions and unusual patterns of transactions, which have no apparent economic or obviously lawful purpose, without fear of assuming criminal or civil liability for breach of any restriction on disclosure of information if they report their suspicions in good faith.’ Thus, for instance, proceeds arising, by whatever means, directly or indirectly, unlawfully and wilfully, from collecting funds with the intention that they should be used or in the knowledge that they will be used, in full or in part, to carry out a terrorist act are within the scope of the convention. It is not clear how the required element of ‘unlawfulness’ must be related to the collection of funds. It is clearly possible that the method used for collecting funds is not unlawful as such. On 15 November 2000, the UN General Assembly adopted the United Nations Convention against Transnational Organized Crime.17 This Convention is intended to close the major loopholes blocking international efforts to crack down on those engaging in illegal activities ranging from money laundering to trafficking in human beings. 17
Available on the web at .
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The Convention contains definitions of a wide range of terms. Thus, for instance, it defines ‘serious crime’ as: ‘conduct constituting an offence punishable by a maximum deprivation of liberty of at least four years or a more serious penalty.’ 18 Article 6 of the new Convention addresses the ‘Criminalization of the laundering of proceeds of crime’.19 The ‘definition’ of money laundering itself is extended quite a bit further than that in the Vienna Convention of 1988. Notably, in this Article 6, the new Convention provides: ‘Each State Party shall seek to apply widest range of predicate offences;
its definition of money laundering to the
Each State Party shall include as predicate offences all serious crime as defined in article 2 of this Convention . . . ’ (parentheses and emphasis added). It should be added that the new Convention explicitly provides for a so-called dual criminality test.20 Hence, the UN seeks to use and define ‘serious crime’, as well as ‘organized crime’. We are approaching the point of an ‘all crimes’ ambit of predicate offences. This brings one back to the EU. On 4 December 2001, the European Parliament and the Council of the European Union adopted the second money laundering prevention directive. 21 Both the EU Council of Ministers and the European Parliament had called for additional measures to enhance the 1991 EU anti-money laundering Directive. 22 On 14 July 1999, the EU Commission presented its proposal23 (the Proposal). The main changes to the 1991 Directive are a widening of the prohibition of money laundering to embrace not only drugs trafficking but also all organized crime, and an extension of the obligations of the Directive to certain non-financial activities and professions. It is this ‘widening’ of the prohibition of money laundering that shall now be the focus of the rest of this paper. The explanatory memorandum expresses it thus: 18 19 20
21
22 23
Art. 2(b). Thus, this Convention makes an explicit reference to the term ‘money laundering’; contrast the absence of such reference in the Vienna Convention of 1988, as was noted supra. Thus, offences committed outside the jurisdiction of a party constitute predicate offences only when the relevant conduct is a criminal offence under the domestic law of the country where it is committed and would be a criminal offence under the domestic law of the party applying the Convention, had it been committed in that party’s jurisdiction, viz. Art. 6(2)(c). Directive 2001/97/EC of the European Parliament and of the Council of 4 December 2001 amending Council Directive 91/308/EEC on prevention of the use of the financial system for the purpose of money laundering, OJ 2001 L 344, p 76 et seq, available on the web at . See, supra, note 12 Commission of the European Communities, Proposal for a European Parliament and Council Directive, amending Council Directive 91/308/EEC of 10 June 1991 on prevention of the use of the financial system for the purpose of money laundering, Brussels, 14 July 1999, COM (1999) 352 final.
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‘The 1991 Directive only requires the prohibition of the laundering of drugs proceeds, as required by the Vienna Convention, but encourages Member States to apply the approach of the Strasbourg Convention,24 namely of combating the laundering of the proceeds of a wider range of criminal offences (often referred to as ‘predicate offences’). The FATF strengthened its relevant recommendation in 1996 to state that ‘each country should extend the offence of drug money laundering to one based on serious offences’. This corresponds to a growing trend based on the dramatic increase in non-drugs based organised crime and on the realisation that having a wide range of predicate offences should improve suspicious transaction reporting and above all facilitate international co-operation between judicial and police authorities in different countries.’ [parentheses and emphasis added] As to the concrete question whether it would also be appropriate to base the prohibition of money laundering contained in the (updated) Directive on the same concept of ‘serious offences’ as in the Strasbourg Convention, 25 the Commission interestingly distinguishes between, on the one hand, the criminal law treatment of money laundering (i.e., the definition of the crime of money laundering) and, on the other hand, the specific obligation to report suspicions of money laundering as imposed upon the financial sector. It stresses that the Directive addresses the obligations of reporting. The Commission then writes: ‘The anti-money laundering defences thus depend to a large extent on the goodwill and efforts of, in particular, the financial sector. The financial sector has expressed considerable reticence concerning any reporting requirement that would extend to an excessively wide range of offences, even including relatively minor ones.’ Which leads the Commission to conclude: ‘The Commission has concluded that for the purposes of the Directive, and its extension to certain non-financial activities, a reporting obligation based on serious offences might be too broad. The Commission is therefore proposing that the reporting obligation under the Directive should be based on activities linked to organised crime or damaging the European Communities financial interests.’ (emphasis added) Concretely then, the Proposal now defines ‘criminal activity’ as encompassing ‘participation in activities linked to organised crime’, and ‘fraud, corruption or any other illegal activity damaging or likely to damage the European Communities’ financial interests’.26 24 25 26
See, supra, note 8. See, supra, note 8. Proposal, Article 1(E).
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For the Directive, the Commission has knowingly thrown out ‘serious offences’, and opted instead for: ‘organised crime’. In the Proposal, ‘organised crime’ means exactly what it says: ‘involvement of an organised crime group’.27 This clear choice was made in the face of the noticeable ‘trend’ among the EU Member States to extend their domestic legislation to outlaw the laundering of the proceeds from a wide range of ‘serious crime’.28
Conclusion Where does all this lead? One thing is clear: Money laundering and financing of terrorism are two completely different concepts. As is implied by the term ‘laundering’, its intent and purpose are to have moneys, derived from crime, assume an apparent legal role in the financial system without this being known to the bona fide participants in the financial system. Logically, this presumes the criminal offence preceding the laundering. Ultimately, if the laundering succeeds, it is instrumental in having those taking an interest in the crime enjoy its financial benefits. Money launderers will seek to hide the funds and their origin from detection. Surely, those contemplating to finance terrorism will strive to hide the funds and their origin devoted to their cause from detection, too. This may well mean that they resort to similar techniques to those used by money launderers. It is precisely here that the strongest analogy between the two phenomena can be seen. Where financing of terrorism is concerned, possibly no criminal offence preceded the introduction of the funds in the financial system. Of course, there will be criminal intent, but it makes no sense to construe the funds used to promote the cause as the ‘proceeds’ of that criminal intent. Arguably, money laundering, to some extent, engenders the predicate offences. Clearly, few would commit predicate offences if they did not perceive an opportunity to ultimately derive the monetary benefit therefrom. Money laundering, however, does not occur so as to bring about, or facilitate the criminal offence itself (although, of course, some proceeds may be used to finance criminal operations). It is suggested that it makes no sense to designate the financing of terrorism as a money laundering predicate offence. Rather, it should be recognized and distinguished as a separate category. This is not to say that, in legislating for the consequences of cases involving the financing of terrorism, one should not draw upon inferences taken and developed from the classical money laundering apparatus.
27 28
Proposal, explanatory memorandum, p. 7. See European Commission, Second Commission Report to the European Parliament and the Council on the implementation of the Money Laundering Directive, XV/1116/97-rev.2 – En, III, 2
Obstacles in Company Law to Anti-Money Laundering International Co-Operation in European Union Member States Ernesto U. Savona
1. Introduction The misuse of corporate vehicles or entities or structures for money laundering purposes has come to the attention of international organizations and the general public together with the issue of offshore countries. In 2000, Transcrime’s Euroshore report pointed out the ‘domino effect’ of company law on other laws and regulations such as criminal, administrative and banking. 1 Depending on the type of regulation, company law makes a financial system more transparent (or more opaque), thereby influencing other sectors of regulation and the effectiveness of police and judicial cooperation. If company law seeks to maximize anonymity in financial transactions by facilitating the creation of shell or shelf companies whose owners remain largely unknown (because other companies own them), such anonymity could be transferred to other sectors of the law (criminal, banking, tax). Therefore, the names of the real beneficial owners or beneficiaries of financial transactions remain obscured, thwarting criminal investigation and prosecution. This conclusion has produced two consequences. The first is the need for a better understanding of the role played by legal and non-legal structures in facilitating crimes. Furthermore, given that the conclusions of the Euroshore report are addressed to European Union Member States, the second need is to better understand which regulation and/or insufficient/ absent implementation of regulation, where it exists, obstruct anti-money laundering international co-operation.2
1
2
‘Euroshore – Protecting the EU Financial System from the exploitation of Financial Centres and Off-shore facilities by Organised Crime’ (Trento Transcrime-University of Trento 2000) at p. 16 (Final Report prepared for the European Commission, Falcone Programme 1998). The first case is dealt with in the ‘OECD Report on the Misuse of Corporate Vehicles for Illicit Purposes, which covers offshore and onshore jurisdictions’ 9 May 2001; the second case dealt with in this Report initiated in 2001 (contract JHA b/2000/B2 of 25 January
M. Pieth (Ed.), Financing Terrorism, 57–85. © 2002 Kluwer Academic Publishers. Printed in the Netherlands.
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The Tampere European Council of October 1999, in agreement with the conclusions of the Euroshore report, considered the role of corporate law to be important and in Recommendation 58 it invited the European Commission ‘to draw up a report identifying provisions in national banking, financial and corporate legislation which obstruct international co-operation. The Council is invited to draw necessary conclusions on the basis of this report’. As a consequence the European Commission launched a tender (JHA B/2000/B2/01 of 20 July 2000) and in January 2001 Transcrime at the University of Trento was awarded the Study of the regulation and its implementation, in EU Member States, that obstruct anti-money laundering international co-operation (banking/financial and corporate/company regulative fields). The Report ‘Transparency and Money Laundering’ is the result of this study and was presented by the European Commission at the Jumbo Council of 16 October 2001, one month after the events of 11 September.3 The report does not mention terrorism, but the financial investigations for tracing and stopping the financing of terrorist groups have always come up against the wall of opacity erected by the corporations that deal with the financial transactions of criminals. Terrorists make use of the same instruments as other criminals for their laundering purposes. The aim of this article is to contribute to the understanding of how corporate law could affect the opacity/transparency of a financial system. It presents, in an abridged version, the second part of the report which covers corporate/company4 regulation. In this field the report covers ‘legal and non-legal structures’ that are susceptible to being used in EU Member States in money-laundering operations. Before moving on to the analysis some definitions are necessary: Legal and non-legal ‘structure’ is defined as an ‘organization with an economic or patrimonial vocation’;5 ‘Regulation’ is defined as ‘the whole group of those laws and provisions in the corporate/company regulative fields relevant to anti-money laundering international co-operation’. In fact, the existence of a legal provision could increase, either directly or indirectly, the effectiveness of the performance of law enforcement, judiciary and financial authorities in the investigation of money-laundering cases. First, it may be carried out directly by encouraging active collaboration in supplying information relevant to criminal investigaCont 2001) the main aim of which is to highlight, in EU Member States, those regulations and or implementations thereof that – in the banking/financial and corporate/company fields – constitute obstacles to anti-money laundering co-operation. 3 The research carried for the production of the main report was directed by the author, coordinated by Sabrina Adamoli with the co-operation of Andrea Di Nicola and Alessandro Scartezzini, all researchers at Transcrime-University of Trento. Eddy Wymeersch professor in Ghent (Belgium) acted as general consultant 4 The first part of the report refers to the banking/financial field. This part has been excluded from this article. 5 The term ‘patrimonial’ is intended as meaning ‘relating to somebody’s estate’.
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tions, and secondly, it may be carried out indirectly by increasing the transparency of a financial system through mechanisms identifying the subjects involved in their operations; Two types of obstacles are identified: ‘Obstacles to regulation’ preventing international co-operation in anti-money laundering activities are defined as ‘the lack of regulation’. They are explained by the variable ‘existence of regulation’ (R), The answers follow two modalities: yes or no. ‘Obstacles to the implementation of regulation’ inhibiting international cooperation in enacting measures against money laundering are defined as ‘the incomplete/absent implementation of regulation’. They are explained by the variables: a) existence of structures which enable the implementation (I) (modalities: fully implemented, partially implemented, not implemented); b) existence of controls for the implementation (C) (modalities: yes/no); c) existence of sanctions against non-compliance (S) (modalities: serious sanction, lenient sanction, no sanction).
2.
Main assumption
The main assumption is that the less regulation there is at a national level in the corporate/company regulative field, and the lower the implementation of the regulation under consideration, where it exists, the greater the obstacles to antimoney laundering international co-operation. That means that in order to remove these obstacles, countries should be called upon to change their regulation in the field. Following this assumption, this article intends to answer the following questions:
1.
2.
What regulation and/or implementation thereof, in the corporate/company regulative field, create obstacles to international co-operation between EU Member States to prevent money-laundering? What is the dimension of the obstacles in these fields?
The following steps have been followed: analysis of the regulation in order to identify which of the specified transparency variables involved in international co-operation for the prevention of money laundering are lacking; analysis of the implementation of regulation in the corporate/company regulative fields in order to identify which of the transparency variables involved in international co-operation for the prevention of money laundering specified in 1) are lacking; evaluation of the results of the two analyses of 1) and 2) in order to identify,
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quantify and cross-compare obstacles to international co-operation between EU Member States for the prevention of money laundering.
3.
Methodology and data collection procedures
In order to identify the transparency variables and obstacles involved in international co-operation for the prevention of money laundering in regulation and/or in its implementation, primary and secondary sources were used:6 the primary sources were: the replies to a questionnaire designed to select the legal and non-legal structures susceptible to being used in money-laundering operations. This questionnaire was sent to experts in the financial police units and the Financial Intelligence Units of the fifteen EU Member States; the replies to a questionnaire designed to study the regulation and its implementation in the corporate/company regulative field and sent to company law experts (professors and auditors), and to members of the IOSCO, in EU Member States.7 secondary sources consisted of a variety of both published and unpublished documents.8 These sources were utilized for the selection of the transparency variables subsequently used in the analysis.
6
7
8
Given the complexity of the identified transparency variables, and the necessity to gather information regarding the implementation of regulation in EU Member States, in collecting information, preference was given to the answers of the experts to the questionnaires submitted to them. The criteria used for the choice in case of differing answers by experts of the same country to the same question is explained on page 144 of the methodological appendix to the report. The list of experts contacted can be found in the acknowledgements at the beginning of the main report. As the results are based on their answers to the submitted questionnaires, some degree of error is due to the opinions expressed by the experts on single transparency variables. The criteria used for the choice in case of differing answers by experts of the same country to the same question is explained in the methodological appendix. ‘Report on the Misuse of Corporate Vehicles for Illicit Purposes’ (Paris OECD Steering Group on Corporate Governance 2001); R. Thomas, Company Law in Europe (London Butterworths 2001); Company Law in Europe: Recent Developments (mimeo) (Manchester CLAB University of Manchester 1999); M.J. Oltmanns, European Company Structures (London-The Hague-Boston Kluwer Law International 1998); ‘Prevention of Organised Crime: The registration of legal persons and the international exchange of information’ final report (T.M.C. Asser Instituut 2000); Modern Company Law for a Competitive Economy (mimeo) (London DTI London 1998); A.J. Oakley, The Modern Law of Trusts (London Sweet and Maxwell 1998); A. Sydenham, Trusts (London Sweet and Maxwell 1997); M. Lupoi, Trusts (Milan Giuffrè Editore 1997); D.J. Hayton, Law Relating to Trusts
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Analysis of the corporate/company regulative field
This section describes the model utilized to analyze data collected for the corporate/company regulative field, and sets out the conclusions. The assumption made here was that obstacles to international co-operation in response to money laundering depend either on a lack of regulation in the regulative field considered, or in the incomplete/absent implementation of the regulation where it exists. The purpose of the model is to show where these obstacles are (in which EU Member State, in which thematic area and at which level), to assess the dimensions of these obstacles in order to cross-compare them at an EU level, and to propose remedies that might remove them. The following steps were taken in developing the model for identifying obstacles to anti-money laundering international co-operation and assessing their dimensions: STEP 1: selection of the legal and non-legal structures susceptible to being used in money laundering operations; STEP 2: Identification of thematic areas and relative transparency variables; STEP 3: Analysis of the regulation at the national level; STEP 4: Analysis of the implementation of the regulation at the national level; STEP 5: Cross-comparative analysis of the results;
4.1 Selection of the legal and non-legal structures susceptible to being used in money laundering operations The first step of the Study was that of selecting the legal and non-legal structures susceptible to being used in money laundering operations in EU Member States. A questionnaire was drafted, starting with a list of legal and non-legal structures used in an earlier study,9 and sent to a maximum of three experts from financial police
Cont. and Trustees (London Butterworths 1995); F. Galgano, Diritto commerciale: le società (Milano Zanichelli 1999/2000 ed.); The Opacity Index (Price Waterhouse-Coopers 2001) available on the Internet at , last visited on 1 June 2001. 9 ‘Transparence des structures utilisées à des fins économiques et/ou patrimoniales: Présentation succinte de la situation actuelle dans les Etats Membres, document de travail des services de la Commission’ of 5 October 2000 EC DOC. 12088/00. The list was comprised of the public limited company, the private limited company, the société de droit civil and its equivalents in other EU Member States, the trust, the società fiduciaria, the limited partnership on shares, the ordinary partnership, the limited partnership, the cooperation, the association, the foundation, the association momentanée, the private limited company with one shareholder, the unlimited company, the European Economic Interest Grouping, the etablissement public, the association internationale, the groupement complementaire d’entreprises, and the association en participation.
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units and Financial Intelligence Units in the fifteen EU Member States. With the cooperation of Europol, the experts were chosen from units which specifically deal with economic crimes on the basis of their experience and knowledge of money laundering investigations. The experts acted as a virtual panel to whom responsibility was given for the selection of the structures susceptible to being used in money laundering operations. 10 According to the results of this survey, the structures selected for further analysis were divided into three groups. Three structures were selected as most susceptible to being used in money laundering operations by at least 30 per cent of the EU Member States. The regulation and its implementation in relation to these structures were, therefore, analyzed in all the EU Member States where they exist. They are: the public limited company (reported as susceptible to being used in money laundering operations in 40 per cent of EU Member States and existing in all of them); the private limited company (reported as susceptible to being used in money laundering operations in 67 per cent of EU Member States and existing in all of them); the société de droit civil and its equivalent in other Member States (reported as susceptible to being used in money laundering operations in 37.5 per cent of the EU Member States where it exists).11 This article covers only the first two company structures, leaving the third to the main report. Furthermore, the analysis covers the regulation of trusts, selected as susceptible to being used in money-laundering operations by Ireland, and also analyzed in the United Kingdom. 10
11
On the basis of their experience and knowledge of money laundering, experts were asked to select which legal and non-legal structures are susceptible to being used in moneylaundering operations in their countries and to weigh up their involvement in such activities using a scale. The structure was selected according to the evaluation of this panel. For the remaining structures in the list, the regulation and its implementation were only analyzed in the single countries where they were reported as susceptible to being used in money-laundering operations. The following structures are not part of this article but are analyzed in the main report: trusts in Ireland and United Kingdom; the società fiduciaria was analyzed in Italy, the only country where it exists; the limited partnership on shares was analyzed in Belgium and Italy; the ordinary partnership was analyzed in Ireland, the Netherlands and Sweden; the limited partnership was analyzed in Sweden; the co-operative was analyzed in Belgium; the association was analyzed in Ireland and Sweden; the foundation was analyzed in Austria and the Netherlands; the association momentanée (unión temporal de empresas) was analyzed in Spain; the single member private limited company was analyzed in the Netherlands, Spain and United Kingdom.
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4.2 Identification of thematic areas and transparency variables in regulation and in its implementation The second step of the Study was to identify thematic areas and related transparency variables involved in the regulation and its implementation. The following thematic areas 12 were selected because of their relevance to international co-operation for the prevention of money laundering: Incorporation; Company activity; Identification of the real beneficial owner. For each thematic area a set of constitutive elements (called ‘transparency variables’), involved in the regulation and in its implementation was identified. The existence of each of these variables ensures greater transparency of the corporate/company regulative field. The idea behind this choice is that, in order to prevent and to combat money laundering both nationally and internationally, it is essential to guarantee the transparency of the financial and corporate systems of the EU Member States. The less transparent the national financial and corporate systems are, the less effective and efficient international anti-money laundering regimes become. This is one of the conclusions reached by the Euroshore Report,13 which states that corporate/company law conditions the level of a financial system’s transparency/opacity. Depending on the type of regulation, it generates greater/lower transparency of a financial system, thereby influencing the other sectors of regulation and conditioning the effectiveness of international police and judicial co-operation. Three thematic areas and the relative transparency variables were identified in discussions with company law experts, who advised and co-operated throughout the development of this Study, supplemented by the existing literature on this topic and by the content of the existing European Union instruments. 14 12 13
14
Their relevance for anti-money laundering international co-operation is explained in sections from 4.2.1 to 4.2.3 of the main report. Transcrime – University of Trento, in co-operation with CERTI – Bocconi University (Milan, Italy) and Erasmus University of Rotterdam (The Netherlands), Euroshore; ‘Protecting the EU Financial System from the Exploitation of Financial Centres and OffShore Facilities by Organised Crime, Final Report Prepared for the European Commission’ (Trento Falcone Programme 1998, January 2000) at pp. 75–77. The most relevant in this context are: First Council Directive 68/151/EEC of 9 March 1968 on co-ordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, with a view to making such safeguards equivalent throughout the Community, OJ 1968 L 65/8; Second Council Directive 77/91/EEC of 13 December 1976 on co-ordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ 1977 L 26/1; Fourth Council Directive
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In each of the three identified thematic areas, the above-mentioned transparency variables were turned into a number of questions, in order to verify the existence of regulation in the area and to evaluate the level of its implementation in the area. The questions were collected in a questionnaire, which was sent to company law experts (professors and auditors) and to members of the IOSCO in all EU Member States.15
4.2.1 The thematic area ‘Incorporation’ Incorporation is the initial phase of the ‘life’ of legal and non-legal structures, in which the structure itself is established through a series of acts aimed at making it operational. The relevance of this thematic area for international co-operation for the prevention of money laundering lies in the fact that a lack of scrutiny during the incorporation phase results in greater opacity in company law, which might obstruct the acquisition of information regarding the physical persons participating in its establishment. The less opaque (or the more transparent) the process of incorporation is, the more available the information concerning the incorporation of the structures will be. This facilitates the investigation of their activities and of the persons controlling them at both national and international levels. In 2000 the FATF stressed the importance of this area for international cooperation for the prevention of money laundering. The existence of ‘inadequate commercial law requirements for registration of businesses and legal entities’ is one of the twenty-five criteria used to identify detrimental rules, which impede international co-operation for the prevention of money laundering in non-cooperative countries or territories.16 Criterion 12 relates to the existence of ‘inadequate means for identifying, recording and making available relevant information related to legal and business entities (name, legal form, address, identity of directors, provisions regulating the power to bind the entity)’. According to the FATF Report on Money Laundering Typologies, 1999–2000, ‘varying company formation procedures, along with a lack of transparency for the process in some jurisdictions, are factors of which the money launderer may take advantage through the company formation agent. The solutions to these problems then, according to the FATF experts, fall into two major areas: increasing
cont. 78/660/EEC of 25 July 1978 based on Article 54 (3) (g) of the Treaty on the annual accounts of certain types of companies, OJ 1978 L 222/11; Eighth Council Directive 84/ 253/EEC of 10 April 1984 based on Article 54 (3) (g) of the Treaty on the approval of persons responsible for carrying out the statutory audits of accounting documents, OJ 1984 L 126/20. 15 The researchers drafted the variables, subsequently turned into questions and sent in the questionnaire, keeping in mind the features of legal structures. The same variables, for analogy, were extended to non-legal structures. 16 FATF, ‘Report on Non-cooperative Countries and Territories’ (Paris FATF 2000) at p. 4.
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oversight of company formation agents and insisting on minimum standards for company registry and administration, as well as transparency for the process’.17 The FATF also underlines the role played by company formation agents,18 who are the experts or agencies offering consultancy services in the incorporation of legal entities. These experts can advise their clients on the choice of jurisdiction or jurisdictions in which incorporating a legal entity is the cheapest and has the least legal requisites. The FATF in fact states: ‘Structures created by company formation agents to facilitate legitimate business activities might also be attractive as a cover for money laundering’. Consequently ‘without the ability to determine the true owner of these companies, government authorities investigating a particular money laundering scheme will be unable to establish the necessary links from the funds to the criminal’.19 The Financial Stability Forum, convened in April 1999 to promote international financial stability through information exchange and international co-operation in financial supervision and surveillance, has also highlighted the importance of scrutiny in the incorporation phase of a legal entity.20 Another problem, mentioned by the OECD in its ‘Report on the misuse of corporate vehicles for illicit purposes’,21 is related to the creation of ‘shelf companies’.22 Therefore a policy aimed at reducing opacity in this area should include a series of elements which, in this study, are identified as transparency variables in regulation. Transparency variable 1 (existence of legal provisions requiring a statutory authorization to incorporate a company) makes it more difficult to use a structure for
17 18 19 20
21 22
FATF, ‘Report on Money Laundering Typologies 1999–2000’ (Paris FATF 2000) at p. 10 (available on the Internet at ). Ibid, at p. 8. Ibid, at p. 9. Specifically, the ‘Report of the Working Group on Offshore Centres’ highlighted how the integrity of financial systems is hampered by the presence, in offshore financial centres, of opaque regulation concerning the incorporation and activity of legal entities and of insufficient control of them. A ‘light and flexible incorporation and licensing regime’ resulting in ‘inadequate due diligence in incorporation and licensing of new financial institutions and shell companies’ creates the risk that legal entities are incorporated with illicit proceeds and are subsequently used in money laundering operations. See ‘Report of the Working Group on Offshore Centres’ (Financial Stability Forum 5 April 2000) p. 12, available on the Internet at . ‘Report on the misuse of corporate vehicles for illicit purposes’ (Paris OECD Steering group on Corporate Governance 2001) at p. 13, available online at . According to the International Narcotics Control Strategy Report 1999, a shelf company is ‘a company that has already been incorporated with a standard memorandum and articles of association and has inactive shareholders, directors, and secretary. When a shelf company is subsequently purchased, the inactive shareholders transfer their shares to the purchaser and the directors and secretary submit their resignations. Typically, the authorities need not be notified when a shelf company is sold’. The end result is that there are companies whose real beneficial owners and directors are unknown and not checked on by the authorities.
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illicit purposes, as it makes it mandatory to supply information to a controlling authority, which supervises the process of incorporation. Transparency variable 2 (existence of legal provisions requiring background investigations into the founders of a company) has the aim of requiring checks on all the persons who intend to set up a structure in order to prevent it from being used as a shield for criminal activities. Transparency variable 3 (existence of legal provisions setting a minimum company incorporation capital) increases the costs incurred by criminals when misusing structures for illicit purposes. Transparency variable 4 (existence of legal provisions requiring verification of the legal origin of the incorporation capital) requires verification of the legal origin of the capital invested in the structure in order to avoid illicit proceeds from being introduced into the financial system. Transparency variable 5 (existence of legal provisions requiring that the incorporation capital is deposited at a credit institution) aims to make the control and verification of the origin of the capital easier by making the use of an intermediary obligatory. Transparency variable 6 (existence of legal provisions requiring a minimum incorporation period, in order to verify the information regarding the founders) makes it possible to accurately investigate the persons incorporating a structure and the documentation involved, in order to detect any anomalies and avoid the structures being misused. Transparency variable 7 (existence of legal provisions prohibiting the incorporation of ‘shelf companies’) is aimed at prohibiting the use of structures, which have already been incorporated with a standard memorandum and articles of association and inactive shareholders, directors and secretary. Authorities need not be informed when such structures are sold and their shareholders, directors and secretary are replaced. This makes it more difficult to thoroughly verify the true beneficial owners due to their very flexible incorporation procedures. Transparency variable 8 (existence of legal provisions requiring that a registered office/agent is domiciled in the country of incorporation) has the aim of linking a structure to a physical location, because this makes eventual criminal investigation of its activities more effective and facilitates the acquisition of information. Transparency variable 9 (existence of legal provisions requiring that the company be registered in a public register) makes information concerning the incorporation of structures readily available to third parties and law enforcement agencies by requiring that they are made public. Transparency variable 10 (existence of legal provisions requiring that a central controlling authority collects, maintains and verifies the information required for registration), is necessary in order to centralize data, quicken access, and verify the accuracy of the documentation presented, thus making it more difficult to misuse structures.
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4.2.2 The thematic area ‘Company activity’ The ‘Company activity’ area refers to the activities of an operational legal and nonlegal structure aimed at achieving its economic or patrimonial goal. This area is relevant for international co-operation for the prevention of money laundering because a lack of controls on the activities of the company increases the opacity in company law and makes it difficult to monitor its behaviour and exchange this information with other foreign authorities. The greater the possibility of gaining information about the management and the activities of a structure, the more the names of shareholders are accessible to other parties. The more closely accounts are audited, and the greater the obligation to disclose relevant information, the more information concerning the activities of structures is available to law enforcement, judiciary and financial authorities and can be exchanged, when necessary, with their counterparts for anti-money laundering purposes. The International Organization of Securities Commissions (IOSCO)23 has underlined how harmonized regulation of the operations of legal entities in the securities market is necessary to guarantee the integrity of financial markets, stating that ‘accounting principles and auditing standards are necessary safeguards of the reliability of financial information’.24 The importance of scrutiny of company activity has also been emphasized by the OECD in the discussions regarding the creation of a set of corporate governance standards and guidelines. A set of non-binding principles, developed in 1999, covers five areas, one of which is disclosure and transparency, directed at ensuring ‘ [ . . . ] that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company. [...] Information should be prepared, audited, and disclosed in accordance with high quality standards of accounting, financial and non-financial disclosure, and audit. An annual audit should he conducted by an independent auditor in order to provide an external and objective assurance on the way in which financial statements have been prepared and presented. Channels for disseminating information should provide for fair, timely and cost-efficient access to relevant information by users’.25 A policy aimed at reducing opacity in this area, therefore, includes a set of elements, identified as transparency variables of regulation in this study: Transparency variable 11 (existence of legal provisions requiring the regular updating of data in the company register) makes it compulsory to communicate all changes in the structure. This makes it possible to improve knowledge of the structure and more difficult to use it for criminal purposes.
23 24 25
Available online at . IOSCO, Objectives and principles of securities regulation, p. 4. ‘OECD Principles of Corporate Governance’ (OECD Ad Hoc Task Force on Corporate Governance 1999) at pp. 19–22, available online at , visited on 25 July 2001.
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Transparency variable 12 (existence of legal provisions requiring systematic examination of the data held in the company register in order to detect inconsistent or missing data) requires that the accuracy of the data is checked and possible inaccuracies, anomalies or lack of information identified; this should indicate misuse of the structure. Transparency variable 13 (existence of legal provisions requiring the maintenance of a shareholder register) is a means of making the names of the shareholders public. It includes the names of the shareholders in alphabetical order and information on the shares held. This makes it possible to acquire information on the persons in control of the structure for law enforcement agency investigation. Transparency variable 14 (existence of legal provisions requiring the regular updating of information in the shareholders register) requires that information regarding shareholders is regularly updated in order to detect anomalies and to connect the structure to the physical persons in control. Transparency variable 15 (existence of legal provisions requiring the maintenance of a share register) is aimed at making it compulsory to collect and keep up to date information on share ownership. This makes the activity of the structure more transparent and information readily available to third parties. Transparency variable 16 (existence of legal provisions requiring the regular updating of information in the share register) requires that information concerning shares is updated in order to detect anomalies and to make it possible to connect the structure to the physical persons controlling it. Transparency variable 17 (existence of legal provisions requiring the filing of the minutes of the annual meeting) requires the filing of a formal document summarizing the main decisions taken during the meeting regarding the activities of the structure. This requirement is aimed at facilitating the scrutiny of the activities of a structure, in order to ensure that they are not fictitious and to make its use for illicit purposes more difficult. Transparency variable 18 (existence of legal provisions requiring the filing of accounts) requires further verification as to whether a structure carries out a real economic activity and is not used only for documentary purposes. Transparency variable 19 (existence of legal provisions requiring the keeping of accounting records for at least five years) makes it possible to keep records of the economic activities conducted in order to be able to examine the accounts at a later date. Transparency variable 20 (existence of legal provisions requiring an external auditor) reduces the risk of fraud and other illicit activities involving the falsification of documents and increases the transparency of corporate/company law by requiring an independent examination of the activities of a structure. Transparency variable 21 (existence of legal provisions requiring the depositing of company documents with a competent authority) makes these documents readily available for investigation of the structure and increases the transparency of the information concerning its activities by making it more difficult to falsify company documents.
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Transparency variable 22 (existence of legal provisions requiring the keeping of tax records) reduces the risk of fraud and other illicit activities making it possible to exercise checks on the economic activity of the structure.
4.2.3 The thematic area ‘Identification of the real beneficial owner’ The area ‘Identification of the real beneficial owner’ refers to rules aimed at identifying the person or persons who are actually in control of a structure and its activities. In this thematic area, the opacity created by the impossibility of ascertaining the identity of the shareholders and establishing a connection between a structure and the physical person or persons running it obstructs effective investigation at national and transnational levels. The importance of the introduction of controls in order to ascertain the identity of the real beneficial owner of a structure has recently been emphasized by the OECD in its ‘Report on the misuse of corporate vehicles for illicit purposes’. The OECD states that ‘any jurisdiction that provides mechanisms enabling individuals to successfully hide their identity behind a corporate vehicle while excessively constraining the capacity of authorities to obtain and share information on beneficial ownership and control for regulatory/supervisory and law enforcement purposes is increasing the vulnerability of its corporate vehicles to misuse’.26 However, ‘certain jurisdictions [...] allow corporate vehicles incorporated or established in their jurisdictions to employ instruments that can be used to obscure beneficial ownership and control, such as bearer shares, nominee shareholders, and nominee directors, without devising effective mechanisms that would enable the authorities to identify the true owners and controllers when illicit activity is suspected or to fulfil their regulatory/supervisory responsibilities. Some of these jurisdictions further protect anonymity by enacting strict secrecy laws that prohibit company registrars, financial institutions, lawyers, accountants, and others, under the threat of civil and criminal sanctions, from disclosing any information regarding beneficial ownership and control to regulatory/ supervisory and law enforcement authorities’.27 Furthermore, the G–7 in July 2000 stressed that ‘corporations are sometimes established simply in order to gain access to the financial system. If there is obscurity about their ownership, banks and other financial institutions may not be able to discover the identity of the beneficiary of the account and will be unable to meet their “know your customer”obligation. The combination of market access and obscurity of ownership can facilitate money laundering and market abuse’.28 Scrutiny during the incorporation phase, therefore, can make it easier to ascertain the identity of the founders and the aims that the structure intends to achieve, thus facilitating international co-operation. 26 27 28
OECD Steering Group on Corporate Governance, op. cit., p. 2. OECD Steering Group on Corporate Governance, op. cit., p. 7. ‘Actions against abuse of the global financial system’ (Okinawa G-7 Financial Ministers 21 July 2000) available online at .
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A policy aimed at reducing opacity in this area should, therefore, include a set of elements which in this study are identified as the transparency variables of regulation: Transparency variable 23 (existence of legal provisions prohibiting the issuance of bearer shares) is aimed at making it possible to identify the physical persons who hold shares in the structure itself and possibly in control of it, thus preventing criminals from controlling structures without disclosing their identities. Transparency variable 24 (existence of legal provisions requiring that participation in a company is communicated if a certain (share) threshold is exceeded) is aimed at making it possible to identify the physical persons with significant shareholdings in a structure and at increasing the transparency of its ownership. Transparency variable 25 (existence of legal provisions prohibiting nominee shareholders) is aimed at preventing a physical person from controlling a structure by means of nominees (e.g. stockbrokers) who appear in the shareholder register but make it difficult to establish the identity of the real beneficial owner of the shares. Transparency variable 26 (existence of legal provisions prohibiting nominee directors) is aimed at making it possible to establish a connection between a structure and the physical person running it by avoiding that the real beneficial owner uses a director for its formal management. Transparency variable 27 (in case a legal entity is a shareholder, existence of legal provisions requiring that complete information is supplied, so as to identify the real beneficial owner) is aimed at making the ownership of a structure more transparent. When a legal entity holds shares in another legal entity, the chain of corporations thus generated makes it difficult to ascertain the identity of the real beneficial owner. Transparency variable 28 (existence of legal provisions prohibiting legal entities from acting as directors) is aimed at making it easier to understand who holds control of a legal structure. When a legal structure is a director of another legal structure, the chain of corporations thus generated makes it difficult to ascertain the identity of the real and final power-holder. Transparency variable 29 (existence of legal provisions requiring the disclosure of the identity of the real beneficial owner of a structure to the authorities) is aimed at obtaining the identity of the real beneficial owner of a structure on request, by the public authorities. This makes the ownership of a structure more transparent and harder to hide behind a corporate shield.
4.2.4 The transparency variables involved in the regulation of trusts In its latest annual report,29 FATF highlighted how ‘trusts, along with various forms of corporate entities, are increasingly perceived as an important element of large-scale or complex money laundering schemes, despite their legitimate use and long tradition in many jurisdictions. [. . .] the concern for anti-money laundering authorities is the
29
‘Annual Report 2000–2001’ (Paris 2001) at p. 16.
