Copyrighted material

The Hidden Global Economy

by Lucy Komisar

on money laundering
(AR) CAMBRIDGE, UK -- Offshore banking is niche banking for crooks -- both the shady kind who push drugs and steal cars and the white collar kind who defraud investors, cheat on taxes, and hide their money from child-support judgments. And favored clients are the dictators who loot their countries.

Though there has been only sporadic attention to it in major media, the law enforcement agencies and governments in many countries have become concerned about how banking secrecy has facilitated the operations of drug traffickers, secreted the loot of corrupt officials, and helped tax cheats hide their money. Until recently, however, the international banking and finance community, which likes getting money no matter what the source, has blocked effective action to deal with the problem. They argue that proposed measures would infringe on clients' "privacy."

Confidentiality means your neighbor or competitor can't walk into a bank and see your account. Secrecy means that law enforcement authorities with evidence you've committed a crime and court orders can't. Sometimes, even bank regulators can't know the identity of players and balances. Violators of secrecy laws can be jailed. Most of the 55 offshore centers don't apply such rules to themselves, only to nonresidents and companies not doing business in their countries.

A few dozen places also have corporate secrecy, hiding the names of the owners of shell companies, called international business corporations or private investment companies. There are more than a million anonymous corporations. They commonly use bearer shares (owned by "the bearer of shares"-- no name supplied) and nominee shareholders and directors provided by incorporators.

Offshore helped dictators hide their loot and keep it even after their overthrow
Offshore is where at least $200 billion a year of the world's drug money is laundered, according to the 1998 United Nations report on "Financial Havens, Banking Secrecy and Money Laundering."

Offshore facilitates international financial fraud, market manipulation, theft of intellectual property, illegal arms dealing and people smuggling in totals exceeding the drug trade's.

Offshore allows rich people and businesses to evade taxes. Offshore helped dictators Mobutu, Suharto, Marcos, and Duvalier hide their loot and keep it even after their overthrow. It is where criminals have washed money to buy political power and threaten democracy in Mexico, Colombia and now Russia.

According to Merrill Lynch & Gemini Consulting's World Wealth Report, one third of the wealth of the world's high net worth individuals, nearly $6 trillion out of $17.5 trillion, may be held offshore. An IMF staff report last January said that global offshore assets and liabilities had grown by over 6 percent annually during the mid-1990s to about $4.8 trillion US dollars."

The OECD says as much as $1.3 trillion is being laundered. IMF Director Michel Camdessus puts it at 2 to 5 percent of the $30 billion global GDP, up to $1.5 trillion.

A Global Crisis Next?
Increased international attention to the impact of offshore secrecy has been prompted not so much by concern about money laundered by drug traffickers and other criminals, but by the fear of international financial instability brought on by migrating crises.

Winer, then U.S. Deputy Secretary of State for International Narcotics and Law Enforcement, explained, "The first thing that caught [then Treasury Secretary Robert] Rubin's attention was the Mexican crisis. Then the Asian financial crisis. Then the Russian financial crisis and Long Term Capital." The Europeans also care about the tax money hidden in places like Luxembourg and Liechtenstein.

Winer was the highest level U.S. official committed to strong action to rein in the offshore system, and he has now left the government for private law practice. He cited an IMF staff report in January which concluded that "offshore banking had played a sometimes 'catalytic' role in recent Asian and Latin American financial crises and that global offshore assets and liabilities had grown by over 6 percent annually during the mid-1990s to about $4.8 trillion U.S. dollars."

The former diplomat said the paper found "that services provided by offshore centers, and the banks, lawyers, accountants, and company formation agents working with those offshore centers, had contributed to global financial crises by hiding risk and loss that professional home country supervisors and auditors were unable to penetrate."

The IMF study found that in Argentina, $3 to $4 billion was lost or hidden offshore by April 1995. In Venezuela, billions in problem loans were moved offshore in 1994. In Korea, inside dealings offshore circumvented regulatory limits on bank lending from 1993 through 1996. In Thailand, poor lending decisions were 'rolled over' offshore from 1993 through 1996. In Malaysia, $10 billions in losses were hidden offshore in 1997. In each case, the study found that the offshore sector had produced inadequate transparency and fragmented regulation.

