Professional Documents
Culture Documents
Geneva,Sept.2001
1.MoneylaunderingasordinaryBusiness 2.Nomoneylaunderingthroughcashtransactionsinindustrialcountries 3.MoneyLaundering:Instrumentsreplacetransactions 4.Derivatives:Thedifferentmarkets 5.Derivatives:Thedifferenttypes 6.Howaswapworks 7.Howtolaundermoneyinthederivativesmarket 8.BunchedordersorhowtheUSGovernmentmadeiteasytolaundermoneywithderivatives 9.Moneylaunderingwithderivativesisnoissue
1.Moneylaunderingasanordinarybusiness
Sotheprocessofmoneylaunderingcouldbeseenasanordinarybusiness.Itfollowsthe lawofalleconomicdevelopmentwithinnovationsasaresponsetobottlenecks.The
Sixtyyearslater,whenthewaronmoneylaunderingbeganinthemideighties,eventhe smartestmixofdomesticandcrossbordertransactionsprovedtobefallible.Therelations betweenItalyandSwitzerlandareagoodexampleofthisdevelopment.Untilthe breakthroughofagroupofMilanprosecutorscalled'manipulite'or'cleanhandsagainst corruption'inJanuary1993therewasanimpenetrablewallbetweenthepoliceand judiciary(tschudischeri)ofthetwocountries.Sincethebeginningof'manipulite'in spring1992theSwissauthoritieshavereceivedmorethan1000lettersfromthe prosecutors'officeinMilanaskingthemtoliftbankingsecrecy,whichtheydidinmost cases.ButAmericasclocksworkdifferent.AsareportfromtheUSGeneralAccounting Officetellsmoneylaunderingthorughcrossbordertransactionsisstillpossibleonalarge scaleintheUSA.EvenifthemoneyoriginatesfromRussia.
2.Nomoneylaunderingthroughcashtransactionsinindustrialcountries
3.Moneylaundering:Instrumentsreplacetransactions
Derivativesarecomplexfinancialconstructions.Askanaccountantaboutderivativesand
4.Derivatives:Thedifferentmarkets
Anotherderivativesmarketisthehedgefundindustry.Hedgefundsoftenareinvestment partnershipsoperatingoutofofficesinNewYorkorotherUScities,butthelegal corporationishiddenaway,offshore,farawayfromthepryingeyesofUSregulatorsand taxauthorities.Hedgefundsareheavelyleveragedbyborrowingandusederivatives. Fortunemagazineestimatedthatthereweremorethan3000hedgefundsin1998.The managersofthesespeculativefundsplacelargebetsonthedirectionofpricemovements andgetgoodmoney.Eachyearabouthalfofthetop20namesontheFinancialWorldlist ofWallStreetshighestpaidprofessionalsarehedgefundmanagers.Butalsothefamous LongTermCapitalMarketwasahedgefund,beingbettedinthewrongdirectionsthe outcomewasfatalforUBS.ThatUBShaslostmuchmoneyisnoaccident.Swissbanks areheavelyinvolvedinhedgefunds.
FortheECNsanonymityisaveryimportantissue.Connectedtooneofthenets,youcan forexampleenteralargerorderthanyouwishtohavedisplayedinthesystem.Youare allowedtomakediscretionaryorderswhichenableyoutosetamoreaggressivepricefor yourorderwithoutexposingyourhandtothemarket.Thesetrickypossibilitieshelpto concealamoneylaunderingmechanismandarethereforequiteusefulformoney launderertodotheirbusiness.
5.Derivatives:Thedifferenttypes
Allswapsareotccontracts.
6.Howaswapworks
OntheothersideasmallSwissresearchfirmneeds10Millionforalongtermresearch project.Howdoestheswapworknow?foralongterminvestmentthebigcorporation getsthemoneyforabetterpricefromthebondmarket,thenthesmallresearchfirm. Thebigcorporationalsogetsthemoneyforabetterpricefromabank Becauseitisnotwellknown,thesmallResearchFirmhastopayamuchhigherpricefor abondloan,thantheinternationalcorporation.Butcomparedtothepricesforabank loanthedifferenceisrathersmaller.Thismeansthat,comparedtothecorporation,the researchfirmhasacomparativeadvantageinbankloans;itisatasmallerdisadvantage comparedtothecorporationwhenitborrowsfromabankthanwhenitborrowsinthe bondmarket.