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seemingly impenetrable anonymity which a trust may provide to the true owner or beneficiary. This anonymity is enhanced by the fact that documentation of trusts is not public information. [. . .]possible solutions range from establishing a strict regulatory regime for trust formation agents (i.e., subject them to licensing, customer identification, record keeping and reporting requirements) to imposing some sort of public or semi-public registration requirement on trust creation’. The reasons why trusts could be used in the money laundering process was highlighted in the typologies report of February 2001.30 In Ireland and the United Kingdom, where trusts exist,31 the more trust law is transparent, the more it is possible to establish the identity of the parties of the trust and to scrutinize the activity of the trustees. Law enforcement authorities can avert the use of trusts as shields for illegal transactions and exchange significant information at a transnational level. Given the diversity between trusts and other legal and non-legal structures, appropriate indicators of transparency were selected for the analysis of the regulation of trusts. They were identified by studying the available literature on their regulation.32 A policy aimed at reducing opacity in the regulation of trusts should contain a set of elements which, in this Study, are identified as indicators of transparency in regulation: Existence of legal provisions requiring written constitution of the trust. This indicator of transparency has the aim of ensuring the existence of written 30
31
32
‘It should be pointed out that a trust is not the same as a company or other form of corporate entity. When a company is established, it has its own “legal personality” that is separate and distinct from the natural persons that serve as directors or shareholders. Property held by a company is owned by the company as a legal person and not individually by the company directors or shareholders. Property held in trust, on the other hand, is legally owned by the trustee and no longer by the settlor nor by the beneficiary. Therefore, when dealing with certain trusts, the work of an investigator may be further complicated by the fact that the trustee may be a legal person (a trust company for example), and the beneficiary or beneficiaries may also be trusts (or corporate entities). Establishing whether there are real persons behind the legal arrangement and that the trust is a sham is a difficult if not impossible task. Furthermore, trusts differ from corporate entities in that they generally have no registration requirement or central registry, and there is usually no authority responsible for oversight of such legal arrangements’. ‘Report on Money Laundering Typologies 2000– 2001’ (Paris FATF 2001) at p. 10. As already mentioned, in the other EU Member States, trusts are not recognized as a separate legal form, but are recognized if incorporated in accordance with the law of the ‘home’ country, such as Ireland or the United Kingdom. A.J. Oakley: The Modern Law of Trusts, (London Sweet and Maxwell 1998); A. Sydenham, Trusts (London Sweet and Maxwell 1997); M. Lupoi, Trusts, (Milan Giuffrè Editore 1997); D.J. Hayton, Law Relating to Trusts and Trustees, (London Butterworths 1995); M.R. Sancilio, ‘La disciplina del trust’, in Ricerca sul riciclaggio nel contesto dei rapporti tra economia criminale edeconomia legale. Rapporto sull’attivita’ di ricerca 1 June 1998–31 May 1999 (Rome Ufficio Italiano dei Cambi 2000); S. Gardner, An Introduction to The Law of Trusts Oxford Clarendon Law Series Clarendon Press 1990).
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evidence that a trust has been set up, granting law enforcement authorities the possibility to obtain information on trusts and their specific features. Existence of legal provisions requiring registration of the trust deed in a public register. This indicator of transparency requires that data regarding the main features of a trust be centrally registered and publicly accessible. This would make information about the trust easier to access by the general public and law enforcement, judiciary and financial authorities, and easier to exchange at a transnational level. Existence of legal provisions requiring that the personal particulars of the settler be included in a public document. This indicator of transparency is aimed at avoiding the possibility that the settler remains anonymous, by supplying the general public and law enforcement, judiciary and financial authorities with information regarding the identity of the original owner of the capital held in trust. Consequently, this diminishes the anonymity surrounding the trust. Existence of legal provisions requiring that the personal particulars of the beneficiary be included in a public document. This indicator of transparency is aimed at avoiding the possibility that the beneficiary remains anonymous by supplying the general public and law enforcement agencies with information regarding the identity of the person entitled to the benefits derived from the investments of the trust fund. Consequently, this diminishes the anonymity surrounding the trust. Existence of legal provisions prohibiting the settler from also being the beneficiary of the same trust. This indicator of transparency is aimed at preventing criminals from exploiting the possibility of formally separating themselves from the ownership of the proceeds of crime by conferring the goods to a trust, and receiving the profits thereof by nominating themselves as the beneficiaries of the same trust. Existence of legal provisions prohibiting the beneficiary of a trust from being another trust. This indicator of transparency is aimed at prohibiting the beneficiary of a trust from being another trust, thus preventing a supplementary layer of secrecy from being added to the trust and enhancing the possibility of detecting the identity of the beneficiary. Existence of legal provisions requiring a public register of trustees. This indicator of transparency requires that data regarding the identity of trustees be registered and publicly accessible, thereby making trustee information available to both the general public and law enforcement agencies. Existence of legal provisions requiring an authority to supervise the activity of trustees. This indicator of transparency grants the possibility of scrutinizing the activities of the persons and companies managing the trust fund and so making it easier to detect any criminal misuse.
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Analysis of the regulation and its implementation in the corporate/company regulative field
The aim of the data analysis is to understand what are the obstacles to international co-operation for the prevention of money laundering, where these obstacles are to be found and at what level (regulation and/or implementation), and what are their dimensions. Separate analysis was carried out for each of the structures in EU Member States identified as being susceptible to use as money laundering operations. The analyzed regulation and its implementation are summarized in a series of synoptic tables available in annex B of this report. The tables outline the obstacles to international co-operation for the prevention of money laundering present in each EU Member State.33 For each of the structures selected for further analysis and for each variable of transparency, an index of obstacles to regulation and the implementation of regulation was calculated, with a view to understanding in which thematic area obstacles to international co-operation on anti-money-laundering activity are to be found.34 These indexes represent, on a scale from 0 to 100, the dimensions of the obstacles created by the absence of regulation and by their incomplete or absent implementation where the regulation under consideration exists. The higher this index, the higher the obstacles to international co-operation for the prevention of money laundering. For each thematic area, these indexes have been subsequently aggregated in a ‘General index of Obstacles to Regulation’ (GOR index) and in a ‘General index of Obstacles to the Implementation of Regulation’ (GOI index). They are a quantitative expression of the obstacles created, in each thematic area and in each EU Member State, by the absence of regulation and the incomplete or absent implementation of the regulation under consideration, where it exists.
5.1 Results of the analysis: the regulation and its implementation for the legal and non-legal structures analyzed in all countries where they exist 5.1.1. Public limited company The above-mentioned Indexes, related to the obstacles to regulation and to its implementation, are summarized in the following table (Table 1).
33 34
The answers given by the experts used for the analysis have not been systematically crosschecked. For an explanation of the process of calculating these indexes, see section B of the methodological appendix (step 6).
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The EU average Indexes of Obstacles to regulation and to its implementation set out in Table 1 are graphically represented in Figure 1. As can be seen from this figure, the greatest obstacles to international cooperation for the prevention of money laundering seem to be found in the lack of regulation in the three identified thematic areas rather than in its implementation. Where regulation exists, it seems to show a high implementation level. The thematic area ‘Identification of the true beneficial owner’ is where obstacles to regulation are the most significant (GOR 62.2). The second area where obstacles to regulation are to be found is ‘Incorporation’ (GOR 43.8). The analysis conducted by applying the model shows which of the single transparency variables, in each thematic area, are the most problematic in terms of obstacles to international co-operation for the prevention of money laundering.
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OBSTACLES IN THE THEMATIC AREA ‘INCORPORATION’
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Main obstacles in the thematic area ‘Incorporation’ Transparency variable 6 (Existence of legal provisions requiring a minimum period for incorporation, in order to scrutinize the information regarding the founders) - index of obstacles to regulation 100.0; Transparency variable 7 (Existence of legal provisions prohibiting the incorporation of ‘shelf’ companies) - index of obstacles to regulation 85.7; Transparency variable 4 (Existence of legal provisions requiring verification of the legal origin of the incorporation capital) – index of obstacles to regulation 78.6; Transparency variable 2 (Existence of legal provisions requiring background investigations on the founders of a company) – index of obstacles to regulation 73.3; Transparency variable 1 (Existence of legal provisions requiring statutory authorization to incorporate a company) – index of obstacles to regulation 46.7. 2.
OBSTACLES IN THE THEMATIC AREA ‘COMPANY ACTIVITY’
Main obstacles in the thematic area ‘Company activity’ Transparency variable 12 (Existence of legal provisions requiring systematic
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examination of the data held in the company register in order to detect inconsistent or missing data) – index of obstacles to regulation 46.7; Transparency variable 15 (Existence of legal provisions requiring the maintenance of a share register) – index of obstacles to the implementation of regulation 26.7; Transparency variable 17 (Existence of legal provisions requiring the filing of the minutes of the annual meeting) – index of obstacles to the implementation of regulation 26.7. 3.
OBSTACLES IN THE THEMATIC AREA ‘IDENTIFICATION OF THE REAL BENEFICIAL OWNER’
Main obstacles in the thematic area ‘Identification of the real beneficial owner’ Transparency variable 23 (Existence of legal provisions prohibiting the issuance of bearer shares) – index of obstacles to regulation 80.0; Transparency variable 27 (In case a legal entity is a shareholder, existence of legal provisions requiring that complete information is supplied in order to identify the true beneficial owner) – index of obstacles to regulation 78.6; Transparency variable 25 (Existence of legal provisions prohibiting nominee shareholders) – index of obstacles to regulation 71.4;
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Transparency variable 26 (Existence of legal provisions prohibiting nominee directors) - index of obstacles to regulation 71.4; Transparency variable 29 (Existence of legal provisions requiring the disclosure of the identity of the true beneficial owner of a company to the authorities) – index of obstacles to regulation 64.3; Transparency variable 28 (Existence of legal provisions prohibiting legal entities from acting as directors) – index of obstacles to regulation 46.7.
5.1.2 Private limited company The indexes, relative to the obstacles to regulation and its implementation, are summarized in the following table (Table 2).
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The EU average indexes of obstacles to regulation and its implementation set out in Table 15 are graphically represented in Figure 5.
As in the case of the public limited company, the greatest obstacles to international co-operation for the prevention of money laundering seem to be found in the lack of regulation in the three identified thematic areas rather than in its implementation. Where the regulation exists, it seems to show a high implementation level. The thematic area ‘Identification of the real beneficial owner’ is where obstacles to regulation are the most significant (GOR 56.5), while the second area where obstacles to regulation are to be found is ‘Incorporation’ (GOR 44.4). The analysis conducted applying the model shows which of the single transparency variables in each thematic area are the most problematic in terms of obstacles to international co-operation for the prevention of money laundering. 1.
OBSTACLES IN THE THEMATIC AREA ‘INCORPORATION’
Main obstacles in the thematic area ‘Incorporation’
Transparency variable 6 (Existence of legal provisions requiring a minimum incorporation period) – index of obstacles to regulation 100.0; Transparency variable 7 (Existence of legal provisions prohibiting the incorporation of ‘shelf companies’) – index of obstacles to regulation 85.7; Transparency variable 2 (Existence of legal provisions requiring background
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investigations into the founders of a company) – index of obstacles to regulation 73.3; Transparency variable 4 (Existence of legal provisions requiring verification of the legal origin of the incorporation capital) – index of obstacles to regulation 71.4; Transparency variable 1 (Existence of legal provisions requiring statutory authorization to incorporate a company) – index of obstacles to regulation 46.7.
2.
OBSTACLES IN THE THEMATIC AREA ‘COMPANY ACTIVITY’
Main obstacles in the thematic area ‘Company activity’
Transparency variable 12 (Existence of legal provisions requiring systematic examination of the data held in the company register in order to detect inconsistent or missing data) – index of obstacles to regulation 60.0; Transparency variable 17 (Existence of legal provisions requiring the filing of minutes of the annual meeting) – index of obstacles to regulation 40.0; Transparency variable 15 (Existence of legal provisions requiring the maintenance of a share register) – index of obstacles to regulation 26.7.
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OBSTACLES IN THE THEMATIC AREA ‘IDENTIFICATION OF THE REAL BENEFICIAL OWNER’
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Main obstacles in the thematic area ‘Identification of the real beneficial owner’ Transparency variable 27 (In case a legal entity is a shareholder, existence of legal provisions requiring that complete information is supplied, so as to identify the real beneficial owner) – index of obstacles to regulation 85.7; Transparency variable 24 (Existence of legal provisions requiring that participation in a company is communicated, if a certain (share) threshold is exceeded) – index of obstacles to regulation 76.9; Transparency variable 29 (Existence of legal provisions requiring the disclosure of the identity of the real beneficial owner of a company to the authorities) – index of obstacles to regulation 64.3; Transparency variable 26 (Existence of legal provisions prohibiting nominee directors) – index of obstacles to regulation 61.5; Transparency variable 25 (Existence of legal provisions prohibiting nominee shareholders) – index of obstacles to regulation 57.1.
5.1.3 Trust The regulation of trusts was analyzed in Ireland (which mentioned them as susceptible to being used in money laundering operations) and the United Kingdom. In order to analyze the regulation of trusts, which differ from all the forms studied in this report, appropriate indicators of transparency were selected. Their relevance for international co-operation for the prevention of money laundering is explained in section 8.2.4. The following table highlights the results of the analysis in relation to the existence of legal provisions, which should ensure transparency of trusts.
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As can be seen in this table, the regulation of trusts allows for a high level of opacity. The basic rule is that no formalities are required, and so a trust can be constituted orally. The decision depends on the importance that the parties attribute to having written evidence of the transaction, and what is entailed. Even though the possibility of constituting trusts orally attributes flexibility to the instrument (allowing the creation of a trust whenever two subjects – the settlor and the trustee – voluntarily agree to create one), this might obstruct investigations into money laundering by the authorities. Official trust registers for registering trust deeds do not exist, even where trusts are incorporated in writing and the identities of the parties, therefore, remain unclear. Furthermore, there are no restrictions on who can be a trustee nor is there a register of the details of the identity of the trustees, and this makes tracing them very difficult. The same obstacles to identification appear to apply to the settlor, whose identity does not need to appear on any document. The beneficiary of a trust may be a company or another trust, not only a physical person or several persons. In the former case, there is an additional layer of confidentiality regarding the beneficiary. There is some opacity in the management of the trust as well. There is no authority that supervises the activity of trustees. The latter only have general limitations as regards the administration of the trust fund, but there is no actual examination of single investments by any person or authority. This difficulty in detecting the existence of a trust and the identity of its parties, together with the absence of supervision of the trustees and the possibility that the settlor or another trust might be the beneficiary, can be misused by criminals. In fact, money launderers can invest the proceeds from crime in a trust thereby formally separating themselves from the ownership of the money and assets, and exploit the confidentiality surrounding the trust to reduce the risk of being identified. Where a criminal is both the settlor and the beneficiary, he will formally separate himself from the ownership of the dirty proceeds by attributing them to a trustee, but actually obtain the benefits from the investment himself.
6.
Conclusions
The results illustrate that, as far as the public and private limited companies are concerned, the greatest obstacles to international co-operation for the prevention of money laundering are to be found in the thematic area ‘Identification of the real beneficial owner’.35 The main obstacle is a lack of regulation requiring full information regarding the real beneficial owner of a public or private limited company, especially when a legal entity is a shareholder or director, or the issuance
35
The relevance of this area for anti-money laundering international co-operation is outlined at section 9.2.3 of the report.
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of bearer shares is permitted. Furthermore, some problems seem to arise from the fact that, in some EU countries, the regulation allows for nominee shareholders and directors. The thematic area ‘Incorporation’ also presents obstacles to international cooperation for the prevention of money laundering, even though to a lesser degree than the former. Lack of regulation in this area makes it more difficult to acquire information about the physical persons party to the creation of legal structures and increases the possibility that these might be used for criminal purposes. Scrutiny in this area would raise the costs incurred by criminals when using legal structures for money laundering and increase the amount of information available to law enforcement, judicial and financial authorities, thereby facilitating national and international investigation of the operations of those companies. Some EU Member States permit shelf companies, that is, previously incorporated companies with a standard memorandum and articles of association with inactive shareholders, directors and secretary. Often, authorities do not need to be informed when such companies are sold and their secretary, directors or shareholders are replaced. This makes it more difficult to thoroughly investigate the real beneficial owner, given that shelf companies are incorporated with a very flexible procedure. Furthermore, many EU Member States do not investigate the founders of a company or ascertain the legal origin of the incorporation capital. The European Commission might, therefore, consider taking action to define more specific and stringent guidelines for EU Member States in the thematic areas mentioned above, relevant to anti-money laundering international co-operation. This would increase transparency of the whole corporate/company regulative field and make information available to law enforcement, judiciary and financial authorities dealing with national money laundering cases, thus facilitating international co-operation for the prevention of money laundering. The analysis of regulation covering trusts has shown it as being characterized by great opacity and absence of all those provisions relevant for international cooperation for the prevention of money laundering. Their regulation and the confidentiality of their constitution hinder the gathering of information about the people setting them up and their management structure. This opacity creates obstacles to international co-operation for the prevention of money laundering because of the lengthy process in getting information. Corporate and/or company regulation, which today is undergoing extensive reforms in the area of corporate governance in the EU Member States, should pay more attention to the benefits that transparency would bring to international cooperation for the prevention of money laundering. The Euroshore report highlighted the strategic importance of this area for international co-operation for the prevention of money laundering and this article illustrates the associated obstacles and their dimensions. Until now, questions relating to corporate governance have mainly been restricted to the national level. It appears however that the European Commission launched a study in December 2000 on codes of corporate governance in the EU. A final report is expected by the end of 2001. In addition, the Commission
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has announced the setting up of a high level group of experts in corporate law who will produce a report by June 2002. There may be scope within these initiatives to tackle the issue of transparency as defined in the main report and in this article. Having a European Directive on banking and financial regulation, without a set of European standards on key issues in corporate governance, makes the whole antimoney laundering regime unbalanced and weak.
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Terrorist Finance, Money Laundering and the Rise and Rise of Mutual Evaluation: A New Paradigm for Crime Control? Michael Levi* and William Gilmore**
Introduction The discourse of risk and globalization has become a very popular one, both among social analysts and within the business and intelligence ‘communities’. Implicit and/ or explicit risk judgments have long been central to the financial world and its policing: the key question is which risks are being considered and whether we have the knowledge and operational models to incorporate them. Bankers, lawyers and law enforcement personnel are forced by pressure of circumstances to live so much in the present that it is difficult to see how far we have travelled in the era beginning approximately in the mid–1980s since money laundering first became a term with which bankers and lawyers were expected to be acquainted. The authors crave the readers’ indulgence therefore for some historical development of the paradigm of banking and law enforcement to set alongside the other contributions to this volume. In making such a contribution, the authors want to clarify how far the risk paradigm has entered the general world of ‘law and order’, at least in the UK. 1 The allocation of scarce policing and surveillance (including private sector) resources inevitably entails the conscious or taken-for-granted allocation of priorities. Goal displacement is commonplace, as interest groups seek (consciously or not) to further their own objectives at the expense of the proclaimed objective. Nevertheless, resource allocators have to decide which are the most serious – in * Professor of Criminology, Cardiff University, Wales. Address for correspondence: Professor Michael Levi, Glamorgan Building, King Edward VII Avenue, Cardiff CF10 3WT, UK, [email protected]. The research on which this article is based was funded by the UK Economic & Social Research Council’s Future Governance Research Initiative. ** Professor of International Criminal Law, University of Edinburgh 1 It is easy to overestimate the extent to which policing paradigms travel at the same speed in the same direction. Those enforcement worlds in which transnational mutual assistance is commonplace may harmonize more quickly – though there are substantial variations even within the EU – but this may not touch significantly the general styles of policing. M. Pieth (Ed.), Financing Terrorism, 87–114. © 2002 Kluwer Academic Publishers. Printed in the Netherlands.
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terms of both ‘objective’ harm 2 and media-constructed harm that turn into political and organizational priorities – current and future events with which they wish to deal in relation to the resources that they have available. This relationship is a naturally dynamic one, in the sense that left to themselves, organizations tend to focus on the short-term politically (with small or large ‘p’) pressed priorities and to neglect the longer term structural issues: in this human process, stated goals are often eroded except when organizations insist on the pursuit of their operational plans. The latter style is often condemned by pragmatists as ‘inflexible’ (and is one of the features of totalitarian centrally planned economies), despite the consistency that such adherence to policy brings compared with the legal dictum of ‘taking each case on its merits’, which latter can amount to little more than a justification for unselfconsciously erratic policy-making. In contemporary policing, for example, in making decisions about how much surveillance particular released sex offenders ‘need’, explicit risk assessments are made, though there may not be the resources to accommodate all those who need high supervision and therefore actual time devoted to each high-risk person may be scaled down.3 Public order policing similarly is riskbased, though not normally on the basis of clinical judgments about the risks from individual people. By contrast with modern banking, 4 the discourses of international bodies such as the Financial Action Task Force are primarily oriented not so much towards riskmanagement as towards national and institutional obligations to reduce crime facilitation. In this sense, though intended to be applied within the context of globalization, they sit securely within the absolutist ‘law and order’ control mode rather than with some other risk optimization mode. Despite the rhetoric of ‘financial crime risk management’, this is based on modest scientific foundations in many areas: despite typologies exercises, there is insufficient hard, systematically collected evidence of the extent and forms of fraud and, especially, of money laundering5 to enable sensible universally agreed judgments to be made. One should have sympathy for the inherent difficulty about the publication of advice on modi operandi of terrorism finance and on the laundering of other forms of crime, since the availability of information of this kind to financial institutions around the globe
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Some readers may not believe in the concept of objective harm but, by analogy with Bishop Berkeley’s refutation of the solipsistic fallacy, there are self-evident effects of terrorist attacks that are physically objective. This is so even though some might not define martyrdom as a ‘harm’ and the slaughter of enemies as not harming the innocent or even (as in genocide) not harming persons of the same human status as the perpetrators. M. Maguire, ‘Policing by risks and targets: Some dimensions and implications of intelligence-led crime control’ in (2000) 9 Policing and Society 1 See Charles Freeland, ‘How Can Sound Customer Due Diligence Rules Help Prevent the Misuse of Financial Institutions in the Financing of Terrorism’ in (2002) 4 European Journal of Law Reform 2, and the standard setting of most bank regulators See, for example, the current advice given to financial institutions by FATF on profiles of terrorism for anti-laundering detection purposes.
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inevitably gives rise to leakage to some offenders and thus serves as counterintelligence.6 Conversely, regulators and policing agencies should understand that if they cannot specify and/or are unwilling to specify the plausible forms of laundering – often on the expressed grounds that they do not want to constrain the identification and reporting behaviour of regulated persons – it may be unfair to expect financial institutions to do so. As money-laundering legislation shifts from criminal penalties for ‘failing’ to report crimes one did actually suspect to those for ‘failing’ to report crimes one ‘objectively’(?) ought to have suspected,7 this tension about reasonable expectations will become progressively greater. But these are not the only difficulties. For example, there are resource constraints that arise in relation to the ‘War on Terrorism’. Governments for whom terrorism risks against domestic targets are modest may be reluctant to divert resources away from local crime concerns (or non-policing needs such as health and education) to help to reduce terrorism risks in other countries; while Western countries such as the UK (since ‘the Troubles’ in Northern Ireland in the late 1960s) and, more recently, the US, more willingly divert resources from domestic crime issues which do concern the public8 to dealing with terrorist threats. A key motivator for this transnational transformation of defences against terrorism is the global reach of threats not just to embassies and other governance institutions overseas but also to corporate interests worldwide. Again, there is nothing new about this risk from globalization to the national economic interests of superpowers: as their role in defending the British East India Company and West Indian plantations illustrates, 18th and 19th century policing in colonies was usually directed towards the preservation of overseas assets, and such threats often contained a cultural or ideological component as well as any desire to take property for resale and economic gain.9
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This is so a fortiori if the information is placed on websites. The UK National Criminal Intelligence Service and some other European FIUs such as the Netherlands are developing limited access extranets, but counter-intelligence risks still remain. For such shifts towards ‘objective’ obligations, see the Second Directive on Money Laundering agreed by the EC and the European Parliament at the end of 2001, and the Proceeds of Crime Act 2002 in the UK. Rates of street and household crime have been falling since 1998 to the time of writing, but fear of those crimes has not been falling. Whether Enron employees and ex-employees in Texas (as opposed to New York and Washington) would be (now and in the past, with the benefit of hindsight) rational to fear terrorism more than to fear the collapse of their own pension funds and employment is a more complex issue that lies outside the scope of this article. Indeed, the tradition of the police serving (and/or being perceived as serving) the interests of the state rather than those of the local population and crime victims is one of the more unfortunate legacies of colonialism that community policing strategies have had great difficulty in overcoming. The fact that no-one then called these ‘anti-globalization’ protests (for the term had not been invented) does not make that any less accurate as an ascription.
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The regulation of economic élite and piratical behaviour trans-nationally involves ‘persuading’ formally independent nation states to adopt similar measures even though there sometimes may be no obvious benefit to them in so doing. To some extent, this constellation of self-interest is altered by terrorism in the abstract. However, those groups or networks threatening the US and other Western powers may be quite different from those threatening some Third World governments, while many small island economies may be affected by terrorism only indirectly via ‘trickle down’ from damage to global business levels. Furthermore, the behavioural boundaries of such global regulation are somewhat vague, given the flexible definitions both of terrorism and transnational organized crime. There is an inherent tension between, on the one hand, governmental and prosecutorial threats to the private sector for not succeeding in detecting or reporting possible money laundering10 and, on the other, the fact that the support of corporate actors is needed for ‘government at a distance’ to succeed: the state or rather, in the case of trans-national crime control, the total set of states11 cannot hope to monitor and control financial transfers directly. This monitoring must be ‘entrusted’ (under threat of penal and/or administrative sanctions) to the financial services firms and professionals in the front line of the ‘war on terrorism’ (and ‘war on organized crime’). Even if we knew how many jurisdictions were currently facilitating the movements of terrorist funds (which potentially is all jurisdictions involved in financial services business), the enforcement task would not be restricted to those, since the use of particular offshore finance centres is based upon a dynamic view of the costs and benefits of particular jurisdictions at any given moment.12 It is difficult, even with hindsight, to work out when and how the view developed that attacking the money trail was a key element in the fight against organized crime. Wechsler places it in the mid–1980s13 – which would be around the period that the FBI and other law enforcement agencies started to use the Racketeer Influenced Corrupt Organizations (RICO) legislation passed in 1970 – but at least outside the US, the investigative resources devoted to financial policing have never reflected the rhetorical and political attention it has received. Even before the frantic and allconsuming financial search for terrorist funds in the wake of the air strikes against
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It is not suggested that this is simple game theory. Through ideological hegemony, the marshalling of political support and party and/or personal financing, corporate actors can wield enormous influence. The authors have avoided the tempting term ‘collectivity’ because it can be argued that this implies harmonious purposes among states: the extent to which the collaboration of all states is required differs by type of crime: fewer states need to co-operate to deal with maritime piracy than with money laundering or intellectual property violations, since technology makes the latter sites very portable with low capital costs. The authors are not positing an optimal or ‘rational’ model here. Every launderer has his or her own information set and contacts, and in an imperfect market of knowledge asymmetries, there is no one model that fits all. W. Wechsler, ‘Follow the Money’ in (July/August 2001) 80(4) Foreign Affairs 40.
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New York and Washington in September 2001 (and, for that matter, before the collapse of Enron in December 2001), there was widespread official fear of ‘the dark side of globalization’. The latter brings together a variety of themes and a variety of political positions from financial regulators concerned about unmonitored ‘off-thebooks’ (though often legal) transactions conducted by vast commodity hedging funds held in offshore finance centres; through law enforcement agencies bothered about ‘the’ Mafia and international terrorist networks; to aid agencies troubled by the ‘export’ (that is, theft) of funds by Third World potentates into covert individual and corporate accounts held in offshore finance centres. Terrorist finance generates a threat to the security of international capital and the lives of financial services employees as well; so (to a greater extent than with drug trafficking or tax evasion, for example) self-interest may reasonably temper profit maximization if institutions believe that the identification of terrorist finance can protect them or activities in which they have a stake.14 The ideological and value threat of terrorism thus constitutes a distinction from organized crime and other ‘threats to society’. One of the special features of terrorist fund laundering is that it explicitly aims to examine the proceeds of legitimate-source activity actually used or intended to be used for (rather than deriving from) a criminal purpose; in that sense, its closest analogues are (1) the corporate and political ‘slush funds’ used for transnational corruption and political finance, and (2) tax evasion on non-criminal activities. This broad approach is crucial if anything approximating a plausible effort is to be made in restricting terrorists’ access to funds; though on a harm reduction model, it may make some sense to restrict flows to particular terrorist groups from particular sources without necessarily having a major impact on the totality of terrorist finance.15 This article shall review how the international ‘community’ strives to counter the anomic, crime-facilitative effects of globalization by rowing against the tide of economic liberalization in the name of global crime control and financial stability. 16 Thus, there is a sometimes faltering attempt to create a new world anti-crime order (of which measures against terrorism are a part) as a component of, or supplement to, the New World Economic Order. There will be a review of the growth of ‘soft law’ instruments and cascading peer group pressures and their gradual transforma-
14
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This stake might include businesses or governments to which they have loaned money, whose security as well as whose business plans may be disrupted both by actual and fear of terrorism. Contrariwise, the reporting of suspected terrorist finance also can bring physical risks to staff should they be identified – directly or by logical deduction – as the source of the information. To avoid accusations of naivety, it is necessary to recognize that terrorist funding can come from the West as well as from the ‘rogue states’ defined by the US. A cynic might suggest that these controls are taken in the interests of Western capitalist security, but given the number of Third World countries devastated by the looting of both overseas aid and domestic assets by their corrupt potentates, the authors regard this as a very partial analysis.
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tion into a mix of raising consciousness of mutual interdependence with economic and political sanctions to act against transnational corruption and transnational laundering facilities.
Money-laundering and anti-crime strategies The regulation of the money trail relates to any crimes that require and/or generate significant crime proceeds requiring more than short-term storage. Drug trafficking was the precursor for international policing expansion by US agencies such as the DEA17 and by the military and intelligence agencies in the post-Communist era, but though proactive ‘special investigative methods’ have expanded everywhere, none of them can plausibly prevent all drugs, people, or contraband smuggling. Therefore the attempt to monitor financial transactions and confiscate crime proceeds beyond the borders of individual governments was the obvious next key strategy in the transnational ‘organized crime’ containment programme.18 Though it was never clear whether such monitoring and confiscation constituted a sufficient as well as necessary condition for success (nor how it would be identified if and when ‘success’ had been attained), success was believed to require a major global infrastructure of compatible legislation and mutual legal assistance both for financial investigation and for proceeds of crime restraint and confiscation. The US, supported from the start by Australia, France and the UK, was the principal enthusiast for antilaundering measures to attack kingpins of the drugs trade but, as Gilmore has observed,19 the extraordinary rapidity (less than two years) with which the 1988 UN Vienna Convention came into force is testimony to the power of drug issues in the political culture of nations around the world. Despite such political consensus, however, the G–7 took an early decision in 1989 to create a new (temporary) body, the Financial Action Task Force, rather than leaving it to the UN to serve as the efficient instrument of these anti-laundering measures. Since that date, measures to control the money trail have proceeded along two axes: 1.
17 18
19
The increased drawing of financial institutions into playing public functions, via the imposition of requirements (a) to report suspicions and – just as
E. Nadelmann Cops Across Borders (University Park Pennsylvania State University Press 1993). See for recent developed notions of this, e.g., Office of National Drug Control, National Drug Control Strategy (Washington DC Office of national Drug Control Policy 2002); State, Money-Laundering and Financial Crimes (Washington DC US State Department 2001); Treasury, The 2001 Money Laundering Strategy (Washington DC US Treasury Department in consultation with the US Justice Department). W. Gilmore, Dirty Money: The Evolution of Money Laundering Counter-Measures (Strasbourg Council of Europe Publishing 1999, 2nd ed.).
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significantly – to develop the capacity to form suspicions (via know-yourcustomer and other rules) on pain of imprisonment and corporate penalties, and (b) to report and not to deal financially with persons who appear on lists of ‘banned persons’, of which the most notable source is the US Office of Foreign Assets Control (OFAC);20 and The increased development of international norms for money laundering control at the level of the nation state via FATF and its regional complementary bodies in Asia-Pacific, the Caribbean, Europe and, most recently, Africa and South America, as well as via financial regulators.
There has been a shift from the initial exclusively drug focus in anti-laundering policy towards a focus on all-crime (though currently excluding tax crime) and transnational organized crime,21 to which terrorism has been added explicitly in the aftermath of 11 September 2001.22 As Levi23 and Gold and Levi24 observed in their
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Of the many other lists, perhaps the most significant are those issued under the authority of the UN Security Council requiring the immediate (and indefinite) freezing of the assets of stipulated natural and legal persons. See in particular the ‘Taliban’ lists made under the authority of Resolution 1267 of 15 October 1999 and the ‘Al-Qaeda’ list mandated by Resolution 1333 of 19 December 2000. As explained elsewhere in this article, these lists are legally binding on all member States because they are measures taken under Chapter VII of the UN Charter. Prior to 11 September 2001, the money-laundering nexus had only intermittently sought to bridge crimes for economic gain with terrorism. The UK Prevention of Terrorism (Temporary Provisions) Act 1989 included several measures intended to clamp down on terrorist finance (and Northern Ireland legislation gave greater powers in the province), but the most explicit link came in June 1995 when President Clinton wrapped up terrorist threats with international organized crime when he told the UN that ‘the threat to our security is not in an enemy silo, but in the briefcase or the car bomb of a terrorist. Our enemies are also international criminals and drug traffickers who threaten the stability of new democracies and the future of our children’. (President Clinton, Address at the United Nations Fiftieth Anniversary Charter Ceremony, San Francisco, 26 June 1995. Text available at <www.defenselink.mil/1995/s19950626-clinton.html>) In Presidential Decision Directive [PDD] 42, dated 21 October 1995, President Clinton asserted that ‘ international organised criminal enterprises [. . .] are not only a law enforcement problem, they are a threat to national security’. In Executive Order 12,978 [21 October 1995, 1995 USCCAN B106], effective the same day and never rescinded, he declared a ‘national emergency to deal with that threat’. Federal agencies were directed to take ‘all appropriate actions within their authority to carry out this order’. The primary and over-riding common purpose of the Directive and the Executive Order was ‘to protect the welfare, safety and security of the United States and its citizens’, though there was some recognition of obligations to others. Prior to the 11 September terrorist attacks in the United States, the issue of terrorist financing had not assumed a position of prominence in the activities of the FATF, though it had in some individual jurisdictions such as Northern Ireland (see Levi and Osofsky, 1995). On 24 September the Ecofin Ministers of the 15 EU members called for the mandate of the FATF to be broadened so as to cover the terrorist issue. On 6 October 2001, G-7 finance ministers called upon the FATF to include specific treatment of terrorist funds in
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studies of how suspicious financial transaction reports come to be constructed and followed through, few bankers know what types of crime – if any – their customers may be engaged in: with the exception of some ideologically or culturally sympathetic bankers and non-bank financial services such as money transmitters, this would apply a fortiori to terrorist finance. If clients fool bankers or lawyers into believing that at most, the funds constitute ‘merely’ tax ‘dodging’, then it is plausible that no suspicious transaction report will be made.25 Therefore, it is only if all crimes are included within the obligation to report suspicions that the layer of rationalizations falls away (save, perhaps, for labelling the behaviour tax avoidance). Conversely, representatives from some offshore finance centres have expressed the view (in discussions with the principal author) that it is only if the drugs issue is split off from tax evasion (and, especially, from OECD measures against ‘harmful tax avoidance’) that effective financial services co-operation with anti-drug law enforcement will take place. At the time of writing, in the summer of 2002, FATF Member States are far from agreement over whether countries should be compelled explicitly to include tax offences as a predicate for money laundering. One of the prime instruments of the New World Economic Order is the radical concept of mutual evaluation, which involves peer evaluation of both the enactment and implementation of legislation and other policy instruments. This represents a major departure from the traditional view that implementation of treaties and conventions was a purely domestic matter. Even though methodological coherence
cont. the current revision of the 40 Recommendations; to issue special guidance on the subject to financial institutions; and to develop a process to identify countries that facilitate terrorist financing and to propose a course of action to achieve co-operation from such jurisdictions. An emergency plenary meeting of the FATF was held in Washington DC on 29–30 October 2001. It agreed on eight special recommendations on terrorist financing and a plan of action ‘to secure the swift and effective implementation of these new standards’. A declaration by the EU heads of state and the commission of 19 October 2001 called for ‘effective measures to combat the funding of terrorism by formal adoption of the Directive on money laundering and the speedy ratification by all Member States of the United Nations Convention for the Suppression of the Financing of Terrorism. Moreover, the commitments made in the FATF, the mandate of which must be broadened, must be turned into legislative instruments by the end of the year’, i.e., 2002. 23 M. Levi, ‘Pecunia non olet: cleansing the money launderers from the Temple’, in (1991) 16 Crime, Law, and Social Change 217. 24 M. Gold and M. Levi, Money-Laundering in the UK: an Appraisal of Suspicion-Based Reporting (London Police Foundation 1994). 25 The 1999 FATF interpretative note tries to find an intermediate position and to get financial and other regulated bodies to report suspicions even when a ‘tax’ explanation is given, at least where it is not obvious that tax evasion actually is involved. This stales: ‘In implementing Recommendation 15, suspicious transactions should be reported by financial institutions regardless of whether they are also thought to involve lax matters. Countries should take into account that, in order to deter financial institutions from reporting a suspicious transaction, money launderers may seek to state inter alia that their transactions relate to tax matters.’
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and standardization remain underdeveloped, mutual evaluation has gained increasing popularity as a method; it holds out the promise of greater legitimation and ‘buy in’ potential than measures that are simply imposed, and thus it is not surprising that (with variations) such a process is built into all late modern regimes for dealing with corruption (Council of Europe ‘GRECO’ and OECD) as well as money laundering and proceeds of crime confiscation (Council of Europe, EU, FATF and the IMF).
Mutual evaluation and the Financial Action Task Force (1) The Context The increasing popularity of mutual evaluation processes at the international level owes much to the demonstration effect of the work of the Financial Action Task Force on Money Laundering (FATF). Since this body was created by the 1989 Paris Summit Meeting of the G–7, its membership has expanded to include 29 jurisdictions representing OECD countries, financial centre jurisdictions and (more recently) selected strategically important states drawn from previously underrepresented regions such as South America. It meets in plenary session several times each year, including one meeting held in the country of the presidency (which rotates on an annual basis). Though located physically within the OECD (and being a significant component of its website), the FATF is not formally part of that or any other international institution, nor is it a creature of treaty. Rather it is the steering body of an ad hoc grouping of governments and others with a single issue agenda – moneylaundering controls – which can contain great complexity given the range of activities with which that agenda intertwines. Regulated laundering potentially includes the proceeds of all crimes for gain and even, in the case of terrorism and some cyber crimes, of the proceeds of both criminal and non-criminal activities committed for ideological rather than material gain. FATF attendees consist mainly of financial regulators and law enforcement representatives, alongside senior civil servants normally drawn from Treasury and Justice Departments. The FATF aims to give effect to three central objectives: the strengthening of the criminal law and securing other improvements in national legal systems; b) the strengthening of international co-operation; and c) the enhancement of the role of the private sector in efforts to prevent and detect money laundering. It has done so primarily by making and reviewing (in 1995–6 and again 2001–2) its 40 recommendations or action steps which were first elaborated in its 1990 Report.26 a)
26
See Gilmore supra note 19, and M. Pieth, Die Bekämpfung der Geldwäscherei – Modellfall Schweiz?, (Basel and Frankfurt am Main 1992).