Winer noted that when Long Term Capital Management collapsed last September, it had excessive leverage of $1.25 trillion, a thousand times the capital held by the firm. But he said it had been "deliberately licensed offshore in the Grand Caymans, where American regulators had no window of transparency to see the losses occurring -- until they put at risk a number of the most significant financial institutions, requiring the Federal Reserve to intervene to prevent massive default," he said. "This lack of basic information about positions held by hedge funds, the nature and extent of exposure, allows them to take positions that threaten our markets or economy without the knowledge of any federal regulatory authority."

Winer noted how the Russian Central Bank had used an offshore subsidiary, FIMACO, to hide money from the IMF and Russia's creditors. He explained that "Jersey was used to mislead the IMF. Jersey regulators could not verify whether the books of FIMACO reflected transactions that took place elsewhere. Nor could other regulators understand the picture.

"The PricewaterhouseCoopers review demonstrated that the Russian Central Bank used FIMAO to park liabilities offshore boosting their balance by $1.2 billion to make the IMF think it was stabilized," Winer said,, noting noted that the bank also secretly speculated on its own bonds, priming the pump, misleading other buyers about their liquidity and value, encouraging Western commercial banks to buy GKOs, and generating $383 million in profits from interest which it moved offshore. In this "classic sucker's game," other buyers were left with worthless GKOs," he said. "There's an allegation that Long Term Capital Management had a lot of investment in GKOs, that the hole they had is due to GKO's. It's interesting to tie it all together."

The various crises cause more high-level people to start paying attention. At the Birmingham G-8 in May 1998, financial crime was at the top of the agenda.

"Our international finance people used to say the markets will correct everything, keep the money moving," Winer added. "Now they realize that without a legal regulatory system which creates integrity in the financial system, you can't have money corrected by the market without huge distortions and dislocations. They saw that happening in Asia, Brazil, Argentina, Mexico and said something must be wrong with our model. "The people who believed in the free flow of capital are now saying you need a system to slow down hot money, not just because it's too hot, but to reduce its reason to move so rapidly by creating more transparency to opportunity and risk are recognized more efficiently."

International Action On The Way
There is growing action against money laundering on the international front, both to drive depositors away from bad jurisdictions and to promote international cooperation in regulation and law enforcement.

In the area of regulation, new recommendations for a new capital adequacy framework drafted by the Basel Committee on Banking Supervision this summer include a requirement, similar to that proposed by the U.S. Treasury, that banks set aside greater reserves for credit risks on lending to institutions in countries that have not taken sufficient steps to provide for transparency and integrity. It would make it less costly to lend to institutions in "good jurisdictions" than in "bad ones." The Basel Committee, responsible to the world's central banks, sets "best practices" standards for international banking.

Various international fora, including the Financial Action Task Force (a 26-nation organization created by the Group-of-Seven industrial countries ten years ago to address the global problem of money laundering) and the Financial Stability Forum Working Group on Offshore Centers (set up this year by the G-7) are discussing new approaches. The Financial Stability Forum, set up in February, grew out of the frustration of G-7 finance ministers and regulators over the lack of cooperation they were getting from offshore centers. They ordered a review of how offshore centers enforce international prudential and disclosure standards and comply with such standards for supply of information.

"The debate is how do you make this happen," said Winer, who left government service in November. "Should you use bank regulatory mechanisms, as in risk weight management by agreement through the Basel Committee or unilaterally through the G-7? Do you do assessments through FATF and come up with white and black lists? Do you do assessments with the financial sector?"

He predicted that the Financial Stability Forum would "break new ground and create new standards for transparency, record-keeping and disclosure of information by private sector entities to governments." He said the Forum might recommend setting up a global system for monitoring compliance and sharing information among regulators and law enforcement.

One of the idea is to compile a public list of non-complying jurisdictions -- "name and shame," which the FATF did with the Seychelles when that country openly invited criminals to set up shop there. Winer suggested that international bodies might also compile a "white list," providing preferential regulatory treatment for entities licensed in those jurisdictions. He noted that the Federal Reserve and US regulators have refused to license Russian banks to do business in the US because there is no supervision in Russia.