ShowninnumberstheborrowingRatesforthecorporationandtheresearchfirmare:
Corporationresearchfirm
Bankloan(floated)5.1%5.9% Bonds(fix)9.0%11.0%
Ifyoulookatthenetinterestpaymentsyoucanseetheadvantageforbothunderthis contract.(allnumbersin%)
Corporation Paysonthebond9.0 ReceivesfromRF10.0
PaystoResearchFirm5.6 NetPayment(floated)4.6
ResearchFirm Paystobank5.9 ReceivesfromCorporation5.6 PaysforCorporation10.0
NetPayment(fix)10.3
7.Howtolaundermoneyinthederivativesmarket
ThefollowingtypologyisprovidedbythelatestTypologiesReportFebruary1999(case
No9)fromtheFinancialActionTaskForceFATFasanexampleofhowfundscanbe launderedusingthederivativesmarket.
Thisisthefirsttimethattheleadinggroupofglobalmoneylaunderingexpertsgathered aroundtheFATFtableinParishavementionedthisparticularlaunderingmethod.Even thoughthistrickhasbeenknownsinceSyedZiauddinAliAkbarfromBCCIsderivatives armCapcomexplainedittoundercoverAgentRobertMazurfromUScustomswayback in1988.LetmequotethemostimportantsectionoutoftheKerryReport,areportthat hasbeenmadefortheUSSenat:IntestimonytotheSubcommittee,Customsagent RobertMazurtestifiedhowAkbarused"mirrorimage"tradingtolaunderhugesumsof money.Mirrorimagetradinginvolvesbuyingcontractsforoneaccountwhilesellingan equalnumberfromanotheraccount.Sincebothaccountsarecontrolledbythesame individualanyprofitorlossiseffectivelynetted.AccordingtoMazur,Akbarexplained thatbecausethese"mirrorimage"transactionscanbelostamongmanymillionsof dollarsworthoflegitimatetransactions"itwouldtakeforeverforanyonetoeverfindit."
Asarule,moneylaunderingexpertsarestillfocusedoncashtransactionbased launderinginvolvingoffshorebanks,corruptlawyers,gangstersandthelike.
TheothertradesareallocatedtotheBaccount,whichfollowingthesamecalculation
theoryofticksizemultipliedbythenumberofcontractsmultipliedbytheprice movementresultsinaprofitasfollows:$0.25x100x0.26x10000=$65,000(profit).
8.BunchedordersorhowtheUSGovernmentmadeiteasytolaundermoneywith derivatives
9.Moneylaunderingwithderivativesisnoissue
Butmoneylaunderingcanbeareasontointerfereifotherrulesarebroken.Threeyears agothecomplianceofficeroftheSecuritiesandFuturesAuthorityinLondoninformed meaboutamoneylaunderingcasehewasinvestigating,becausesomecommodityprices werebehavingverystrangely.Somemarketparticipantsinformedhimaboutpossible manipulationsandhereferredthecasetotheNationalCriminalIntelligenceService (NCIS).DrugmoneyascashhadbeenbroughtfromtheUnitedStatestosomeEastern State.Thereitwasinvestedintheproductionofaspecificcommodity.Becausethe producerofthisbasemetalhadadominantpositionintheworldmarket,theproducers couldinfluencetheupsanddownsoftheprice.KnowingtheUpsanddownsoftheprice movements,somebrokersconstructedderivativesontheunderlyingandmadealotof moneythatwastransferredtotheUnitedStates.
Allthisdoesnotnecessarilyindicatethattherearentsuchcases.Itmaybethatthe judgesandtheFBIjustdidn'tseethem.Discussionswithseveralinternationalanti moneylaunderingagenciesinSwitzerland,theUnitedKingdomandtheUSAhavemade itclearthatthesestateagenciesactonthebasisofwhattheyconsidertobesecured knowledge.Researchonthisissue?IaskedMr.AlanBeverly,responsibleforthenew guidelinesonmoneylaunderingfromtheEuropeanCommissionwhattheirintentionsare aboutthissubject?Ofcourseheknowsaboutthepossibilitythatmoneyisbeing launderedwithderivatives.TheCommissionalsohadahearingwithPeterQuirkfromthe IMF.ButtoquoteAlanBeverlythereisnomoneyforresearchonmoneylaundering withderivatives.