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Monitoring implementation by FA TF members
In the conclusion to the 1990 report it was recognized that ‘a regular assessment of progress realised in enforcing money laundering measures would stimulate countries to give to these issues a high priority...’.27 Two principal procedures have since been developed to this end:28 1. a process of annual self assessment, originally based on two detailed questionnaires circulated to each member country or territory and then analyzed for compliance with the 40 Recommendations. The self-assessment system has been refined on several occasions, adding to the number of more objective items and then, after the general revisions of 1996, extending questions on the laundering of non-drug crime proceeds. ‘Enhanced selfassessment’ procedures were agreed to at the September 1999 FATF plenary, and two alterations are particularly significant, namely the removal from the self-assessment process of non-mandatory or vague recommendations and a more focused review on areas of partial or non-compliance. FATF also tried to simplify and streamline the process, shortening and combining the previous questionnaires. 29 The self-assessment procedure continues to contain divergent interpretations of some recommendations, but FATF members themselves consider there to have been a significant improvement;30 2. Unprecedented in international practice in the criminal law sphere at the time, FATF II decided to supplement self assessment with a system of mutual evaluation, examined by selected other members of the FATF, according to an agreed protocol for examination and agreed selection criteria. The initial round of mutual evaluation, the major purpose of which was to assess the degree of formal compliance with the recommendations, was completed in 1995. A second round, with a focus on the effectiveness in practice of the measures taken by members, was initiated in the following year and was completed in mid–1999. The remit here also included an assessment of ‘any follow-up action taken in response to the suggestions for improvement made in the first round’,31 The third round will focus ‘exclusively on compliance
27 28
29 30
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W. Gilmore (ed.) International Efforts to Combat Money Laudering, (Cambridge Grotius 1992) at p. 24. A third but little used device is known as a cross-country review. This is intended to provide an analysis of the implementation of specific recommendations by the membership as a whole. ‘FATF Annual Report 1999–2000’ (Paris FATF 2000) at p. 20. See, e.g., ‘FATF Annual Report 2000–2001’ (Paris FATF 2001) at pp. 13–14. The FATF has decided to complete an early self-assessment exercise to ascertain the degree of compliance by its members with the new recommendations on the financing of terrorist activities. See ‘FATF Annual Report: 1996–1997’ (Paris FATF1997) at p. 10. Although there were only 26 members in the relevant period, a total of 28 evaluations were undertaken; this
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with the revised parts of the recommendations, the areas of significant deficiencies identified in the second round and generally the effectiveness of the counter-measures’32 but because of the phasing of the evaluation cycle in relation to the revisions, evaluation criteria are always the product of the previous set of recommendations rather than the most recent agreed improvements. Mutual evaluation is, in essence, an international system of periodic peer review under which each member is subject to a form of on-site examination. 33 As Patrick Moulette, the current FATF executive secretary, has pointed out: ‘Each evaluation team usually comprises three examiners (four for the larger countries) of different nationalities whose expertise must cover all aspects of the fight against money laundering. Each team therefore comprises a legal expert (a judge or justice ministry representative), a financial expert (from a finance ministry, central bank or regulatory authority for the financial sector), and an operational services (law enforcement) expert (from the police, the customs or an agency receiving and analysing suspicious transaction reports, such as FINCEN in the United States).’34 Formally, the team of examiners is selected by the FATF president (in reality, by the secretariat), and thereafter, the country to be examined is advised as to both the composition of the team and the dates of the on-site visit. 35 While it is ‘an underlying principle of the mutual evaluation process[. . .]that all members should participate in the process’, this goal was not fully satisfied in the first round. In the second, all members provided at least one evaluator although efforts to secure a better balance in terms of overall involvement were not completely realized.36 The examination team visits the country in question, normally for three days,
cont. included assessments of Aruba and the Netherlands Antilles, which are separate constituent parts of the Netherlands which is a member of the FATF. 32 ‘FATF Annual Report: 1997–1998 (Paris FATF 1998) at p. 8 33 For this reason (among others), the Multilateral Evaluation Mechanism (MEM) being operated by the Inter-American Drug Abuse Control Commission of the OAS to monitor compliance with the anti-drug strategy of the hemisphere cannot be regarded as a system of mutual evaluation as that term is used in this paper. In the CICAD process, each evaluated country provides data in response to a standard questionnaire as well as a paper on its drug problem on the basis of which a governmental expert’s group, representing all 34 Member States, drafts jurisdiction specific reports including recommendations for improvement. There is no on-site visit element to the process (which also excludes sanctions of any kind). However, the process does include detailed coverage of the issue of money laundering and extends to the monitoring of the implementation of country specific recommendations. 34 P. Moulette, ‘The Mutual Evaluation Process of the Financial Action Task Force on Money Laundering’ (PC-R-EV(98)1, 29 January 98) (Strasbourg Council of Europe 1998) at p. 25. 35 ‘Review of FATF Anti-Money Laundering Systems and Mutual Evaluation Procedures 1992–1999’ (Paris FATF 2001) at p. 37. 36 Ibid. at pp. 37–38.
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during which time it meets those ministries and institutions (public and private) with a mandate or substantial practical involvement in the anti-money laundering sphere. The team then prepares a detailed report, including the identification of deficiencies and suggestions for improvement, which is discussed in and adopted by a plenary meeting of the Task Force. Although each such report is and remains confidential, agreement was reached to make executive summaries public. These are contained in the annual reports of the work of the FATF, which can now be accessed by the general public on the Internet. Detailed procedures, rules and expectations have been developed to govern all of the stages of this innovative and intrusive process,37 the comprehensive exposition of which lies beyond the scope of this article. However, while the system has evolved over time, a significant effort has been made from the outset to ensure equality and consistency of treatment of evaluated jurisdictions and a recent internal review has concluded that, by and large, these goals have been met.38 Although the self assessment and mutual evaluation procedures were developed with existing Member States and territories in mind, they have been used in two situations which were not fully envisaged at the outset; in relation to institutional members and in the context of the recent limited programme of geographic expansion of membership. The European Commission and the GCC are full participants within the FATF, but – perhaps significantly for anti-terrorism purposes – while all fifteen European Union States are members, none of the six members of the GCC (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) are Task Force participants in their own right. Over time the absence of regular monitoring procedures for these countries emerged as a source of concern, connected at least in part to terrorism and the fear thereof. In May 1997 agreement was reached on how to carry out an evaluation of the measures taken by them. The first step was to distribute self-assessment questionnaires. Unfortunately the partial and incomplete nature of the subsequent returns made it impossible to form a view as to the state of compliance. Consequently, it was agreed that a high level FATF mission would be despatched to the Council Secretariat to seek further information and ‘to discuss how to improve the implementation of effective anti-money laundering systems in the Gulf region’.39 This mission eventually took place in January 1999 and resulted in a commitment to provide all outstanding information required for the selfassessment exercise. In addition, the discussions set in train a process which was to result in all GCC members save Saudi Arabia agreeing to undergo mutual evaluation.40 However, ‘given the unique position of the GCC[. . .]it was decided 37
38 39 40
Ibid, at 35–42; R. Sansonetti, The Mutual Evaluation Process: A Methodology of Increasing Importance at International Level’ in (2000) 7(3) Journal of Financial Crime 218 at 219–220. See FATF supra note at p. 13. See FATF supra note at p. 11. ‘FATF Annual Report: 1998–1999’ (Paris FATF 1999) at p. 30.
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that mutual evaluations of its member States should be a joint FATF/GCC process’.41 The series of on-site visits commenced in June 2000 and all five had taken place prior to June 2001. Similarly, the same five states have completed the self-assessment exercise and responsibility for future such surveys has been assumed by the GCC Secretariat.42 The second innovative context in which the process of mutual evaluation has been employed is in the vetting of new applicants for membership. In June 1998, the FATF decided to permit the first limited expansion of its membership since the early 1990s. Here the focus was to be on broadening the geographic base to include ‘strategically important countries which already have certain key anti-money laundering measures in place (criminalization of money laundering; mandatory customer identification and suspicious transactions reporting by financial institutions), and which are politically determined to make a full commitment towards the implementation of the forty recommendations, and which could play a major role in their regions in the process of combating money laundering’.43 The subsequently elaborated criteria for admission included a political commitment ‘to undergo annual self-assessment exercises and two rounds of mutual evaluations’.44 Pursuant to this policy of strategic influence, Argentina, Brazil and Mexico, which had been admitted to observer status in September 1999, had their anti-money laundering systems positively evaluated (on the limited range of ‘fundamental’ principles) the following year and were admitted to full membership in June.45 Surprising those sceptics who regard mutual evaluation as a ‘stroking’ cartel, the prospect of a mutual evaluation visit frequently acts as a catalyst for governmental action. As Dilwyn Griffiths, the then FATF executive secretary, noted in his address to the 1993 Oxford Conference on International and White Collar Crime: ‘I do not think that progress in implementing the recommendations would have been as swift and substantial without it. Countries are concerned to have a good story to tell examiners and there is thus an impetus to get things done which would otherwise be lacking’.46 The detailed reports indicate often quite extensive areas in which improvements in laws, regulations and practices could and should be made. One of the functions of the second round (which will also be a feature of the third) is to
41 42 43 44 45 46
See FATF supra note at p. 24. See FATF supra note at pp. 14–15; Saudi Arabia has since submitted a self-assessment to the Secretariat of the GCC. See FATF supra note at p. 8. See FATF supra note at p. 7. Potential new members include Russia, India, China and South Africa. A curious feature of this list is that Russia, as will be seen below, is presently on the FATF blacklist of NCCTs. D. Griffiths, ‘International Efforts to Combat Money Laundering: Developments and Prospects’, in Action Against Transnational Criminality: Papers from the 1993 Oxford Conference on International and White Collar Crime (London Commonwealth Secretariat 1994) p. 11 at p. 13.
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check on the measures adopted in response to the deficiencies identified in the earlier report.47 While these periodic reviews have been sufficient to secure substantial improvements in many FATF members, compliance with the forty recommendations is incomplete. For this reason, the Task Force has formulated a policy (unchanged since 1994) which reflects a graduated approach. At its most basic and frequently invoked level, this takes the form of a requirement for the country concerned to make periodic reports. As one insider has noted: ‘when a country fails to comply with a large number of FATF recommendations, we initiate a follow-up procedure, a major feature of which is the obligation to submit regular progress reports on the implementation of the recommendations. There would be no point in completing an evaluation and then ignoring the result.’ 48 When this tactic for increasing peer pressure fails, additional steps may be taken, as happened with Turkey in 1995—96. Its failure, inter alia, even to enact basic antimoney laundering legislation had placed it in a position of serious non-compliance with the recommendations. Accordingly, the FATF president first wrote to relevant ministers in that member country expressing concern. Subsequently, a high level mission was sent to Ankara to encourage the government to take urgent action or face the possibility of having more serious steps taken against it. Finally, on 19 September 1996, the FATF issued a public statement in which it invoked its so-called Recommendation 21 procedure against a member for the first time.49 This prospect of financial near-paralysis seems to have had the effect of stimulating the attention of policy makers and others in Ankara, and in November 1996 Turkey enacted and brought into force the Law on the Prevention of Money Laundering. The Recommendation 21 measures were then lifted. Concerns over partial non-compliance by other FATF members have been frequently expressed. Of these, the most serious to date related to Austria, which had declined to abolish anonymous passbooks for Austrian residents in spite of the fact that this was regarded as a clear breach of the requirements of Recommendation 10. As a result, the FATF policy was triggered. The president first wrote to the Austrian Government about this matter, but when this did not lead to change, a high level
47
48 49
A recent FATF internal review reveals significant differences in the level of positive responses to such recommendations from the first round: ‘When averaged out across all the members[...], approximately the same number of suggestions were implemented as those that were not’ (see FATF supra note at p. 34). See Moulette supra note at p. 27) Recommendation 21 of the FATF states: ‘Financial institutions should give special attention to business relations and transactions with persons, including companies and financial institutions, from countries which do not or insufficiently apply these Recommendations. Whenever these transactions have no apparent economic or visible lawful purpose, their background and purpose should, as far as possible, be examined, the findings established in writing, and be available to help supervisors, auditors and law enforcement agencies.’
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mission was dispatched to Vienna without success. The Task Force invoked Recommendation 21 and called on financial institutions to give special attention ‘to transactions with bank cheques issued by Austrian banks and denominated in Austrian schillings, as these funds might be the result of the closing of anonymous passbook savings accounts’. In the news release of 11 February 1999 which announced this measure, the FATF indicated that it would continue to monitor the situation. When even this robust (in international relations terms) stance failed to bring about the desired change in policy the Task Force, at its February 2000 meeting, took the unprecedented step of agreeing – and agreeing publicly – to suspend Austria from membership unless, by 20 May:
‘1. The Austrian government issues a clear political statement that it will take all necessary steps to eliminate the system of anonymous passbooks in accordance with the 40 FATF Recommendations by the end of June 2002. 2. The Austrian government introduces and supports a Bill into Parliament to prohibit the opening of new anonymous passbooks and to eliminate existing anonymous passbooks in accordance with the above paragraph.’50 Whether to mitigate public shaming or from fear of economic consequences, the Austrian government soon took the required steps, leading to the lifting of the threat of suspension.51 However, questions have been raised about the willingness of FATF to apply consistent principles to more powerful nations than Turkey or Austria: the prime candidate here is the US, whose 1997 and subsequent evaluations might appear to merit more severe treatment than it has received.52 The operation of the noncompliance policy ‘relies on a combination of the compliance findings under mutual evaluation reports and the self-assessment exercise’,53 though both the noncompliance strategy and mutual evaluation have had the original 1990 recommendations as the frame of reference whilst self assessment relates to the recommendations as amended in 1996. These should however be brought into alignment in the course of the third round (although as noted earlier, the next round will also be out of ‘sync’ with the new recommendations).54
ii)
FATF-style regional bodies
In governmental circles in the major economies, the FATF experience with mutual evaluation has been widely perceived as a success. A recent internal review concluded
50 51
52 53 54
OECD News Release, Paris, 3 February 2000. See FATF supra note at pp. 20–22; K. Alexander, ‘The International Anti-Money Laundering Regime: The Role of the financial Action Task force’ in (2000) 1(1) Financial Crime Review 9 at 19. The Economist, 23 June 2001, at p. 801. See FATF supra note at p. 43. See FATF supra note at pp. 17–18
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that the process had ‘proven to be, by and large, an effective and efficient one, which utilises relatively few resources to obtain significant results’.55 A broadly similar view has been taken in the literature. 56 Sansonetti noted that the process ‘is one of the cornerstones of the FATF and has proven to be the most successful element of its activities’.57 The Task Force has created an ever-growing number of regional antimoney laundering bodies, most recently in Africa and South America. These regional structures differ in practice, procedure and emphasis in response to regional needs, practical local realities and political sensitivities. Similarly, the nature and intensity of the relationship with the FATF itself differs from case to case, but there is always some involvement with the FATF secretariat, and such bodies as the Offshore Group of Banking Supervisors conduct joint OGBS/FATF evaluations. The rather awkwardly entitled Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures (PC-R-EV) is supported by the Secretariat of the Council of Europe in Strasbourg, and its processes of self assessment and mutual evaluation are undertaken against a more extensive set of anti-laundering standards than those applied to FATF members. Thus, in addition to the Forty Recommendations, participating countries are assessed in relation to their compliance with the 1988 UN and 1990 Council of Europe conventions, and the 1991 EC Directive.58 All members report back to a plenary meeting one year after being subject to mutual evaluation on their own progress made towards implementation of the recommendations contained therein.59 Members cannot be suspended, though the Recommendation 21 procedure for ‘special attention to transactions’ may be applied.60 At its January 2001 plenary, it was agreed that in principle the second round of evaluations, which has now commenced, should include at least one FATF evaluator in each team.61 Clearly, the political principle is to get Member States to ‘buy in’ to the legitimacy of the process and to the outcomes generated by that process under the watchful eye of FATF. The June 1996 annual report noted that ‘where a non-member has successfully gone through a mutual evaluation by an international organisation, using a methodology in line with FATF standards, and is in compliance with the FATF forty recommendations according to this evaluation, that non-member should not fall under the policy outlined in Recommendation 21’.62 Conversely, a mutual
55 56
57 58 59 60 61 62
See FATF supra note at p. 49. S. Morris, ‘Mutual Evaluation: An Approach to Achieving Fairness and Progress in Implementing International Agreements’ in (1999) 15(7) International Enforcement Reporter 285; S. Morris, ‘Mutual Evaluation Systems’ in (2000) 15(4) American University International Law Review 792. See R. Sansonetti (2000) at p. 218. ‘PC-R-EV: Annual Report 2000’ (Strasbourg Council of Europe 2000) at p. 41. Ibid, at pp. 5, 8. ‘PC-R-EV: Examiners Guide’ (Strasbourg Council of Europe 2000) at pp. 12–13. See Council of Europe supra note at p. 6. ‘FATF Annual Report: 1995–1996’, (Paris FATF 1996) at p. 17.
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evaluation by such a body which revealed substantial non-compliance could be expected to make the imposition of this measure by the FATF even more likely. However, the Non-Cooperative Countries or Territories (NCCT) initiative has called this into question. The Task Force established a working group which afforded priority to the elaboration of criteria to be utilized in defining non-cooperation and in establishing the process through which to identify specific jurisdictions considered to meet the criteria in practice. Central to it are some 25 criteria – a distillation from and adaptation to the 40 Recommendations – which define non-cooperation for these purposes. 63 It also established a review process which was intended to result in the production of a ‘black list’ of NCCTs. Finally, for present purposes, it identified a number of steps – including the imposition of sanctions – to encourage progress from those so listed. The Task Force undertook country specific reviews (which differed substantially from the mutual evaluation process in both nature and scope) over the following months the outcome of which was contained in its report of 22 June 2000.64 This created, inter alia, a ‘black list’ of 15 jurisdictions. While the majority were ‘offshore’ centres in the Caribbean and the Pacific, it also embraced states as diverse as Israel and Russia. Those listed were strongly urged to address identified deficiencies in their systems. As an initial encouragement to do so, the Task Force (unexpectedly) invoked its Recommendation 21 procedure for all on the list. It also warned that if they failed to respond in a positive manner, consideration would be given to the adoption of counter-measures. In July these developments were warmly welcomed by the G–7. Heads of State and Government reiterated their willingness to act together, in appropriate cases, to impose such measures ‘including the possibility to condition or restrict financial transactions with those jurisdictions and to condition or restrict support from IFIs to them’.65 In the course of the following year, the FATF articulated its policy on the removal of jurisdictions which make sufficient progress from the list, reviewed (and listed) additional non-member states and territories, and paved the way for the imposition of co-ordinated measures against certain delinquents,66 a step finally taken for the first time in early December 2001, but restricted to the Pacific Island micro-State of Nauru. 67
63 64 65 66
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See FATF supra note at pp. 18–19. ‘Review to Identify Non-Cooperative Countries or Territories: Increasing the Worldwide Effectiveness of Anti-Money Laundering Measures’ (Paris FATF 2000). Statement of the G-7. See FATF supra note 35; and FATF, ‘Review to Identify Non-Cooperative Countries or Territories: Increasing the Worldwide Effectiveness of Anti-Money Laundering Measures’ (Paris FATF 2001). At the joint Ecofin and Justice and Home Affairs (JHA) Council held in Luxembourg on 16 October 2001, all EU members agreed to apply countermeasures ‘in concert and concomitantly’. All undertook to ensure that they had the necessary legal powers in place by 1 January 2002.
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This plainly represented a cultural shift, in trying to achieve results from multilateral efforts without first or afterwards requiring global consensus. Needless to say, virtually every aspect of this initiative has been the subject of criticism and it has proved to be extremely controversial within the FATF-style regional groups.68 Expressions of significant discontent in this and other similar contexts have been acknowledged by the Task Force. In the words of the June 2001 annual report:69 […] the FATF recognises that this effort has[…]had the unintentional effect of straining the relationship between the FATF and the FATF-style regional bodies. The FATF has therefore discussed possible solutions to improve its relationships with the FATF-style regional bodies in the NCCT area. Possibilities include giving greater weight to the mutual evaluations conducted by FATF-style regional bodies when assessing potential NCCTs, provided the regional body takes into account the 25 NCCT criteria as part of its mutual evaluation process.70 Both the PC-R-EV and the FATF have agreed to do this: notwithstanding the fact that there is no doubt that certain of those criteria, while consistent with the 40 Recommendations, go beyond those standards as currently drafted and therefore impose higher standards than those applied to ‘full’ FATF members.71
iii) The influence of the FATF model beyond money laundering Given the fact that all fifteen Member States of the EU are FATF participants, it is not surprising that the positive experience of the mutual evaluation of anti-money laundering measures should have resulted in discussions of how it could and should be used in the work of the union in other justice and home affairs spheres. In the mid–1990s, the increased focus on the threat posed by organized crime provided that opportunity. The high level group set up in 1998 recognized that, while formal participation in such treaty regimes was a necessary condition for the provision of specific forms of international co-operation, it was not, in itself, sufficient to ensure effective and coordinated action. For this reason, Political Guideline 3 requested the Council to establish a mechanism, based on the experience with the model developed in the FATF, for mutually evaluating the manner in which instruments concerning international co-operation in criminal matters are applied and implemented in each of the Member States. Elsewhere the principles on which this peer evaluation process were to be based were set out in summary form. It was recommended that mutual 68 69
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Cf. Council of Europe supra note 58 at pp. 5–7. The FATF decided in September 2001 to conduct a self-assessment exercise to gauge the extent to which its own membership complies with the NCCT criteria. No decision has yet been taken to integrate this equivalence into the next round of mutual evaluations. See FATF XII supra note at p. 11. See Council of Europe supra note 58 at pp. 6–7; see FATF supra note at p. 5.
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evaluation ‘should as a priority be carried out in respect of judicial co-operation and could, if the experience proves positive, be extended to other areas of implementation’.72 While the FATF precedent was clearly influential in the formulation of the text of the Action Plan (and is specifically invoked in the preamble), only two (Ireland and the Netherlands) FATF reports have been made public by those countries,73 whereas every member of the EU has elected to permit publication in full of the country reports produced during the first round. In this respect, there is a parallel with Council of Europe GRECO teams74 discussed below. Within the OECD corruption context, unlike FATF, the full reports are required to be made publicly available. At a more substantive level, the follow-up and compliance procedures of the FATF are more extensive and firmly established than those of the EU. This is partly explained by the fact that, while it has a single-issue agenda, the Joint Action is intended to deal in sequence with diverse criminal justice issues. Nevertheless, proposals have recently been made by the presidency that a reporting system be established through which each jurisdiction would describe, in writing, ‘either the action taken since the evaluation to remedy the problems pinpointed by the experts, or the reasons for their inaction’.75 The presidency suggested that, subject to cost, consideration be given to extending such evaluations to the candidate countries for admission to the EU.76 The strategy for the prevention and control of organized crime for the beginning of the new millennium published in the Official Journal in May 2000 calls for highest possible priority to be given to the strengthening of the mutual evaluation process and its utilization for the most important issues concerned with the prevention and control of organized crime. Here a balance should be sought between relevant law enforcement, judicial and prosecutorial concerns. Furthermore the Council was urged to consider the possibility of supplementing it ‘with a simplified and expedited mechanism, to be applied to the implementation by Member States of specific undertakings. This simplified and expedited mechanism could be used for the evaluation of specific areas of implementation or for questions which necessitate rapid evaluation’. 77 However, without overstating and idealizing the ‘one culture’
72 73 74 75
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Council action plan to combat organized crime of 15 August 1997, OJ 1997 C251/1 at p. 11. See FATF supra note at p. 42. Technically, a country can object to having its report published but to date (Spring 2002) this has not happened, as a culture has developed of making them open. ‘Note from the Presidency: Final report on the first mutual evaluation exercise – mutual legal assistance in criminal matters’ (CRIMORG 12/EJN5) (Brussels Council of the European Union 2001) at p. 30. Ibid. The Prevention and Control of Organised Crime: A European Union Strategy for the Beginning of the New Millennium, of 3 May 2000, OJ 2000 C 124/1 at pp. 12–13.
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view of Europe, these measures arise within the context of fairly equal countries: post-enlargement, far greater heterogeneity of culture, income and state capacity will exist.
Mutual Evaluation and the OECD’s instruments against transnational corruption The Context The procedures of mutual evaluation have been further developed in an area closely related to money laundering and containing some overlaps with it: the harmonization of international standards against corruption, promoted primarily by the OECD78 and the Council of Europe. 79 One component of this is the application of money laundering legislation as a lever for freezing and repatriating embezzled and defrauded public funds as well as bribe payments to senior public officials in the victim countries, especially in the South and the East. Again, the technologies applied to make international instruments work are closely related to the context of the initiative. In the case of the OECD’s anti-bribery initiative, the US has initially been the driving force, even if for reasons that differ from those that drive its interests in combating money laundering. The Foreign Corrupt Practices Act (FCPA), enacted under the Carter administration as part of the post-Watergate clean-up,80 left US-business at a competitive trade disadvantage since their major competitors in Europe and Asia were not ready to follow suit in the 1970s.81 However, towards the end of the 1980s the Republican administrations under Reagan and Bush began to tone down the FCPA.82 In an effort to shift responsibility for what seemed to be a departure from a moral approach to international business, the first Bush administration sought a clear decision within the OECD. However, quite unexpectedly, instead of refusing the US initiative, the OECD Working Group on Bribery (WGB) decided to outlaw transnational corruption. The example of the FATF greatly helped to develop a flexible soft-law
78
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OECD: Revised Recommendation of the Council on Combating Bribery in International Business Transactions, adopted on 23 May 1997, Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, adopted by the Negotiating Conference on 21 November 1997, signed on 17 December 1997. Council of Europe: Criminal Law Convention on Corruption, ETS No 173, 27 January 1999, Civil Law Convention on Corruption, ETS No 174, 4 November 1999. ABA (ed.), The Foreign Corrupt Practices Act: How to Comply Under the New Amendments and the OECD Convention, (California 19 February 1999). An early attempt of the UN to co-ordinate the efforts of the Convention was abandoned in 1979 after there was a failure to agree. Cf. the amendments to the FCPA of 1988.
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approach in the years between 1989 and 1994, with the drafting of an openly worded recommendation. The process of toughening up the language in the years up to 1997 demonstrates the ambiguous nature of such collegial participant groups: the intergovernmental process leaves national governments totally outside until they are suddenly confronted with a fairly concrete text and asked to take legal action. The text is only politically, not legally, binding, but its implementation will be forced along by a very strong lobby of peers. In May 1997, some European countries (especially France and Germany) sought to slow down or derail the initiative by substituting for the collegial ‘soft law’ procedures the more formal negotiated rules required for a legally binding convention. The OECD, an institution hitherto unaccustomed to drafting conventions let alone criminal law treaties, countered by rewriting part of the recommendation into a binding text and negotiated the final treaty in a matter of six months. Whereas, as was noted above, the FATF integrated its members’ standards into regional and national texts to be applied both inside and outside the organization, the OECD’s peer group amalgamated soft law and convention texts and appended an evaluation process to enforce the implementation of this mix, but only on its members.83 Shortly afterwards, the Council of Europe followed suit by pursuing an equally mixed agenda of guiding principles and criminal and civil law conventions among its GRECO members.84 Different from the FATF and also from most international organizations dealing with corruption, the OECD is totally focused on a very specific goal: to create a level playing field for exporters and investors worldwide85 by collectively-unilaterally86 banning the bribery of foreign public officials and related accounting offences as well as money laundering by natural and corporate persons domiciled in industrialized states. Caught in a kind of ‘prisoner’s dilemma’, states had to choose whether to go ahead and expose industries domiciled in their territories to the risk of severe criminal or administrative action, or to risk public stigma and marginalization as states tolerant of corruption. Such pressure has taken on formidable forms and – to a greater extent than the FATF NCCT initiative, for example – has been directed towards changing the legislation and behaviour of the core members of the Club.
83
84
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Article 12 of the bribery convention specifically provides for monitoring and follow-up to be undertaken in the framework of the OECD Working Group on Bribery (WGB). The terms of reference of the WGB in turn make provision for systems of both self- and mutual evaluation. The 1998 agreement establishing GRECO contains detailed provisions on the mutual evaluation procedures that were to be utilized, so these are less flexible than the OECD arrangements. The OECD Member States represent 70 per cent of world exports and 90 per cent of foreign direct investment. The US trade representative estimated the value of the OECD convention to the US at 30 billion USD per annum in potential trade gained from the prevention of transnational bribery by its competitors. Cf. for this approach M. Pieth, ‘The Harmonization of Law against Economic Crime’ in (1998/99) European Journal of Law Reform 527 at 535 et seq.
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Targets for such high-visibility pressure have included France, Germany, Japan and the UK.87 Under this high-profile media and political reputational spotlight, it is not surprising that the OECD convention was implemented even more quickly than the UN drugs convention: it entered into force barely a year after its signature and two years later, all signatories have ratified, and thirty out of thirty-five members have implemented the standard in national law. This rapid development may suggest a sense of the pressure applied amongst Member States, a pressure intensified after the key G–7 countries had decided to change their own legislation.
The international significance of the FATF precedent The significance of the rise and rise of mutual evaluation processes of the FATF type at the international level should not be underestimated. The notion that, to join a quasi-club within the international community and to be considered acceptable to responsible international society, one had to submit to periodic on-site inspection by one’s peers, constituted a radical departure from the orthodoxy of international affairs, where considerations of autonomy and sensitivities about territorial sovereignty have traditionally dominated governmental thinking. Intrusive verification procedures are, of course, not unknown. Of these, perhaps the most comprehensive are to be found in the sphere of arms control and disarmament; the ultimate form of which to date was provided for in the text of the 1993 UN Convention on the Prohibition of the Development, Production, Stockpiling and use of Chemical Weapons and on their Destruction. However, even in the sphere of the monitoring of the implementation of legal obligations enshrined in international treaties, on-site procedures are very much the exceptions which prove the rule. More commonly, multilateral treaties will contain either no or relatively formal monitoring procedures allied with weak dispute settlement procedures: an approach well illustrated by the 1988 UN drug trafficking convention.88 In the case of the FATF’s efforts to monitor compliance and 87
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The then German minister of economy was exposed in the international media as condoning international corruption for delaying the agreement to the new text. The UK has been officially and publicly criticized for its unwillingness to legislate in time and representatives have gone as far as to discuss economic sanctions against British companies. Japan has been asked to redraft its new law due to serious ‘misunderstandings’, and in late 2001, the diet was in the process of adopting new additional legislation to complement the first version of three years ago. In the case of France, the WGB intervened during the primary legislative process itself and asked for changes to be made between the first and second reading. After some serious political haggling, essential changes were made. W. Gilmore (1993) at pp. 38–41.
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implementation of its 40 Recommendations, they take the form of ‘soft law’ and are not formally binding as a matter of international law. As noted earlier, its package of counter measures is not contained in a treaty text to which its members have subscribed (though some of the required or suggested measures are embodied, at least in part, in other treaty texts). While some recommendations may have crystallized into rules of customary international law, many must continue to be regarded as lacking any obligatory legal effect, whatever may be the political and economic effects of non-compliance. The importance of the international precedent set by the FATF (and, at least on paper, by certain of the regional anti-money laundering groupings) is further underlined by the fact that the membership agreed to a practical graduated procedure (of which the imposition of Recommendation 21 measures89 and the threat of expulsion are particularly noteworthy) through which their own compliance with the agreed strategy can be encouraged if not enforced. It is rare for countries to accept the concept of the imposition of quasi-sanctions for failure to implement non-legally binding standards, and this indicates the power of ‘soft law’ when combined with heavyweight political push. The Security Council has the power to impose sanctions under Chapter VII of the UN charter in order to maintain or restore international peace and security. In the aftermath of the terrorist attacks on the US on 11 September 2001, such powers were used to prevent and suppress the financing of terrorist acts and to require the freezing, without delay, of terrorist funds (Security Council Resolution 1373 (2001)). Notwithstanding the view of the Council that there is a close connection between international terrorism and, inter alia, drugs, money laundering and organized crime,90 the opportunity to utilize its powers against other criminal suspects in the absence of such a demonstrable terrorism nexus is severely restricted by both technical legal and political considerations. In large measure because of the positive demonstration effect of the FATF precedent, the making of provision for mutual evaluation of the implementation of international commitments in the area of financial crime has become commonplace. Indeed, in certain institutional contexts it has become the new orthodoxy. This is, in turn, well illustrated in the practice of the Council of Europe, where the firm expectation has emerged that international legal instruments adopted in pursuance of its programme against corruption will make specific provision for the monitoring of implementation through GRECO.91 Though some few communist ideological insurgents remain (e.g. FARC in Colombia) and the G–7 may reasonably fear Islamic anti-capitalist as well as antiglobalization campaigners, anti-communism may no longer be as necessary because
89 90 91
See supra note 13. This is too large an issue to be dealt with here, but some groups fund terrorist activities from crime, while others may do so wholly or partially from legitimate business activities. See, e.g., Article 24 of the Council of Europe Criminal Law Convention on Corruption.
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there are no plausible alternatives to capitalism, at least in non-theocratic States. Bodies such as FATF where voting powers are widely distributed cannot be a simple mechanism for the pursuit of US-only, UK-only or France-only ‘threat reduction’. An authentic reason to take action outside the borders of the state is provided by the (correct) analytic construction that the continuing existence of places to hide and cleanse money is a prerequisite for a continuing transnational crime enterprise trade. Putting pressure on all governments to comply has both symbolic as well as direct instrumental purposes. The term ‘mutual evaluation’ will survive because it serves the purpose of making international relations look voluntary; the extent to which this is and will be seen as being mystificatory, and by whom, depends both on how the major G–7 countries behave (in whatever international body they are operating) and on how legitimate both the acts and the process are seen by those who are members of regional/international bodies and those who are not. At least three aspects of the expansion of globalized modes of regulation (including mutual evaluation) may give cause for concern. First, such expansion may erode or side-step some essential principles of the rule of law, not because it is involuntary but because it shows a lack of interest in classical principles of criminal law. Secondly, it is not clear what, if any, limits there are to this pragmatic expansionism (and the implementation ‘assistance’ that often accompanies it). And thirdly, the soft focus of mutual evaluation may conceal a tougher underbelly of hegemony and lack of democratic control.92 It is difficult to see what sort of democratic argument would support the right of Third World élites to receive bribes from the West against the economic interests of their nations. However, if the economic activities of independent states are defined as illegitimate facilitators of ‘the enemy’93 that ‘require’ disablement in the ‘Wars’ on organised crime and terrorism, this poses obvious dangers for the traditional rights of minority nations who are cajoled or threatened into submission.94 A sense of grievance is especially likely when FATF member countries are not sanctioned for the same practices that would lead less powerful nations to be blacklisted. This may be politically tempting but it looks like the sort of (often unconscious) preference for symbolic victories over real impact that has bedevilled the ‘War on Drugs’ since its inception; if the UK, US or other powers are allowed not to identify beneficial owners, but the OGBS and smaller economies are required to identify them on pain of economic sanctions, how can the claim to effectiveness – whether as a motivation or as an effect – be justified? A similar situation arises with requirements on European but not American
92 93
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See Pieth supra note at pp. 540–5. J. Blum et al., Financial Havens, Banking Secrecy and Money-Laundering (New York United Nations 1998); M. Levi and M. Maguire, ‘The Identification, Development and Exchange of Good Practice for Reducing Organised Crime’ (Report for Falcone Programme, European Commission, 2001 unpublished). It can become a slippery slope on which any obstructions to smooth co-operation are deemed to justify intervention and sanctions.
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accountants and lawyers to report suspected transactions. The imposition of reporting obligations on lawyers flows from the new directive and (at least until the revision of the 40 Recommendations) does not form a part of the FATF package. Consequently, the sanctions against non compliance does not apply to this issue for EU members at present. Thus, mutual evaluation is a very useful process to international bodies who are concerned with effectiveness (or rather, efficiency and coherence) of implementation, which also offers a political mode of integration well beyond the mere passage of legislation; it does not by itself orient states in judging the impact of regulation on the extent and organizational form of primary criminal behaviour itself. Indeed, whereas there is a clear connectedness of anti-transnational bribery policies to fairer trade and of some ‘good governance’ controls to better flows of famine and (relative) poverty relief, the measurement of the relationship between anti-laundering controls and actual outcomes, such as crime reduction, remains very much in its infancy. Although this paper has described the rise and rise of mutual evaluation and stressed the significance of this, there must also be consideration of the limitations of this exercise. Whether or not it is correct that a tighter focus on terrorist finance will eliminate (or, more plausibly, reduce) terrorism, the measures demanded by the most likely attack targets are unlikely to be achieved simply by mutual evaluation and voluntary responses. There is too great a temptation to stigmatize ‘rogue states’ and take financial action in the face of ‘clear and present danger’. There will also be pressures to rationalize the world systems of evaluation to reduce the regulatory burdens that inspections impose, though if and how this will be achieved politically remains open to serious question. One should note here the FATF-inspired selfassessment exercise of compliance by both member and non member States, with the eight special recommendations on terrorism. In the latter context at least, by the June 2002 plenary, the FATF put in place a process to identify non-cooperative jurisdictions in this sphere and compel improvements, based on the responses to self assessment questionnaires by members and non-members.95 Though it is doubtful that those areas in which mutual evaluation has been firmly established will be reigned back, newer international conventions and other instruments outside the EU and applicant countries’ framework may find it more difficult to get countries to agree to be monitored. It remains to be seen, therefore, whether mutual evaluation constitutes a false dawn of a new mode of regulation of international criminal ‘law-in-action’, or merely an application to a relatively restricted though important set of globalized commercial phenomena based on what the unprepared political market would bear at a particular historical conjuncture.
95
See the FATF website, especially the press releases following the Washington DC meeting October 2001, the Hong Kong meeting at the end of January 2002, and the Paris meeting June 2002.