Key players in the international financial regulatory and enforcement community are discussing even more stringent sanctions, said, Winer, including creation of financial "cordons sanitaires" that would prohibit financial transactions with non-cooperative jurisdictions partially or entirely until they come into compliance with international norms to protect against financial crime." He said, "It's not clear to me it's possible in a global financial system with the Internet, but the fact it's being considered is remarkable. It would have been unthinkable a few years ago when the principle goal of economists was to insure the free flow of capital throughout the world's economies." He said that "the risks posed by illicit flows have indeed engendered a counter-current, one which may yet become something of a new tidal wave."

France has been in the forefront of efforts to get transparency in the offshore sector. In April, when Finance Minister Dominique Strauss-Kahn proposed to the G-7 to cut recalcitrant offshore centers out of the international financial system, he got a negative response. This time, said Jean-Claude Milleron, the French executive director at the IMF, "apparently it is moving forward. From what I heard, there is a positive echo."

In addition to movement by the Americans, Winer said, "The UK has done a 180 degree turn that began under the Major government after BCCI and accelerated rapidly under Blair. The Japanese are pushing for broader law enforcement to get themselves out of business problems resulting from lack of transparency. The Germans are mostly focused on the Euro. The IMF and the World Bank have begun to experience the impact on lending of corruption and lack of transparency."

Winer said a consensus was developing on the need to end fragmentation both between countries and by sectors within countries so that information can be shared between regulators and law enforcement and between countries.

He said the solutions include integrating regulatory agencies into super-regulators, as the British Financial Services Authority has done. He noted that differential supervision at the domestic level created the potential for undesirable "regulatory arbitrage," and that in the US there was a problem "especially in states that permit off-the-shelf corporate formation." Delaware is the most prominent. Ricardo Alba, president of Agrica/Lex, Panama, said with a touch of irony that Panama incorporation regulations are based on a 1927 Delaware law.

The need for cross-border regulation was made apparent by the BCCI case, where neither the British, Luxembourg, nor Caymans regulators considered BCCI to be their responsibility. Winer said that after BCCI, it was obvious that all international banks should be supervised by a home country authority that permitted consolidated supervision including monitoring of the activities of the banks it licenses worldwide. He said that the Benex-Bank of New York case is "prompting in the United States a new recognition of the degree to which regulators must be ready to review the operations of US financial institutions wherever they may be located."

The Financial Stability Forum will report its proposals in the coming months for possible agreement by finance ministers at the summer 2000 summit in Okinawa.

What The U.S. Is Doing
For 17 years, the Cambridge Symposium on International Economic Crime has gathered hundreds of government and law enforcement officials, diplomats, regulators, lawyers, bankers, academics and advisors to talk and network. The meetings were originated by Barry Rider, director of the Institute of Advanced Legal Studies, University of London, with the goal of promoting international cooperation and mutual assistance.

This subject of the last conference was presciently "Banking on Secrets: the price we all pay for secrecy and confidentiality in the face of international organized and economic crime." It had been planned before the August revelations that Russian crooks had washed at least $7 billion through the Bank of New York brought the issue to general public attention. It made the Cambridge meeting more than timely.

At the Cambridge symposium, Jonathan Winer described a strategy, in which the U.S. would use the device of the market to persuade legitimate businesses to shun the badly regulated offshore centers. It would require U.S. banks that lend to companies in such offshore jurisdictions to put aside greater reserves, which would make the loans more expensive.

The proposal was considered with others in the administration's new anti-money laundering strategy by an inter-agency task force. The idea had been floated in April 1999 in a Washington speech by then Treasury Secretary Robert Rubin. However, when the administration strategy was announced in March, that item was missing.

Instead, the administration asked for authority to ban financial transactions between United States banks or brokerage houses and offshore financial centers that are believed to be laundering money. Democratic Senator Charles Schumer of New York criticized the proposal because it didn't not require a ban, only gave the administration discretionary authority to impose it. He said political considerations would invariably block implementation of bans.

But the financial services industry has lobbied hard to prevent the adoption of measures with teeth. The banking industry, which prefers no more regulation, complains that new rules will put U.S. banks at a disadvantage to competitors abroad. However, it hasn't pushed for tough world-wide regulation, either.

