Current Legal Issues Affecting Central Banks, Volume V


Robert Effros
Published Date:
May 1998
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All over the world, a growth in international criminal activity has occurred. The criminal groups involved respect no national borders or boundaries; they move their money, power, and corruption from place to place, depending on where they perceive the greatest rewards lie or where the weakest deterrents in the economic or law enforcement systems exist. One of the principal goals of these groups is to legitimize and return their illicit proceeds to the world’s financial system—in other words, to launder their criminal gains. To achieve this objective, the groups have often sought to conceal their activities through the protection afforded by the doctrines of banking secrecy. This tactic, in turn, has necessitated responses from the responsible supervisory agencies and the law enforcement authorities that result in departures from these doctrines.

The world’s international organizations have recognized this international money-laundering threat and, on many levels, have come together to try to formulate financial, regulatory, and legal norms of behavior to combat international organized crime. These include the Financial Action Task Force (FATF), with its 40 recommendations on money laundering;1 the Organization of American States (OAS), which has adopted model regulations on money laundering;2 and the Caribbean Financial Action Task Force, which has devised principles for Caribbean nations as well as certain participating Central and South American nations.3 In addition, a Statement of Principles Concerning Prevention of Criminal Use of the Banking System for the Purpose of Money-Laundering exists.4 It was prepared in 1988 by the Basle Committee on Banking Supervision with respect to money laundering and the safety and soundness of the international banking community. Other international anti-money-laundering documents include the 1988 Vienna Convention,5 the ancestor of all anti-money-laundering documents; the EC Directive of 1991;6 and the Council of Europe’s Convention of 1990.7 Recently, in December 1995, 29 nations signed the Summit of the Americas communiqué in Buenos Aires, which elaborated certain minimum principles for all countries in Central and South America to adopt as a threshold for combating international money laundering.8

Why is money laundering a key target of law enforcement? Governments try to enlist their financial sectors in law enforcement efforts to target and eliminate international organized criminal activity inasmuch as most organized criminal activity is undertaken expressly to make a profit. Organized crime operates for profit organizations, not charitable organizations. While criminals may make local contributions to their political parties of choice and even, on occasion, for local charitable purposes, these contributions occur largely because of the criminals’ desire to corrode and corrupt public institutions, not because of altruistic motives. Therefore, attacking the financial side of this organized criminal activity is crucial.

Money laundering permits law enforcement to pursue criminal activity in two directions. First, following the money “downstream” permits an attack on the professional laundering organizations that have sprung up to cater to the needs of organized crime. These laundering organizations are composed of people who may go to church, who contribute to civic associations and political parties, who are bankers, lawyers, money exchangers, accountants, insurance sellers, real estate agents, automobile dealers, stockbrokers, and many others. Organized crime purchases every form of financial assistance possible. It will find the weak link in the system. Thus, organized crime activity cannot survive without the use of such professionals, and law enforcement must necessarily look to the financial infrastructure professionals—central bankers, commercial bankers, as well as nonbank financial professionals—for assistance in identifying, targeting, and eradicating the use of the world’s financial systems by criminals. Bankers and other professionals involved in the legitimate international financial systems are crucial in any effort to find, detect, investigate, and prosecute those who abuse the world’s financial systems. Attacking downstream money laundering consists of attacking the professionals who assist in laundering and cleaning up the dirty money.

Second, attacking money laundering leads to “upstream” results as well, especially with respect to those criminal enterprises that commit the underlying predicate crimes generating the proceeds to be laundered. Once the money launderers are identified, a link exists that enables one to identify the cartels involved in the narco-trafficking, prostitution, smuggling of aliens, and other forms of organized crime activity.

However, a tension involving bank secrecy exists because the legitimate expectation of financial privacy possessed by an individual or company in financial dealings must be balanced against the legitimate interests of a country that relies on its law enforcement apparatus, domestically and internationally, to detect, investigate, and prosecute the abuse of the financial system by criminals.

Each country’s approach to addressing this tension is likely to differ, depending on constitutional, common law, and statutory constructs. In the United States, for instance, the Supreme Court has held that no constitutionally protected privacy interest in one’s financial dealings at a bank exists.9 When the Bank Secrecy Act was passed in 1970,10 the banks attacked the constitutionality of requirements that force them to file large-value reporting forms with the government. The Supreme Court ruled that financial institutions do have to file such forms,11 and that there was no constitutional right to privacy in one’s bank records.12 Congress stepped forward and passed the Right to Financial Privacy Act, which, statutorily, prescribed the circumstances in which the government could access such financial information for the purposes of legitimate law enforcement activity.13

Different countries clearly have different approaches to the regulation of their financial systems. As was pointed out in Chapter 17, while some form of bank secrecy is the rule, for purposes of anti-money-laundering enforcement, the key is under what circumstances that rule may or must be pierced. The United States has adopted and implemented a multipronged approach to combat both domestic and international money laundering, including both mandated large-value14 and suspicious-transaction reporting,15 record keeping for such activity as wire transfers exceeding $3,000,16 criminal statutes penalizing the laundering of the proceeds of many domestic and international predicate crimes (the latter including fraud against foreign banks), as well as a statute providing for the forfeiture of both the proceeds and the instrumentalities of crime.17 Whether every country needs all aspects of this regime is uncertain; however, every country needs some of its components. Nevertheless, to put financial reporting into place by both bank and nonbank financial sectors (money exchangers, stockbrokers, and the like), bank secrecy laws must be pierced in certain circumstances.