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References Council Action plan to combat organized crime of 15 August 1997, OJ 1997 C251/1. K. Alexander, ‘The International Anti-Money Laundering Regime: The Role of the Financial Action Task Force’ in (2000) 1(1) Financial Crime Review 9. I. Ayres and J. Braithwaite, Responsive Regulation (Oxford: Oxford University Press 1992). U. Beck, ‘From Industrial Society to the Risk Society : Questions of Survival, Social Structure and Ecological Enlightenment’ in (1992) 9 Theory, Culture and Society 97. J. Blum, M. Levi, T. Naylor, and P. Williams Financial Havens, Banking Secrecy and Money-Laundering (New York United Nations 1998). J. Braithwaite, and P. Drahos Global Business Regulation (Cambridge Cambridge UP 2000). B. Bullington and A. Block ‘A Trojan horse: anti-Communism and the War on Drugs’, in (1990) 14(1) Contemporary Crises 39. ‘PC-R-EV: Annual Report 2000’ (Strasbourg Council of Europe 2000). PC-R-EV: Examiners Guide (Strasbourg Council of Europe 2000). P. van Duyne ‘Pavlov’s dog: beyond money laundering’ in (1998) 37(4) Howard Journal of Criminal Justice 359. ‘FATF Annual Report: 1995–1996’ (Paris FATF 1996). ‘FATF Annual Report: 1996–1997’ (Paris FATF 1997). ‘FATF Annual Report 1997–1998’ (Paris FATF 1998). ‘FATF Annual Report: 1998–1999’ (Paris FATF 1999). ‘FATF Annual Report 1999–2000’ (Paris FATF 2000). ‘FATF Annual Report 2000–2001’ (Paris FATF 2001). ‘Analysis of the 1999–2000 Self-Assessment Exercise: Note by the Secretariat’ (Paris FATF 2000) PLEN/46.REV1. ‘Report on Non-Cooperative Countries and Territories’ (Paris FATF 14 February 2000). ‘Review to Identify Non-Cooperative Countries or Territories: Increasing the Worldwide Effectiveness of Anti-Money Laundering Measures’ (Paris FATF 22 June 2000). ‘Review of FATF Anti-Money Laundering Systems and Mutual Evaluation Procedures 1992–1999’ (Paris FATF 16 February 2001). ‘Review to Identify Non-Cooperative Countries or Territories: Increasing the Worldwide Effectiveness of Anti-Money Laundering Measures’ (Paris FATF 22 June 2001). ‘Developments in Non-Cooperative Countries and Territories’ (Press Release of 7.9.2001) (Paris FATF 2001) (Press Release of 7 September 2001). ‘G–7 Statement’ Okinawa G–7 (21 July 2000). D. Garland, ‘The limits of the sovereign state’ in (1996) 36(4) British Journal of Criminology 445.
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W. Gilmore, Combating International Drugs Trafficking: The 1988 United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (London Commonwealth Secretariat 1993). W. Gilmore (ed.), International Efforts to Combat Money Laundering (Cambridge Grotius 1992) W. Gilmore, Dirty Money: The Evolution of Money Laundering Counter-Measures (Strasbourg Council of Europe Publishing 1999, 2nd ed.). M. Gold and M. Levi, Money-Laundering in the UK: an Appraisal of Suspicion-Based Reporting (London Police Foundation 1994). D. Griffiths, ‘International Efforts to Combat Money Laundering: Developments and Prospects’ in Action Against Transnational Criminality: Papers from the 1993 Oxford Conference on International and White Collar Crime (London Commonwealth Secretariat 1994) at p. 11. Joint Action of 5 December 1997 establishing a mechanism for evaluating the application and implementation at national level of international undertakings in the fight against organized crime, OJ 1997 L 344/7. M. Levi, Regulating Fraud: White-Collar Crime and the Criminal Process (London Routledge 1987). M. Levi, ‘Pecunia non olet: cleansing the money launderers from the Temple’ in (1991) 16 Crime, Law, and Social Change 217. M. Levi and M. Maguire, ‘The Identification, Development and Exchange of Good Practice for Reducing Organised Crime’ (Report for Falcone Programme European Commission 2001, unpublished). M. Levi and L. Osofsky, Investigating, Freezing and Confiscating the Proceeds of Crime, London Home Office 1995. M. Levi and A. Pithouse, White-Collar Crime and its Victims: the social and media construction of business fraud (Oxford Clarendon Press) (forthcoming). M. Maguire, ‘Policing by risks and targets: Some dimensions and implications of intelligence-led crime control’ in (2000) 9 Policing and Society 1. A. McCoy, with C. Read, and L. Adams, The Politics of Heroin in South-East Asia (New York Harper and Row 1972). S. Morris, ‘Mutual Evaluation: An Approach to Achieving Fairness and Progress in Implementing International Agreements’ in (1999) 15(7) International Enforcement Law Reporter 285. S. Morris, ‘Mutual Evaluation Systems’ in (2000) 15(4) American University International Law Review 792. P. Moulette, ‘The Mutual Evaluation Process of the Financial Action Task Force on Money Laundering’ (Strasbourg Council of Europe 1998) (PC-R-EV(98)1, 29 January 1998). E. Nadelmann, Cops Across Borders (University Park Pennsylvania State University Press 1993). ‘Note from the Presidency: Final report on the first mutual evaluation exercise – mutual legal assistance in criminal matters’ (Brussels Council of the European Union 2001) (CRIMORG 12/EJN5, 16 February 2001).
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National Drug Control Strategy (Washington DC Office of National Drug Control Policy 2002) R.M. Pecchioli, ‘The Financial Action Task Force’ (Paper presented at the Council of Europe Money Laundering Conference, Strasbourg, 28–30 September 1992) (typescript). M. Pieth, ‘From Ideal to Reality: Making the New Global Standards Stick’ in No Longer Business as Usual, Fighting Bribery and Corruption (Paris OECD 2000) at p. 51. M. Pieth, Aequivalenz¤: Praktische Rechtsvergleichung und internationale Harmonisierung von Wirtschaftsstrafrecht‘ in (2000) 119 Zeitschrift für Schweiz Recht (ZSR) 477. M. Pieth, ‘The Harmonisation of Law against Economic Crime’ in (1998/99) The European Journal of Law Reform 527. M. Pieth, ‘The Prevention of Money Laundering: A Comparative Analysis’ in (1998) European Journal of Crime, Criminal Law and Criminal Justice 159. M. Pieth, Die Bekämpfung der Geldwäscherei – Modellfall Schweiz? (Basel und Frankfurt am Main 1992). Council Programme of measures to implement the principle of mutual recognition of decisions in criminal matters, OJ 2001 C 12/10. The Prevention and Control of Organised Crime: A European Union Strategy for the Beginning of the New Millennium, OJ 2000 C 124/1. R. Sansonetti, ‘The Mutual Evaluation Process: A Methodology of Increasing Importance at International Level’ in (2000) 7(3) Journal of Financial Crime 218. T. Sherman, ‘International Efforts to Combat Money Laundering: the Role of the Financial Action Task Force’ in (1993) 1(2) Hume Papers on Public Policy 12. Money-Laundering and Financial Crimes (Washington DC U.S. State Department 2001). G. Stessens, Money Laundering: an International Enforcement Model (Cambridge, Cambridge University Press 2000). The 2001 Money Laundering Strategy (Washington DC U.S. Treasury Department in consultation with the U.S. Justice Department 2001). W. Wechsler, ‘Follow the Money’, in (Jul/Aug 2001) 80(4) Foreign Affairs 40.
Financing of Terrorism: Following the Money Mark Pieth*
1.
Introduction
Combating money laundering or, to borrow a phrase, ‘following the money’, has developed into one of the most dynamic concepts in financial regulation and criminal law over the past decade. The paradigm has turned out to be extremely flexible; first applied in a limited field to describe the accumulation of capital generated on illegal markets, it is now used as a catch-all phrase for the management of ill-gotten gains from all possible sources. It is hardly surprising then that once the first shock after the 11 September terrorist attacks had subsided, governments,1 financial institutions 2 and later also international organizations 3 started to develop the concept of a coordinated fight against terrorism. In fact, one might ask why existing policies had not been more rigorously implemented before that date. 4 As early as 1980, the first document in Europe conceptualizing the term ‘money laundering’5 did not focus on drug trafficking, rather it sought a means of tracking the ill-gotten gains of hijacking and robbery by left-wing terrorists, especially in Italy and Germany (‘Red Brigades’ and ‘Red Army Faction’). Furthermore, the UN had already negotiated a series of instruments against terrorism 6 before 11 September, some of which were only ratified by the majority of member states after the attacks of last fall. The question why the anti-money-laundering-concept was not applied more rigorously to terrorist groups, such as the IRA, ETA and others, that have long been in existence is certainly a valid one. The suspicion arises that political difficulties in * Professor, Criminal Law at University of Basel. 1 For US: Cf. ‘USA Patriot Act’, H.R. 3162 < www.politechbot.com/docs/usa.act.final.102401.html>. 2 Cf. ‘Wolfsberg Statement, the Suppression of the Financing of Terrorism’. 3 FATF, Special Recommendations on Terrorist Financing, 31 October 2001. 4 If they had been, why would many countries now be drafting more stringent legislation? 5 Council of Europe: R(80)10 of 27 June 1980. 6 GA Res. 49/60, 9 December 1994; GA Res. 51/210, 17 December 1996; GA Res. 52/164 and 165, 15 December 1997; GA Res. 53/108, 8 December 1998; GA Res. 54/109, 9 December 1999, launching the International Convention for the Suppression of the Financing of Terrorism and the Security Council Res. 13/73. M. Pieth (Ed.), Financing Terrorism, 115–126. © 2002 Kluwer Academic Publishers. Printed in the Netherlands.
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drawing a clear line between ‘freedom fighters’ and ‘terrorists’ blocked the necessary consensus. After 11 September, everything seems quite different: the UN, the Financial Action Task Force (FATF) and others are now focusing their efforts on controlling the ‘financing of terrorism’ and have immediately attempted to apply the concept commonly used for the control of money laundering for this purpose.7 International agendas come about through pragmatic reactions to events. The problem, however, demands a more fundamental discussion of the wider context of the development of the paradigm. Going back in time to the mid 1980s, when ‘money laundering’ became a household word throughout the world, the aim at that time and subsequently focused mainly on impeding the financing and re-financing of illicit drug-trafficking. Within the field of criminal law, international standards promoted three major changes: the criminalization of the management of funds derived from the drugs trade, forfeiture of ill-gotten gains, and reciprocal mutual legal assistance.8 However, a closer look reveals that in the early discussions leading up to the Forty Recommendations of the Financial Action Task Force on Money Laundering (FATF),9 a second goal had already been defined, which aimed at a more rigorous control of routine transactions. This was, of course, the primary concern of countries with large drug-user markets. However, it was evident that the ambitions, especially those of the US delegation to the FATF, went even further; beyond the registration of cash transactions, the suggested measures were intended to reduce drastically the use of cash globally in order to establish a paper trail wherever possible. It is in keeping with the logic of this strategy that one of the major suggestions made by the US delegation in the early days of the FATF was to maintain meaningful statistics on aggregate financial flows in OECD countries.10 Clearly, the international minimal standards developed concurrently on ‘customer-due-diligence’ (CDD) for banks, especially the ‘KYC’-principle (know-your-customer), codified first in the Basel Statement of Principles 11 and integrated into the common standards of the FATF 1990,12 indicate that the initiative against money laundering was from the outset multi-focused. Beyond tracking criminals and their assets, broader risk management strategies and international regulations for financial markets were anticipated. This motivation comes out even more clearly in later initiatives, most notably the Financial Stability Forum and its report in 2001 13 as well as the current work of the
7 8 9 10 11 12 13
Cf. note 3,‘… financing of terrorism, terrorist acts and terrorist organisations as predicate offences to money laundering’! Pieth, Tracking Down the Dirty Money, Financial Times, 25 October 2001, p. 23. FATF, Forty Recommendations, report of 6 February 1990. Cf. ibid, Documentation Legal and Regulatory Subgroups FATF I. Basel Statement of Principles of 12 December 1988. Cf. supra note 9, FATF Rec. 12–14. Financial Stability Forum, International Standards and Codes to Strengthen Financial Systems, April 2001.
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IMF14 that addresses the problems associated with the destabilizing potential of offshore financial centres and the services they offer.
2.
The abolition and re-introduction of asset forfeiture
Returning to the primary goal – crime control – a rarely discussed development needs to be analyzed. In the beginning, money laundering was not so much a concept to criminalize the behaviour of individuals or legal persons but rather a means of securing the forfeiture of ill-gotten gains. In fact the United Nations’ ‘Comprehensive Multi-disciplinary Outline of Future Activities in Drug Abuse Control’15 of 1988, the blueprint of the Vienna Convention Against Trafficking in Narcotic Drugs of 1988,16 did not mention criminalization as such, but concentrated exclusively on forfeiture. Forfeiture of assets looks like an old concept and in fact has its roots in the confiscation of the entire assets of a person convicted and executed for major crime (‘laesio majestatis’, treason, witchcraft and similar offences) in ancient Rome, also later on in the Middle Ages and especially during early industrialization in the period of absolutist rule in Europe. One thing these regimes had in common was that they used criminal law in a purely utilitarian if not instrumental way, an approach best illustrated by Macchiavelli’s views on government in ‘Il Principe’. The current discourse on forfeiture of assets frequently overlooks the fact that the abolition of confiscation was at least as crucial to the protagonists of early Human Rights declarations and the drafters of the first constitutions in Europe and the Americas during the Age of Enlightenment as the restriction of the death penalty. Absolutists in the 18th century were often unable to raise sufficient funds to meet the costs of their overblown schemes and their penchant for warfare without increasing reliance on loans from the emerging moneyed industrialist class. Under these circumstances, it was occasionally practical to dispossess those winners of the industrialization process, especially as they increasingly demanded their share of political power to match their economic significance. Asset forfeiture was used as an element in the process of criminalization of political opponents. It is hardly then surprising that for those from whom property was confiscated, forfeiture was regarded as an arbitrary tool wielded
14
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Developing an IMF-ROSC-Module on money laundering, cf. Neue Zürcher Zeitung, 12 March 2002, p. 27. Target 23, p. 63 f: ‘Forfeiture of the Instruments and Proceeds of Illegal Drug Trafficking’; the issue of criminalizing money laundering, however, was introduced in Art. 3 of the 1988 Convention and the political declaration of the General Assembly in the GA Res. S-17/2 of 15 March 1990. UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (‘Vienna Convention’) of 20 December 1988.
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by a non-legitimate state with the aim of subjugating and dispossessing them in order to enrich the ruler. Beccaria (Dei delitti e delle bene, 1766, XXV.), for instance, one of the most articulate contemporary protagonists of criminal policy in the 18th century, deplored the irrational aspects of confiscation, which included pushing the innocent (i.e. family members of the dispossessed) into crime. Confiscation viewed from this angle clearly posed a risk to investment and an infringement on the inviolability of private property. It is no coincidence that some modern constitutions, which are still extensively influenced by the bourgeois revolutions of the late 18th and early 19th centuries and to be found in some Latin American constitutions (see Mexico), squarely declare ‘confiscation’ as unconstitutional. It is noteworthy that ‘confiscation’ remained a political ‘four-letter-word’ for nearly two hundred years until it was reinvented in the 1970s. Certainly up until then, the general confiscation of all assets of a convicted person was outlawed because it was considered disproportionate and had far reaching effects on the family of the dispossessed. However, many legal systems retained a certain power to forfeit, although this was generally limited to dangerous objects (‘instrumenta sceleris’, such as the instruments or weapons used to perpetrate a crime or the products of crime, for instance pornographic paintings) in order to destroy them. Increasingly, it must be added, an effect similar to that of confiscation was achieved by raising the level of fines to siphon off ill-gotten gains. Even nowadays, some legal systems prefer confiscatory fines to the actual confiscation of ill-gotten gains.17 Nevertheless, this historical development still does not explain how it was possible to reintroduce confiscation towards the end of the 20th century, including some broad, sweeping forms of forfeiture of all assets18 and even the occasional reversal of the burden of proof of legal origin imposed on the owner. 19 Furthermore, there is the need to clarify why this historical shift back to an old and discredited concept could have been engineered without provoking major intellectual debate. A change of conceptual terminology is discernible in the early 1970s, when it was increasingly stated that it was inadequate to punish individuals, whilst at the same time allowing them to enjoy the fruits of their illegal behaviour. The issue did not really develop, however, as long as criminal law concentrated on crimes with clearly defined victims who could be granted compensation out of the profits of crime. With the expansion of victimless crimes or crimes against the public interest, especially the criminalization of trafficking in narcotic substances, the issue became increasingly important. Whereas in Europe in the 18th century during the age of absolutist regimes, confiscation was used to dispossess well-to-do citizens who were claiming their share in political power, the new concepts were far more easily legitimized, as they largely
17 18 19
So, for instance, the US FCPA does not contain special provisions for criminal forfeiture, similar results could, however, be achieved either by civil forfeiture or a confiscatory fine. Cf. the German ‘Vermögensstrafe’ and ‘Erweiterter Verfall’. Cf. Rider, ‘The Crusade against Money Laundering – Time to Think!’ (1998) Vol. 1 Issue 4 European Journal of Law Reform at p. 518.
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constituted a welcome addition to public income, by way of ‘taxing’ large-scale illegal activities and organized criminals (‘The Mafia’, the ‘folk-devils’ of our time).
3.
Contradictions in controlling drug money laundering
Forfeiting the gains derived from illegal drug trafficking and, at a later stage, criminalizing those who helped obscure the origins of those gains, was introduced as a narrowly focused tactical concept that pinpointed taking away the profits and thereby reducing the attractiveness of becoming a trafficker. Already at that time, a macroeconomic rationale was put forward in support of the new tactics. The argument was advanced that siphoning off the illegal profits would lead to a rise in the price of the illegal goods and consequently to a reduction in their demand.20 This was rather short-sighted reasoning in an area where demand is bound to be highly elastic due to the dependency of a large segment of drug-users who are prepared to procure the necessary funds to finance their habit by all available means. In fact, the effect of the strategy was that it most likely even made the problem all the more acute by boosting the market volume. It raised the attraction of illegal activity since the profits were bound to rise concurrently with the prices, probably even disproportionately so. The impact of anti-money laundering policies on the drug problem worldwide thus remained very limited. Huge efforts, at immense expense in money and personnel, in both the public and the private sectors were made, yet the number of criminal cases brought 21 and the amount of profit forfeited 22 remained small in relation to the estimated funds generated by illegal markets.23 The size of the drug problem has, if at all, been affected to a much greater degree by alternative policies than by the military/police approach. 24 Nevertheless, the production of laws and regulations has not diminished and the regional reach of anti-money laundering concepts has continued to expand. The discourse shifted and increasingly all funds in the hands of organized crime operators, (whether legally or illegally obtained25) were declared dangerous, just as ‘instrumenta sceleris’ had been earlier on, since they increased the ability of such organizations to engage in illegal activities and to come into conflict with the 20 21 22 23
24 25
Meier/Dessecker/Smettan (eds.), Gewinnabschöpfung bei Betäubungmitteln (Wiesbaden 1989) at p. 539. Kilchling (ed.), Die Praxis der Gewinnabschöpfung in Europa (Freiburg 2002) at p. 441. Ibid., at p. 444. Cf. the figures published by the UN and their critique in Pieth, Bekämpfung der Geldwäscherei (Basel/Frankfurt 1992) at p. 12. Cf. Pieth, ‘Gefährliche Strategiespiele’ in: Plädoyer (1992) at p. 38. Cf. for the more recent of forfeiture of assets under the control of organized crime: UN Model Legislation on Money Laundering 1995 (UNDP) or Art. 59 s. 3 Swiss Penal Code.
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authorities (or, alternatively, bribe them for protection). In a relatively short period of time the international organizations, pushed on by a small group of countries (especially the US, France and the UK), managed to broaden the discussion on money laundering from a limited effort to reduce drug-trafficking to a generalized concept to tackle serious crime. The political mechanisms used for the expansion of the paradigm can be illustrated by the image of concentric circles created by a stone thrown into a pond. The core countries mentioned above convinced the G–7 States. The G–7 States in turn created a specialized body to combat money laundering (the FATF26) in 1989, which then included the wider framework of OECD countries (and a few non-members), and ultimately formed regional satellites.27 The implementation of the strategy was promoted by soft law and peer pressure (monitoring28 ), it was only at a later stage that some areas were integrated into binding international law.29 Most recently, the UN went over the same terrain again with the largest constituency.30 The fact that the effect of anti-money laundering policies probably amounts to little more than a relatively low ‘tax’ on illegal trade has not impeded the continued production of yet more rules. Instead the focus of the discourse shifted entirely.
4.
The generalization of the concept of money laundering
With the extension of the scope of money-laundering-offences from drug-trafficking to ‘all serious crime’, (which was accepted by the FATF in 1996 in the revised edition of its Forty Recommendations)31 and its implementation at the national level around the world, now ordinary crimes against property as well as corruption, illegal armstrading, gaming and trafficking in human beings, and so on, are considered predicates. If this is a perfectly logical step intellectually (why should fraud be less serious than drug trafficking?), neither the authorities, nor the private sector, have fully grasped the practical implications of this widening of the scope of anti-money laundering. On the one hand the sheer volume of ‘dirty money’ has probably
26 27 28
29
30 31
Cf. supra note 9, revised Recommendation of 1996 N. 4. As, for example, the Caribbean Financial Action Task Force, created with the Kingston Declaration of 6 November 1992. Gilmore, Dirty Money: The Evolution of Money Laundering Counter-Measures (Strasbourg 1999, 2nd ed.); for monitoring procedures in general: Pieth, ‘From Ideal to Reality: Making the New Global Standards Stick’ in No Longer Business as Usual, Fighting Bribery and Corruption (Paris OECD 2000). Cf. the Council of Europe Convention of 8 November 1990 on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime, Strasbourg. UN Convention against Transnational Organised Crime, cf. GA 55/383. Cf. supra note 26.
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doubled, or even tripled, as estimates of the funds generated by corruption (bribes and the profits of bribery) alone are said to equal the profits of the illegal drugs trade.32 These additions also extend awareness (red flag lists etc.) to new types of legal risks, even if the actual methodology of laundering may not vary that much according to the predicates. Financial institutions are now forced to extend their vigilance to ‘slush funds’ held by their largest and best institutional clients (especially multinational enterprises who might get involved in grand corruption). Although the money held in these funds is not actually laundered, it may still be destined for criminal purposes, and for financial institutions, the risk is not so much that of becoming a launderer but of being held liable as an accomplice, if the purpose of a transaction was foreseeable. The impact of the extension of predicates is considerable. Apart from the traditional transaction-related red flag lists, additional factors pertaining to the person (client as well as beneficial owner), his or her place of origin and residence and so on, his or her economic background, the industry-sector involved and so on will all have to be monitored and it would be best to develop a weighted score-table for the new risks identified. From a more general standpoint it may be said that money laundering is now used as an icon for ‘financial crime’ as such. Financial crime has developed into a common denominator of all kinds of macrocrime. Organized, corporate and also state-criminals (as well as para-state criminals if one thinks of offences committed by the members of militias) all need funding and most of them need to hide their profits.33 Just as legal business entities have maximized the benefits of globalization so too have criminal operators. They are linked up in international networks and can easily transfer their centres of activity and, above all, make use of modern banking technology to transfer their assets. They have proved to be highly proficient in benefiting from regulatory arbitrage, similar to the way companies and individuals optimize their tax situation. Having recruited the help of financial institutions across the world, these operators have succeeded in building so-called structures (combining the assistance of attorneys and other holders of professional privilege with the use of bank accounts located in financial centres with strong bank secrecy and little inclination for giving mutual legal assistance as well as deploying International Business Companies).34
32
33
34
This figure has repeatedly been quoted by the media as a World Bank estimate. It has, however, not been possible to track down the original source. Nevertheless, it can be assumed that the dimensions of funds generated both by bribes and the profits of bribery are huge. Pieth, Working paper presented at the 10th UN Congress on the Prevention of Crime and the Treatment of Offenders, Vienna, 10–17 April 2000, plenary meeting on international co-operation in combating transnational crime: New challenges in the 21st century. ‘Paradis financier, secret bancaire et blanchissement d’argent’ United Nations, New York 1999.
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Jonathan Winer has in this volume 35 pointed out that there is an inherent risk of the banking community being used for these purposes and that part of the problem is the organization of banking supervision at the national level when financial institutions operate globally. This takes us back to the regulatory concepts that have developed in parallel to criminal law over the last decade.
5.
The slow development of ‘customer-due-diligence’ (CDD)
In 1988, when the Basel Committee on Banking Supervision (BCBS) wrote the Basel Statement of Principles36 and introduced the concept of ‘KYC’ (know-yourcustomer) as a fundamental principle in banking supervision, the aim was far broader than ‘catching criminals’. The principle sought first to facilitate credible risk management by financial institutions, and secondly to reduce the risks of uncontrolled money flows worldwide. If this last point had not yet clearly emerged, it certainly was part of the motivation for upgrading these principles in a fundamentally new code, the BCBS’s new code of ‘Customer-Due-Diligence for Banks’ of October 2001, discussed in greater detail by Charles Freeland in this volume. 37 These efforts are closely linked to the work of the Financial Stability Forum 38 and its successors in the IMF. 39 Beyond combating money laundering, these obligations on customer acceptance and their continuous monitoring are part of an attempt at harmonizing standards in banking supervision as a reaction to the demise of national control by using elements of global governance for financial centres. Of course, more detailed rules on CDD are only one aspect within a wider framework, and the next steps due in this development are still quite undefined. It is, however, significant that the FATF was not really in the position to give more detailed guidance between 1990 and about 1999 on customer due diligence. All the excitement about the Non Co-operative Countries and Territories process, the blacklisting and partial de-listing of so-called ‘NCCTs’, has overshadowed the fact that many FATF core-members were not ready to implement even basic customer due diligence standards at the levels already defined in the 1990 recommendations. 40
35
36 37
38 39 40
See J. Winer, ‘Globalization, Terrorist Finance, and Global Conflict – Time for a White List?’ in (2002) 4 European Journal of Law Reform (in this issue). Cf. supra note 11. C. Freeland, ‘How Can Sound Customer Due Diligence Rules Help Prevent the Misuse of Financial Institutions in the Financing of Terrorism?’ in (2002) 4 European Journal of Law Reform (in this issue). Cf. supra note 13. Cf. supra note 14. Cf as an example: Financial Action Task Force on Money Laundering, Second Mutual Evaluation Report on the United States, FATF VIII, 21 March 1997.
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The lack of clear international guidance on identifying ‘beneficial owners’ is an example of this period of stagnation. New developments were set in motion by various international initiatives. In 1997 the OECD Working Group on Bribery wrote its Convention on Combating Bribery in International Business Transactions.41 As part of the concluding act, the Council of the OECD decided to go beyond this convention and discuss the abuse of financial resorts (especially OFCs) for the purpose of facilitating bribery and bribemoney laundering.42 Work on this topic very soon focused, at least in part, on customer due diligence. Concurrently, and not unrelated to the process, 13 major international banks and the NGO ‘Transparency International’ decided to develop a private code of conduct, the ‘Wolfsberg Principles’.43 Probably their most significant effect was to provoke regulators, who had already started work on new rules on CDD within the BCBS, into adopting a more rigorous approach. As was to be expected, the CDD paper of the BCBS would in turn influence the FATF recommendations which have also been under revision since 2000 and are due to be published in October 2002.
6.
The impact of 11 September 2001
The foregoing is a description of the state of affairs prevailing when the events of 11 September occurred and completely changed perceptions of terrorism worldwide. During the period immediately following the attacks, governments and international organizations working on this subject grappled mainly with the differences between money laundering and the financing of crime.44 It was maintained correctly that much of the money used to finance terrorist operations could have legal sources, and that therefore different concepts should be applied. The FATF tried to short-circuit this by a daring, if intellectually untenable, assertion: by calling the financing of terrorism ‘money laundering’, the tedious discussions and new concepts seemed to become unnecessary. Armand Kersten rightly criticizes this approach in this volume.45 Nevertheless, concepts need to be in place to criminalize the intentional acceptance and the management of such funds which are to be subject to forfeiture and must also be included in the anti-money laundering notification schemes.46 It
41 42 43 44 45
46
OECD: Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, 21 November 1997. Cf. Pieth, ‘Korruptionsgeldwäsche’, in FS Niklaus Schmid (Zürich 2001) at p. 437. Cf. < www.wolfsberg-principles.com > . Cf. supra note 3, FATF Special Recommendations on Terrorist Financing. A. Kersten, ‘Financing Terrorism – a Predicate Offence to Money Laundering?’ in (2002) 4 European Journal of Law Reform (in this issue). Cf. supra note 8.
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will almost certainly be more difficult for banks to identify such funds compared to those of other high risk clients because the red flags pointing to the criminal origin will have to be re-assigned. In this context, financial institutions are even more dependant on official lists of names than they would be, for instance, in the case of drug-traffickers. 47 One might therefore say that the awareness concepts used to detect the monies of terrorists have far more in common with the formal approach used in embargo cases than with the usual increase in diligence with respect to unusual circumstances or critical client segments. With the passage of time since the attacks, however, what emerges is that at a technical level risk management in connection with the financing of terrorism is not all that different from managing other, more traditional, risks. The principal lesson we can draw from 11 September is that it would be a good idea to finally implement the basic concepts against money laundering. The section of the US PATRIOT Act 48 referring to new rules for financial institutions to a large extent covers traditional ground, and issues which could not be implemented previously on account of political opposition under the former US administration49 have now passed into law.
7.
Where are we going?
The events of 11 September have certainly shocked legislators into action. Some of the laws against terrorism enacted quickly all over the world, have little more than symbolic value, much of what has been addressed in the financial field was already in the pipeline well before the attacks. Legislation on KYC that was formerly considered impossible is suddenly acceptable.50 Furthermore, it is now possible to speed up legislation and regulation in previously targeted areas like correspondent banking.51 This could also be the moment to re-evaluate more thoroughly the question which of the recommendations of the FATF remains too unspecific. To some extent the Wolfsberg principles or, even more apposite in connection with this issue, the BCBS’s CDD-Recommendations address the question of thorough identification of ‘beneficial owners’, including beneficiaries of trusts and corporate
47 48 49
50 51
Cf. supra note 2. Cf. supra note 1, US PATRIOT Act, Sec. 301 ss. Cf. the difficulties of the previous administration in passing more stringent anti-moneylaundering rules under the Chairmanship of Senator Levin; the last minute agreement of the New York Clearing House Association under the Chairmanship of Undersecretary Eizenstat and the initial reluctance of the new administration (Spokesperson: Secretary of the Treasury Paul Henry O’Neill) on introducing tougher anti-money-laundering legislation. Cf. supra notes 48 and 49. Cf. already the New York Clearing House Association Guidelines and the Patriot Act.
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vehicles, on the basis of ‘satisfactory evidence’.52 This direction is a welcome addition to the up-to-now, rather superficial obligation of clients simply to name the beneficiaries. The identification of beneficiaries is probably one of the key topics in the current development of anti-money laundering systems. In parallel to the blacklisting of ‘NCCTs’, it would be worthwhile to do a better job in the world of regulated banking (roughly comprising the OECD Member States) to prevent the uncontrolled influx of assets from under-regulated centres outside the area (the ‘cordon sanitaire’-model). Up to now, the main focus of this text has been the technical development of money laundering principles. It is time to place the discourse in a wider context. It has already been stated that money laundering is increasingly turning into an ‘icon’ of financial crime in general and that it is closely linked to all forms of organizational crime (including organized, state and corporate crime), be it Mafia-type activities on illegal markets, the plundering of natural resources, environmental crime, corruption, terrorism or even genocide. Organizational crime is typically transnational and usually maintains its activities over an extended period of time. In order to keep going, it is dependant on a business-orientated, financial and administrative management structure. Of all forms of organizational crime, terrorism is probably one of the least cost intensive. Nevertheless, the use of financial institutions is crucial to these types of crime. Jonathan Winer in his paper rightly points out that ‘contrary to the position of many banks and bankers, moving money from country to country, disguising its origins and enabling its use for criminal purposes is not a morally neutral activity’. 53 Financial institutions all over the world have been used to prolong and deepen the plight of the victims of these practices, especially that of the population of developing countries in the South. There have been countless financial scandals in connection with potentates who have plundered their countries’ coffers, who have received exorbitant bribes which will have to be repaid by the already impoverished citizens of their states. Money laundering, however, is being conceptualized more and more as a means of repatriating stolen goods. Conceptual terminology gives the fight against money laundering a distinct emancipatory ring, thus creating strong ethical grounds for pressurizing financial centres and institutions to follow strict customer due diligence guidelines. Whilst breaking the power of undemocratic leaders and their accomplices in the financial world may help to quell the anger of dispossessed populations from which terrorists are frequently recruited, an all-out war against the financing of terrorism could backfire, even if it appears to be the logical consequence of what has been said so far. If money laundering is increasingly used as an ‘empty concept’ that is arbitrarily adapted, and possibly were to go as far as attempting to gain control over
52
53
Basel Committee on Banking Supervision, Customer Due Diligence for Banks, October 200l, § 32 ss. (p. 8). Cf. supra, note 35 at p. xx.
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money flows worldwide – as if this were even feasible – then the idea of using it to track down any political opponent would make the concept at risk of being regarded as an oppressive tool. It is unfortunate that there is almost no intellectual debate currently as to what constitutes ‘terrorism’. This makes it even easier for politicians to fill the gap – for example by the EU Council in its Common Positionf54 adopted at the end of 2001. This document defines a ‘terrorist act’ in terms of the sort of crimes one would expect, but then goes on to include intentional acts; ‘causing extensive destruction to an information system, [or] a fixed platform located on the continental shelf … resulting in major economic loss’. If terrorism is to encompass hackers and organizations that protest in the North Sea then – to put it somewhat bluntly – the efforts to fight money laundering become part of the problem as well. They are at risk of being perceived as instruments of repression and terror and not only nurture the anger of those who are already disaffected with society but also alienate the average citizen as well. There is still time however, to re-define the goals of antimoney laundering initiatives and give their instrumentation the necessary contours.
54
Council Common Position 2001/931/CFSP on the application of specific measures to combat terrorism OJ 2001 L 344/93.#
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FATF Cracks Down on Terrorist Financing
At an extraordinary Plenary1 on the Financing of Terrorism held in Washington, D.C. on 29 and 30 October 2001, the Financial Action Task Force (FATF) expanded its mission beyond money laundering. It will now also focus its energy and expertise on the worldwide effort to combat terrorist financing. ‘Today the FATF has issued new international standards to combat terrorist financing, which we call on all countries in the world to adopt and implement,’ and FATF President Clarie Lo. ‘Implementation of these Special Recommendations will deny terrorists and their supporters access to the international financial system.’ During the extraordinary Plenary, the FATF agreed to a set of Special Recommendations on Terrorist Financing2 which commit members to: Take immediate steps to ratify and implement the relevant United Nations instruments. Criminalize the financing of terrorism, terrorist acts and terrorist organisations. Freeze and confiscate terrorist assets. Report suspicious transactions linked to terrorism. Provide the widest possible range of assistance to other countries’ law enforcement and regulatory authorities for terrorist financing investigations. Impose anti-money laundering requirements on alternative remittance systems. Strengthen customer identification measures in international and domestic wire transfers. Ensure that entities, in particular non-profit organisations, cannot be misused to finance terrorism. 1
2
Attended by representatives of the 31 FATF members and 18 FATF-style regional bodies and observer organizations. Regional bodies and observer organizations included the Asia/ Pacific Group on Money Laundering, the Caribbean Financial Action Task Force, the Easterna dn Southern Africa Anti-Money Laundering Group, the Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures of the Council of Europe, the Asian Development Bank, the Commonwealth Secretariat, the European Central Bank, Europol, the Inter-American Development Bank, the International Monetrary Fund, the International Organisation of Securities Commissions, Interpol, the Offshore Group of Banking Supervisors, OAS/CICAD, the United Nations Office on Drug Control and Crime Prevention, the World Bank, and the World Customs Organisation. See the text of the Special Recommendations in Annex.
M. Pieth (Ed.), Financing Terrorism, 129–130. © 2002, Financial Action Task Force on Money Laundering. Printed in the Netherlands.
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In order to secure the swift and effective implementation of these new standards, FATF agreed to the following comprehensive Plan of Action: By 31 December 2001, self-assessment by all FATF members against the Special Recommendations. This will include a commitment to come into compliance with the Special Recommendations by June 2002 and action plans addressing the implementation of Recommendations not already in place. All countries around the world will be invited to participate on the same terms as FATF members. By February 2002, the development of additional guidance for financial institutions on the techniques and mechanisms used in the financing of terrorism. In June 2002, the initiation of a process to identify jurisdictions that lack appropriate measures to combat terrorist financing and discussion of next steps. including the possibility of counter-measures, for jurisdictions that do not counter terrorist financing. Regular publication by its members of the amount of suspected terrorist assets frozen, in accordance with the appropriate United Nations Security Council Resolutions. The provision by FATF members of technical assistance to non-members, as necessary, to assist them in complying with the Special Recommendations. In taking forward its Plan of Action against terrorist financing, the FATF will intensify its co-operation with the FATF–style regional bodies and international organizations and bodies such as the United Nations, the Egmont Group of Financial Intelligence Units, the G-20, and International Financial Institutions, that support and contribute to the international effort against money laundering and terrorist financing. FATF also agreed to take into account the Special Recommendations as it revises the FATF 40 Recommendations on Money Laundering and to intensify its work with respect to corporate vehicles, correspondent banking, identification of beneficial owners of accounts, and regulation of non-bank financial institutions. The FATF is an independent international body whose Secretariat is housed at the OECD. The twenty-nine member countries and governments of the FATF are: Argentina; Australia; Austria; Belgium; Brazil; Canada; Denmark; Finland; France; Germany; Greece; Hong Kong; China; Iceland; Ireland; Italy; Japan; Luxembourg; Mexico; the Kingdom of the Netherlands; New Zealand; Norway; Portugal; Singapore; Spain; Sweden; Switzerland; Turkey; the United Kingdom; and the United States. Two international organizations are also members of the FATF: the European Commission and the Gulf Co-operation Council. For further information, please contact Helen Fisher, OECD Media Relations Division (Tel: 33 1 45 24 80 94 or [email protected]) or the FATF Secretariat (Tel: 33 1 45 24 79 45 or [email protected])
FATF Special Recommendations on Terrorist Financing
Recognizing the vital importance of taking action to combat the financing of terrorism, the FATF has agreed these Recommendations, which, when combined with the FATF Forty Recommendations on money laundering, set out the basic framework to detect, prevent and suppress the financing of terrorism and terrorist acts. For further information on the Special Recommendations as related to the selfassessment process, see the Guidance Notes.
