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US Senate Banking Committee Approves Money Laundering Law

by Leroy Baker, Tax-News.com, Washington

08 October 2001

The international effort to track down and choke off sources of terrorist funding has scored two major advances over the past few days, with the approval of anti-money laundering legislation by a key US Senate Committee, and the issue of an 'Action Plan' by the G-7 after its finance ministers met on Sunday.

On Friday the US Senate Banking Committee unanimously approved broad legislation to combat money laundering that would require banks and other financial institutions to make a serious effort to determine the source of deposits from foreign countries, and would authorize the Treasury Department to take various actions against dubious foreign banks, including prohibiting American banks from dealing with them.

'We have to hunt the financial benefactors and the willfully blind financial intermediaries that underwrite murder and mayhem,' Treasury Secretary Paul H. O'Neill told the House Financial Services Committee last week. 'Government should not be handcuffed in this endeavor,' he said.

The G-7 plan incorporates proposals that would expand the functions of the Financial Action Task Force - set up originally as part of the OECD at the behest of the G-7 - allowing it to cut off the flow of funds to terrorists and set up a G-7 research center to sniff out the sources of terrorist funding.

Ever ready with a comment, the press corps' favourite finance minister Paul O'Neill said: 'We are well on the way to building an international consensus against terrorist funding'.

The administration had opposed further legislation on money-laundering before the Sept. 11 terrorist attacks. But the new bill, the International Money Laundering Abatement and Anti-Terrorist Act of 2001, moved quickly through the committee after a hard push from the chairman, Senator Paul S. Sarbanes, Democrat of Maryland.

Key features of the bill include:

  • A requirement that financial institutions exercise "due diligence" about foreign customers;

  • Power for the federal authorities to investigate the source of foreign deposits that may be the proceeds of corruption.

  • A prohibition on American banks' dealing with certain overseas "shell" banks that have no connection to any regulated banking industry.

  • Directing the Treasury to extend to broker-dealers money laundering rules now applying to banks, and quick studies of other issues, like whether to apply the rules to investment companies and hedge funds.

  • New forfeiture provisions to seize currency being smuggled out of the United States.

  • Authority to monitor the United States activities of hawalas, the nearly paperless banks that send money back and forth between the United States and the Mideast and Asia.

Senator Phil Gramm, ranking member of the Committee, said the bill was a marked improvement over similar bills introduced last year. "Those bills lacked due-process protections for bank customers and financial institutions alike," said Senator Gramm, "and their lack of focus threatened to impede rather than improve anti-money-laundering efforts."

The senator's specific concerns regarding the legislation were addressed during the markup when the committee voted to adopt a series of Gramm amendments addressing due process and accountability considerations and focusing the legislation on money laundering and terrorism.

The Gramm amendments would:

  • Ensure that actions by the U.S. Treasury to implement the bill will be accomplished through formal rule-making procedures, with full opportunity for prior public review and comment.

  • Limit emergency actions to a carefully circumscribed time frame, not longer than 120 days. Outside of emergency situations, all regulatory actions taken by the Treasury would have to be taken in the open through the regular, well-established procedures designed by Congress to promote the public accountability of government agencies.

  • Add a requirement that the government help banks focus on up-to-date money-laundering threats by sharing with banks specific money-laundering concerns, enabling institutions to know what to be on the lookout for. This is expected to result in better enforcement and cooperation, while reducing the burden of unnecessary paper chases. The amendment would also permit financial institutions to share with each other relevant information about suspected money-laundering activities.

  • Remove a potential irritant to international cooperation by deleting from the bill a provision making United States banks enforce the laws of foreign countries. In fact, under that deleted provision, the United States could have found itself frustrating the efforts of people to find safe havens from oppressive regimes such as Cuba and Burma.

  • Recognizing the complexity of the legislation and the speed with which it was considered, provide for enhanced Congressional oversight by requiring annual reports by the Secretary of the Treasury and a special evaluation, in two-and-a-half years, of the effectiveness of the Act. After 2005, the Act could be repealed by joint resolution of Congress (under special procedures for expediting consideration) if the new law turns out to be ineffective or counterproductive in practice.

"I am pleased the bill was improved to reflect these crucial due-process concerns. We must focus our efforts on the terrorists, not on law-abiding citizens," Senator Gramm said. "The fact that we accomplished those aims is reflected in the bill's unanimous approval by the committee. I congratulate Chairman Sarbanes and the other committee members for their fine work."

Even in its amended form the bill will worry offshore jurisdictions, since it clearly gives the Treasury power to investigate and act against any jurisdiction which is classed as non-co-operative by the FATF or by other 'credible international organizations or multilateral expert groups.' However, any jurisdiction which adheres to the FATF's recommendations on money-laundering, as many already do, will presumably be outside the scope of the new law.

The bill did not go far enough to satisfy Senator Charles E. Schumer of New York, who wanted to require, and not merely permit, the Treasury to forbid dealing with banks in countries where secrecy laws prevent cooperation with the FBI. or other United States investigative agencies. He said many of the most notorious were in small countries and had no reason to exist besides laundering money.

He complained that over the years, the Treasury Department had not acted against such institutions, and simply permitting it to act would not work.

Mr. Gramm attacked the proposal, saying he opposed "trying to say we're going to write the banking laws of other countries." Mr. Schumer withdrew the amendment when it was clear it would be defeated, saying he would try again on the Senate floor.

The G-7's new action plan includes an agreement to ratify the U.N. Convention on the Suppression of Terrorist Financing as soon as possible. At present, Britain is the only G-7 nation to have ratified the convention.

The Action Plan maps out further efforts the G-7 members will take to boost cooperation among law enforcement agencies. The Financial Action Task Force will hold a special meeting in Washington on Oct. 29 and 30 to elaborate a comprehensive strategy to pursue terrorist finances.

 

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