Every country likely has a specific problem with respect to money laundering that is unique to that country. The people most likely to know how to approach the laundering of criminal proceeds in any given country’s financial system are the people who are engaged in that system—the bankers and other financial specialists who are intimately familiar with the strengths and weaknesses of the country’s financial system. As previously noted, cooperation between a country’s financial specialists and domestic and international law enforcement officials must occur to increase the likelihood of catching money launderers.

In the United States, the approach was not initially based on cooperation. The Bank Secrecy Act mandated a large-value reporting regime for banks18 and thereby revealed the tension between law enforcement and banking interests. In a mandated large-value reporting regime, if someone deposits, withdraws, or transfers cash in excess of a predetermined amount (in the United States, amounts exceeding $10,000),19 the designated financial entity must file a report and identify certain information about the transaction.

Engaging in the large-value transaction itself, unless other indicia of criminal activity apply, does not mean that a person is guilty of a crime. Thus, if someone brings in or takes out more than $10,000 when he or she enters or leaves the United States, that person is required to complete a special form and submit it to the U.S. Customs Service prior to entry or departure.20 This requirement does not impede the movement of currency into the country or out of it. It is merely a signal to the Treasury Department that someone brought the currency into or took it out of the United States.

Mandated large-value reporting targeting the placement of drug proceeds into the U.S. financial system was the basic approach that the United States took in 1970. The rationale behind this system was that the United States has a huge financial infrastructure and officials had reason to believe that criminals were depositing drug proceeds directly into that system with impunity. The government, however, first had to identify where the money was being deposited and then work to separate the clean from the dirty. Where cash placement of criminal proceeds is a country’s most glaring problem, mandated large-value reporting will flush it out of hiding and force it into other, unfamiliar channels where the government may be able to more easily identify and target it.

What about countries with a much smaller financial infrastructure? What if, for example, instead of 10,000 banks, a country has only 50 major banks. With only 50 major banks, is mandated large-value reporting really necessary? It depends upon the nature of the money laundering that is occurring. If the physical deposit or physical transportation of drug proceeds directly into or out of a country’s financial system is the problem, then some form of mandated large-value reporting by those institutions infected by such criminal proceeds is a necessity. It is a necessity because regulators will identify who is depositing that cash into what parts of the financial system. This was the first approach taken in the United States.

Twenty-five years, and millions of filed forms later, the United States is looking for a way to maintain mandated large-value reporting, but to balance that reporting against the burdens on the financial system. Also, in the 25 years the United States has gone from a system of confrontation to one of cooperation with its financial systems. The United States has succeeded in forcing cash placement money launderers to look elsewhere to place larger percentages of their cash, whether through physical transportation, concealment in cargo, or downstream introduction by feeder nonbank financial institutions.

Having achieved this goal, the United States is now looking to increase the exemptions banks can give to specified customers for whom no mandated filings need be made to the Treasury Department. In April 1996, the Treasury Department’s central financial database group, the Financial Crimes Enforcement Network (FinCEN), published new regulations permitting banks to exempt large categories of customers from mandated filings.21 At the same time, however, the United States is moving into a mandated suspicious-transaction reporting regime. In February 1996, the Treasury Department issued regulations that mandate suspicious-transaction reporting by banks.22 If a transaction is unusual or suspicious, regardless of its amount, then the bank must file a report with the Treasury Department.23 Thus, the United States is keeping the most essential aspects of large-value reporting, while expanding the exemptions from that reporting, but is also moving toward a mandated suspicious-transaction reporting regime.

A country, therefore, has the option of implementing a reporting system for large-value or suspicious transactions, or both, on a voluntary or mandatory basis. The mix selected by any country will be determined by its own internal analysis of the money laundering occurring in its financial system. Arguably, the reporting, to be effective, must be mandatory and must cover all serious criminal activities, not just drug trafficking.

This comment has focused on only one side of the law enforcement/banking tension up to this point, that is, what countries should require their financial systems to report to counter money-laundering activity. What about the other side of the equation? What about bank secrecy issues? In the United States, Congress enacted a statute that insulates financial institutions that report to the government in good faith from any civil liability to a private party.24 If such reporting is to be mandated, a “hold harmless” provision must exist to insulate from civil liability any bank that files a report in good faith. Otherwise, the institution will be caught between two dilemmas: a possible charge of money laundering or civil litigation brought by the account holder. A hold harmless provision in favor of a reporting financial institution is a necessary correlative to mandatory suspicious-transaction reporting.