A. Ratification and Implementation of UN Instruments Each country should take immediate steps to ratify and to implement fully the 1999 United Nations International Convention for the Suppression of the Financing of Terrorism. Countries should also immediately implement the United Nations resolutions relating to the prevention and suppression of the financing of terrorist acts, particularly United Nations Security Council Resolution 1373.
B. Criminalizing the Financing of Terrorism and Associated Money Laundering Each country should criminalize the financing of terrorism, terrorist acts and terrorist organizations. Countries should ensure that such offences are designated as money laundering predicate offences.
M. Pieth (Ed.), Financing Terrorism, 131–145. © 2002, Financial Action Task Force on Money Laundering. Printed in the Netherlands.
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C. Freezing and Confiscating Terrorist Assets Each country should implement measures to freeze without delay funds or other assets of terrorists, those who finance terrorism and terrorist organizations in accordance with the United Nations resolutions relating to the prevention and suppression of the financing of terrorist acts. Each country should also adopt and implement measures, including legislative ones, which would enable the competent authorities to seize and confiscate property that is the proceeds of, or used in, or intended or allocated for use in, the financing of terrorism, terrorist acts or terrorist organizations.
D. Reporting Suspicious Transactions Related to Terrorism If financial institutions, or other businesses or entities subject to anti-money laundering obligations, suspect or have reasonable grounds to suspect that funds are linked or related to, or are to be used for terrorism, terrorist acts or by terrorist organizations, they should be required to report promptly their suspicions to the competent authorities.
E. International Co-operation Each country should afford another country, on the basis of a treaty, arrangement or other mechanism for mutual legal assistance or information exchange, the greatest possible measure of assistance in connection with criminal, civil enforcement, and administrative investigations, inquiries and proceedings relating to the financing of terrorism, terrorist acts and terrorist organizations. Countries should also take all possible measures to ensure that they do not provide safe havens for individuals charged with the financing of terrorism, terrorist acts or terrorist organizations, and should have procedures in place to extradite, where possible, such individuals.
F. Alternative Remittance Each country should take measures to ensure that persons or legal entities, including agents, that provide a service for the transmission of money or value, including
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transmission through an informal money or value transfer system or network, should be licensed or registered and subject to all the FATF Recommendations that apply to banks and non-bank financial institutions. Each country should ensure that persons or legal entities that carry out this service illegally are subject to administrative, civil or criminal sanctions.
G. Wire Transfers Countries should take measures to require financial institutions, including money remitters, to include accurate and meaningful originator information (name, address and account number) on funds transfers and related messages that are sent, and the information should remain with the transfer or related message through the payment chain. Countries should take measures to ensure that financial institutions, including money remitters, conduct enhanced scrutiny of and monitor for suspicious activity funds transfers which do not contain complete originator information (name, address and account number).
H. Non-profit Organizations Countries should review the adequacy of laws and regulations that relate to entities that can be abused for the financing of terrorism. Non-profit organizations are particularly vulnerable, and countries should ensure that they cannot be misused:
a. b. c.
by terrorist organizations posing as legitimate entities; to exploit legitimate entities as conduits for terrorist financing, including for the purpose of escaping asset freezing measures; and to conceal or obscure the clandestine diversion of funds intended for legitimate purposes to terrorist organizations.
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Annex 1 (on the report of the Sixth Committee (A/54/615)) 54/109.
Convention for the Suppression of the Financing of Terrorism The General Assembly, Recalling all its relevant resolutions, including resolution 46/51 of 9 December 1991, resolution 49/60 of 9 December 1994, by which it adopted the Declaration on Measures to Eliminate International Terrorism, and resolutions 51/210 of 17 December 1996 and 53/108 of 8 December 1998, Having considered the text of the draft international convention for the suppression of the financing of terrorism prepared by the Ad Hoc Committee established by General Assembly resolution 51/210 of 17 December 1996 and the Working Group of the Sixth Committee,* 1. Adopts the International Convention for the Suppression of the Financing of Terrorism annexed to the present resolution, and requests the Secretary-General to open it for signature at United Nations Headquarters in New York from 10 January 2000 to 31 December 2001; 2. Urges all States to sign and ratify, accept, approve or accede to the Convention. 76th plenary meeting 9 December 1999
Annex International Convention for the Suppression of the Financing of Terrorism Preamble The States Parties to this Convention, Bearing in mind the purposes and principles of the Charter of the United Nations concerning the maintenance of international peace and security and the promotion of goodneighbourliness and friendly relations and cooperation among States, Deeply concerned about the worldwide escalation of acts of terrorism in all its forms and manifestations, Recalling the Declaration on the Occasion of the Fiftieth Anniversary of the United Nations, contained in General Assembly resolution 50/6 of 24 October 1995, Recalling also all the relevant General Assembly resolutions on the matter, including resolution 49/60 of 9 December 1994 and the annex thereto on the Declaration on Measures to Eliminate International Terrorism, in which the States Members of the United Nations solemnly reaffirmed their unequivocal condemnation of all acts, methods and practices of terrorism as criminal and unjustifiable, wherever and by whomever committed, including those which jeopardize the friendly relations among States and peoples and threaten the territorial integrity and security of States,
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Noting that the Declaration on Measures to Eliminate International Terrorism also encouraged States to review urgently the scope of the existing international legal provisions on the prevention, repression and elimination of terrorism in all its forms and manifestations, with the aim of ensuring that there is a comprehensive legal framework covering all aspects of the matter, Recalling paragraph 3 (f) of General Assembly resolution 51/210 of 17 December 1996, in which the Assembly called upon all States to take steps to prevent and counteract, through appropriate domestic measures, the financing of terrorists and terrorist organizations, whether such financing is direct or indirect through organizations which also have or claim to have charitable, social or cultural goals or which are also engaged in unlawful activities such as illicit arms trafficking, drug dealing and racketeering, including the exploitation of persons for purposes of funding terrorist activities, and in particular to consider, where appropriate, adopting regulatory measures to prevent and counteract movements of funds suspected to be intended for terrorist purposes without impeding in any way the freedom of legitimate capital movements and to intensify the exchange of information concerning international movements of such funds, Recalling also General Assembly resolution 52/165 of 15 December 1997, in which the Assembly called upon States to consider, in particular, the implementation of the measures set out in paragraphs 3 (a) to (f) of its resolution 51/210, Recalling further General Assembly resolution 53/108 of 8 December 1998, in which the Assembly decided that the Ad Hoc Committee established by General Assembly resolution 51/ 210 of 17 December 1996 should elaborate a draft international convention for the suppression of terrorist financing to supplement related existing international instruments, Considering that the financing of terrorism is a matter of grave concern to the international community as a whole, Noting that the number and seriousness of acts of international terrorism depend on the financing that terrorists may obtain, Noting also that existing multilateral legal instruments do not expressly address such financing, Being convinced of the urgent need to enhance international cooperation among States in devising and adopting effective measures for the prevention of the financing of terrorism, as well as for its suppression through the prosecution and punishment of its perpetrators, Have agreed as follows:
Article 1 For the purposes of this Convention: 1. ‘Funds’ means assets of every kind, whether tangible or intangible, movable or immovable, however acquired, and legal documents or instruments in any form, including electronic or digital, evidencing title to, or interest in, such assets, including, but not limited to, bank credits, travellers cheques, bank cheques, money orders, shares, securities, bonds, drafts and letters of credit. 2. ‘State or government facility’ means any permanent or temporary facility or conveyance that is used or occupied by representatives of a State, members of Government, the legislature
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or the judiciary or by officials or employees of a State or any other public authority or entity or by employees or officials of an intergovernmental organization in connection with their official duties. 3. ‘Proceeds’ means any funds derived from or obtained, directly or indirectly, through the commission of an offence set forth in article 2.
Article 2 1. Any person commits an offence within the meaning of this Convention if that person by any means, directly or indirectly, unlawfully and wilfully, provides or collects funds with the intention that they should be used or in the knowledge that they are to be used, in full or in part, in order to carry out: (a) An act which constitutes an offence within the scope of and as defined in one of the treaties listed in the annex; or (b) Any other act intended to cause death or serious bodily injury to a civilian, or to any other person not taking an active part in the hostilities in a situation of armed conflict, when the purpose of such act, by its nature or context, is to intimidate a population, or to compel a Government or an international organization to do or to abstain from doing any act. 2.(a) On depositing its instrument of ratification, acceptance, approval or accession, a State Party which is not a party to a treaty listed in the annex may declare that, in the application of this Convention to the State Party, the treaty shall be deemed not to be included in the annex referred to in paragraph 1, subparagraph (a). The declaration shall cease to have effect as soon as the treaty enters into force for the State Party, which shall notify the depositary of this fact; (b) When a State Party ceases to be a party to a treaty listed in the annex, it may make a declaration as provided for in this article, with respect to that treaty. 3. For an act to constitute an offence set forth in paragraph 1, it shall not be necessary that the funds were actually used to carry out an offence referred to in paragraph 1, subparagraph (a) or (b). 4. Any person also commits an offence if that person attempts to commit an offence as set forth in paragraph 1 of this article. 5. Any person also commits an offence if that person: (a) Participates as an accomplice in an offence as set forth in paragraph 1 or 4 of this article; (b) Organizes or directs others to commit an offence as set forth in paragraph 1 or 4 of this article; (c) Contributes to the commission of one or more offences as set forth in paragraph 1 or 4 of this article by a group of persons acting with a common purpose. Such contribution shall be intentional and shall either: (i) Be made with the aim of furthering the criminal activity or criminal purpose of the group, where such activity or purpose involves the commission of an offence as set forth in paragraph 1 of this article; or (ii) Be made in the knowledge of the intention of the group to commit an offence as set forth in paragraph 1 of this article.
Article 3 This Convention shall not apply where the offence is committed within a single State, the alleged offender is a national of that State and is present in the territory of that State and no
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other State has a basis under article 7, paragraph 1 or 2, to exercise jurisdiction, except that the provisions of articles 12 to 18 shall, as appropriate, apply in those cases.
Article 4 Each State Party shall adopt such measures as may be necessary: (a) To establish as criminal offences under its domestic law the offences as set forth in article 2; (b) To make those offences punishable by appropriate penalties which take into account the grave nature of the offences.
Article 5 1. Each State Party, in accordance with its domestic legal principles, shall take the necessary measures to enable a legal entity located in its territory or organized under its laws to be held liable when a person responsible for the management or control of that legal entity has, in that capacity, committed an offence as set forth in article 2. Such liability may be criminal, civil or administrative. 2. Such liability is incurred without prejudice to the criminal liability of individuals who have committed the offences. 3. Each State Party shall ensure, in particular, that legal entities liable in accordance with paragraph 1 above are subject to effective, proportionate and dissuasive criminal, civil or administrative sanctions. Such sanctions may include monetary sanctions.
Article 6 Each State Party shall adopt such measures as may be necessary, including, where appropriate, domestic legislation, to ensure that criminal acts within the scope of this Convention are under no circumstances justifiable by considerations of a political, philosophical, ideological, racial, ethnic, religious or other similar nature.
Article 7 1. Each State Party shall take such measures as may be necessary to establish its jurisdiction over the offences set forth in article 2 when: (a) The offence is committed in the territory of that State; (b) The offence is committed on board a vessel flying the flag of that State or an aircraft registered under the laws of that State at the time the offence is committed; (c) The offence is committed by a national of that State. 2. A State Party may also establish its jurisdiction over any such offence when: (a) The offence was directed towards or resulted in the carrying out of an offence referred to in article 2, paragraph 1, subparagraph (a) or (b), in the territory of or against a national of that State; (b) The offence was directed towards or resulted in the carrying out of an offence referred to in article 2, paragraph 1, subparagraph (a) or (b), against a State or government facility of that State abroad, including diplomatic or consular premises of that State; (c) The offence was directed towards or resulted in an offence referred to in article 2, paragraph 1, subparagraph (a) or (b), committed in an attempt to compel that State to do or abstain from doing any act;
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(d) The offence is committed by a stateless person who has his or her habitual residence in the territory of that State; (e) The offence is committed on board an aircraft which is operated by the Government of that State. 3. Upon ratifying, accepting, approving or acceding to this Convention, each State Party shall notify the Secretary-General of the United Nations of the jurisdiction it has established in accordance with paragraph 2. Should any change take place, the State Party concerned shall immediately notify the Secretary-General. 4. Each State Party shall likewise take such measures as may be necessary to establish its jurisdiction over the offences set forth in article 2 in cases where the alleged offender is present in its territory and it does not extradite that person to any of the States Parties that have established their jurisdiction in accordance with paragraphs 1 or 2. 5. When more than one State Party claims jurisdiction over the offences set forth in article 2, the relevant States Parties shall strive to coordinate their actions appropriately, in particular concerning the conditions for prosecution and the modalities for mutual legal assistance. 6. Without prejudice to the norms of general international law, this Convention does not exclude the exercise of any criminal jurisdiction established by a State Party in accordance with its domestic law.
Article 8 1. Each State Party shall take appropriate measures, in accordance with its domestic legal principles, for the identification, detection and freezing or seizure of any funds used or allocated for the purpose of committing the offences set forth in article 2 as well as the proceeds derived from such offences, for purposes of possible forfeiture. 2. Each State Party shall take appropriate measures, in accordance with its domestic legal principles, for the forfeiture of funds used or allocated for the purpose of committing the offences set forth in article 2 and the proceeds derived from such offences. 3. Each State Party concerned may give consideration to concluding agreements on the sharing with other States Parties, on a regular or case-by-case basis, of the funds derived from the forfeitures referred to in this article. 4. Each State Party shall consider establishing mechanisms whereby the funds derived from the forfeitures referred to in this article are utilized to compensate the victims of offences referred to in article 2, paragraph 1, subparagraph (a) or (b), or their families. 5. The provisions of this article shall be implemented without prejudice to the rights of third parties acting in good faith.
Article 9 1. Upon receiving information that a person who has committed or who is alleged to have committed an offence set forth in article 2 may be present in its territory, the State Party concerned shall take such measures as may be necessary under its domestic law to investigate the facts contained in the information. 2. Upon being satisfied that the circumstances so warrant, the State Party in whose territory the offender or alleged offender is present shall take the appropriate measures under its domestic law so as to ensure that person’s presence for the purpose of prosecution or extradition. 3. Any person regarding whom the measures referred to in paragraph 2 are being taken shall be entitled:
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(a) To communicate without delay with the nearest appropriate representative of the State of which that person is a national or which is otherwise entitled to protect that person’s rights or, if that person is a stateless person, the State in the territory of which that person habitually resides; (b) To be visited by a representative of that State; (c) To be informed of that person’s rights under subparagraphs (a) and (b). 4. The rights referred to in paragraph 3 shall be exercised in conformity with the laws and regulations of the State in the territory of which the offender or alleged offender is present, subject to the provision that the said laws and regulations must enable full effect to be given to the purposes for which the rights accorded under paragraph 3 are intended. 5. The provisions of paragraphs 3 and 4 shall be without prejudice to the right of any State Party having a claim to jurisdiction in accordance with article 7, paragraph 1, subparagraph (b), or paragraph 2, subparagraph (b), to invite the International Committee of the Red Cross to communicate with and visit the alleged offender. 6. When a State Party, pursuant to the present article, has taken a person into custody, it shall immediately notify, directly or through the Secretary-General of the United Nations, the States Parties which have established jurisdiction in accordance with article 7, paragraph 1 or 2, and, if it considers it advisable, any other interested States Parties, of the fact that such person is in custody and of the circumstances which warrant that person’s detention. The State which makes the investigation contemplated in paragraph 1 shall promptly inform the said States Parties of its findings and shall indicate whether it intends to exercise jurisdiction.
Article 10 1. The State Party in the territory of which the alleged offender is present shall, in cases to which article 7 applies, if it does not extradite that person, be obliged, without exception whatsoever and whether or not the offence was committed in its territory, to submit the case without undue delay to its competent authorities for the purpose of prosecution, through proceedings in accordance with the laws of that State. Those authorities shall take their decision in the same manner as in the case of any other offence of a grave nature under the law of that State. 2. Whenever a State Party is permitted under its domestic law to extradite or otherwise surrender one of its nationals only upon the condition that the person will be returned to that State to serve the sentence imposed as a result of the trial or proceeding for which the extradition or surrender of the person was sought, and this State and the State seeking the extradition of the person agree with this option and other terms they may deem appropriate, such a conditional extradition or surrender shall be sufficient to discharge the obligation set forth in paragraph 1.
Article 11 1. The offences set forth in article 2 shall be deemed to be included as extraditable offences in any extradition treaty existing between any of the States Parties before the entry into force of this Convention. States Parties undertake to include such offences as extraditable offences in every extradition treaty to be subsequently concluded between them. 2. When a State Party which makes extradition conditional on the existence of a treaty receives a request for extradition from another State Party with which it has no extradition treaty, the requested State Party may, at its option, consider this Convention as a legal basis for
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extradition in respect of the offences set forth in article 2. Extradition shall be subject to the other conditions provided by the law of the requested State. 3. States Parties which do not make extradition conditional on the existence of a treaty shall recognize the offences set forth in article 2 as extraditable offences between themselves, subject to the conditions provided by the law of the requested State. 4. If necessary, the offences set forth in article 2 shall be treated, for the purposes of extradition between States Parties, as if they had been committed not only in the place in which they occurred but also in the territory of the States that have established jurisdiction in accordance with article 7, paragraphs 1 and 2. 5. The provisions of all extradition treaties and arrangements between States Parties with regard to offences set forth in article 2 shall be deemed to be modified as between States Parties to the extent that they are incompatible with this Convention.
Article 12 1. States Parties shall afford one another the greatest measure of assistance in connection with criminal investigations or criminal or extradition proceedings in respect of the offences set forth in article 2, including assistance in obtaining evidence in their possession necessary for the proceedings. 2. States Parties may not refuse a request for mutual legal assistance on the ground of bank secrecy. 3. The requesting Party shall not transmit or use information or evidence furnished by the requested Party for investigations, prosecutions or proceedings other than those stated in the request without the prior consent of the requested Party. 4. Each State Party may give consideration to establishing mechanisms to share with other States Parties information or evidence needed to establish criminal, civil or administrative liability pursuant to article 5. 5. States Parties shall carry out their obligations under paragraphs 1 and 2 in conformity with any treaties or other arrangements on mutual legal assistance or information exchange that may exist between them. In the absence of such treaties or arrangements, States Parties shall afford one another assistance in accordance with their domestic law.
Article 13 None of the offences set forth in article 2 shall be regarded, for the purposes of extradition or mutual legal assistance, as a fiscal offence. Accordingly, States Parties may not refuse a request for extradition or for mutual legal assistance on the sole ground that it concerns a fiscal offence.
Article 14 None of the offences set forth in article 2 shall be regarded for the purposes of extradition or mutual legal assistance as a political offence or as an offence connected with a political offence or as an offence inspired by political motives. Accordingly, a request for extradition or for mutual legal assistance based on such an offence may not be refused on the sole ground that it concerns a political offence or an offence connected with a political offence or an offence inspired by political motives.
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Article 15 Nothing in this Convention shall be interpreted as imposing an obligation to extradite or to afford mutual legal assistance, if the requested State Party has substantial grounds for believing that the request for extradition for offences set forth in article 2 or for mutual legal assistance with respect to such offences has been made for the purpose of prosecuting or punishing a person on account of that person’s race, religion, nationality, ethnic origin or political opinion or that compliance with the request would cause prejudice to that person’s position for any of these reasons.
Article 16 1. A person who is being detained or is serving a sentence in the territory of one State Party whose presence in another State Party is requested for purposes of identification, testimony or otherwise providing assistance in obtaining evidence for the investigation or prosecution of offences set forth in article 2 may be transferred if the following conditions are met: (a) The person freely gives his or her informed consent; (b) The competent authorities of both States agree, subject to such conditions as those States may deem appropriate. 2. For the purposes of the present article: (a) The State to which the person is transferred shall have the authority and obligation to keep the person transferred in custody, unless otherwise requested or authorized by the State from which the person was transferred; (b) The State to which the person is transferred shall without delay implement its obligation to return the person to the custody of the State from which the person was transferred as agreed beforehand, or as otherwise agreed, by the competent authorities of both States; (c) The State to which the person is transferred shall not require the State from which the person was transferred to initiate extradition proceedings for the return of the person; (d) The person transferred shall receive credit for service of the sentence being served in the State from which he or she was transferred for time spent in the custody of the State to which he or she was transferred. 3. Unless the State Party from which a person is to be transferred in accordance with the present article so agrees, that person, whatever his or her nationality, shall not be prosecuted or detained or subjected to any other restriction of his or her personal liberty in the territory of the State to which that person is transferred in respect of acts or convictions anterior to his or her departure from the territory of the State from which such person was transferred.
Article 17 Any person who is taken into custody or regarding whom any other measures are taken or proceedings are carried out pursuant to this Convention shall be guaranteed fair treatment, including enjoyment of all rights and guarantees in conformity with the law of the State in the territory of which that person is present and applicable provisions of international law, including international human rights law.
Article 18 1. States Parties shall cooperate in the prevention of the offences set forth in article 2 by taking all practicable measures, inter alia, by adapting their domestic legislation, if necessary, to
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prevent and counter preparations in their respective territories for the commission of those offences within or outside their territories, including: (a) Measures to prohibit in their territories illegal activities of persons and organizations that knowingly encourage, instigate, organize or engage in the commission of offences set forth in article 2; (b) Measures requiring financial institutions and other professions involved in financial transactions to utilize the most efficient measures available for the identification of their usual or occasional customers, as well as customers in whose interest accounts are opened, and to pay special attention to unusual or suspicious transactions and report transactions suspected of stemming from a criminal activity. For this purpose, States Parties shall consider: (i) Adopting regulations prohibiting the opening of accounts, the holders or beneficiaries of which are unidentified or unidentifiable, and measures to ensure that such institutions verify the identity of the real owners of such transactions; (ii) With respect to the identification of legal entities, requiring financial institutions, when necessary, to take measures to verify the legal existence and the structure of the customer by obtaining, either from a public register or from the customer or both, proof of incorporation, including information concerning the customer’s name, legal form, address, directors and provisions regulating the power to bind the entity; (iii) Adopting regulations imposing on financial institutions the obligation to report promptly to the competent authorities all complex, unusual large transactions and unusual patterns of transactions, which have no apparent economic or obviously lawful purpose, without fear of assuming criminal or civil liability for breach of any restriction on disclosure of information if they report their suspicions in good faith; (iv) Requiring financial institutions to maintain, for at least five years, all necessary records on transactions, both domestic and international. 2. States Parties shall further cooperate in the prevention of offences set forth in article 2 by considering: (a) Measures for the supervision, including, for example, the licensing, of all moneytransmission agencies; (b) Feasible measures to detect or monitor the physical cross-border transportation of cash and bearer negotiable instruments, subject to strict safeguards to ensure proper use of information and without impeding in any way the freedom of capital movements. 3. States Parties shall further cooperate in the prevention of the offences set forth in article 2 by exchanging accurate and verified information in accordance with their domestic law and coordinating administrative and other measures taken, as appropriate, to prevent the commission of offences set forth in article 2, in particular by: (a) Establishing and maintaining channels of communication between their competent agencies and services to facilitate the secure and rapid exchange of information concerning all aspects of offences set forth in article 2; (b) Cooperating with one another in conducting inquiries, with respect to the offences set forth in article 2, concerning: (i) The identity, whereabouts and activities of persons in respect of whom reasonable suspicion exists that they are involved in such offences; (ii) The movement of funds relating to the commission of such offences. 4. States Parties may exchange information through the International Criminal Police Organization (Interpol).
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Article 19 The State Party where the alleged offender is prosecuted shall, in accordance with its domestic law or applicable procedures, communicate the final outcome of the proceedings to the Secretary-General of the United Nations, who shall transmit the information to the other States Parties.
Article 20 The States Parties shall carry out their obligations under this Convention in a manner consistent with the principles of sovereign equality and territorial integrity of States and that of non-intervention in the domestic affairs of other States.
Article 21 Nothing in this Convention shall affect other rights, obligations and responsibilities of States and individuals under international law, in particular the purposes of the Charter of the United Nations, international humanitarian law and other relevant conventions.
Article 22 Nothing in this Convention entitles a State Party to undertake in the territory of another State Party the exercise of jurisdiction or performance of functions which are exclusively reserved for the authorities of that other State Party by its domestic law.
Article 23 1. The annex may be amended by the addition of relevant treaties: (a) That are open to the participation of all States; (b) That have entered into force; (c) That have been ratified, accepted, approved or acceded to by at least twenty-two States Parties to the present Convention. 2. After the entry into force of this Convention, any State Party may propose such an amendment. Any proposal for an amendment shall be communicated to the depositary in written form. The depositary shall notify proposals that meet the requirements of paragraph 1 to all States Parties and seek their views on whether the proposed amendment should be adopted. 3. The proposed amendment shall be deemed adopted unless one third of the States Parties object to it by a written notification not later than 180 days after its circulation. 4. The adopted amendment to the annex shall enter into force 30 days after the deposit of the twenty-second instrument of ratification, acceptance or approval of such amendment for all those States Parties that have deposited such an instrument. For each State Party ratifying, accepting or approving the amendment after the deposit of the twenty-second instrument, the amendment shall enter into force on the thirtieth day after deposit by such State Party of its instrument of ratification, acceptance or approval.
Article 24 1. Any dispute between two or more States Parties concerning the interpretation or application
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of this Convention which cannot be settled through negotiation within a reasonable time shall, at the request of one of them, be submitted to arbitration. If, within six months from the date of the request for arbitration, the parties are unable to agree on the organization of the arbitration, any one of those parties may refer the dispute to the International Court of Justice, by application, in conformity with the Statute of the Court. 2. Each State may at the time of signature, ratification, acceptance or approval of this Convention or accession thereto declare that it does not consider itself bound by paragraph 1. The other States Parties shall not be bound by paragraph 1 with respect to any State Party which has made such a reservation. 3. Any State which has made a reservation in accordance with paragraph 2 may at any time withdraw that reservation by notification to the Secretary-General of the United Nations.
Article 25 1. This Convention shall be open for signature by all States from 10 January 2000 to 31 December 2001 at United Nations Headquarters in New York. 2. This Convention is subject to ratification, acceptance or approval. The instruments of ratification, acceptance or approval shall be deposited with the Secretary-General of the United Nations. 3. This Convention shall be open to accession by any State. The instruments of accession shall be deposited with the Secretary-General of the United Nations.
Article 26 1. This Convention shall enter into force on the thirtieth day following the date of the deposit of the twenty-second instrument of ratification, acceptance, approval or accession with the Secretary-General of the United Nations. 2. For each State ratifying, accepting, approving or acceding to the Convention after the deposit of the twenty-second instrument of ratification, acceptance, approval or accession, the Convention shall enter into force on the thirtieth day after deposit by such State of its instrument of ratification, acceptance, approval or accession.
Article 27 1. Any State Party may denounce this Convention by written notification to the SecretaryGeneral of the United Nations. 2. Denunciation shall take effect one year following the date on which notification is received by the Secretary-General of the United Nations.
Article 28 The original of this Convention, of which the Arabic, Chinese, English, French, Russian and Spanish texts are equally authentic, shall be deposited with the Secretary-General of the United Nations who shall send certified copies thereof to all States. IN WITNESS WHEREOF, the undersigned, being duly authorized thereto by their respective Governments, have signed this Convention, opened for signature at United Nations Headquarters in New York on 10 January 2000.
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Annex 2 1. 2. 3.
4. 5. 6.
7. 8. 9.
Convention for the Suppression of Unlawful Seizure of Aircraft, done at The Hague on 16 December 1970. Convention for the Suppression of Unlawful Acts against the Safety of Civil Aviation, done at Montreal on 23 September 1971. Convention on the Prevention and Punishment of Crimes against Internationally Protected Persons, including Diplomatic Agents, adopted by the General Assembly of the United Nations on 14 December 1973. International Convention against the Taking of Hostages, adopted by the General Assembly of the United Nations on 17 December 1979. Convention on the Physical Protection of Nuclear Material, adopted at Vienna on 3 March 1980. Protocol for the Suppression of Unlawful Acts of Violence at Airports Serving International Civil Aviation, supplementary to the Convention for the Suppression of Unlawful Acts against the Safety of Civil Aviation, done at Montreal on 24 February 1988. Convention for the Suppression of Unlawful Acts against the Safety of Maritime Navigation, done at Rome on 10 March 1988. Protocol for the Suppression of Unlawful Acts against the Safety of Fixed Platforms located on the Continental Shelf, done at Rome on 10 March 1988. International Convention for the Suppression of Terrorist Bombings, adopted by the General Assembly of the United Nations on 15 December 1997.
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Financial Action Task Force Guidance for Financial Institutions in Detecting Terrorism*
A. Introduction At its extraordinary Plenary meeting on 29–30 October 2001, the Financial Action Task Force on Money Laundering (FATF) agreed to develop special guidance for financial institutions to help them detect the techniques and mechanisms used in the financing of terrorism. The FATF subsequently brought together experts from its member countries to gather information on and study the issue of terrorist financing as part of its annual exercise on money laundering methods and trends. One goal of this exercise was to begin establishing such guidance for financial institutions that could be issued along with the annual FATF Report on Money Laundering Methods and Trends. Material derived from the exercise, along with contributions from the Egmont Group and other international bodies, was used in developing the present document. The information contained in it represents a first attempt at providing necessary guidance for financial institutions in this area. The goal in providing this guidance is to ensure that financial institutions do not unwittingly hide or move terrorist funds. Financial institutions will thus be better able to protect themselves from being used as a conduit for such activity. To help build awareness of how terrorists, their associates or those who support terrorism may use the financial system, this document describes the general characteristics of terrorist financing. The accompanying case studies illustrate the manner in which competent law enforcement authorities or financial intelligence units (FIUs) are able to establish a terrorist-financing link based on information reported by financial institutions. Annex 1 contains a series of characteristics of financial transactions that have been linked to terrorist activity in the past. When one or several of these potentially suspicious or unusual factors is present as regards a specific financial transaction – especially when the individual or entity may appear on one of the lists of suspected terrorists, terrorist organizations or associated individuals and entities (see Annex 2: Sources of Information) – then a financial institution would have cause
* 24 April 2002.
M. Pieth (Ed.), Financing Terrorism, 147–159. © 2002, Financial Action Task Force on Money Laundering. Printed in the Netherlands.
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to increase its scrutiny of the transaction and any associated individuals or entities. In certain instances, this scrutiny could result in reporting the transaction to authorities under applicable suspicious or unusual transaction reporting systems.
B. Terrorist Financing and risks to Financial Institutions A financial institution that carries out a transaction, knowing that the funds or property involved are owned or controlled by terrorists or terrorist organizations, or that the transaction is linked to, or likely to be used in, terrorist activity, may be committing a criminal offence under the laws of many jurisdictions. Such an offence may exist regardless of whether the assets involved in the transaction were the proceeds of criminal activity or were derived from lawful activity but intended for use in support of terrorism. Regardless of whether the funds in a transaction are related to terrorists for the purposes of national criminal legislation, business relationships with such individuals or other closely associated persons or entities could, under certain circumstances, expose a financial institution to significant reputational, operational, and legal risk. This risk is even more serious if the person or entity involved is later shown to have benefited from the lack of effective monitoring or wilful blindness of a particular institution and thus was to carry out terrorist acts.
C. Reinforcing Existing Requirements Consideration of the factors contained in this guidance is intended to clarify, complement and/or reinforce existing due diligence requirements, along with current policies and procedures imposed by national anti-money laundering programmes. It should be stressed, however, that this guidance does not constitute an additional rule or regulation. Rather it represents advice from the operational experts of FATF members as to factors associated with financial transactions that should trigger further questions on the part of the financial institution. The FATF encourages all financial institutions to consider these factors along with policies, practices and procedures already in place for ensuring compliance with appropriate laws and regulations and for minimising reputational risks. It should be noted as well that, while the characteristics indicated in this document may apply specifically to terrorist financing, most of them may also apply in identifying suspicious transactions generally. Financial institutions in many jurisdictions may already be aware of these characteristics through existing guidance notes or other sources. In providing this guidance, the FATF intends it to be consistent with applicable criminal and civil laws, as well as relevant regulations, to which financial institutions
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may be subject in their particular jurisdiction. It should be noted however that this guidance does not replace or supersede any obligations under the current national laws or regulations. In particular, implementing the measures proposed by this guidance should not be construed as necessarily protecting a financial institution from any action that a jurisdiction might choose to take against it. Furthermore, this guidance does not supersede or modify requirements imposed by national or regional authorities, which call for the freezing of assets of individuals and entities suspected of being terrorists or terrorist related, as part of implementing relevant United Nations Security Council Resolutions (see Annex 2: Sources of Information).
D. Determining when increased scrutiny is necessary Financial institutions are encouraged to develop practices and procedures that will help to detect and deter those transactions that may involve funds used in terrorist financing. The increased scrutiny that may be warranted for some transactions should be seen as a further application of the institution’s due diligence and antimoney laundering policies and procedures and should lead, when appropriate, to reporting of such financial activity as suspicious or unusual under applicable transaction reporting regimes for a particular jurisdiction. To ensure that the practical steps are taken to increase scrutiny of certain transactions when necessary, it may be useful for a financial institution to review its practices in this area as part of its general internal and external audit processes.
Example 1: Front for individual with suspected terrorist links revealed by suspicious transaction report The FIU in Country D received a suspicious transaction report from a domestic financial institution regarding an account held by an individual residing in a neighbouring country. The individual managed European-based companies and had filed two loan applications on their behalf with the reporting institution. These loan applications amounted to several million US dollars and were ostensibly intended for the purchase of luxury hotels in Country D. The bank did not grant any of the loans. The analysis by the FIU revealed that the funds for the purchase of the hotels were to be channelled through the accounts of the companies represented by the individual. One of the companies making the purchase of these hotels would then have been taken over by an individual from another country. This second person represented a group of companies whose activities focused on hotel and leisure sectors, and he appeared to be the ultimate buyer of the real estate. On the basis of the analysis within the FIU, it appeared that the subject of the suspicious transaction report was acting as a front for the second person. The latter as well as his family are suspected of being linked to terrorism. The manner in which a financial institution may choose to apply this Guidance will
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vary depending on the extent of the risk determined to exist by each institution as a general matter, given its normal business operations. It will also vary according to the individual factors of each case as it occurs. Financial institutions should exercise reasonable judgement in modifying and implementing policies and procedures in this area. This Guidance should not be interpreted as discouraging or prohibiting financial institutions from doing business with any legitimate customer. Indeed, it has been designed solely as a means of assisting financial institutions in determining whether a transaction merits additional scrutiny so that the institution is thus better able to identify, report (when appropriate) and ultimately avoid transactions involving the funds supporting or associated with the financing of terrorism.
Example 2: Individual’s account activity and inclusion on UN list show possible link to terrorist activity An individual resided in a neighbouring country but had a demand deposit account and a savings account in Country N. The bank that maintained the accounts noticed the gradual withdrawal of funds from the accounts from the end of April 2001 onwards and decided to monitor the accounts more closely. The suspicions of the bank were subsequently reinforced when a name very similar to the account holder’s appeared in the consolidated list of persons and/or entities issued by the United Nations Security Council Committee on Afghanistan (UN Security Council Resolution 1333/2000). The bank immediately made a report to the FIU. The FIU analyzed the financial movements relating to the individual’s accounts using records requested from the bank. It appeared that both of the accounts had been opened by the individual in 1990 and had been fed mostly by cash deposits. In March 2000 the individual made a sizeable transfer from his savings account to his checking account. These funds were used to pay for a single premium life insurance policy and to purchase certificates of deposit. From the middle of April 2001 the individual made several large transfers from his savings account to his demand deposit account. These funds were transferred abroad to persons and companies located in neighbouring countries and in other regions. In May and June 2001, the individual sold the certificates of deposit he had purchased, and he then transferred the profits to the accounts of companies based in Asia and to that of a company established in his country of origin. The individual also cashed in his life insurance policy before the maturity date and transferred its value to an account at a bank in his country of origin. The last transaction was carried out on 30 August 2001, that is, shortly before the 11 September attacks in the United States. Finally, the antimoney laundering unit in the individual’s county of origin communicated information related to suspicious operations carried out by him and by the companies that received the transfers. Many of these names also appeared in the files of the FIU. This case is currently under investigation. It should be acknowledged as well that financial institutions would probably be unable to detect terrorist financing as such. Indeed, the only time that financial institutions might clearly identify terrorist financing as distinct from other criminal misuse of the financial system is when a known terrorist or terrorist organization has
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opened an account. Financial institutions are, however, in a position to detect suspicious transactions that, if reported, may later prove to be related to terrorist financing. It is the competent enforcement authority or the FIU then that is in a position to determine whether the transaction relates to a particular type of criminal or terrorist activity and decide on a course of action. For this reason, financial institutions do not necessarily need to determine the legality of the source or destination of the funds. Instead, they should ascertain whether transactions are unusual, suspicious or otherwise indicative of criminal or terrorist activity.
E. Characteristics of terrorist financing The primary objective of terrorism according to one definition is ‘to intimidate a population, or to compel a Government of an international organization to do or abstain from doing any act’.1 In contrast, financial gain is generally the objective of other types of criminal activities. While the difference in ultimate goals between each of these activities may be true to some extent, terrorist organizations still require financial support in order to achieve their aims. A successful terrorist group, like any criminal organization, is therefore necessarily one that is able to build and maintain an effective financial infrastructure. For this it must develop sources of funding, a means of laundering those funds and then finally a way to ensure that the funds can be used to obtain material and other logistical items needed to commit terrorist acts.
I. Sources of terrorist funds Experts generally believe that terrorist financing comes from two primary sources. The first source is the financial support provided by States or organizations with large enough infrastructures to collect and then make funds available to the terrorist organization. This so-called State-sponsored terrorism has declined in recent years, according to some experts, and is increasingly replaced by other types of backing. An individual with sufficient financial means may also provide substantial funding to terrorist groups. Osama bin Laden, for example, is thought to have contributed significant amounts of his personal fortune to the establishment and support of the Al-Qaeda terrorist network.
Example 3: Diamond trading company possibly linked to terrorist funding operation The FIU in Country C received several suspicious transaction reports from different
1
Art. 2, International Convention for the Suppression of the Financing of Terrorism, 9 December 1999.
