Citation: 19 Commw. L. Bull. 1824 1993 Content downloaded/printed from HeinOnline (http://heinonline.

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Commonwealth Law Bulletin

International Efforts to Combat Money Laundering: Developments and Prospects

By Dilwyn Griffiths, Secretary, FinancialAction Task Force, OECD Introduction One of the questions we are frequently asked by journalists is whether the Task Force has had any effect on an impossible question to answer since no one actually knows the volume of the money being laundered and any estimates quoted-and they vary considerably-can only be very rough and ready. Nevertheless, although there is no simple performance indicator for the work of the FATF, it is perfectly fair to ask what it has achieved during its four years of existence, particularly as we are now just starting the mid-term review of the mission and work programme of the Task Force. In this paper I want to provide an assessment of the progress made by the Task Force, particularly over the last year, before giving my thoughts on prospects for our future work. Developments in Money Laundering The money laundering problem has certainly grown more complex, if not actually worse, since the Task Force was established in 1989. In part this reflects the fact that our knowledge of the problem is now much better: the increasing focus on laundering has revealed more about the true nature and extent of the phenomenon. So evidence of the increasing incidence of laundering is only to be expected and, in its way, is a good thing. If you want to take effective measures to combat the crime, you need to have a good idea of where, how and to what extent it is carried out. But it is also true that money laundering techniques have become increasingly varied and sophisticated. Money laundering takes place in virtually every country and territory of the world-it is certainly not just a problem faced by the major financial centres or the offshore centres. The nature of the international financial system and modem technology, particularly electronic funds transfers, means any country integrated into that system is at risk. And the professional money launderers are as adept as anyone in the legitimate financial sector in seeking out opportunities and switching their money around the world. There is extensive involvement by organised crime in money laundering and the review we conducted this year indicated the existence of a money laundering "holding company" independent of any organisation involved with drugs trafficking or primary criminal activity. The methods of laundering money have also become more complex. In response to the measures taken in the banking sector, there is increasing use of non-bank financial institutions, especially those which, like bureaux de change, are largely unregulated, as entry points to the international financial system. There is also increasing use of nonfinancial businesses, such as retail shops and import-export companies. Control over these businesses provides a continuing means of facilitating money laundering operations-the proceeds of crime can be commingled with those of the legitimate commercial activities of the company, using false invoicing to disguise the origin of the illicit funds. Role of the FATF So the job of combating money laundering is a huge one-more challenging than was realised when the Task Force was set up. The role of the FATF is essentially three-fold: (i) monitoring developments in money laundering techniques and pursuing appropriate refinements to the counter-measures;

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(ii) monitoring the progress of FATF members in implementing the forty Recommendations for combating money laundering set out in the first FATF report; (iii) implementing an external relations programme to promote the widest possible international action against money laundering. Counter Measures So far the FATF has not come forward with any additional Recommendations to those it published in 1990. This is not because we think that the original Recommendations represent the last word on money laundering-money laundering is a dynamic activity and hence it is essential to keep counter-measures under review. But we decided that, while FATF members were implementing the Recommendations, it was best to leave the Recommendations as they were to allow a stable framework for the laws being put into effect. Instead we have confined ourselves to drawing up as appropriate, Interpretative Notes to the Recommendations. These do not change the scope or substance of the Recommendations but clarify or provide supplementary guidance on their application. This year the main Interpretative Note adopted concerned the law enforcement technique known as controlled delivery-allowing shipments of or transactions involving suspect funds to proceed under the surveillance of the authorities to identify and gather evidence against as many as possible of the criminals involved. This technique has been used in drugs cases for some time but it is equally valid for the proceeds of crime. Our work on money laundering methods has indicated that there is an increasing return to cross-border movements of funds in the laundering process. As FATF members and other countries apply the Task Force Recommendations in their jurisdictions, there is an increasing disincentive for the criminals to use their financial systems and instead move the funds to countries who do not yet have adequate antilaundering measures and whose financial systems can be penetrated with less risk. So controlled delivery has a valuable part to play in countering international money laundering operations and the FATF is concerned to encourage the use of this technique. Other issues pursued over the past year have been improving the audit trail in electronic funds transfers, the use of shell corporations for money laundering; and the money laundering by non-financial businesses. We have made good progress on the first topic, thanks to the co-operation we have received from SWIFT, the leading international funds transfer messages system. Following our approaches to them SWIFT have asked all the users of their system to include details of the ordering customer or the beneficiary in a transaction and the institution which originated the payment instruction, when sending messages. National authorities in FATF have taken steps to encourage users in their jurisdictions to comply with this. FATF members are also looking at the feasibility of having the same information included in the messages in their respective national electronic payment systems. The potential for the abuse of shell corporations by money launderers was noted in earlier rounds and, as with electronic funds transfers, the FATF's work in this area during 1992-93 has been concerned with improving transparency in this case the transparency of ownership of corporate bodies. We have in particular been looking at clarifying the measures which financial institutions should take in obtaining information identifying corporate clients. It has proved tricky finding a formulation which covers the different systems of commercial law of FATF members and achieves the necessary transparency without being unduly burdensome. But we should be able to reach agreement before the end of the year on appropriate measures. We shall also be looking at the question of methods to ensure that adequate records of owners of shell corporations are maintained and accessible to law enforcement authorities.