How should reporting be handled? To whom should the reports be sent? The particular regime by which suspicious reports are given and handled within a particular government differ. In the United States, the central data unit, FinCEN, was created within the Treasury Department. It receives directly all such suspicious-transaction reports. Other countries have buffers between the police, the entity that initially receives the report, and the reporting banks and nonbanks. A country’s reporting regime could contemplate disclosure directly to the police, the Ministry of Justice or Ministry of Finance, or to a buffer in between, for example, the central bank.

In addition to legislating these actions that pierce bank secrecy laws, the United States has money-laundering statutes that criminalize intentional use of the financial infrastructure to launder the proceeds of a myriad of domestic and international predicate crimes.25 These statutes criminalize the initial placement of illicit proceeds into the U.S. system, the layering of those proceeds through wire transfers and other transactions, and the final integration of the proceeds back into the legitimate sector through the purchase of goods.

The final components of the U.S. anti-money-laundering regime are the asset forfeiture laws.26 Once a corpus of illicit proceeds is identified, they can be frozen and ultimately forfeited either in a civil or criminal setting. Asset forfeiture of laundered proceeds and instrumentalities is a crucial part of any anti-money-laundering enforcement regime because it takes the proceeds out of the criminal’s pocket. The criminal statute, puts the launderers into jail. The forfeiture law decreases the launderers’ rewards after jail. Prior to asset forfeiture laws, the criminal would say, “Well, I’ll tell you what, you’ve got me, I’m going to go to jail for five years, but when I come out, I’ll be just fine.” Those days are over in the United States.

Thus far, this comment has been concerned with the reporting and record keeping requirements that the U.S. government has imposed on the financial industry through legislation or regulation. What can industry do in the ongoing struggle to purge itself of illicit proceeds laundered through it? The most significant way for financial institutions to shield themselves from unintentional collusion in money-laundering activity is to know their customers. This requirement does not end upon accepting bona fides at the time of opening an account, but also requires knowledge of changes in legal and beneficial ownership, as well as an awareness of what the customer does.

Both government and the regulated financial institutions must work together, not only to identify potential money laundering, but to draft strategy as well. In the United States, a more collegial relationship currently exists between the government and the banking sector than had existed in the past. The banking community acknowledges this partnership. It is not an agent of the government, but is in partnership to pursue a joint strategic goal to purge the U.S. financial system of as much criminal proceeds as possible.

Reflecting this collegial approach, the Bank Secrecy Act Advisory Group, chaired by the Department of the Treasury, was established. The group, composed of a mix of governmental (law enforcement/regulators) and nongovernmental (banking industry members, as well as check cashers and wire transferers) representatives, is small but influential. At its meetings, current issues in money laundering are discussed. The government representatives may note that they are thinking about the possibility of amending a statute or asking for additional regulatory authority. They may ask the banking regulators what they think of this proposal, does it make sense, or is there another way it could be done to produce less impact on the banks, but at the same time provide the government with the needed information. Other issues, such as the possible use of evolving technologies (smart cards and the like) for money laundering may also be discussed. The group has assisted the government in tailoring other regulations and preventing the promulgation of regulations that would not produce their desired effect. The establishment of such groups in other countries should be encouraged.

As noted above, the money-laundering problem in each country is different. Some countries have placement problems with cash. In some Caribbean islands, the chief problem in money-laundering concerns wire transfers. In other countries, financial institutions are not even used for the primary or the secondary stages of laundering, but are used only at the final stage of money laundering. The final stage of laundering, the integration of the proceeds of criminal activity back into the legitimate community, is the hardest stage at which to detect the illegal proceeds.

Below follows a very brief survey of the international efforts to fight money laundering and the U.S. participation in them. The United States is a member of the Financial Action Task Force, serving as its President in 1996. The United States participates in the Caribbean Financial Action Task Force, as well as the OAS’s Inter-American Drug Abuse Control Commission, which has drafted model money-laundering regulations.27 In 1995, the United States participated in drafting the Summit of the Americas communique, which recommended that anti-money-laundering measures be undertaken and implemented throughout the western hemisphere.28

Bilaterally, the United States has 19 Mutual Legal Assistance Treaties with foreign countries in force. Money laundering is one of the areas in which the United States can both request and give assistance under a treaty, where appropriate.29 Similarly, the United States has entered into a number of tax information exchange agreements, financial information exchange agreements (with respect to the exchange of currency information on deposits and withdrawals), and customs agreements, where financial records may be shared to assist in investigations of money laundering and other financial crimes.30

To summarize, the tension between legitimate expectations of privacy in financial dealings and the need of any country to purge itself of criminal proceeds must be recognized. The government’s need is very important for the protection of a country’s financial integrity and reputation, as well as from preventing potentially corrupting and destabilizing effects. Laundered money leaves telltale signs that clean money does not. Strong know-your-customer policies, strong reporting (particularly suspicious-transaction reporting to a centralized financial database), and cooperation between government regulators and financial institutions can help to combat the international money-laundering problem while preserving the core principles that underpin bank secrecy.

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