Under the "risk weighting" system, in the same way that corporate rating services rate the quality of government debt, regulatory and law enforcement organizations would rate the quality of government regulation and law enforcement in assessing risk.

These badly regulated jurisdictions, he said had inadequate rules for creation and regulation of financial institutions, inadequate customer identification requirements, permission of bearer share or anonymous accounts in fictitious names, ineffective or no requirements for reporting of suspicious transactions, and legal obstacles to access by authorities of other countries seeking information about the beneficial owners of accounts.

Winer said that organizations such as the G-7, the Bureau of International Settlements and the Financial Action Task Force of the OECD could articulate the risk, and the national regulators would weigh them in accord with their own domestic supervision. "That's a change from 'capital should flow to wherever the market says to flow'.

The results would be higher borrowing costs for anyone doing business in an under-regulated, non-cooperative or non-transparent jurisdiction." He said "the impact on international finance and banking would be revolutionary by making it unprofitable for hedge funds or others to incorporate in jurisdictions that due to their regulatory and enforcement regimes are vulnerable to unrecognized financial risk. You lend money to Long Term Capital Management based in the Caymans, they don't have enough data for US regulators, they're going to charge the US lenders more. It's a tremendous disincentive for Long Term Capital to locate in the Caymans."

That would not, however, affect the banking choices of tax cheats or of criminals who don't borrow their money but hide or steal it. That would be targeted by other anti-money laundering measures supported by the administration similar to that of bills already introduced by Schumer, Sen. Carl Levin (D-Mich.) and Iowa Republican Rep. James Leach, chair of the House Banking Committee. The Leach-Levin-Schumer bill require financial institutions:

  • to record and report on transactions with problem countries or institutions;
  • to ascertain the foreign beneficial owners of accounts in the U.S.
  • to ask for identification of those who use a bank's correspondent and "payable through" accounts, which allow foreign bank customers to conduct banking operations through a U.S. bank, and
  • where necessary, prohibit U.S. financial institutions from opening or maintaining correspondent accounts altogether.

    Also, importantly, the administration will press for legislation it called for last year to make public corruption by a foreign officials an offense after the fast under the anti-money laundering laws. This would ensure that U.S. banks scrutinized accounts of foreign officials, and would also give U.S. prosecutors tools needed to bring to justice foreign officials who have looted their countries. It would also help investigations by foreign governments seeking to bring "kleptocrats" to justice.

Euro And Union
The European Union is moving to strengthen its anti-money laundering regime and considering measures to block criminals from washing dirty money through exchanges into euros.

The eurocurrency unit became the single currency in all European states January 1999, but it won't exist in physical form until January 1, 2001. Existing national currencies will be withdrawn as legal currency by June 30, 2002. The dates will vary in member states.

Manuel Lezertua, head of the Economic and Organized Crime Section of the Council of Europe, says a decision must be made about which institutions should be authorized to carry out exchanges of national currencies into the euro, where those changes will take place, and whether there should be additional criteria for detecting money laundering operations in relations to the exchange process.

He says some countries think the introduction of the euro will provide a chance to catch money launderers. Italy suggested that there be additional criteria for the massive exchange of currency in a country other than the country of that currency -- that a huge amount of lira changed into the euro in France should trigger money laundering criteria. In the Netherlands, only banks, not exchange offices, will be authored to change currencies to the euro. However, money in stock markets in Europe will automatically be changed into the new currency.

A new proposed directive from the Council of Europe, following a resolution by the European Parliament, tabled July 14, 1999, will strengthen the anti-money laundering regime. The 1991 directive introduced an obligation for financial institutions to report suspicious transactions and establish criteria for the identification of clients. Reporting was limited to money laundering of proceeds from drug trafficking.

The new directive widens the ban on money laundering to embrace not only drug trafficking but all organized crime, specifies that financial institutions include investment firms, bureaux de change and money transmitters, and extends the obligations to non-financial activities and professionals.

