What Is Money-Laundering?

Jeremy Hetherington-Gore, Tax-news.com, London

01 August 2000

What is money-laundering?

That's a no-brainer, you say: it's when a Colombian walks into a bank into P*n*m* with $500,000, opens an account, and the next day uses it to buy bearer bonds through a Swiss brokerage. Then two days later his brother deposits the bonds in Brussels, sells them and buys a cottage in the Ardennes for cash. That money is laundered.

Such crude techniques no longer work. Banks in P*n*m* are highly regulated these days, and apply Know Your Customer (KYC) rules. Bearer bonds immediately arouse suspicions, and large cash payments inside the EU are next to impossible without stringent checks being imposed.

As a result, money-launderers have become much more sophisticated, so that rich and respectable countries like the US and the member states of the EU have to follow them by constructing ever-more elaborate defences. The problem is that the extremely sticky fly-traps that result tend to catch their prey quite indiscriminately. At least on the US side of the Atlantic, the legislature is increasingly reluctant to wave through measures that are coming to seem overly intrusive and Draconian.

Such thoughts however are from from the minds of the G7 Finance Ministers, who met before the Okinawa summit last week and agreed to further the measures proposed by the Financial Action Task Force against 15 offshore jurisdictions it labelled 'nonco-operative' and which 'engage in financial practices conducive to money laundering'.

The ministers also promised to work to reduce money laundering as it occurs in the international payments system, phony corporate vehicles, and stolen assets. They said cooperation was needed to deal with tax havens and other harmful practices, and offshore financial centers. The report said the international financial institutions have a large role to play in curbing money laundering.

The resulting G7 statement takes acronyms to a new, record-setting level. 'Nonco-operative territories' are now 'NCCT's, while national 'financial intelligence units' are 'FIU's.

So you would agree, wouldn't you, that: G8 FIUs should study NCCTs for the OECD's FATF program? Well that's good, because they're going to, whether you know it or not.

See the G7's Finance Ministers on Money Laundering report in Tax-news.com Resources. It contains the significant phrase: 'Although tax evasion and money laundering are different crimes,
there are many similarities in the methods used to commit them.'

In Europe, the EU Commission introduced a Directive in 1999 to update its 1991 Directive on Money-Laundering, which introduced KYC rules for financial institutions. The new Directive would extend KYC to a wide range of other professionals, including 'professions at risk of being involved in money laundering or abused by money launderers, such as estate agents, art dealers, auctioneers, casinos, bureaux de change (exchange offices), transporters of funds, notaries, accountants, advocates, tax advisors and auditors'.

In addition, the Directive would widen the range of suspected crimes causing a duty to report, so that it would cover 'all organised crime and illegal activities affecting the financial interests of the Communities as the basis of the prohibition of money laundering'. This is an extremely wide definition, almost certainly including tax evasion, and it should be remembered that as transposed into national laws, failure to report is normally subject to criminal sanctions, including imprisonment.

The European Parliament has expressed reservations about some parts of the Directive, and reaching a formal agreement by ministers on the Directive could be difficult, as Germany, Austria, the Netherlands and Spain object to inflicting such damage on the principle of client confidentiality. These four Member States form a blocking minority under the qualified majority rule. However, the French presidency has confirmed that it will work towards reaching an agreement at the Finance Council meeting on October 17 when ministers have to address the issue again.

(See the text of the Directive and the Commission's Explanatory Statement in Tax-news.com Resources.)

In the US, meanwhile, the Administration sought additional resources from the Congress to push forward its proposed attack on money-laundering (see Tax-news.com article http://www.tax-news.com/html/oldnews/st_Laundering_12_06_00.htm), but the House refused the money.

In the report accompanying H.R. 4871 as passed by the full House on July 20, the appropriators not only explicitly refuse the new funding, but they also raise specific concerns relating to the National Anti-Money Laundering Strategy for 2000.

The appropriation request ran:

'This proposed new appropriation would provide additional funds beyond those currently included in the budgets of Treasury bureaus for money laundering. The appropriation also would fund increased coordination within the Department of the Treasury to work with various law enforcement entities involved in addressing money laundering crimes.'

The refusal says:

'The Committee does not recommend creating a new appropriation for the Money Laundering Strategy. The Committee has provided $504,000 in the Departmental Offices, Salaries and Expenses appropriation for enhancing Treasury management of its efforts to combat money laundering and for improving the coordination of efforts within the federal government and with state and local as well as international entities to fight money laundering. The Committee also provides the same level of support ($2,900,000) as was provided for fiscal year 2000 for state and local law enforcement grants to help combat money laundering; these funds are also located in the Departmental Offices, Salaries and Expenses appropriation. The Committee denies without prejudice the balance of the funds requested for inclusion in this proposed new appropriation.

'Although the Committee is concerned about the extent and scope of money laundering, it has not been given data that identify and quantify the types and levels of resources that the Department has already committed to this issue within its base budget, and how a program centralized in the Department would relate to and improve upon existing programs and cooperative efforts within the federal government and with state, local, and foreign governments. One of the key items of the National Money Laundering Strategy for 2000 is a thorough review of the resources devoted to anti-money laundering efforts. The Committee directs the Department of the Treasury to submit a report 60 days after the enactment of this act that identifies and quantifies the resources in the various accounts of the Department for the budget year (fiscal year 2001), the current year (fiscal year 2000), and the previous three fiscal years for combating money laundering and how these resources are currently being coordinated.

'The Committee raises the following concerns about the local geographic emphasis and approach adopted by the National Money Laundering Strategy for 2000: (1) money laundering is an international problem and a focus on local geographic areas does not intuitively address the heart of the issue, which is the fluidity by which criminal organizations launder their proceeds; (2) a crackdown on money laundering within specific geographic areas may only result in moving the criminal activity to a different area rather than eliminating the criminal activity; (3) the electronic aspect of fund transfers inherently broadens the scope of the issue beyond a local geographic area; and (4) such local geographic foci have a way of becoming viewed as permanent features unless strict and firm management is put in place, including the development of base line data for judging the extent of the local problem, quantifiable performance measures for monitoring program progress at a local level, and a clear concept of achievable goals for determining how and when a local effort should be terminated.'

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