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banks concerning two persons and a diamond trading company. The individuals and the company in question were account holders at the various banks. In the space of a few months, a large number of fund transfers to and from overseas were made from the accounts of the two individuals. Moreover, soon after the account was opened, one of the individuals received several USD cheques for large amounts. According to information obtained by the FIU, one of the accounts held by the company appeared to have received large US dollar deposit originating from companies active in the diamond industry. One of the directors of the company, a citizen of Country C but residing in Africa, maintained an account at another bank in Country C. Several transfers had been carried out to and from overseas using this account. The transfers from foreign countries were mainly in US dollars. They were converted into the local currency and were then transferred to foreign countries and to accounts in Country C belonging to one of the two subjects of the suspicious transaction report. Police information obtained by the FIU revealed that an investigation had already been initiated relating to these individuals and the trafficking of diamonds originating from Africa. The large funds transfers by the diamond trading company were mainly sent to the same person residing in another region. Police sources revealed that this person and the individual that had cashed the cheques were suspected of buying diamonds from the rebel army of an African country and then smuggling them into Country C on behalf of a terrorist organization. Further research by the FIU also revealed links between the subjects of the suspicious transaction report and individuals and companies already tied to the laundering of funds for organized crime. This case is currently under investigation. The second major source of funds for terrorist organizations is income derived directly from various ‘revenue-generating’ activities. As with criminal organizations, a terrorist group’s income may be derived from crime or other unlawful activities. A terrorist group in a particular region may support itself through kidnapping and extortion. In this scenario, ransoms paid to retrieve hostages, along with a special ‘revolutionary tax’ (in reality a euphemism for protection money) demanded of businesses, provide needed financial resources but also play a secondary role as one other means of intimidating the target population. Besides kidnapping and extortion, terrorist groups may engage in large-scale smuggling, various types of fraud (for example, through credit cards or charities), thefts and robbery, and narcotics trafficking. Funding for terrorist groups, unlike for criminal organizations, however, may also include income derived from legitimate sources or from a combination of lawful and unlawful sources. Indeed, this funding from legal sources is a key difference between terrorist groups and traditional criminal organizations. How much of a role legal money plays in the support of terrorism varies according to the terrorist group and whether the source of funds is in the same geographic location as the terrorist acts the group commits. Community solicitation and fundraising appeals are one very effective means of raising funds to support terrorism. Often such fundraising is carried out in the name of organizations having the status of a charitable or relief organization, and it may
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be targeted at a particular community. Some members of the community are led to believe that they are giving for a good cause. In many cases, the charities to which donations are given are in fact legitimate in that they do engage in some of the work they purport to carry out. Most of the members of the organization, however, have no knowledge that a portion of the funds raised by the charity is being diverted to terrorist causes. For example, the supporters of a terrorist movement from one country may carry out ostensibly legal activities in another country to obtain financial resources. The movement’s supporters raise these funds by infiltrating and taking control of institutions within the immigrant community of the second country. Some of the specific fundraising methods might include: collection of membership dues and/or subscriptions; sale of publications; speaking tours, cultural and social events; door-to-door solicitation within the community; appeals to wealthy members of the community; and donations of a portion of their personal earnings.
II.
Laundering of terrorist-related funds
From a technical perspective, the methods used by terrorists and their associates to generate funds from illegal sources differ little from those used by traditional criminal organizations. Although it would seem logical that funding from legitimate sources would not need to be laundered, there is nevertheless often a need for the terrorist group to obscure or disguise links between it and its legitimate funding sources. It follows then that terrorist groups must similarly find ways to launder these funds in order to be able to use them without drawing the attention of authorities. In examining terrorist related financial activity, FATF experts have concluded that terrorists and their support organizations generally use the same methods as criminal groups to launder funds. Some of the particular methods detected with respect to various terrorist groups include: cash smuggling (both by couriers or bulk cash shipments), structured deposits to or withdrawals from bank accounts, purchases of various types of monetary instruments (travellers’ cheques, bank cheques, money orders), use of credit or debit cards, and wire transfers. There have also been indications that some forms of underground banking (particularly the hawala system2) have had a role in moving terrorist-related funds.
Example 4: Cash deposits to accounts of non-profit organization allegedly finance terrorist group The FIU in Country L received a suspicious transaction report from a bank regarding an account held by an offshore investment company. The bank’s suspicions arose after the company’s manager made several large cash deposits in
2
For more information on the hawala system of alternate remittance/underground banking, see the 1999-2000 FATF Report on Money Laundering Typologies, 3 February 2001, at pp. 4–8.
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different foreign currencies. According to the customer, these funds were intended to finance companies in the media sector. The FIU requested information from several financial institutions. Through these enquiries, it learned that the managers of the offshore investment company were residing in Country L and a bordering country. They had opened accounts at various banks in Country L under the names of media companies and a non-profit organization involved in the promotion of cultural activities. According to the analysis by the FIU, the managers of the offshore investment company and several other clients had made cash deposits to the accounts. These funds were ostensibly intended for the financing of media-based projects. The analysis further revealed that the account held by the non-profit organization was receiving almost daily deposits in small amounts by third parties. The manager of this organization stated that the money deposited in this account was coming from its members for the funding of cultural activities. Police information obtained by the FIU revealed that the managers of offshore investment company were known to have been involved in money laundering and that an investigation was already underway into their activities. The managers appeared to be members of a terrorist group, which was financed by extortion and narcotics trafficking. Funds were collected through the non-profit organization from the different suspects involved in this case. This case is currently under investigation. The difference between legally and illegally obtained proceeds raises an important legal problem as far as applying anti-money laundering measures to terrorist financing. Money laundering has generally been defined as a process whereby funds obtained through or generated by criminal activity are moved or concealed in order to obscure the link between the crime and generated funds. The terrorist’s ultimate aim on the other hand is not to generate profit from his or her fundraising mechanisms but to obtain resources to support his or her operations. In a number of countries, terrorist financing thus may not yet be included as a predicate offence for money laundering, and it may be impossible therefore to apply preventive and repressive measures specifically targeting this terrorist activity. When terrorists or terrorist organizations obtain their financial support from legal sources (donations, sales of publications, etc.), there are certain factors that make detecting and tracing these funds more difficult. For example, charities or non-profit organizations and other legal entities have been cited as playing an important role in the financing of some terrorist groups. The apparent legal source of this funding may mean that there are few, if any, indicators that would make an individual financial transaction or series of transactions stand out as linked to terrorist activities. Other important aspects of terrorist financing that make its detection more difficult are the size and nature of the transactions involved. Several FATF experts have mentioned that the funding needed to mount a terrorist attack does not always call for large sums of money, and the associated transactions are usually not complex. For example, an examination of the financial connections among the 11 September hijackers showed that most of the individual transactions were small sums, that is, below the usual cash transaction reporting thresholds, and in most cases the operations consisted of only wire transfers. The individuals were ostensibly
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foreign students who appeared to be receiving money from their parents or in the form of grants for their studies, thus the transactions would not have been identified as needing additional scrutiny by the financial institutions involved.
Example 5: High account turnover indicates fraud allegedly used to finance terrorist organization An investigation in Country B arose as a consequence of a suspicious transaction report. A financial institution reported that an individual who allegedly earned a salary of just over USD 17,000 per annum had a turnover in his account of nearly USD 356,000. Investigators subsequently learned that this individual did not exist and that the account had been fraudulently obtained. Further investigation revealed that the account was linked to a foreign charity and was used to facilitate funds collection for a terrorist organization through a fraud scheme. In Country B, the government provides matching funds to charities in an amount equivalent to 42 per cent of donations received. Donations to this charity were being paid into to the account under investigation, and the government matching funds were being claimed by the charity. The original donations were then returned to the donors so that effectively no donation had been given to the charity. The charity retained the matching funds. This fraud resulted in over USD 1.14 million being fraudulently obtained. This case is currently under investigation.
Example 6: Lack of clear business relationship appears to point terrorist connection The manager of a chocolate factory (CHOCCo) introduced the manager of his bank accounts to two individuals, both company managers, who were interested in opening commercial bank accounts. The two companies were established within a few days of each other, but in different countries. The first company (TEXTCo) was involved in the textile trade while the second one was a real estate (REALCo) nontrading company. The companies had different managers and their activities were not connected. The bank manager opened the accounts for the two companies, which thereafter remained dormant. After several years, the manager of the chocolate factory announced the arrival of a credit transfer issued by the REALCo to the account of the TEXTCo. This transfer was ostensibly an advance on an order of tablecloths. No invoice was shown. However, once the account of TEXTCo received the funds, its manager asked for them to be made available in cash at a bank branch near the border. There, accompanied by the manager of CHOCCo, the TEXTCo manager withdrew the cash. The bank reported this information to the FIU. The FIU’s research showed that the two men crossed the border with the money after making the cash withdrawal. The border region is one in which terrorist activity occurs, and further information from the intelligence services indicated links between the managers of TEXTCo and REALCo and terrorist organizations active in that region.
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Annex 1: Characteristics of Financial Transactions that May Be a Cause for Increased Scrutiny As a normal part of carrying out their work, financial institutions should be aware of elements of individual transactions that could indicate funds involved in terrorist financing. The following list of potentially suspicious or unusual activities is meant to show types of transactions that could be a cause for additional scrutiny. This list is not exhaustive, nor does it take the place of any legal obligations related to reporting suspicious or unusual transactions that may be imposed by individual national authorities. This list of characteristics should be taken into account by financial institutions along with other available information (including any lists of suspected terrorists, terrorist groups, and associated individuals and entities issued by the United Nations3 Financial institutions should pay particular attention to:
A. Accounts (1) Accounts that receive relevant periodical deposits and are dormant at other periods. These accounts are then used in creating an apparently legitimate financial background through which additional fraudulent activities may be carried out. (2) A dormant account containing a minimal sum suddenly receives a deposit or series of deposits followed by daily cash withdrawals that continue until the transferred sum has been removed. (3) When opening an account, the customer refuses to provide information required by the financial institution, attempts to reduce the level of information provided to the minimum or provides information that is misleading or difficult to verify. (4) An account for which several persons have signature authority, yet these persons appear to have no relation among each other (either family ties or business relationship). (5) An account opened by a legal entity or an organization that has the same address as other legal entities or organizations but for which the same person or persons have signature authority, when there is no apparent economic or legal reason for such an arrangement (for example, individuals serving as company directors for multiple companies headquartered at the same location, etc.). (6) An account opened in the name of a recently formed legal entity and in which a higher than expected level of deposits are made in comparison with the income of the founders of the entity. (7) The opening by the same person of multiple accounts into which numerous small deposits are made that in aggregate are not commensurate with the expected income of the customer. (8) An account opened in the name of a legal entity that is involved in the activities of an association or foundation whose aims are related to the claims or demands of a terrorist organization. (9) An account opened in the name of a legal entity, a foundation or an association, which
3
This guidance does not supersede or modify requirements imposed by national or regional authorities, which call for the freezing of assets of individuals and entities suspected of being terrorists or terrorist related, as part of implementing relevant United Nations Security Council Resolutions.
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may be linked to a terrorist organization and that shows movements of funds above the expected level of income.
B. Deposits and withdrawals (1) Deposits for a business entity in combinations of monetary instruments that are atypical of the activity normally associated with such a business (for example, deposits that include a mix of business, payroll and social security cheques). (2) Large cash withdrawals made from a business account not normally associated with cash transactions. (3) Large cash deposits made to the account of an individual or legal entity when the apparent business activity of the individual or entity would normally be conducted in cheques or other payment instruments. (4) Mixing of cash deposits and monetary instruments in an account in which such transactions do not appear to have any relation to the normal use of the account. (5) Multiple transactions carried out on the same day at the same branch of a financial institution but with an apparent attempt to use different tellers. (6) The structuring of deposits through multiple branches of the same financial institution or by groups of individuals who enter a single branch at the same time. (7) The deposit or withdrawal of cash in amounts which fall consistently just below identification or reporting thresholds. (8) The presentation of uncounted funds for a transaction. Upon counting, the transaction is reduced to an amount just below that which would trigger reporting or identification requirements. (9) The deposit or withdrawal of multiple monetary instruments at amounts which fall consistently just below identification or reporting thresholds, particularly if the instruments are sequentially numbered.
C. Wire transfers (1) Wire transfers ordered in small amounts in an apparent effort to avoid triggering identification or reporting requirements. (2) Wire transfers to or for an individual where information on the originator, or the person on whose behalf the transaction is conducted, is not provided with the wire transfer, when the inclusion of such information would be expected. (3) Use of multiple personal and business accounts or the accounts of non-profit organizations or charities to collect and then funnel funds immediately or after a short time to a small number of foreign beneficiaries. (4) Foreign exchange transactions that are performed on behalf of a customer by a third party followed by wire transfers of the funds to locations having no apparent business connection with the customer or to countries of specific concern.
D. Characteristics of the customer or his/her business activity (1) Funds generated by a business owned by individuals of the same origin or involvement of multiple individuals of the same origin from countries of specific concern acting on behalf of similar business types. (2) Shared address for individuals involved in cash transactions, particularly when the address
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is also a business location and/or does not seem to correspond to the stated occupation (for example student, unemployed, self-employed, etc.). (3) Stated occupation of the transactor is not commensurate with the level or type of activity (for example, a student or an unemployed individual who receives or sends large numbers of wire transfers, or who makes daily maximum cash withdrawals at multiple locations over a wide geographic area). (4) Regarding non-profit or charitable organizations, financial transactions for which there appears to be no logical economic purpose or in which there appears to be no link between the stated activity of the organization and the other parties in the transaction. (5) A safe deposit box is opened on behalf of a commercial entity when the business activity of the customer is unknown or such activity does not appear to justify the use of a safe deposit box. (6) Unexplained inconsistencies arising from the process of identifying or verifying the customer (for example, regarding previous or current country of residence, country of issue of the passport, countries visited according to the passport, and documents furnished to confirm name, address and date of birth).
E. Transactions linked to locations of concern (1) Transactions involving foreign currency exchanges that are followed within a short time by wire transfers to locations of specific concern (for example, countries designated by national authorities, FATF non-cooperative countries and territories, etc.). (2) Deposits are followed within a short time by wire transfers of funds, particularly to or through a location of specific concern (for example, countries designated by national authorities, FATF non-cooperative countries and territories, etc.). (3) A business account through which a large number of incoming or outgoing wire transfers take place and for which there appears to be no logical business or other economic purpose, particularly when this activity is to, through or from locations of specific concern. (4) The use of multiple accounts to collect and then funnel funds to a small number of foreign beneficiaries, both individuals and businesses, particularly when these are in locations of specific concern. (5) A customer obtains a credit instrument or engages in commercial financial transactions involving movement of funds to or from locations of specific concern when there appears to be no logical business reasons for dealing with those locations. (6) The opening of accounts of financial institutions from locations of specific concern. (7) Sending or receiving funds by international transfers from and/or to locations of specific concern.
Annex 2: Sources of Information Several sources of information exist that may help financial institutions in determining whether a potentially suspicious or unusual transaction could indicate funds involved in the financing of terrorism and thus be subject to reporting obligations under national anti-money laundering or antiterrorism laws and regulations.
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A. United Nations lists Committee on S/RES/1267 (1999) website: http://www.un.org/Docs/sc/committees/AfghanTemplate.htm
B. Other lists (1) Financial Action Task Force FATF Identification of Non-Cooperative Countries and Territories FATF website: http://www.fatf-gafi.org/NCCT_en.htm
(2) United States Executive Order 13224, 23 September 2001 (with updates) US Department of the Treasury website: http://www.ustreas.gov/terrorism.html
(3) Council of the European Union Council Regulation 467/2001 of 6 March 2001 OJ 2001 L67 (on freezing Taliban funds) Council Decision 927/2001 of 27 December 2001 (list of terrorist and terrorist organizations whose assets should be frozen in accordance with Council Regulation 2580/2001) Council Common Position of 27 December 2001 on application of specific measures to combat terrorism (list of persons, groups and entities involved in terrorist acts) EUR-lex website: http://europa.eu.int/eur-lex/en/index.html
C. Standards (1) Financial Action Task Force FA TF Special Recommendations on Terrorist Financing FATF website: http://www.fatf-gafi.org/TerFinance_en.htm FATF Forty Recommendations on Money Laundering FATF website: http://www.fatf-gafi.org/40Recs_en.htm
(2) UN Conventions and Resolutions International Convention on the Suppression of Terrorist Financing Website: http://untreaty.un.org/English/Terrorism.asp UN Security Council Resolutions on Terrorism Website: http://www.un.org/terrorism/sc.htm
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(3) Council of the European Union Council Regulation 2580/2001 of 27 December 2001 on specific restrictive measures directed against certain persons and entities with a view to combating terrorism EUR-lex website: http://europa.eu.int/eur-lex/en/index.html
International Convention for the Suppression of the Financing of Terrorism
The General Assembly, Recalling all its relevant resolutions, including resolution 46/51 of 9 December 1991, resolution 49/60 of 9 December 1994, by which it adopted the Declaration on Measures to Eliminate International Terrorism, and resolutions 51/210 of 17 December 1996 and 53/108 of 8 December 1998, Having considered the text of the draft international convention for the suppression of the financing of terrorism prepared by the Ad Hoc Committee established by General Assembly resolution 51/210 of 17 December 1996 and the Working Group of the Sixth Committee,* 1. Adopts the International Convention for the Suppression of the Financing of Terrorism annexed to the present resolution, and requests the Secretary-General to open it for signature at United Nations Headquarters in New York from 10 January 2000 to 31 December 2001; 2. Urges all States to sign and ratify, accept, approve or accede to the Convention. 76th plenary meeting 9 December 1999
Preamble The States Parties to this Convention, Bearing in mind the purposes and principles of the Charter of the United Nations concerning the maintenance of international peace and security and the promotion of good-neighbourliness and friendly relations and cooperation among States,
*
/A/C.6/54/L.2, annex I.
M. Pieth (Ed.), Financing Terrorism, 161–175. © 1999 United Nation. Printed in the Netherlands.
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Deeply concerned about the worldwide escalation of acts of terrorism in all its forms and manifestations, Recalling the Declaration on the Occasion of the Fiftieth Anniversary of the United Nations, contained in General Assembly resolution 50/6 of 24 October 1995, Recalling also all the relevant General Assembly resolutions on the matter, including resolution 49/60 of 9 December 1994 and the annex thereto on the Declaration on Measures to Eliminate International Terrorism, in which the States Members of the United Nations solemnly reaffirmed their unequivocal condemnation of all acts, methods and practices of terrorism as criminal and unjustifiable, wherever and by whomever committed, including those which jeopardize the friendly relations among States and peoples and threaten the territorial integrity and security of States, Noting that the Declaration on Measures to Eliminate International Terrorism also encouraged States to review urgently the scope of the existing international legal provisions on the prevention, repression and elimination of terrorism in all its forms and manifestations, with the aim of ensuring that there is a comprehensive legal framework covering all aspects of the matter, Recalling paragraph 3 (f) of General Assembly resolution 51/210 of 17 December 1996, in which the Assembly called upon all States to take steps to prevent and counteract, through appropriate domestic measures, the financing of terrorists and terrorist organizations, whether such financing is direct or indirect through organizations which also have or claim to have charitable, social or cultural goals or which are also engaged in unlawful activities such as illicit arms trafficking, drug dealing and racketeering, including the exploitation of persons for purposes of funding terrorist activities, and in particular to consider, where appropriate, adopting regulatory measures to prevent and counteract movements of funds suspected to be intended for terrorist purposes without impeding in any way the freedom of legitimate capital movements and to intensify the exchange of information concerning international movements of such funds, Recalling also General Assembly resolution 52/165 of 15 December 1997, in which the Assembly called upon States to consider, in particular, the implementation of the measures set out in paragraphs 3 (a) to (f) of its resolution 51/210, Recalling further General Assembly resolution 53/108 of 8 December 1998, in which the Assembly decided that the Ad Hoc Committee established by General Assembly resolution 51/210 of 17 December 1996 should elaborate a draft international convention for the suppression of terrorist financing to supplement related existing international instruments, Considering that the financing of terrorism is a matter of grave concern to the international community as a whole, Noting that the number and seriousness of acts of international terrorism depend on the financing that terrorists may obtain,
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Noting also that existing multilateral legal instruments do not expressly address such financing, Being convinced of the urgent need to enhance international cooperation among States in devising and adopting effective measures for the prevention of the financing of terrorism, as well as for its suppression through the prosecution and punishment of its perpetrators, Have agreed as follows:
Article 1 For the purposes of this Convention:
1.
2.
3.
‘Funds’ means assets of every kind, whether tangible or intangible, movable or immovable, however acquired, and legal documents or instruments in any form, including electronic or digital, evidencing title to, or interest in, such assets, including, but not limited to, bank credits, travellers cheques, bank cheques, money orders, shares, securities, bonds, drafts and letters of credit. ‘State or government facility’ means any permanent or temporary facility or conveyance that is used or occupied by representatives of a State, members of Government, the legislature or the judiciary or by officials or employees of a State or any other public authority or entity or by employees or officials of an intergovernmental organization in connection with their official duties. ‘Proceeds’ means any funds derived from or obtained, directly or indirectly, through the commission of an offence set forth in article 2.
Article 2 1.
2.
Any person commits an offence within the meaning of this Convention if that person by any means, directly or indirectly, unlawfully and wilfully, provides or collects funds with the intention that they should be used or in the knowledge that they are to be used, in full or in part, in order to carry out: (a) An act which constitutes an offence within the scope of and as defined in one of the treaties listed in the annex; or (b) Any other act intended to cause death or serious bodily injury to a civilian, or to any other person not taking an active part in the hostilities in a situation of armed conflict, when the purpose of such act, by its nature or context, is to intimidate a population, or to compel a Government or an international organization to do or to abstain from doing any act. (a) On depositing its instrument of ratification, acceptance, approval or accession, a State Party which is not a party to a treaty listed in the annex may declare that, in the application of this Convention to the State Party, the treaty shall be deemed not to be included in the annex referred to in paragraph 1, subparagraph (a). The declaration shall cease
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to have effect as soon as the treaty enters into force for the State Party, which shall notify the depositary of this fact; (b) When a State Party ceases to be a party to a treaty listed in the annex, it may make a declaration as provided for in this article, with respect to that treaty. For an act to constitute an offence set forth in paragraph 1, it shall not be necessary that the funds were actually used to carry out an offence referred to in paragraph 1, subparagraph (a) or (b). Any person also commits an offence if that person attempts to commit an offence as set forth in paragraph 1 of this article. Any person also commits an offence if that person: (a) Participates as an accomplice in an offence as set forth in paragraph 1 or 4 of this article; (b) Organizes or directs others to commit an offence as set forth in paragraph 1 or 4 of this article; (c) Contributes to the commission of one or more offences as set forth in paragraph 1 or 4 of this article by a group of persons acting with a common purpose. Such contribution shall be intentional and shall either: (i) Be made with the aim of furthering the criminal activity or criminal purpose of the group, where such activity or purpose involves the commission of an offence as set forth in paragraph 1 of this article; or (ii) Be made in the knowledge of the intention of the group to commit an offence as set forth in paragraph 1 of this article.
Article 3 This Convention shall not apply where the offence is committed within a single State, the alleged offender is a national of that State and is present in the territory of that State and no other State has a basis under article 7, paragraph 1 or 2, to exercise jurisdiction, except that the provisions of articles 12 to 18 shall, as appropriate, apply in those cases.
Article 4 Each State Party shall adopt such measures as may be necessary:
(a) To establish as criminal offences under its domestic law the offences as set forth in article 2; (b) To make those offences punishable by appropriate penalties which take into account the grave nature of the offences.
Article 5 1.
Each State Party, in accordance with its domestic legal principles, shall take
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2. 3.
the necessary measures to enable a legal entity located in its territory or organized under its laws to be held liable when a person responsible for the management or control of that legal entity has, in that capacity, committed an offence as set forth in article 2. Such liability may be criminal, civil or administrative. Such liability is incurred without prejudice to the criminal liability of individuals who have committed the offences. Each State Party shall ensure, in particular, that legal entities liable in accordance with paragraph 1 above are subject to effective, proportionate and dissuasive criminal, civil or administrative sanctions. Such sanctions may include monetary sanctions.
Article 6 Each State Party shall adopt such measures as may be necessary, including, where appropriate, domestic legislation, to ensure that criminal acts within the scope of this Convention are under no circumstances justifiable by considerations of a political, philosophical, ideological, racial, ethnic, religious or other similar nature.
Article 7 1.
2.
3.
Each State Party shall take such measures as may be necessary to establish its jurisdiction over the offences set forth in article 2 when: (a) The offence is committed in the territory of that State; (b) The offence is committed on board a vessel flying the flag of that State or an aircraft registered under the laws of that State at the time the offence is committed; (c) The offence is committed by a national of that State. A State Party may also establish its jurisdiction over any such offence when: (a) The offence was directed towards or resulted in the carrying out of an offence referred to in article 2, paragraph 1, subparagraph (a) or (b), in the territory of or against a national of that State; (b) The offence was directed towards or resulted in the carrying out of an offence referred to in article 2, paragraph 1, subparagraph (a) or (b), against a State or government facility of that State abroad, including diplomatic or consular premises of that State; (c) The offence was directed towards or resulted in an offence referred to in article 2, paragraph 1, subparagraph (a) or (b), committed in an attempt to compel that State to do or abstain from doing any act; (d) The offence is committed by a stateless person who has his or her habitual residence in the territory of that State; (e) The offence is committed on board an aircraft which is operated by the Government of that State. Upon ratifying, accepting, approving or acceding to this Convention, each
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State Party shall notify the Secretary-General of the United Nations of the jurisdiction it has established in accordance with paragraph 2. Should any change take place, the State Party concerned shall immediately notify the Secretary-General. Each State Party shall likewise take such measures as may be necessary to establish its jurisdiction over the offences set forth in article 2 in cases where the alleged offender is present in its territory and it does not extradite that person to any of the States Parties that have established their jurisdiction in accordance with paragraphs 1 or 2. When more than one State Party claims jurisdiction over the offences set forth in article 2, the relevant States Parties shall strive to coordinate their actions appropriately, in particular concerning the conditions for prosecution and the modalities for mutual legal assistance. Without prejudice to the norms of general international law, this Convention does not exclude the exercise of any criminal jurisdiction established by a State Party in accordance with its domestic law.
Article 8 l.
2.
3. 4.
5.
Each State Party shall take appropriate measures, in accordance with its domestic legal principles, for the identification, detection and freezing or seizure of any funds used or allocated for the purpose of committing the offences set forth in article 2 as well as the proceeds derived from such offences, for purposes of possible forfeiture. Each State Party shall take appropriate measures, in accordance with its domestic legal principles, for the forfeiture of funds used or allocated for the purpose of committing the offences set forth in article 2 and the proceeds derived from such offences. Each State Party concerned may give consideration to concluding agreements on the sharing with other States Parties, on a regular or case-by-case basis, of the funds derived from the forfeitures referred to in this article. Each State Party shall consider establishing mechanisms whereby the funds derived from the forfeitures referred to in this article are utilized to compensate the victims of offences referred to in article 2, paragraph 1, subparagraph (a) or (b), or their families. The provisions of this article shall be implemented without prejudice to the rights of third parties acting in good faith.
Article 9 1.
Upon receiving information that a person who has committed or who is alleged to have committed an offence set forth in article 2 may be present in its territory, the State Party concerned shall take such measures as may be necessary under its domestic law to investigate the facts contained in the information.
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2.
3.
4.
5.
6.
Upon being satisfied that the circumstances so warrant, the State Party in whose territory the offender or alleged offender is present shall take the appropriate measures under its domestic law so as to ensure that person’s presence for the purpose of prosecution or extradition. Any person regarding whom the measures referred to in paragraph 2 are being taken shall be entitled: (a) To communicate without delay with the nearest appropriate representative of the State of which that person is a national or which is otherwise entitled to protect that person’s rights or, if that person is a stateless person, the State in the territory of which that person habitually resides; (b) To be visited by a representative of that State; (c) To be informed of that person’s rights under subparagraphs (a) and (b). The rights referred to in paragraph 3 shall be exercised in conformity with the laws and regulations of the State in the territory of which the offender or alleged offender is present, subject to the provision that the said laws and regulations must enable full effect to be given to the purposes for which the rights accorded under paragraph 3 are intended. The provisions of paragraphs 3 and 4 shall be without prejudice to the right of any State Party having a claim to jurisdiction in accordance with article 7, paragraph 1, subparagraph (b), or paragraph 2, subparagraph (b), to invite the International Committee of the Red Cross to communicate with and visit the alleged offender. When a State Party, pursuant to the present article, has taken a person into custody, it shall immediately notify, directly or through the SecretaryGeneral of the United Nations, the States Parties which have established jurisdiction in accordance with article 7, paragraph 1 or 2, and, if it considers it advisable, any other interested States Parties, of the fact that such person is in custody and of the circumstances which warrant that person’s detention. The State which makes the investigation contemplated in paragraph 1 shall promptly inform the said States Parties of its findings and shall indicate whether it intends to exercise jurisdiction.
Article 10 1.
2.
The State Party in the territory of which the alleged offender is present shall, in cases to which article 7 applies, if it does not extradite that person, be obliged, without exception whatsoever and whether or not the offence was committed in its territory, to submit the case without undue delay to its competent authorities for the purpose of prosecution, through proceedings in accordance with the laws of that State. Those authorities shall take their decision in the same manner as in the case of any other offence of a grave nature under the law of that State. Whenever a State Party is permitted under its domestic law to extradite or
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otherwise surrender one of its nationals only upon the condition that the person will be returned to that State to serve the sentence imposed as a result of the trial or proceeding for which the extradition or surrender of the person was sought, and this State and the State seeking the extradition of the person agree with this option and other terms they may deem appropriate, such a conditional extradition or surrender shall be sufficient to discharge the obligation set forth in paragraph 1.
Article 11 1.
2.
3.
4.
5.
The offences set forth in article 2 shall be deemed to be included as extraditable offences in any extradition treaty existing between any of the States Parties before the entry into force of this Convention. States Parties undertake to include such offences as extraditable offences in every extradition treaty to be subsequently concluded between them. When a State Party which makes extradition conditional on the existence of a treaty receives a request for extradition from another State Party with which it has no extradition treaty, the requested State Party may, at its option, consider this Convention as a legal basis for extradition in respect of the offences set forth in article 2. Extradition shall be subject to the other conditions provided by the law of the requested State. States Parties which do not make extradition conditional on the existence of a treaty shall recognize the offences set forth in article 2 as extraditable offences between themselves, subject to the conditions provided by the law of the requested State. If necessary, the offences set forth in article 2 shall be treated, for the purposes of extradition between States Parties, as if they had been committed not only in the place in which they occurred but also in the territory of the States that have established jurisdiction in accordance with article 7, paragraphs 1 and 2. The provisions of all extradition treaties and arrangements between States Parties with regard to offences set forth in article 2 shall be deemed to be modified as between States Parties to the extent that they are incompatible with this Convention.
Article 12 1.
2. 3.
States Parties shall afford one another the greatest measure of assistance in connection with criminal investigations or criminal or extradition proceedings in respect of the offences set forth in article 2, including assistance in obtaining evidence in their possession necessary for the proceedings. States Parties may not refuse a request for mutual legal assistance on the ground of bank secrecy. The requesting Party shall not transmit or use information or evidence
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4.
5.
furnished by the requested Party for investigations, prosecutions or proceedings other than those stated in the request without the prior consent of the requested Party. Each State Party may give consideration to establishing mechanisms to share with other States Parties information or evidence needed to establish criminal, civil or administrative liability pursuant to article 5. States Parties shall carry out their obligations under paragraphs 1 and 2 in conformity with any treaties or other arrangements on mutual legal assistance or information exchange that may exist between them. In the absence of such treaties or arrangements, States Parties shall afford one another assistance in accordance with their domestic law.
Article 13 None of the offences set forth in article 2 shall be regarded, for the purposes of extradition or mutual legal assistance, as a fiscal offence. Accordingly, States Parties may not refuse a request for extradition or for mutual legal assistance on the sole ground that it concerns a fiscal offence.
Article 14 None of the offences set forth in article 2 shall be regarded for the purposes of extradition or mutual legal assistance as a political offence or as an offence connected with a political offence or as an offence inspired by political motives. Accordingly, a request for extradition or for mutual legal assistance based on such an offence may not be refused on the sole ground that it concerns a political offence or an offence connected with a political offence or an offence inspired by political motives.
Article 15 Nothing in this Convention shall be interpreted as imposing an obligation to extradite or to afford mutual legal assistance, if the requested State Party has substantial grounds for believing that the request for extradition for offences set forth in article 2 or for mutual legal assistance with respect to such offences has been made for the purpose of prosecuting or punishing a person on account of that person’s race, religion, nationality, ethnic origin or political opinion or that compliance with the request would cause prejudice to that person’s position for any of these reasons.
Article 16 l.
A person who is being detained or is serving a sentence in the territory of one State Party whose presence in another State Party is requested for purposes of identification, testimony or otherwise providing assistance in obtaining evidence for the investigation or prosecution of offences set forth in article 2 may be transferred if the following conditions are met:
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(a) The person freely gives his or her informed consent; (b) The competent authorities of both States agree, subject to such conditions as those States may deem appropriate. For the purposes of the present article: (a) The State to which the person is transferred shall have the authority and obligation to keep the person transferred in custody, unless otherwise requested or authorized by the State from which the person was transferred; (b) The State to which the person is transferred shall without delay implement its obligation to return the person to the custody of the State from which the person was transferred as agreed beforehand, or as otherwise agreed, by the competent authorities of both States; (c) The State to which the person is transferred shall not require the State from which the person was transferred to initiate extradition proceedings for the return of the person; (d) The person transferred shall receive credit for service of the sentence being served in the State from which he or she was transferred for time spent in the custody of the State to which he or she was transferred. Unless the State Party from which a person is to be transferred in accordance with the present article so agrees, that person, whatever his or her nationality, shall not be prosecuted or detained or subjected to any other restriction of his or her personal liberty in the territory of the State to which that person is transferred in respect of acts or convictions anterior to his or her departure from the territory of the State from which such person was transferred.
Article 17 Any person who is taken into custody or regarding whom any other measures are taken or proceedings are carried out pursuant to this Convention shall be guaranteed fair treatment, including enjoyment of all rights and guarantees in conformity with the law of the State in the territory of which that person is present and applicable provisions of international law, including international human rights law.
Article 18 1.
States Parties shall cooperate in the prevention of the offences set forth in article 2 by taking all practicable measures, inter alia, by adapting their domestic legislation, if necessary, to prevent and counter preparations in their respective territories for the commission of those offences within or outside their territories, including: (a) Measures to prohibit in their territories illegal activities of persons and organizations that knowingly encourage, instigate, organize or engage in the commission of offences set forth in article 2;
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2.
3.
(b) Measures requiring financial institutions and other professions involved in financial transactions to utilize the most efficient measures available for the identification of their usual or occasional customers, as well as customers in whose interest accounts are opened, and to pay special attention to unusual or suspicious transactions and report transactions suspected of stemming from a criminal activity. For this purpose, States Parties shall consider: (i) Adopting regulations prohibiting the opening of accounts, the holders or beneficiaries of which are unidentified or unidentifiable, and measures to ensure that such institutions verify the identity of the real owners of such transactions; (ii) With respect to the identification of legal entities, requiring financial institutions, when necessary, to take measures to verify the legal existence and the structure of the customer by obtaining, either from a public register or from the customer or both, proof of incorporation, including information concerning the customer’s name, legal form, address, directors and provisions regulating the power to bind the entity; (iii) Adopting regulations imposing on financial institutions the obligation to report promptly to the competent authorities all complex, unusual large transactions and unusual patterns of transactions, which have no apparent economic or obviously lawful purpose, without fear of assuming criminal or civil liability for breach of any restriction on disclosure of information if they report their suspicions in good faith; (iv) Requiring financial institutions to maintain, for at least five years, all necessary records on transactions, both domestic and international. States Parties shall further cooperate in the prevention of offences set forth in article 2 by considering: (a) Measures for the supervision, including, for example, the licensing, of all money-transmission agencies; (b) Feasible measures to detect or monitor the physical cross-border transportation of cash and bearer negotiable instruments, subject to strict safeguards to ensure proper use of information and without impeding in any way the freedom of capital movements. States Parties shall further cooperate in the prevention of the offences set forth in article 2 by exchanging accurate and verified information in accordance with their domestic law and coordinating administrative and other measures taken, as appropriate, to prevent the commission of offences set forth in article 2, in particular by: (a) Establishing and maintaining channels of communication between their competent agencies and services to facilitate the secure and rapid exchange of information concerning all aspects of offences set forth in article 2;
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(b) Cooperating with one another in conducting inquiries, with respect to the offences set forth in article 2, concerning: (i) The identity, whereabouts and activities of persons in respect of whom reasonable suspicion exists that they are involved in such offences; (ii) The movement of funds relating to the commission of such offences. States Parties may exchange information through the International Criminal Police Organization (Interpol).
Article 19 The State Party where the alleged offender is prosecuted shall, in accordance with its domestic law or applicable procedures, communicate the final outcome of the proceedings to the Secretary-General of the United Nations, who shall transmit the information to the other States Parties.
Article 20 The States Parties shall carry out their obligations under this Convention in a manner consistent with the principles of sovereign equality and territorial integrity of States and that of non-intervention in the domestic affairs of other States.
Article 21 Nothing in this Convention shall affect other rights, obligations and responsibilities of States and individuals under international law, in particular the purposes of the Charter of the United Nations, international humanitarian law and other relevant conventions.
Article 22 Nothing in this Convention entitles a State Party to undertake in the territory of another State Party the exercise of jurisdiction or performance of functions which are exclusively reserved for the authorities of that other State Party by its domestic law.
Article 23 1.
2.
The (a) (b) (c)
annex may be amended by the addition of relevant treaties: That are open to the participation of all States; That have entered into force; That have been ratified, accepted, approved or acceded to by at least twenty-two States Parties to the present Convention. After the entry into force of this Convention, any State Party may propose such an amendment. Any proposal for an amendment shall be communicated
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3.
4.
to the depositary in written form. The depositary shall notify proposals that meet the requirements of paragraph 1 to all States Parties and seek their views on whether the proposed amendment should be adopted. The proposed amendment shall be deemed adopted unless one third of the States Parties object to it by a written notification not later than 180 days after its circulation. The adopted amendment to the annex shall enter into force 30 days after the deposit of the twenty-second instrument of ratification, acceptance or approval of such amendment for all those States Parties that have deposited such an instrument. For each State Party ratifying, accepting or approving the amendment after the deposit of the twenty-second instrument, the amendment shall enter into force on the thirtieth day after deposit by such State Party of its instrument of ratification, acceptance or approval.