"The use by organized criminal groups of experts has been noted as a trend," Lezertua explained. "They more widely resort to lawyers, accountants, and specialists in investment. So the new directive will require monitoring and reporting by real estate agents, accountants, auditors, notaries and lawyers and dealers in high-value goods such as precious stones or metals." A threshold is even set for clients of casinos purchasing gambling chips, he said. Recognizing the special relationship attorney have with clients, the directive suggests they might be required to file such reports thought a self-regulatory organization of the bar.

Though money laundering would be triggered by all criminal offenses, the reporting requiring are limited to cases of organized transnational crime and crimes affecting the financial interests of the community. The Council said requiring reporting in the case of all crimes would be too burdensome.

The institutions and persons subject to the law must require identification of their customers through supporting evidence. Identification would be required for any transaction involving 15,000 euros or more (about $15,000), including money in linked transactions. Identification would be required of all customers of casinos buying or exchanging gambling chips worth 1000 euros or more. Non-face-to-face identification would not be accepted in operations involving cash.

The proposed directive also requires cooperation between national authorities and the Commission in case of illegal activities against the financial interests of the Communities. That targets the use of Liechtenstein and Luxembourg to hide money from the tax authorities in other European countries.

Rosalind Wright, director of the UK Serious Fraud Office, pointed out that in Liechtenstein there are 17 venues of appeal which an account holder can use to delay law enforcement access to his bank account or secret trust. Claudio Stolica, part of a team evaluating country practices for the Council of Europe Select Committee on Money Laundering, predicts that Liechtenstein will have a major problem. "And they don't think they have a problem. It's a question of how seriously they take their membership in the Council of Europe," Stolica said.

Michael Levi, professor of Criminology at the University of Wales and a consultant to the UK Home Office, proposed renaming Liechtenstein "Dunkelstein." Licht means light in German, and dunkel means dark.

Corruption, Challenge In Third World
Developing countries are both the victims and beneficiaries of offshore centers. In his keynote speech to the symposium, Winer spoke of "non-cooperative jurisdictions" which he said tended to include micro-states with small populations who "have chosen to license their sovereignty to those looking for loopholes in financial regulations." Some developing country speakers would keep offshore secrecy; others would abolish it. Speaking for offshore centers, Rose-Marie Antoine of the Law Faculty of the University of the West Indies in Barbados, said, "If you destroy offshore confidentiality, the entire offshore system will collapse" and with it offshore countries' whole economies. She said the effect on many developing nations "lends a political slant to the whole question."

"Emerging countries need capital," explained Hugo Anzorreguy, secretary of state for intelligence in Argentina. He said, "Emerging countries have a much smaller market, offer fewer attractive opportunities, and are less trusted by their own nationals. This encourages capital flight to larger financial centers." He said Merco Sur had affected smaller industries that can't compete with imported goods. At the same time, protectionism by the other countries and the EU subsidies hampered its entry to the global market. The dilemma was how to apply scarce capital, he said.

"Should governments impose stringent controls that will insure that the origin of capital is squeaky clean for investment, therefore pushing that investment to more flexible areas?" Anzorreguy asked. "Emerging markets have a great problem when it comes to making banking secrecy more flexible, especially when in neighboring countries attract investors by offering them a tax haven without risks and costs," he said. It was in the interest of countries to receive some of the money that was moving through markets, sometimes from criminal activities but that "Government must have better and more information available to decide which opportunities they can accept without giving succor to organized crime."

Victor Odozi, who left in June after 12 years as deputy governor of the Central Bank of Nigeria, also acknowledged "the apparent conflict" between the need to bring in needed resources through a free market policy and the need for effective supervision to curb criminal activity. Odozi noted that the case was sometimes made that developed countries were seeking to impose on developing nations much higher standards of conduct than they had at a similar stage of development. However, he called that notion "flawed," arguing, "it has been amply demonstrated that the proceeds of economic crime are in most cads employed in ways that undermine the healthy grown of an economy rather than advance it."

Still, Odozi called for international efforts not only to penalize criminal activity but "to pursue initiatives for substantial debt and debt-service reduction and better distribution of the increasing global prosperity." And he asked for help in locating "the billions of dollars stolen by African dictators, dead and alive." The money was laundered and retained by European and American banks, he said, which are not readily lifting the veil of secrecy that would facilitate the money's return. The new civilian government of Nigeria which was elected in February has asked the United States, the UK and the IMF for helping in recovering $55 billion stolen by the previous military regimes and hidden through offshore mechanisms; only 1 percent has been traced and recovered.