Article 24 1. Any dispute between two or more States Parties concerning the interpretation or application of this Convention which cannot be settled through negotiation within a reasonable time shall, at the request of one of them, be submitted to arbitration. If, within six months from the date of the request for arbitration, the parties are unable to agree on the organization of the arbitration, any one of those parties may refer the dispute to the International Court of Justice, by application, in conformity with the Statute of the Court. 2. Each State may at the time of signature, ratification, acceptance or approval of this Convention or accession thereto declare that it does not consider itself bound by paragraph 1. The other States Parties shall not be bound by paragraph 1 with respect to any State Party which has made such a reservation. 3. Any State which has made a reservation in accordance with paragraph 2 may at any time withdraw that reservation by notification to the SecretaryGeneral of the United Nations.
Article 25 1. 2.
3.
This Convention shall be open for signature by all States from 10 January 2000 to 31 December 2001 at United Nations Headquarters in New York. This Convention is subject to ratification, acceptance or approval. The instruments of ratification, acceptance or approval shall be deposited with the Secretary-General of the United Nations. This Convention shall be open to accession by any State. The instruments of accession shall be deposited with the Secretary-General of the United Nations.
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Article 26 1.
2.
This Convention shall enter into force on the thirtieth day following the date of the deposit of the twenty-second instrument of ratification, acceptance, approval or accession with the Secretary-General of the United Nations. For each State ratifying, accepting, approving or acceding to the Convention after the deposit of the twenty-second instrument of ratification, acceptance, approval or accession, the Convention shall enter into force on the thirtieth day after deposit by such State of its instrument of ratification, acceptance, approval or accession.
Article 27 1. 2.
Any State Party may denounce this Convention by written notification to the Secretary-General of the United Nations. Denunciation shall take effect one year following the date on which notification is received by the Secretary-General of the United Nations.
Article 28 The original of this Convention, of which the Arabic, Chinese, English, French, Russian and Spanish texts are equally authentic, shall be deposited with the SecretaryGeneral of the United Nations who shall send certified copies thereof to all States. IN WITNESS WHEREOF, the undersigned, being duly authorized thereto by their respective Governments, have signed this Convention, opened for signature at United Nations Headquarters in New York on 10 January 2000.
Annex 1. Convention for the Suppression of Unlawful Seizure of Aircraft, done at The Hague on 16 December 1970. 2. Convention for the Suppression of Unlawful Acts against the Safety of Civil Aviation, done at Montreal on 23 September 1971. 3. Convention on the Prevention and Punishment of Crimes against Internationally Protected Persons, including Diplomatic Agents, adopted by the General Assembly of the United Nations on 14 December 1973. 4. International Convention against the Taking of Hostages, adopted by the General Assembly of the United Nations on 17 December 1979. 5. Convention on the Physical Protection of Nuclear Material, adopted at Vienna on 3 March 1980. 6. Protocol for the Suppression of Unlawful Acts of Violence at Airports Serving International Civil Aviation, supplementary to the Convention for the Suppression of Unlawful Acts against the Safety of Civil Aviation, done at Montreal on 24 February 1988. 7. Convention for the Suppression of Unlawful Acts against the Safety of Maritime Navigation, done at Rome on 10 March 1988.
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8. Protocol for the Suppression of Unlawful Acts against the Safety of Fixed Platforms located on the Continental Shelf, done at Rome on 10 March 1988. 9. International Convention for the Suppression of Terrorist Bombings, adopted by the General Assembly of the United Nations on 15 December 1997.
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Council Common Position of 27 December 2001 on the Application of Specific Measures to Combat Terrorism
(2001/931/CFSP)
THE COUNCIL OFTHE EUROPEAN UNION, Having regard to the Treaty on European Union, and in particular Articles 15 and 34 thereof, Whereas: (1) At its extraordinary meeting on 21 September 2001, the European Council declared that terrorism is a real challenge to the world and to Europe and that the fight against terrorism will be a priority objective of the European Union. (2) On 28 September 2001, the United Nations Security Council adopted Resolution 1373(2001) laying out wide-ranging strategies to combat terrorism and in particular the fight against the financing of terrorism. (3) On 8 October 2001, the Council reiterated the Union’s determination to attack the sources which fund terrorism, in close cooperation with the United States. (4) On 26 February 2001, pursuant to UNSC Resolution 1333(2000), the Council adopted Common Position 2001/154/CFSP (1) which provides inter alia for the freezing of funds of Usama bin Laden and individuals and entities associated with him. Consequently, those persons, groups and entities are not covered by this Common Position. (5) The European Union should take additional measures in order to implement UNSC Resolution 1373(2001). (6) Member States have transmitted to the European Union the information necessary to implement some of those additional measures. (7) Action by the Community is necessary in order to implement some of those additional measures; action by the Member States is also necessary, in particular as far as the application of forms of police and judicial cooperation in criminal matters is concerned,
HAS ADOPTED THIS COMMON POSITION: M. Pieth (Ed.), Financing Terrorism, 177–182. © 2001 Official Journal of the European Communities. Printed in the Netherlands.
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Article 1 1. 2.
3.
This Common Position applies in accordance with the provisions of the following Articles to persons, groups and entities involved in terrorist acts and listed in the Annex. For the purposes of this Common Position, ‘persons, groups and entities involved in terrorist acts’ shall mean: persons who commit, or attempt to commit, terrorist acts or who participate in, or facilitate, the commission of terrorist acts, groups and entities owned or controlled directly or indirectly by such persons; and persons, groups and entities acting on behalf of, or under the direction of, such persons, groups and entities, including funds derived or generated from property owned or controlled directly or indirectly by such persons and associated persons, groups and entities. For the purposes of this Common Position, ‘terrorist act’ shall mean one of the following intentional acts, which, given its nature or its context, may seriously damage a country or an international organisation, as defined as an offence under national law, where committed with the aim of: (i) seriously intimidating a population, or (ii) unduly compelling a Government or an international organisation to perform or abstain from performing any act, or (iii) seriously destabilising or destroying the fundamental political, constitutional, economic or social structures of a country or an international organisation: (a) attacks upon a person’s life which may cause death; (b) attacks upon the physical integrity of a person; (c) kidnapping or hostage taking; (d) causing extensive destruction to a Government or public facility, a transport system, an infrastructure facility, including an information system, a fixed platform located on the continental shelf, a public place or private property, likely to endanger human life or result in major economic loss; (e) seizure of aircraft, ships or other means of public or goods transport; manufacture, possession, acquisition, transport, supply or use of (f) weapons, explosives or of nuclear, biological or chemical weapons, as well as research into, and development of, biological and chemical weapons; (g) release of dangerous substances, or causing fires, explosions or floods the effect of which is to endanger human life; (h) interfering with or disrupting the supply of water, power or any other fundamental natural resource, the effect of which is to endanger human life; (i) threatening to commit any of the acts listed under (a) to (h);
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(j) directing a terrorist group; (k) participating in the activities of a terrorist group, including by supplying information or material resources, or by funding its activities in any way, with knowledge of the fact that such participation will contribute to the criminal activities of the group. For the purposes of this paragraph, ‘terrorist group’ shall mean a structured group of more than two persons, established over a period of time and acting in concert to commit terrorist acts. ‘Structured group’ means a group that is not randomly formed for the immediate commission of a terrorist act and that does not need to have formally defined roles for its members, continuity of its membership or a developed structure. The list in the Annex shall be drawn up on the basis of precise information or material in the relevant file which indicates that a decision has been taken by a competent authority in respect of the persons, groups and entities concerned, irrespective of whether it concerns the instigation of investigations or prosecution for a terrorist act, an attempt to perpetrate, participate in or facilitate such an act based on serious and credible evidence or clues, or condemnation for such deeds. Persons, groups and entities identified by the Security Council of the United Nations as being related to terrorism and against whom it has ordered sanctions may be included in the list. For the purposes of this paragraph ‘competent authority’ shall mean a judicial authority, or, where judicial authorities have no competence in the area covered by this paragraph, an equivalent competent authority in that area. The Council shall work to ensure that names of natural or legal persons, groups or entities listed in the Annex have sufficient particulars appended to permit effective identification of specific human beings, legal persons, entities or bodies, thus facilitating the exculpation of those bearing the same or similar names. The names of persons and entities on the list in the Annex shall be reviewed at regular intervals and at least once every six months to ensure that there are grounds for keeping them on the list.
Article 2 The European Community, acting within the limits of the powers conferred on it by the Treaty establishing the European Community, shall order the freezing of the funds and other financial assets or economic resources of persons, groups and entities listed in the Annex.
Article 3 The European Community, acting within the limits of the powers conferred on it by the Treaty establishing the European Community, shall ensure that funds, financial
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assets or economic resources or financial or other related services will not be made available, directly or indirectly, for the benefit of persons, groups and entities listed in the Annex.
Article 4 Member States shall, through police and judicial cooperation in criminal matters within the framework of Title VI of the Treaty on European Union, afford each other the widest possible assistance in preventing and combating terrorist acts. To that end they shall, with respect to enquiries and proceedings conducted by their authorities in respect of any of the persons, groups and entities listed in the Annex, fully exploit, upon request, their existing powers in accordance with acts of the European Union and other international agreements, arrangements and conventions which are binding upon Member States.
Article 5 This Common Position shall take effect on the date of its adoption.
Article 6 This Common Position shall be kept under constant review.
Article 7 This Common Position shall be published in the Official Journal. Done at Brussels, 27 December 2001. For the Council The President L. MICHEL
Annex First list of persons, groups and entities referred to in Article 11
1. Persons *— ABAUNZA MARTINEZ, Javier (E.T.A. Activist) born 1.1.1965 in Guernica (Biscay), identity card No 78.865.882, *— ALBERDI URANGA, Itziar (E.T.A. Activist) born 7.10.1963 in Durango (Biscay), identity card No 78.865.693,
1
Persons marked with an * shall be the subject of Article 4 only.
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*— ALBISU IRIARTE, Miguel (E.T.A. Activist; Member of Gestoras Pro-amnistía) born 7.6.1961 in San Sebastián (Guipúzcoa), identity card No 15.954.596, *— ALCALDE LINARES, Angel (E.T.A. Activist; Member of Herri Batasuna/E.H/ Batasuna) born 2.5.1943 in Portugalete (Vizcaya), identity card 14.390.353, — AL-MUGHASSIL, Ahmad Ibrahim (a.k.a. ABU OMRAN; a.k.a.AL-MUGHASSIL, Ahmed Ibrahim) born 26.6.1967 in Qatif-Bab al Shamal, Saudi Arabia; citizen Saudi Arabia, — AL-NASSER, Abdelkarim Hussein Mohamed, born in Al Ihsa, Saudi Arabia; citizen Saudi Arabia, — AL YACOUB, Ibrahim Salih Mohammed, born 16.10.1996 in Tarut, Saudi Arabia; citizen Saudi Arabia, *— ARZALLUS TAPIA, Eusebio (E.T.A. Activist) born 8.11.1957 in Regil (Guipúzcoa), identity card No 15.927.207, — ATWA, Ali (a.k.a. BOUSLIM, Ammar Mansour; a.k.a. SALIM, Hassan Rostom), Lebanon, born 1960 in Lebanon; citizen Lebanon, *— ELCORO AYASTUY, Paulo (E.T.A. Activist; Member of Jarrai/Haika/Segi) born 22.10.1973 in Vergara (Guipúzcoa), identity card No 15.394.062, — EL-HOORIE, Ali Saed Bin Ali (a.k.a. AL-HOURI, Ali Saed Bin Ali; a.k.a EL-HOURI, Ali Saed Bin Ali) born 10.7.1965 alt. 11.7.1965 in El Dibabiya, Saudi Arabia; citizen Saudi Arabia, *— FIGAL ARRANZ, Antonio Agustín (E.T.A. Activist; Member of Kas/Ekin) born 2.12.1972 in Baracaldo (Biscay), identity card No 20.172.692, *— GOGEASCOECHEA ARRONATEGUI, Eneko (E.T.A. Activist), born 29.4.1967 in Guernica (Biscay), identity card No 44.556.097, *— GOIRICELAYA GONZALEZ, Cristina (E.T.A. Activist; Member of Herri Batasuna/ E.H/Batasuna), born 23.12.1967 in Vergara (Guipúzcoa), identity card No 16.282.556, *— IPARRAGUIRRE GUENECHEA, Ma Soledad (E.T.A. Activist) born 25.4.1961 in Escoriaza (Navarre), identity card No 16.255.819, — IZZ-AL-DIN, Hasan (a.k.a GARBAYA, AHMED; a.k.a. SA-ID; a.k.a. SALWWAN, Samir), Lebanon, born 1963 in Lebanon, citizen Lebanon, — MOHAMMED, Khalid Shaikh (a.k.a. ALI, Salem; a.k.a. BIN KHALID, Fahd Bin Adballah; a.k.a. HENIN, Ashraf Refaat Nabith; a.k.a. WADOOD, Khalid Adbul) born 14.4.1965 alt. 1.3.1964 in Kuwait; citizen Kuwait, *— MORCILLO TORRES, Gracia (E.T.A. Activist; Member of Kas/Ekin) born 15.3.1967 in San Sebastián (Guipúzcoa), identity card No 72.439.052, *— MÚGICA GOÑI, Ainhoa (E.T.A. Activist) born 27.6.1970 in San Sebastián (Guipúzcoa), identity card No 34.101.243, — MUGHNIYAH, Imad Fa’iz (a.k.a. MUGHNIYAH, Imad Fayiz), Senior Intelligence Officer of HIZBALLAH, born 7.12.1962 in Tayr Dibba, Lebanon, passport No 432298 (Lebanon), *— MUÑOA ORDOZGOITI, Aloña (E.T.A. Activist; Member of Kas/Ekin) born 6.7.1976 in Segura (Guipúzcoa), identity card No 35.771.259, *— NARVÁEZ GOÑI, Juan Jesús (E.T.A. Activist) born 23.2.1961 in Pamplona (Navarra), identity card No 15.841.101, *— OLARRA GURIDI, Juan Antonio (E.T.A. Activist) born 11.9.1967 in San Sebastián (Guipúzcoa), identity card No 34.084.504, *— ORBE SEVILLANO, Zigor (E.T.A. Activist; Member of Jarrai/Haika/Segi) born 22.9.1975 in Basauri (Biscay), identity card No 45.622.851,
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*— OTEGUI UNANUE, Mikel (E.T.A. Activist; Member of Jarrai/Haika/Segi) born 8.10.1972 in Itsasondo (Guipúzcoa), identity card No 44.132.976, *— PEREZ ARAMBURU, Jon Iñaki (E.T.A. Activist; Member of Jarrai/Haika/Segi) born 18.9.1964 in San Sebastián (Guipúzcoa), identity card No 15.976.521, *— SAEZ DE EGUILAZ MURGUIONDO, Carlos (E.T.A. Activist; Member of Kas/Ekin) born 9.12.1963 in San Sebastián (Guipúzcoa), identity card No 15.962.687, *— URANGA ARTOLA, Kemen (E.T.A. Activist; Member of Herri Batasuna/E.H/ Batasuna) born 25.5.1969 in Ondarroa (Biscay), identity card No 30.627.290, *— VILA MICHELENA, Fermín (E.T.A. Activist; Member of Kas/Ekin) born 12.3.1970 in Irún (Guipúzcoa), identitycard No 15.254.214; 2. GROUPS AND ENTITIES *— Continuity Irish Republican Army (CIRA) *— Euskadi Ta Askatasuna/Tierra Vasca y Libertad/Basque Fatherland and Liberty (E.T.A.) (The following organisations are part of the terrorist group E.T.A.: K.a.s., Xaki; Ekin, JarraiHaika-Segi, Gestoras pro-amnistía.) *— Grupos de Resistencia Antifascista Primero de Octubre/Antifascist Resistance Groups First of October (G.R.A.P.O.) — Hamas-Izz al-Din al-Qassem (terrorist wing of Hamas) *—Loyalist Volunteer Force (LVF) *— Orange Volunteers (OV) — Palestinian Islamic Jihad (PIJ) *— Real IRA *— Red Hand Defenders (RHD) *— Revolutionary Nuclei/Epanastatiki Pirines *— Revolutionary Organisation 17 November/Dekati Evdomi Noemvri *— Revolutionary Popular Struggle/Epanastatikos Laikos Agonas (ELA) *— Ulster Defence Association/Ulster Freedom Fighters (UDA/UFF)
Council Common Position of 27 December 2001 on combating terrorism
(2001/930/CFSP) THE COUNCIL OFTHE EUROPEAN UNION Having regard to the Treaty on European Union, and in particular Articles 15 and 34 thereof, Whereas: (1) At its extraordinary meeting on 21 September 2001, the European Council declared that terrorism is a real challenge to the world and to Europe and that the fight against terrorism will be a priority objective of the European Union. (2) On 28 September 2001, the United Nations Security Council adopted resolution 1373(2001), reaffirming that terrorist acts constitute a threat to peace and security and setting out measures aimed at combating terrorism and in particular the fight against the financing of terrorism and the provision of safe havens for terrorists. (3) On 8 October 2001, the Council reaffirmed the determination of the EU and its Member States to play their full part, in a coordinated manner, in the global coalition against terrorism, under the aegis of the United Nations. The Council also reiterated the Union’s determination to attack the sources which fund terrorism, in close cooperation with the United States. (4) On 19 October 2001, the European Council declared that it is determined to combat terrorism in every form throughout the world and that it will continue its efforts to strengthen the coalition of the international community to combat terrorism in every shape and form, for example by the increased cooperation between the operational services responsible for combating terrorism: Europol, Eurojust, the intelligence services, police forces and judicial authorities. (5) Action has already been taken to implement some of the measures listed below. (6) Under these extraordinary circumstances, action by the Community is needed in order to implement some of the measures listed below, HAS ADOPTED THIS COMMON POSITION:
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Article 1 The wilful provision or collection, by any means, directly or indirectly, of funds by citizens or within the territory of each of the Member States of the European Union with the intention that the funds should be used, or in the knowledge that they are to be used, in order to carry out terrorist acts shall be criminalized.
Article 2 Funds and other financial assets or economic resources of: persons who commit, or attempt to commit, terrorist acts or participate in or facilitate the commission of terrorist acts; entities owned or controlled, directly or indirectly, by such persons; and persons and entities acting on behalf of or under the direction of such persons and entities, including funds derived or generated from property owned or controlled directly or indirectly by such persons and associated persons and entities, shall be frozen.
Article 3 Funds, financial assets or economic resources or financial or other related services shall not be made available, directly or indirectly, for the benefit of: persons who commit or attempt to commit or facilitate or participate in the commission of terrorist acts; entities owned or controlled, directly or indirectly, by such persons; and persons and entities acting on behalf of or under the direction of such persons.
Article 4 Measures shall be taken to suppress any form of support, active or passive, to entities or persons involved in terrorist acts, including measures aimed at suppressing the recruitment of members of terrorist groups and eliminating the supply of weapons to terrorists.
Article 5 Steps shall be taken to prevent the commission of terrorist acts, including by the provision of early warning among Member States or between Member States and third States by exchange of information.
Article 6 Safe haven shall be denied to those who finance, plan, support, or commit terrorist acts, or provide safe havens.
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Article 7 Persons who finance, plan, facilitate or commit terrorist acts shall be prevented from using the territories of the Member States of the European Union for those purposes against Member States or third States or their citizens.
Article 8 Persons who participate in the financing, planning, preparation or perpetration of terrorist acts or in supporting terrorist acts shall be brought to justice; such terrorist acts shall be established as serious criminal offences in laws and regulations of Member States and the punishment shall duly reflect the seriousness of such terrorist acts.
Article 9 Member States shall afford one another, as well as third States, the greatest measure of assistance in connection with criminal investigations or criminal proceedings relating to the financing or support of terrorist acts in accordance with international and domestic law, including assistance in obtaining evidence in the possession of a Member State or a third State which is necessary for the proceedings.
Article 10 The movement of terrorists or terrorist groups shall be prevented by effective border controls and controls on the issuing of identity papers and travel documents, and through measures for preventing counterfeiting, forgery or fraudulent use of identity papers and travel documents. The Council notes the Commission’s intention to put forward proposals in this area, where appropriate.
Article 11 Steps shall be taken to intensify and accelerate the exchange of operational information, especially regarding actions or movements of terrorist persons or networks; forged or falsified travel documents; traffic in arms, explosives or sensitive materials; use of communication technologies by terrorist groups; and the threat posed by the possession of weapons of mass destruction by terrorist groups.
Article 12 Information shall be exchanged among Member States or between Member States and third States in accordance with international and national law, and cooperation shall be enhanced among Member States or between Member States and third States on administrative and judicial matters to prevent the commission of terrorist acts.
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Article 13 Cooperation among Member States or between Member States and third States, particularly through bilateral and multilateral arrangements and agreements, to prevent and suppress terrorist attacks and take action against perpetrators of terrorist acts shall be enhanced.
Article 14 Member States shall become parties as soon as possible to the relevant international conventions and protocols relating to terrorism listed in the Annex.
Article 15 Member States shall increase cooperation and fully implement the relevant international conventions and protocols relating to terrorism and United Nations Security Council Resolutions 1269(1999) and 1368(2001).
Article 16 Appropriate measures shall be taken in accordance with the relevant provisions of national and international law, including international standards of human rights, before granting refugee status, for the purpose of ensuring that the asylumseeker has not planned, facilitated or participated in the commission of terrorist acts. The Council notes the Commission’s intention to put forward proposals in this area, where appropriate.
Article 17 Steps shall be taken in accordance with international law to ensure that refugee status is not abused by the perpetrators, organisers or facilitators of terrorist acts and that claims of political motivation are not recognised as grounds for refusing requests for the extradition of alleged terrorists. The Council notes the Commission’s intention to put forward proposals in this area, where appropriate.
Article 18 This Common Position shall take effect on the date of its adoption.
Article 19 This Common Position shall be published in the Official Journal. Done at Brussels, 27 December 2001. For the Council The President L. MICHEL
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Annex List of international conventions and protocols relating to terrorism referred to in Article 14
1. Convention on Offenses and Certain Other Offenses Committed on Board Aircraft –
Tokyo 14.9.1963 2. Convention for the Unlawful Seizure of Aircraft – The Hague 16.12.1970 3. Convention for the Suppression of Unlawful Acts Against the Safety of Aircraft –
Montreal 23.9.1971 4. Convention on the Prevention and Punishment of Crimes Against Internationally
5. 6. 7. 8.
9. 10. 11. 12. 13.
Protected Persons, Including Diplomatic Personnel – New York 14.12.1973 European Convention for the Suppression of Terrorism – Strasbourg 27.1.1977 Convention Against the Taking of Hostages – New York 17.12.1979 Convention on the Physical Protection of Nuclear Materials – Vienna 3.3.1980 Protocol for the Suppression of Unlawful Acts of Violence at Airports Serving International Aviation, complementary to the Convention for the Suppression of Unlawful Acts Against the Safety of Aircraft – Montreal 24.2.1988 Convention for the Suppression of unlawful Acts Against the Safety of Maritime Navigation – Rome 10.3.1988 Protocol for the Suppression of Unlawful Acts Against the Safety of Fixed Platforms on the Continental Shelf – Rome 10.3.1988 Convention on the Marking of Plastic Explosives for the Purpose of Detection – Montreal 1.3.1991 UN Convention for the Suppression of Terrorist Bombings – New York 15.12.1997 UN Convention for the Suppression of Financing of Terrorism – New York, 9.12.1999
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Customer Due Diligence for Banks*
A. Introduction Supervisors around the world are increasingly recognizing the importance of ensuring that their banks have adequate controls and procedures in place so that they know the customers with whom they are dealing. Adequate due diligence on new and existing customers is a key part of these controls. Without this due diligence, banks can become subject to reputational, operational, legal and concentration risks, which can result in significant financial cost. In reviewing the findings of an internal survey of cross-border banking in 1999, the Basel Committee identified deficiencies in a large number of countries’ knowyour-customer (KYC) policies for banks. Judged from a supervisory perspective, KYC policies in some countries have significant gaps and in others they are nonexistent. Even among countries with well-developed financial markets, the extent of KYC robustness varies. Consequently, the Basel Committee asked the Working Group on Cross-border Banking 1 to examine the KYC procedures currently in place and to draw up recommended standards applicable to banks in all countries. The resulting paper was issued as a consultative document in January 2001. Following a review of the comments received, the Working Group has revised the paper and the Basel Committee is now distributing it worldwide in the expectation that the KYC framework presented here will become the benchmark for supervisors to establish national practices and for banks to design their own programmes. It is important to acknowledge that supervisory practices of some jurisdictions already meet or exceed the objective of this paper and, as a result, they may not need to implement any changes. KYC is most closely associated with the fight against money-laundering, which is essentially the province of the Financial Action Task Force (FATF).2 It is not the * Bank for International Settlements, Basel Committee on Banking Supervision, October 2001. 1
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This is a joint group consisting of members of the Basel Committee and of the Offshore Group of Banking Supervisors. The FATF is an inter-governmental body which develops and promotes policies, both nationally and internationally, to combat money laundering. It has 29 member countries and two regional organisations. It works in close cooperation with other international
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Committee’s intention to duplicate the efforts of the FATF. Instead, the Committee’s interest is from a wider prudential perspective. Sound KYC policies and procedures are critical in protecting the safety and soundness of banks and the integrity of banking systems. The Basel Committee and the Offshore Group of Banking Supervisors (OGBS) continue to support strongly the adoption and implementation of the FATF recommendations, particularly those relating to banks, and intend the standards in this paper to be consistent with the FATF recommendations. The Committee and the OGBS will also consider the adoption of any higher standards introduced by the FATF as a result of its current review of the 40 Recommendations. Consequently, the Working Group has been and will remain in close contact with the FATF as it develops its thoughts. The Basel Committee’s approach to KYC is from a wider prudential, not just anti-money laundering, perspective. Sound KYC procedures must be seen as a critical element in the effective management of banking risks. KYC safeguards go beyond simple account opening and record-keeping and require banks to formulate a customer acceptance policy and a tiered customer identification programme that involves more extensive due diligence for higher risk accounts, and includes proactive account monitoring for suspicious activities. The Basel Committee’s interest in sound KYC standards originates from its concerns for market integrity and has been heightened by the direct and indirect losses incurred by banks due to their lack of diligence in applying appropriate procedures. These losses could probably have been avoided and damage to the banks’ reputation significantly diminished had the banks maintained effective KYC programmes. This paper reinforces the principles established in earlier Committee papers by providing more precise guidance on the essential elements of KYC standards and their implementation. In developing this guidance, the Working Group has drawn on practices in member countries and taken into account evolving supervisory developments. The essential elements presented in this paper are guidance as to minimum standards for worldwide implementation for all banks. These standards may need to be supplemented and/or strengthened, by additional measures tailored to the risks of particular institutions and risks in the banking system of individual countries. For example, enhanced diligence is required in the case of higher-risk accounts or for banks that specifically aim to attract high net-worth customers. In a number of specific sections in this paper, there are recommendations for higher standards of due diligence for higher risk areas within a bank, where applicable. The need for rigorous customer due diligence standards is not restricted to banks.
cont. Prevention, the Council of Europe, the Asia-Pacific Group on Money Laundering and the Caribbean Financial Action Task Force. The FATF defines money laundering as the processing of criminal proceeds in order to disguise their illegal origin.
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The Basel Committee believes similar guidance needs to be developed for all nonbank financial institutions and professional intermediaries of financial services such as lawyers and accountants.
B. Importance of KYC Standards for Supervisors and Banks The FATF and other international groupings have worked intensively on KYC issues, and the FATF’s 40 Recommendations on combating money-laundering 3 have international recognition and application. It is not the intention of this paper to duplicate that work. At the same time, sound KYC procedures have particular relevance to the safety and soundness of banks, in that: they help to protect banks’ reputation and the integrity of banking systems by reducing the likelihood of banks becoming a vehicle for or a victim of financial crime and suffering consequential reputational damage; they constitute an essential part of sound risk management (e.g., by providing the basis for identifying, limiting and controlling risk exposures in assets and liabilities, including assets under management). The inadequacy or absence of KYC standards can subject banks to serious customer and counterparty risks, especially reputational, operational, legal and concentration risks. It is worth noting that all these risks are interrelated. However, any one of them can result in significant financial cost to banks (e.g., through the withdrawal of funds by depositors, the termination of inter-bank facilities, claims against the bank, investigation costs, asset seizures and freezes, and loan losses), as well as the need to divert considerable management time and energy to resolving problems that arise. Reputational risk poses a major threat to banks, since the nature of their business requires maintaining the confidence of depositors, creditors and the general marketplace. Reputational risk is defined as the potential that adverse publicity regarding a bank’s business practices and associations, whether accurate or not, will cause a loss of confidence in the integrity of the institution. Banks are especially vulnerable to reputational risk because they can so easily become a vehicle for or a victim of illegal activities perpetrated by their customers. They need to protect themselves by means of continuous vigilance through an effective KYC programme. Assets under management, or held on a fiduciary basis, can pose particular reputational dangers. Operational risk can be defined as the risk of direct or indirect loss resulting
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See FATF recommendations 10 to 19 which are reproduced in Annex 2.
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from inadequate or failed internal processes, people and systems or from external events. Most operational risk in the KYC context relates to weaknesses in the implementation of banks’ programmes, ineffective control procedures and failure to practise due diligence. A public perception that a bank is not able to manage its operational risk effectively can disrupt or adversely affect the business of the bank. Legal risk is the possibility that lawsuits, adverse judgements or contracts that turn out to be unenforceable can disrupt or adversely affect the operations or condition of a bank. Banks may become subject to lawsuits resulting from the failure to observe mandatory KYC standards or from the failure to practise due diligence. Consequently, banks can, for example, suffer fines, criminal liabilities and special penalties imposed by supervisors. Indeed, a court case involving a bank may have far greater cost implications for its business than just the legal costs. Banks will be unable to protect themselves effectively from such legal risks if they do not engage in due diligence in identifying their customers and understanding their business. Supervisory concern about concentration risk mostly applies on the assets side of the balance sheet. As a common practice, supervisors not only require banks to have information systems to identify credit concentrations but most also set prudential limits to restrict banks’ exposures to single borrowers or groups of related borrowers. Without knowing precisely who the customers are, and their relationship with other customers, it will not be possible for a bank to measure its concentration risk. This is particularly relevant in the context of related counterparties and connected lending. On the liabilities side, concentration risk is closely associated with funding risk, particularly the risk of early and sudden withdrawal of funds by large depositors, with potentially damaging consequences for the bank’s liquidity. Funding risk is more likely to be higher in the case of small banks and those that are less active in the wholesale markets than large banks. Analyzing deposit concentrations requires banks to understand the characteristics of their depositors, including not only their identities but also the extent to which their actions may be linked with those of other depositors. It is essential that liabilities managers in small banks not only know but maintain a close relationship with large depositors, or they will run the risk of losing their funds at critical times. Customers frequently have multiple accounts with the same bank, but in offices located in different countries. To effectively manage the reputational, compliance and legal risk arising from such accounts, banks should be able to aggregate and monitor significant balances and activity in these accounts on a fully consolidated worldwide basis, regardless of whether the accounts are held on balance sheet, off balance sheet, as assets under management, or on a fiduciary basis. Both the Basel Committee and the Offshore Group of Banking Supervisors are fully convinced that effective KYC practices should be part of the risk management and internal control systems in all banks worldwide. National supervisors are responsible for ensuring that banks have minimum standards and internal controls that allow them to adequately know their customers. Voluntary
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codes of conduct4 issued by industry organisations or associations can be of considerable value in underpinning regulatory guidance, by giving practical advice to banks on operational matters. However, such codes cannot be regarded as a substitute for formal regulatory guidance.
C. Essential elements of KYC standards The Basel Committee’s guidance on KYC has been contained in the following three papers and they reflect the evolution of the supervisory thinking over time. The Prevention of Criminal Use of the Banking System for the Purpose of MoneyLaundering issued in 1988 stipulates the basic ethical principles and encourages banks to put in place effective procedures to identify customers, decline suspicious transactions and cooperate with law enforcement agencies. The 1997 Core Principles for Effective Banking Supervision states, in a broader discussion of internal controls, that banks should have adequate policies, practices and procedures in place, including strict ‘know-your-customer’ rules; specifically, supervisors should encourage the adoption of the relevant recommendations of the FATF. These relate to customer identification and record-keeping, increased diligence by financial institutions in detecting and reporting suspicious transactions, and measures to deal with countries with inadequate anti-money laundering measures. The 1999 Core Principles Methodology further elaborates the Core Principles by listing a number of essential and additional criteria. (Annex 1 sets out the relevant extracts from the Core Principles and the Methodology.) All banks should be required to ‘have in place adequate policies, practices and procedures that promote high ethical and professional standards and prevent the bank from being used, intentionally or unintentionally, by criminal elements’.5 Certain key elements should be included by banks in the design of KYC programmes. Such essential elements should start from the banks’ risk management and control procedures and should include (1) customer acceptance policy, (2) customer identification, (3) on-going monitoring of high risk accounts and (4) risk management. Banks should not only establish the identity of their customers, but should also monitor account activity to determine those transactions that do not conform with the normal or expected transactions for that customer or type of account. KYC should be a core feature of banks’ risk management and control procedures, and be complemented by regular compliance reviews and internal audit. The intensity of KYC programmes beyond these essential elements should be tailored to the degree of risk. 4
5
An example of an industry code is the ‘Global anti-money-laundering guidelines for Private Banking’ (also called the Wolfsberg Principles) that was drawn up in October 2000 by twelve major banks with significant involvement in private banking. Core Principles Methodology, Essential Criterion 1.
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I.
Customer acceptance policy
Banks should develop clear customer acceptance policies and procedures, including a description of the types of customer that are likely to pose a higher than average risk to a bank. In preparing such policies, factors such as customers’ background, country of origin, public or high profile position, linked accounts, business activities or other risk indicators should be considered. Banks should develop graduated customer acceptance policies and procedures that require more extensive due diligence for higher risk customers. For example, the policies may require the most basic account-opening requirements for a working individual with a small account balance. It is important that the customer acceptance policy is not so restrictive that it results in a denial of access by the general public to banking services, especially for people who are financially or socially disadvantaged. On the other hand, quite extensive due diligence would be essential for an individual with a high net worth whose source of funds is unclear. Decisions to enter into business relationships with higher risk customers, such as politically exposed persons (see section 2.2.3 below), should be taken exclusively at senior management level.
II.
Customer identification
Customer identification is an essential element of KYC standards. For the purposes of this paper, a customer includes: the person or entity that maintains an account with the bank or those on whose behalf an account is maintained (i.e., beneficial owners); the beneficiaries of transactions conducted by professional intermediaries; and any person or entity connected with a financial transaction who can pose a significant reputational or other risk to the bank. Banks should establish a systematic procedure for identifying new customers and should not establish a banking relationship until the identity of a new customer is satisfactorily verified. Banks should ‘document and enforce policies for identification of customers and those acting on their behalf’.6 The best documents for verifying the identity of customers are those most difficult to obtain illicitly and to counterfeit. Special attention should be exercised in the case of non-resident customers and in no case should a bank short-circuit identity procedures just because the new customer is unable to present himself for interview. The bank should always ask itself why the customer has chosen to open an account in a foreign jurisdiction. The customer identification process applies naturally at the outset of the relationship. To ensure that records remain up-to-date and relevant, there is a need for banks to undertake regular reviews of existing records.7 An appropriate time to 6 7
Core Principles Methodology, Essential Criterion 2. The application of new KYC standards to existing accounts is currently subject to FATF review.
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do so is when a transaction of significance takes place, when customer documentation standards change substantially, or when there is a material change in the way that the account is operated. However, if a bank becomes aware at any time that it lacks sufficient information about an existing customer, it should take steps to ensure that all relevant information is obtained as quickly as possible. Banks that offer private banking services are particularly exposed to reputational risk, and should therefore apply enhanced due diligence to such operations. Private banking accounts, which by nature involve a large measure of confidentiality, can be opened in the name of an individual, a commercial business, a trust, an intermediary or a personalized investment company. In each case reputational risk may arise if the bank does not diligently follow established KYC procedures. All new clients and new accounts should be approved by at least one person, of appropriate seniority, other than the private banking relationship manager. If particular safeguards are put in place internally to protect confidentiality of private banking customers and their business, banks must still ensure that at least equivalent scrutiny and monitoring of these customers and their business can be conducted, e.g. they must be open to review by compliance officers and auditors. Banks should develop ‘clear standards on what records must be kept on customer identification and individual transactions and their retention period’.8 Such a practice is essential to permit a bank to monitor its relationship with the customer, to understand the customer’s on-going business and, if necessary, to provide evidence in the event of disputes, legal action, or a financial investigation that could lead to criminal prosecution. As the starting point and natural follow-up of the identification process, banks should obtain customer identification papers and retain copies of them for at least five years after an account is closed. They should also retain all financial transaction records for at least five years after the transaction has taken place.
1. General identification requirements Banks need to obtain all information necessary to establish to their full satisfaction the identity of each new customer and the purpose and intended nature of the business relationship. The extent and nature of the information depends on the type of applicant (personal, corporate, etc.) and the expected size of the account. National supervisors are encouraged to provide guidance to assist banks in designing their own identification procedures. The Working Group intends to develop essential elements of customer identification requirements. When an account has been opened, but problems of verification arise in the banking relationship which cannot be resolved, the bank should close the account and return the monies to the source from which they were received.9
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Core Principles Methodology, Essential Criterion 2. Subject to any national legislation concerning handling of suspicious transactions.
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While the transfer of an opening balance from an account in the customer’s name in another bank subject to the same KYC standard may provide some comfort, banks should nevertheless consider the possibility that the previous account manager may have asked for the account to be removed because of a concern about dubious activities. Naturally, customers have the right to move their business from one bank to another. However, if a bank has any reason to believe that an applicant is being refused banking facilities by another bank, it should apply enhanced diligence procedures to the customer. Banks should never agree to open an account or conduct ongoing business with a customer who insists on anonymity or who gives a fictitious name. Nor should confidential numbered10 accounts function as anonymous accounts but they should be subject to exactly the same KYC procedures as all other customer accounts, even if the test is carried out by selected staff. Whereas a numbered account can offer additional protection for the identity of the account-holder, the identity must be known to a sufficient number of staff to operate proper due diligence. Such accounts should in no circumstances be used to hide the customer identity from a bank’s compliance function or from the supervisors.