At a panel that included a Swiss banker, lawyer and government official, Philippines Solicitor General Ricardo P. Galvez stood up asked Daniel Heini, group compliance officer for the Union Bank of Switzerland, about a $13 billion of Philippines money the late dictator Ferdinand Marcos is rumored to have stashed at the giant UBS. Galvez said that a German witness at a Senate investigation in the Phlippines had said an executive of UBS had admitted to the existence of the account.

A surprised Heini replied, "If you have specific information about specific accounts and have the legal grounds to ask for it, ask through diplomatic channels." The Philippines has been trying to get the return of the money for a decade. Attorney Cecile Ringgenberg told Galvez to "shop for a specialist."

Speaking strongly in favor of "partial demolition of the walls of bank secrecy," Ramesh Maharaj, attorney general of Trinidad and Tobago, said that "the traditional notions of sovereignty cannot be adhered to by countries if they are to fight effectively international criminal activity in our global village." He added that laws needed to be backed by legal infrastructure, pointing out that in Trinidad and Tobago, with anti-money laundering legislation since 1994, no prosecution occurred till 1998, when with the help of the U.S. and the UK, the country set up an agency to enforce new asset forfeiture and anti-money laundering laws. He said the law would be expanded to include the proceeds of crimes beyond drug trafficking, would require financial institutions to maintain records, and would require reporting of all suspicious transactions and of all transactions over 1,000 pounds."

Pros And Con Games
Two far-reaching and potentially controversial anti-money laundering measures would put require professionals such as lawyers and accountants to file the same sort of suspicious transaction reports that banks do and would extend "know your customer" rules to include the owners of companies. The Council of Europe has already proposed the first. U.S. authorities have not acted on either.

However, Winer said there is a growing recognition by key nations and institutions about the need to impose the same kinds of obligations on licensed professionals -- lawyers, accountants, auditors, company formation agents and notaries -- that have been imposed on financial institutions."

He said mechanisms should facilitate suspicious transaction reporting by these people and that intentional failure to file such reports might be made a punishable offense. Standards are needed to "discourage them from becoming wittingly or unwittingly facilitators of serious transnational financial crime," he warned.

"It is neither practical nor fair to ask banks and bank regulators to protect themselves and the rest of us through due diligence if a body of professionals is busily working to create mechanisms to make due diligence impossible," Winer said.

In her speech, Wright told the symposium "Legal professional privilege does not apply where the transaction is in the pursuance of a crime." She referred to press rumors that half a dozen leading London law firms are being investigated for money laundering.

Winer said international standards such as know your customer practices also needed to be extended into the incorporation and licensing of exempt companies, shell companies, international business companies, offshore trusts, offshore insurance and reinsurance companies, and offshore fund vehicles, including hedge funds. He noted that the Channel Islands, Jersey and Guernsey, allowed "bearer shares" (the company belongs to "the bearer of the shares") and trusts that concealed the beneficial owners of companies and aided criminals in hiding their money from private creditors and government inquiries.

Assistant New York District Attorney John Moscow agreed that, "Now we have jurisdictions where the bank records are available, and you find out the money is held in the name of a corporation. The corporation is owned anonymously. It has nominee directors and you can't find out who the beneficiaries are." He said such companies were set up not only in offshore islands but in New York and London.

He recalled, "In a fraud against New York banks on third world debt trading, we asked an accounting firm for assistance. They said no. Ultimately, it turned out the accounting firm did not know for whom they set up the company they were managing. A law firm we respected in New York was asked to wave attorney client privilege and indicated they would be delighted to ask their client if he was willing, but they didn't know who their client was."

He said the lack of information was not due only to ignorance. "We have attorneys who set up corporations, cause them to be managed by a company, and assert attorney client privilege as to conversations where the customer asks the attorney to move money. That conversation is not privileged. In the first case, the client cooperated, so we knew the attorney was lying."

Russians And Cyprus
"For years and years, we have seen Russians go into Cyprus and talk about the use of Cyprus for money laundering." Winer said he went to Cyprus and found there was no Russian money in the Cypriot banking system, but there were large numbers of Russian shell companies formed there.

"It appears Russians use Cypriot companies which have accounts at Cypriot banks," he said. "Most of the money never goes into Cypriot bank accounts in Cyprus, but it goes to accounts of Cypriot banks operating outside Cyprus, largely in Switzerland. Cypriot regulators don't see it.

"I've tried to figure out what the Russians are doing in Cyprus," Winer added, "but every attempt to examine it directly has proved futile. The system works to discourage accountability even when regulators are trying to do the right thing, as Swiss and Cypriot regulators are doing."

"The Cypriots have to look more closely at financial activities of Cypriot banks that have foreign offices, which is difficult to do if you're a small country and don't have the personnel to go overseas."

Global Electronic Fraud
The dangers of international money laundering are massively magnified by electronic transfers and the new electronic cash.

"The really big challenge that's coming, that's arrived, is electronic cash," said Thomas Roche, deputy general counsel of the Federal Reserve Bank of New York. "That's going to present really daunting challenges. There's always been an audit trail in credit cards and checks. In most electronic cash, stored values cards, there's no audit trail."

"In the old days," he said, "a drug dealer had to get people to go with shopping bags into the bank. CTR [currency transaction report] requirements drove criminals out of banks. Then they took the cash and tried to convert it to multiple checks or structured deposits. Then there was an unholy alliance of business people exchanging cash for checks. Now, people who have to enforce the laws are playing catch-up, because there's new technology. Cash is dying, checks are down."

He said, "Imagine the ability of a drug dealer to sell to a drug customer who pays with a stored value card. They even have docking stations. You can take your card, put it in a docking station, and transfer the value to another card. I can plug a cellular phone into a modem in a docking station and transfer that value to any financial institution overseas. Assume your bank is in the Cayman Islands. You can be sitting in New York or Cambridge, the value from the drug dealer goes into your docking station, and you transfer it. The technology exists to do that, but it is not yet in use. There are also enormous legal and jurisdictional issues. If there's' a wire transfer from New York to Hong Kong to Sidney to the Isle of Man, who has jurisdiction?"

Regulators are already seeing the impact of electronic fraud. Philip Rutledge, deputy chief counsel of the Pennsylvania Securities Commission, said, "Global fraud is steadily increasing. Now we have an added kicker, the Internet. In the last four to five years, we have seen our caseload of securities fraud with an Internet related component increase from zero to 20 or 25 percent." He said that in the future, the Internet could combine with stored value cards to allow people to avoid banks. "You might be able to get stored value like a floppy, upload it to a computer and send it as an attachment on email. That might lessen the need for people to go through banks."

Even before electronic cash comes, electronic transfers pose a problem. John Mahr, a member of the Pennsylvania Securities Commission, said electronic movement of money would increase the "growing black hole in public finances caused by massive tax evasion," he said. "Electronic payments will make more difficult the task of the state in collecting revenues and bringing to justice those who seek to evade fiscal responsibilities," Maher charged.

In this new world, with massive transborder financial transactions and the rules of bank secrecy, the protectors of the international financial system lack the tools to do their jobs, said Jonathan Winer, then US Deputy Secretary of State for International Narcotics and Law Enforcement.

"In a wired world," Winer noted, "where everyone is on the Internet, potentially someone can structure all their transactions to take advantage of jurisdictions -- credit cards, bank accounts -- put everything through Antigua and Nahru. I can prevent my wife and children from receiving child support and defraud all my creditors," he said. "The Benex [Russian-Bank of New York money laundering] case raised a fundamental question about the steps needed to allow financial supervisors to protect against abuse of electronic money, which is now the dominant form."

Winer said that in the United States and elsewhere, old anti-money laundering provisions based on tracking currency were expected to protect against the newer kind of money generated and moved electronically. Instead, he said, "know your customer" rules should be applied to electronic transactions.

That could work for wire transfers. There's no way to "know a customer" when people transfer value from cybercash cards, with no records of where it is going, the attorney said.

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Albion Monitor May 22, 2000 (

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