2.
Specific identification issues
There are a number of more detailed issues relating to customer identification which need to be addressed. Several of these are currently under consideration by the FATF as part of a general review of its 40 recommendations, and the Working Group recognizes the need to be consistent with the FATF. (A) TRUST, NOMINEE AND FIDUCIARY ACCOUNTS
Trust, nominee and fiduciary accounts can be used to circumvent customer identification procedures. While it may be legitimate under certain circumstances to provide an extra layer of security to protect the confidentiality of legitimate private banking customers, it is essential that the true relationship is understood. Banks should establish whether the customer is taking the name of another customer, acting as a ‘front’, or acting on behalf of another person as trustee, nominee or other intermediary. If so, a necessary precondition is receipt of satisfactory evidence of the identity of any intermediaries, and of the persons upon whose behalf they are acting, as well as details of the nature of the trust or other arrangements in place. Specifically, the identification of a trust should include the trustees, settlors/grantors and beneficiaries.11
10 11
In a numbered account, the name of the beneficial owner is known to the bank but is substituted by an account number or code name in subsequent documentation. Beneficiaries should be identified as far as possible when defined. It is recognized that it may not be possible to identify the beneficiaries of trusts precisely at the outset. For example, some beneficiaries may be unborn children and some may be conditional on the
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(B) CORPORATE VEHICLES
Banks need to be vigilant in preventing corporate business entities from being used by natural persons as a method of operating anonymous accounts. Personal asset holding vehicles, such as international business companies, may make proper identification of customers or beneficial owners difficult. A bank should understand the structure of the company, determine the source of funds, and identify the beneficial owners and those who have control over the funds. Special care needs to be exercised in initiating business transactions with companies that have nominee shareholders or shares in bearer form. Satisfactory evidence of the identity of beneficial owners of all such companies needs to be obtained. In the case of entities which have a significant proportion of capital in the form of bearer shares, extra vigilance is called for. A bank may be completely unaware that the bearer shares have changed hands. The onus is on banks to put in place satisfactory procedures to monitor the identity of material beneficial owners. This may require the bank to immobilize the shares, for example, by holding the bearer shares in custody. (C) INTRODUCED BUSINESS
The performance of identification procedures can be time consuming and there is a natural desire to limit any inconvenience for new customers. In some countries, it has therefore become customary for banks to rely on the procedures undertaken by other banks or introducers when business is being referred. In doing so, banks risk placing excessive reliance on the due diligence procedures that they expect the introducers to have performed. Relying on due diligence conducted by an introducer, however reputable, does not in any way remove the ultimate responsibility of the recipient bank to know its customers and their business. In particular, banks should not rely on introducers that are subject to weaker standards than those governing the banks’ own KYC procedures or that are unwilling to share copies of due diligence documentation. The Basel Committee recommends that banks that use introducers should carefully assess whether the introducers are ‘fit and proper’ and are exercising the necessary due diligence in accordance with the standards set out in this paper. The ultimate responsibility for knowing customers always lies with the bank. Banks should use the following criteria to determine whether an introducer can be relied upon: 12 it must comply with the minimum customer due diligence practices identified in this paper; the customer due diligence procedures of the introducer should be as rigorous as those which the bank would have conducted itself for the customer;
cont. occurrence of specific events. In addition, beneficiaries being specific classes of individuals (e.g., employee pension funds) may be appropriately dealt with as pooled accounts as referred to in paragraphs 38–9. 12 The FATF is currently engaged in a review of the appropriateness of eligible introducers.
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the bank must satisfy itself as to the reliability of the systems put in place by the introducer to verify the identity of the customer; the bank must reach agreement with the introducer that it will be permitted to verify the due diligence undertaken by the introducer at any stage; and all relevant identification data and other documentation pertaining to the customer’s identity should be immediately submitted by the introducer to the bank, who must carefully review the documentation provided. Such information must be available for review by the supervisor and the financial intelligence unit or equivalent enforcement agency, where appropriate legal authority has been obtained. In addition, banks should conduct periodic reviews to ensure that introducers on which they rely continue to conform to the criteria set out above. (D) CLIENT ACCOUNTS OPENED BY PROFESSIONAL INTERMEDIARIES
When a bank has knowledge or reason to believe that a client account opened by a professional intermediary is on behalf of a single client, that client must be identified. Banks often hold ‘pooled’ accounts managed by professional intermediaries on behalf of entities such as mutual funds, pension funds and money funds. Banks also hold pooled accounts managed by lawyers or stockbrokers that represent funds held on deposit or in escrow for a range of clients. Where funds held by the intermediary are not co-mingled at the bank, but where there are ‘sub-accounts’ which can be attributable to each beneficial owner, all beneficial owners of the account held by the intermediary must be identified. Where the funds are co-mingled, the bank should look through to the beneficial owners. There can be circumstances where the bank may not need to look beyond the intermediary, for example, when the intermediary is subject to the same regulatory and money-laundering legislation and procedures, and in particular is subject to the same due diligence standards in respect of its client base as the bank. National supervisory guidance should clearly set out those circumstances in which banks need not look beyond the intermediary. Banks should accept such accounts only on the condition that they are able to establish that the intermediary has engaged in a sound due diligence process and has the systems and controls to allocate the assets in the pooled accounts to the relevant beneficiaries. In assessing the due diligence process of the intermediary, the bank should apply the criteria set out in paragraph 36 above, in respect of introduced business, in order to determine whether a professional intermediary can be relied upon. Where the intermediary is not empowered to furnish the required information on beneficiaries to the bank, for example, lawyers13 bound by professional secrecy codes or when that intermediary is not subject to due diligence standards equivalent to 13
The FATF is currently engaged in a review of KYC procedures governing accounts opened by lawyers on behalf of clients.
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those set out in this paper or to the requirements of comprehensive anti-money laundering legislation, then the bank should not permit the intermediary to open an account. (E) POLITICALLY EXPOSED PERSONS
Business relationships with individuals holding important public positions and with persons or companies clearly related to them may expose a bank to significant reputational and/or legal risks. Such politically exposed persons (‘PEPs’) are individuals who are or have been entrusted with prominent public functions, including heads of State or of government, senior politicians, senior government, judicial or military officials, senior executives of publicly-owned corporations and important political party officials. There is always a possibility, especially in countries where corruption is widespread, that such persons abuse their public powers for their own illicit enrichment through the receipt of bribes, embezzlement, and so on. Accepting and managing funds from corrupt PEPs will severely damage the bank’s own reputation and can undermine public confidence in the ethical standards of an entire financial centre, since such cases usually receive extensive media attention and strong political reaction, even if the illegal origin of the assets is often difficult to prove. In addition, the bank may be subject to costly information requests and seizure orders from law enforcement or judicial authorities (including international mutual assistance procedures in criminal matters) and could be liable to actions for damages by the State concerned or the victims of a regime. Under certain circumstances, the bank and/or its officers and employees themselves can be exposed to charges of money laundering, if they know or should have known that the funds stemmed from corruption or other serious crimes. Some countries have recently amended or are in the process of amending their laws and regulations to criminalize active corruption of foreign civil servants and public officers in accordance with the relevant international convention.14 In these jurisdictions foreign corruption becomes a predicate offence for money laundering and all the relevant anti-money laundering laws and regulations apply (e.g., reporting of suspicious transactions, prohibition on informing the customer, internal freeze of funds, etc.). But even in the absence of such an explicit legal basis in criminal law, it is clearly undesirable, unethical and incompatible with the fit and proper conduct of banking operations to accept or maintain a business relationship if the bank knows or must assume that the funds derive from corruption or misuse of public assets. There is a compelling need for a bank considering a relationship with a person whom it suspects of being a PEP to identify that person fully, as well as people and companies that are clearly related to him or her.
14
See OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, adopted by the Negotiating Conference on 21 November 1997.
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Banks should gather sufficient information from a new customer, and check publicly available information, in order to establish whether or not the customer is a PEP. Banks should investigate the source of funds before accepting a PEP. The decision to open an account for a PEP should be taken at a senior management level. (F) NON-FACE-TO-FACE CUSTOMERS
Banks are increasingly asked to open accounts on behalf of customers who do not present themselves for personal interview. This has always been a frequent event in the case of non-resident customers, but it has increased significantly with the recent expansion of postal, telephone and electronic banking. Banks should apply equally effective customer identification procedures and on-going monitoring standards for non-face-to-face customers as for those available for interview. One issue that has arisen in this connection is the possibility of independent verification by a reputable third party. This whole subject of non-face-to-face customer identification is being discussed by the FATF, and is also under review in the context of amending the 1991 EEC Directive. A typical example of a non-face-to-face customer is one who wishes to conduct electronic banking via the Internet or similar technology. Electronic banking currently incorporates a wide array of products and services delivered over telecommunications networks. The impersonal and borderless nature of electronic banking combined with the speed of the transaction inevitably creates difficulty in customer identification and verification. As a basic policy, supervisors expect that banks should proactively assess various risks posed by emerging technologies and design customer identification procedures with due regard to such risks. 15 Even though the same documentation can be provided by face-to-face and nonface-to-face customers, there is a greater difficulty in matching the customer with the documentation in the case of non-face-to-face customers. With telephone and electronic banking, the verification problem is made even more difficult. In accepting business from non-face-to-face customers: banks should apply equally effective customer identification procedures for non-face-to-face customers as for those available for interview; and there must be specific and adequate measures to mitigate the higher risk. Examples of measures to mitigate risk include: certification of documents presented; requisition of additional documents to complement those which are required for face-to-face customers; independent contact with the customer by the bank; 15
The Electronic Banking Group of the Basel Committee issued a paper on risk management principles for electronic banking in May 2001.
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third party introduction, e.g., by an introducer subject to the criteria established in paragraph 36; or requiring the first payment to be carried out through an account in the customer’s name with another bank subject to similar customer due diligence standards. (G) CORRESPONDENT BANKING
Correspondent banking is the provision of banking services by one bank (the ‘correspondent bank’) to another bank (the ‘respondent bank’). Used by banks throughout the world, correspondent accounts enable banks to conduct business and provide services that the banks do not offer directly. Correspondent accounts that merit particular care involve the provision of services in jurisdictions where the respondent banks have no physical presence. However, if banks fail to apply an appropriate level of due diligence to such accounts, they expose themselves to the range of risks identified earlier in this paper, and may find themselves holding and/or transmitting money linked to corruption, fraud or other illegal activity. Banks should gather sufficient information about their respondent banks to understand fully the nature of the respondent’s business. Factors to consider include: information about the respondent bank’s management, major business activities, where they are located and its money-laundering prevention and detection efforts; the purpose of the account; the identity of any third-party entities that will use the correspondent banking services; and the condition of bank regulation and supervision in the respondent’s country. Banks should only establish correspondent relationships with foreign banks that are effectively supervised by the relevant authorities. For their part, respondent banks should have effective customer acceptance and KYC policies. In particular, banks should refuse to enter into or continue a correspondent banking relationship with a bank incorporated in a jurisdiction in which it has no physical presence and which is unaffiliated with a regulated financial group (i.e., shell banks). Banks should pay particular attention when continuing relationships with respondent banks located in jurisdictions that have poor KYC standards or have been identified as being ‘noncooperative’ in the fight against anti-money laundering. Banks should establish that their respondent banks have due diligence standards as set out in this paper, and employ enhanced due diligence procedures with respect to transactions carried out though the correspondent accounts. Banks should be particularly alert to the risk that correspondent accounts might be used directly by third parties to transact business on their own behalf (e.g., payable-through accounts). Such arrangements give rise to most of the same considerations applicable to introduced business and should be treated in accordance with the criteria set out in paragraph 36.
III. On-going Monitoring of Accounts and Transactions On-going monitoring is an essential aspect of effective KYC procedures. Banks can
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only effectively control and reduce their risk if they have an understanding of normal and reasonable account activity of their customers so that they have a means of identifying transactions which fall outside the regular pattern of an account’s activity. Without such knowledge, they are likely to fail in their duty to report suspicious transactions to the appropriate authorities in cases where they are required to do so. The extent of the monitoring needs to be risk-sensitive. For all accounts, banks should have systems in place to detect unusual or suspicious patterns of activity. This can be done by establishing limits for a particular class or category of accounts. Particular attention should be paid to transactions that exceed these limits. Certain types of transactions should alert banks to the possibility that the customer is conducting unusual or suspicious activities. They may include transactions that do not appear to make economic or commercial sense, or that involve large amounts of cash deposits that are not consistent with the normal and expected transactions of the customer. Very high account turnover, inconsistent with the size of the balance, may indicate that funds are being ‘washed’ through the account. Examples of suspicious activities can be very helpful to banks and should be included as part of a jurisdiction’s anti-money laundering procedures and/or guidance. There should be intensified monitoring for higher risk accounts. Every bank should set key indicators for such accounts, taking note of the background of the customer, such as the country of origin and source of funds, the type of transactions involved, and other risk factors. For higher risk accounts: Banks should ensure that they have adequate management information systems to provide managers and compliance officers with timely information needed to identify, analyze and effectively monitor higher risk customer accounts. The types of reports that may be needed include reports of missing account opening documentation, transactions made through a customer account that are unusual, and aggregations of a customer’s total relationship with the bank. Senior management in charge of private banking business should know the personal circumstances of the bank’s high risk customers and be alert to sources of third-party information. Significant transactions by these customers should be approved by a senior manager. Banks should develop a clear policy and internal guidelines, procedures and controls and remain especially vigilant regarding business relationships with PEPs and high profile individuals or with persons and companies that are clearly related to or associated with them. 16 As all PEPs may not be identified 16
It is unrealistic to expect the bank to know or investigate every distant family, political or business connection of a foreign customer. The need to pursue suspicions will depend on the size of the assets or turnover, pattern of transactions, economic background, reputation of the country, plausibility of the customer’s explanations, etc. It should however be noted that PEPs (or rather their family members and friends) would not necessarily present
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initially and since existing customers may subsequently acquire PEP status, regular reviews of at least the more important customers should be undertaken.
IV. Risk Management Effective KYC procedures embrace routines for proper management oversight, systems and controls, segregation of duties, training and other related policies. The board of directors of the bank should be fully committed to an effective KYC programme by establishing appropriate procedures and ensuring their effectiveness. Explicit responsibility should be allocated within the bank for ensuring that the bank’s policies and procedures are managed effectively and are, at a minimum, in accordance with local supervisory practice. The channels for reporting suspicious transactions should be clearly specified in writing, and communicated to all personnel. There should also be internal procedures for assessing whether the bank’s statutory obligations under recognized suspicious activity reporting regimes require the transaction to be reported to the appropriate law enforcement and/or supervisory authorities. A bank’s internal audit and compliance functions have important responsibilities in evaluating and ensuring adherence to KYC policies and procedures. As a general rule, the compliance function should provide an independent evaluation of the bank’s own policies and procedures, including legal and regulatory requirements. Its responsibilities should include ongoing monitoring of staff performance through sample testing of compliance and review of exception reports to alert senior management or the Board of Directors if it believes management is failing to address KYC procedures in a responsible manner. Internal audit plays an important role in independently evaluating the risk management and controls, discharging its responsibility to the Audit Committee of the Board of Directors or a similar oversight body through periodic evaluations of the effectiveness of compliance with KYC policies and procedures, including related staff training. Management should ensure that audit functions are staffed adequately with individuals who are well versed in such policies and procedures. In addition, internal auditors should be proactive in following-up their findings and criticisms. All banks must have an ongoing employee-training programme so that bank staff are adequately trained in KYC procedures. The timing and content of training for various sectors of staff will need to be adapted by the bank for its own needs. Training requirements should have a different focus for new staff, front-line staff, compliance staff or staff dealing with new customers. New staff should be educated in the importance of KYC policies and the basic requirements at the bank. Frontline staff members who deal directly with the public should be trained to verify the
cont. themselves in that capacity, but rather as ordinary (albeit wealthy) business people, masking the fact they owe their high position in a legitimate business corporation only to their privileged relation with the holder of the public office.
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identity of new customers, to exercise due diligence in handling accounts of existing customers on an ongoing basis and to detect patterns of suspicious activity. Regular refresher training should be provided to ensure that staff are reminded of their responsibilities and are kept informed of new developments. It is crucial that all relevant staff fully understand the need for and implement KYC policies consistently. A culture within banks that promotes such understanding is the key to successful implementation. In many countries, external auditors also have an important role to play in monitoring banks’ internal controls and procedures, and in confirming that they are in compliance with supervisory practice.
D. The Role of Supervisors Based on existing international KYC standards, national supervisors are expected to set out supervisory practice governing banks’ KYC programmes. The essential elements as presented in this paper should provide clear guidance for supervisors to proceed with the work of designing or improving national supervisory practice. In addition to setting out the basic elements for banks to follow, supervisors have a responsibility to monitor that banks are applying sound KYC procedures and are sustaining ethical and professional standards on a continuous basis. Supervisors should ensure that appropriate internal controls are in place and that banks are in compliance with supervisory and regulatory guidance. The supervisory process should include not only a review of policies and procedures but also a review of customer files and the sampling of some accounts. Supervisors should always have the right to access all documentation related to accounts maintained in that jurisdiction, including any analysis the bank has made to detect unusual or suspicious transactions. Supervisors have a duty not only to ensure their banks maintain high KYC standards to protect their own safety and soundness but also to protect the integrity of their national banking system. 17 Supervisors should make it clear that they will take appropriate action, which may be severe and public if the circumstances warrant, against banks and their officers who demonstrably fail to follow their own internal procedures and regulatory requirements. In addition, supervisors should ensure that banks are aware of and pay particular attention to transactions that involve jurisdictions where standards are considered inadequate. The FATF and some national authorities have listed a number of countries and jurisdictions that are considered to have legal and administrative arrangements that do not comply with international standards for combating money laundering. Such findings should be a component of a bank’s KYC policies and procedures. 17
Many supervisors also have a duty to report any suspicious, unusual or illegal transactions that they detect, for example, during onsite examinations.
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F. Implementation of KYC Standards in a Cross-border Context Supervisors around the world should seek, using their best efforts, to develop and implement their national KYC standards fully in line with international standards so as to avoid potential regulatory arbitrage and safeguard the integrity of domestic and international banking systems. The implementation and assessment of such standards put to the test the willingness of supervisors to cooperate with each other in a very practical way, as well as the ability of banks to control risks on a groupwide basis. This is a challenging task for banks and supervisors alike. Supervisors expect banking groups to apply an accepted minimum standard of KYC policies and procedures to both their local and overseas operations. The supervision of international banking can only be effectively carried out on a consolidated basis, and reputational risk as well as other banking risks are not limited to national boundaries. Parent banks must communicate their policies and procedures to their overseas branches and subsidiaries, including non-banking entities such as trust companies, and have a routine for testing compliance against both home- and host-country KYC standards in order for their programmes to operate effectively globally. Such compliance tests will also be tested by external auditors and supervisors. Therefore, it is important that KYC documentation is properly filed and available for their inspection. As far as compliance checks are concerned, supervisors and external auditors should in most cases examine systems and controls and look at customer accounts and transactions monitoring as part of a sampling process. However small an overseas establishment is, a senior officer should be designated to be directly responsible for ensuring that all relevant staff are trained in, and observe, KYC procedures that meet both home and host standards. While this officer will bear primary responsibility, he should be supported by internal auditors and compliance officers from both local and head offices as appropriate. Where the minimum KYC standards of the home and host countries differ, branches and subsidiaries in the host jurisdictions should apply the higher standard of the two. In general, there should be no impediment to prevent a bank from adopting standards that are higher than the minima required locally. If, however, local laws and regulations (especially secrecy provisions) prohibit the implementation of home-country KYC standards, where the latter are more stringent, host country supervisors should use their best endeavours to have the law and regulations changed. In the meantime, overseas branches and subsidiaries would have to comply with host country standards, but they should make sure the head office or parent bank and its home-country supervisor are fully informed of the nature of the difference. Criminal elements are likely to be drawn toward jurisdictions with such impediments. Hence, banks should be aware of the high reputational risk of conducting business in these jurisdictions. Parent banks should have a procedure for
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reviewing the vulnerability of the individual operating units and implement additional safeguards where appropriate. In extreme cases, supervisors should consider placing additional controls on banks operating in those jurisdictions and ultimately perhaps encouraging their withdrawal. During on-site inspections, home-country supervisors or auditors should face no impediments in verifying the unit’s compliance with KYC policies and procedures. This will require a review of customer files and some random sampling of accounts. Home-country supervisors should have access to information on sampled individual customer accounts to the extent necessary to enable a proper evaluation of the application of KYC standards and an assessment of risk management practices, and should not be impeded by local bank secrecy laws. Where the home-country supervisor requires consolidated reporting of deposit or borrower concentrations or notification of funds under management, there should be no impediments. In addition, with a view to monitoring deposit concentrations or the funding risk of the deposit being withdrawn, home supervisors may apply materiality tests and establish some thresholds so that if a customer’s deposit exceeds a certain percentage of the balance sheet, banks should report it to the home supervisor. However, safeguards are needed to ensure that information regarding individual accounts is used exclusively for lawful supervisory purposes, and can be protected by the recipient in a satisfactory manner. A statement of mutual cooperation18 to facilitate information sharing between the two supervisors would be helpful in this regard. In certain cases there may be a serious conflict between the KYC policies of a parent bank imposed by its home authority and what is permitted in a cross-border office. There may, for example, be local laws that prevent inspections by the parent banks’ compliance officers, internal auditors or home country supervisors, or that enable bank customers to use fictitious names or to hide behind agents or intermediaries that are forbidden from revealing who their clients are. In such cases, the home supervisor should communicate with the host supervisor in order to confirm whether there are indeed genuine legal impediments and whether they apply extraterritorially. If they prove to be insurmountable, and there are no satisfactory alternative arrangements, the home supervisor should make it clear to the host that the bank may decide for itself, or be required by its home supervisor, to close down the operation in question. In the final analysis, any arrangements underpinning such on-site examinations should provide a mechanism that permits an assessment that is satisfactory to the home supervisor. Statements of cooperation or memoranda of understanding setting out the mechanics of the arrangements may be helpful. Access to information by home country supervisors should be as unrestricted as possible, and at a minimum they should have free access to the banks’ general policies and procedures for customer due diligence and for dealing with suspicions.
18
See the Basel Committee paper Essential elements of a statement of cooperation between banking supervisors (May 2001).
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Annex 1: Excerpts from Core Principles Methodology Principle 15: Banking supervisors must determine that banks have adequate policies, practices and procedures in place, including strict ‘know-your-customer’ rules, that promote high ethical and professional standards in the financial sector and prevent the bank being used, intentionally or unintentionally, by criminal elements. Essential criteria
1. The supervisor determines that banks have in place adequate policies, practices and procedures that promote high ethical and professional standards and prevent the bank from being used, intentionally or unintentionally, by criminal elements. This includes the prevention and detection of criminal activity or fraud, and reporting of such suspected activities to the appropriate authorities. 2. The supervisor determines that banks have documented and enforced policies for identification of customers and those acting on their behalf as part of their anti-money laundering program. There are clear rules on what records must be kept on customer identification and individual transactions and the retention period. 3. The supervisor determines that banks have formal procedures to recognise potentially suspicious transactions. These might include additional authorisation for large cash (or similar) deposits or withdrawals and special procedures for unusual transactions. 4. The supervisor determines that banks appoint a senior officer with explicit responsibility for ensuring that the bank’s policies and procedures are, at a minimum, in accordance with local statutory and regulatory anti-money laundering requirements. 5. The supervisor determines that banks have clear procedures, communicated to all personnel, for staff to report suspicious transactions to the dedicated senior officer responsible for anti-money laundering compliance. 6. The supervisor determines that banks have established lines of communication both to management and to an internal security (guardian) function for reporting problems. 7. In addition to reporting to the appropriate criminal authorities, banks report to the supervisor suspicious activities and incidents of fraud material to the safety, soundness or reputation of the bank. 8. Laws, regulations and/or banks’ policies ensure that a member of staff who reports suspicious transactions in good faith to the dedicated senior officer, internal security function, or directly to the relevant authority cannot be held liable. 9. The supervisor periodically checks that banks’ money laundering controls and their systems for preventing, identifying and reporting fraud are sufficient. The supervisor has adequate enforcement powers (regulatory and/or criminal prosecution) to take action against a bank that does not comply with its anti-money laundering obligations. 10. The supervisor is able, directly or indirectly, to share with domestic and foreign financial sector supervisory authorities information related to suspected or actual criminal activities. 11. The supervisor determines that banks have a policy statement on ethics and professional behaviour that is clearly communicated to all staff. Additional criteria
1. The laws and/or regulations embody international sound practices, such as compliance with the relevant forty Financial Action Task Force Recommendations issued in 1990 (revised 1996).
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2. The supervisor determines that bank staff is adequately trained on money laundering detection and prevention. 3. The supervisor has the legal obligation to inform the relevant criminal authorities of any suspicious transactions. 4. The supervisor is able, directly or indirectly, to share with relevant judicial authorities information related to suspected or actual criminal activities. 5. If not performed by another agency, the supervisor has in-house resources with specialist expertise on financial fraud and anti-money laundering obligations.
Annex 2: Excerpts from FATF recommendations C. Role of the financial system in combating money laundering Customer Identification and Record-keeping Rules
Financial institutions should not keep anonymous accounts or accounts in obviously fictitious names: they should be required (by law, by regulations, by agreements between supervisory authorities and financial institutions or by self-regulatory agreements among financial institutions) to identify, on the basis of an official or other reliable identifying document, and record the identity of their clients, either occasional or usual, when establishing business relations or conducting transactions (in particular opening of accounts or passbooks, entering into fiduciary transactions, renting of safe deposit boxes, performing large cash transactions). In order to fulfil identification requirements concerning legal entities, financial institutions should, when necessary, take measures: i)
to verify the legal existence and structure of the customer by obtaining either from a public register or from the customer or both, proof of incorporation, including information concerning the customer’s name, legal form, address, directors and provisions regulating the power to bind the entity. ii) to verify that any person purporting to act on behalf of the customer is so authorised and identify that person. 11. Financial institutions should take reasonable measures to obtain information about the true identity of the persons on whose behalf an account is opened or a transaction conducted if there are any doubts as to whether these clients or customers are acting on their own behalf, for example, in the case of domiciliary companies (i.e., institutions, corporations, foundations, trusts, etc. that do not conduct any commercial or manufacturing business or any other form of commercial operation in the country where their registered office is located). 12. Financial institutions should maintain, for at least five years, all necessary records on transactions, both domestic or international, to enable them to comply swiftly with information requests from the competent authorities. Such records must be sufficient to permit reconstruction of individual transactions (including the amounts and types of currency involved if any) so as to provide, if necessary, evidence for prosecution of criminal behaviour. Financial institutions should keep records on customer identification (e.g., copies or records of official identification documents like passports, identity cards, driving licenses
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or similar documents), account files and business correspondence for at least five years after the account is closed. These documents should be available to domestic competent authorities in the context of relevant criminal prosecutions and investigations. 13. Countries should pay special attention to money laundering threats inherent in new or developing technologies that might favour anonymity, and take measures, if needed, to prevent their use in money laundering schemes. Increased Diligence of Financial Institutions
14. Financial institutions should pay special attention to all complex, unusual large transactions, and all unusual patterns of transactions, which have no apparent economic or visible lawful purpose. The background and purpose of such transactions should, as far as possible, be examined, the findings established in writing, and be available to help supervisors, auditors and law enforcement agencies. 15. If financial institutions suspect that funds stem from a criminal activity, they should be required to report promptly their suspicions to the competent authorities. 16. Financial institutions, their directors, officers and employees should be protected by legal provisions from criminal or civil liability for breach of any restriction on disclosure of information imposed by contract or by any legislative, regulatory or administrative provision, if they report their suspicions in good faith to the competent authorities, even if they did not know precisely what the underlying criminal activity was, and regardless of whether illegal activity actually occurred. 17. Financial institutions, their directors, officers and employees, should not, or, where appropriate, should not be allowed to, warn their customers when information relating to them is being reported to the competent authorities. 18. Financial institutions reporting their suspicions should comply with instructions from the competent authorities. 19. Financial institutions should develop programs against money laundering. These programs should include, as a minimum: i) the development of internal policies, procedures and controls, including the designation of compliance officers at management level, and adequate screening procedures to ensure high standards when hiring employees; ii) an ongoing employee training programme; iii) an audit function to test the system.
Annex 3: Working Group on Cross-border Banking Co-Chairs: Mr Charles Freeland, Deputy Secretary General, Basel Committee on Banking Supervision Mr Colin Powell, Chairman, Offshore Group of Banking Supervisors, and Chairman, Jersey Financial Services Commission
Bermuda Monetary Authority
Mr D Munro Sutherland
Cayman Islands Monetary Authority
Mr John Bourbon Mrs Anna McLean
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Banque de France/Commission Bancaire Federal Banking Supervisory Office of Germany Guernsey Financial Services Commission
Banca d’Italia Financial Services Agency, Japan
Commission de Surveillance du Secteur Financier, Luxembourg Monetary Authority of Singapore Swiss Federal Banking Commission Financial Services Authority, United Kingdom Board of Governors of the Federal Reserve System Federal Reserve Bank of New York Office of the Comptroller of the Currency Secretariat
Mr Laurent Ettori Mr Jochen Sanio Mr Peter Kruschel Mr Peter G Crook (until April 2001) Mr Philip Marr (since April 2001) Mr Giuseppe Godano Mr Kiyotaka Sasaki (until July 2001) Mr Hisashi Ono (since July 2001) Mr Romain Strock Mrs Foo-Yap Siew Hong Ms Teo Lay Har Mr Daniel Zuberbühler Ms Dina Balleyguier Mr Richard Chalmers Mr William Ryback Ms Nancy Bercovici Mr Jose Tuya Ms Tanya Smith Mr Andrew Khoo
Wolfsberg Group Pledges AntiTerrorism Support*
Zurich, October 5, 2001 – In view of the recent events in the United States the Wolfsberg Group of International Private Banks1 together with Transparency International 2 and their advisers3 have agreed on the following private sector initiative to promote the international fight against terrorism: All member banks of the Wolfsberg Group in their global businesses are fully committed to supporting all local and international authorities in their tracing of terrorists as well as their associates and flow of funds. For this the banks have set up appropriate internal structures. The Wolfsberg Principles already cover all kinds of serious crime which include terrorism. Nevertheless, the banks will review the Principles by the end of this month to explicitly include terrorism as one of the serious offences under the policy and all the relevant paragraphs. Last spring the banks started an initiative for closer co-operation between regulators, law enforcement agencies, international police organizations and the private sector. Both sides agreed that there is room for closer co-operation
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Press statement; see www.wolfsberg-principles.com. The Wolfsberg Group consists of the following leading international banks: ABN Amro Bank NV, Banco Santander Central Hispano, S.A., Barclays Bank, Citibank, N.A., Credit Suisse Group, Deutsche Bank AG, Goldman Sachs, HSBC, JPMorgan Private Bank, Société Générale, UBS AG and became known when they agreed to a set of global antimoney-laundering guidelines international private banks a year ago. The guidelines were jointly announced by the banks and by Transparency International (TI). Wolfsberg is the location in Switzerland where an important working session to formulate the guidelines was held. Transparency International (TI) is a Berlin-based non-governmental organization, dedicated to increasing government accountability and curbing both international and national corruption. Prof. Mark Pieth is a law professor in Basel, Switzerland. He is Chairman of the OECD Group on Bribery and Corruption and a former member of the Financial Action Task Force on Money Laundering (FATF). Stanley E. Morris is an international Consultant on anti-money-laundering issues. He was head of FinCEN and a member of the Financial Action Task Force on Money Laundering (FATF).
M. Pieth (Ed.) , Financing Terrorism, 211–212. © 2001 Wolfsberg Group. Printed in the Netherlands.
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in the fight against serious crime which could also include the mutual sharing of more information. To bring this dialogue forward the banks will schedule a follow-up meeting which will focus especially on common ground for intensified fight against international terrorism which may lead to joint initiatives and actions between the private and public sector. The banks welcome the idea that the Financial Action Task Force on Money Laundering (FATF) should extend their anti-money laundering principles to the fight against international terrorism and offer their support as industry advisors.
The Suppression of the Financing of Terrorism – Wolfsberg Statement
A. Preamble The Wolfsberg Group of financial institutions (the ‘Wolfsberg Group’1) is committed to contributing to the fight against terrorism and is making the following statement to describe the role of financial institutions in preventing the flow of terrorist funds through the world’s financial system. This fight presents new challenges. Funds used in the financing of terrorism do not necessarily derive from criminal activity, which is a requisite element of most existing money laundering offences. Successful participation in this fight by the financial sector requires global cooperation by governments with the financial institutions to an unprecedented degree.
B. Role of Financial Institutions in the Fight Against Terrorism Financial institutions can assist governments and their agencies in the fight against terrorism. They can help this effort through prevention, detection and information sharing. They should seek to prevent terrorist organizations from accessing their financial services, assist governments in their efforts to detect suspected terrorist financing and promptly respond to governmental enquiries.
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The Wolfsberg Group consists of the following leading international banks ABN Amro N.V., Banco Santander Central Hispano, S.A., Bank of Tokyo-Mitsubishi, Ltd., Barclays Bank, Citigroup, Credit Suisse Group, Deutsche Bank AG, Goldman Sachs, HSBC, J.P. Morgan Chase, Société Générale, UBS AG and became known when they, together with Transparency International and Mark Pieth, agreed to a set of global anti-moneylaundering guidelines for international private banks in October 2000. Wolfsberg is the location in Switzerland where an important working session to formulate the guidelines was held.
M. Pieth (Ed.) , Financing Terrorism, 213–216. © 2002 Wolfsberg Group. Printed in the Netherlands.
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C. Rights of the Individual The Wolfsberg Group is committed to participating in the fight against terrorism in a manner which is non-discriminatory and is respectful of the rights of individuals.
D. Know Your Customer The Wolfsberg Group recognises that adherence to existing ‘Know Your Customer’ policies and procedures is important to the fight against terrorism. Specifically the proper identification of customers by financial institutions can improve the efficacy of searches against lists of known or suspected terrorists issued by competent authorities having jurisdiction over the relevant financial institution (‘applicable lists’). In addition to the continued application of existing customer identification, acceptance and due diligence procedures, the Wolfsberg Group is committed to: Implementing procedures for consulting applicable lists and taking reasonable and practicable steps to determine whether a person involved in a prospective or existing business relationship appears on such a list. Reporting to the relevant authorities matches from lists of known or suspected terrorists or terrorist organisations consistent with applicable laws and regulations regarding the disclosure of customer information. Exploring with governmental agencies ways of improving information exchange within and between jurisdictions. Exploring ways of improving the maintenance of customer information to facilitate the timely retrieval of such information.
E. High Risk Sectors and Activities The Wolfsberg Group is committed to applying enhanced and appropriate due diligence in relation to those of their customers engaged in sectors and activities which have been identified by competent authorities as being widely used for the financing of terrorism, such as underground banking businesses or alternative remittance systems. This will include the adoption, to the extent not already in place, of specific policies and procedures on acceptance of business from customers engaged in such sectors or activities, and increased monitoring of activity of customers who meet the relevant acceptance criteria. In particular the Wolfsberg Group is committed to restricting their business relationships with remittance businesses, exchange houses, casas de cambio, bureaux
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de change and money transfer agents to those which are subject to appropriate regulation aimed at preventing such activities and businesses from being used as a conduit to launder the proceeds of crime and/or finance terrorism. The Wolfsberg Group recognises that many jurisdictions are currently in the process of developing and implementing regulations with regard to these businesses and that appropriate time needs to be given for these regulations to take effect.
F. Monitoring Recognising the difficulties inherent in identifying financial transactions linked to the financing of terrorism (many of which appear routine in relation to information known at the time) the Wolfsberg Group is committed to the continued application of existing monitoring procedures for identifying unusual or suspicious transactions. The Wolfsberg Group recognises that while the motive for such transactions may be unclear, monitoring and then identifying and reporting unusual or suspicious transactions may assist government agencies by linking seemingly unrelated activity to the financing of terrorism. In addition, the Wolfsberg Group is committed to: Exercising heightened scrutiny in respect of customers engaged in sectors identified by competent authorities as being widely used for the financing of terrorism. Monitoring account and transactional activity (to the extent meaningful information is available to financial institutions) against lists generated by competent authorities of known or suspected terrorists or terrorist organisations. Working with governments and agencies in order to recognise patterns and trends identified as related to the financing of terrorism. Considering the modification of existing monitoring procedures as necessary to assist in the identification of such patterns and trends.
G. Need for Enhanced Global Co-operation The Wolfsberg Group is committed to co-operating with and assisting law enforcement and government agencies in their efforts to combat the financing of terrorism. The Wolfsberg Group has identified the following areas for discussion with governmental agencies, with a view to enhancing the contribution financial institutions are able to make: The provision of official lists of suspected terrorists and terrorist organisations
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on a globally co-ordinated basis by the relevant competent authority in each jurisdiction. The inclusion of appropriate details and information in official lists to assist financial institutions in efficient and timely searches of their customer bases. This information should ideally include (where known) in the case of individuals: date of birth; place of birth; passport or identity card number; in the case of corporations; place of incorporation or establishment; details of principals; to the extent possible, reason for inclusion on the list; and geographic information, such as the location, date and time of the transaction. Providing prompt feedback to financial institutions on reports made following circulation of such official lists. The provision of meaningful information in relation to patterns, techniques and mechanisms used in the financing of terrorism to assist with monitoring procedures. The provision of meaningful information about corporate and other types of vehicles used to facilitate terrorist financing. The development of guidelines on appropriate levels of heightened scrutiny in relation to sectors or activities identified by competent authorities as being widely used for terrorist financing. The development by governments and clearing agencies of uniform global formats for funds transfers that require information which may assist their efforts to prevent and detect the financing of terrorism. Ensuring that national legislation: Permits financial institutions to maintain information derived from official lists within their own databases and to share such information within their own groups. Affords financial institutions protection from civil liability for relying on such lists. Permits financial institutions to report unusual or suspicious transactions that may relate to terrorism to the relevant authorities without breaching any duty of customer confidentiality or privacy legislation. Permits the prompt exchange of information between governmental agencies of different nation States. The Wolfsberg Group supports the FATF Special Recommendations on Terrorist Financing as measures conducive to the suppression of the financing of terrorism.