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Commonwealth Law Bulletin

Our work on the issue of money laundering by non-financial businesses is only in its early stages and this is obviously going to be a long-term exercise. We have concentrated so far on identifying those which are particularly vulnerable. We are starting with businesses which carry out quasi-financial activities and will be looking at what are the appropriate measures to apply. Progress in Implementing the FATF Recommendations An important part of the Task Force's work is monitoring the progress of its members in applying the Recommendations. The assessment we conducted in the last round showed that substantial progress was being made in putting the necessary measures into place. As regards the Recommendations concerning legal matters, nearly all our members have now made drug money laundering a criminal offence or are taking steps to enable them to do so. There has also been a substantial move towards criminalising money laundering involving the proceeds of non-drug crime. When the Recommendations were drawn up there was no clear consensus in favour of requiring countries to do this and so the Recommendation was not drafted in mandatory terms. The relevant Recommendation reads "each country should consider extending the offence of drug money laundering to any other crimes for which there is a link to narcotics; an alternative approach is to criminalise money laundering based on all serious offences, and/or on all offences that generate a significant amount of proceeds, or on certain serious crimes. However, most countries--even those such as the United Kingdom who were originally strongly in favour of a narrow money laundering offence-now see the benefit of covering all serious predicates. Ten members have now introduced measures making it an offence to launder the proceeds of any serious crime and another eight are still in the process of doing so. This is an important development which will strengthen the effectiveness of the action against laundering. On the financial side, the majority of members have also implemented most of the Recommendations concerning customer identification and record-keeping and most either permit or require the reporting of suspicious transactions. The biggest area of weakness is in the non-bank financial sector where the application of the Recommendations is much more patchy. For example, while the majority of FATF members require banks to pay special attention to complex, unusual, large transactions, only a quarter of them currently oblige non-bank financial institutions to do so. Clearly the non-bank sector can be very diverse and many of the institutions may have no formal regulatory arrangements, which makes it more difficult to apply the various measures. But, given the vulnerability of this sector to the attentions of money launderers, particularly as procedures in the banking sector are tightened, we need to keep up the pressure for early and effective action. The mutual evaluation process we have established is the main method we have for doing this. The process has proved to be a very valuable monitoring mechanism, ensuring that there is a detailed and thorough scrutiny of the measures taken against money laundering and, more important, indicating what still needs to be done. I do not think that progress in implementing the Recommendations would have been as swift and substantial without it. Countries are concerned to have a good story to tell to the examiners and there is thus an impetus to get things done which would otherwise be lacking. The process obviously benefits the countries examined. In all the examinations we have conducted so far we have been able to point to some areas where the anti-money laundering framework could be strengthened with a view to maximising the countermeasures and preventing the exploitation of any weak links in the system. No system is

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perfect. And already there have been cases where policies or laws have been changed in line with recommendations from the examination team. But the process is of value to all members. It produces a lot of information about the various approaches and measures adopted in the different members and is particularly helpful for those still drawing up their own laws and systems. We have now evaluated nearly half our membership and the remaining evaluations are expected to be completed by the end of 1994. Promoting World-Wide Action Against Money Laundering The FATF is not and has no pretensions to become the United Nations of the antimoney laundering world. We want to remain a cohesive and flexible body and clearly that would be threatened if our membership were to become significantly larger than it is now. But we are well aware that money laundering cannot be combated by actions taken in FATF members alone. Promoting the widest possible international action against money laundering has been a concern of the Task Force since its inception and over the past year we have intensified our contacts with non-member countries. Geographically, we have concentrated our efforts on three areas of the world: the Caribbean; Central and Eastern Europe; and Asia. I will not say much about the Caribbean since Justice Smellie will shortly be speaking about the activities of the Caribbean FATF. But we are certainly pleased at the progress which the CFATF has made and look forward to continuing to work with it. Central and Eastern Europe have been a priority for the Task Force for two reasons. First, although they are not yet major money laundering centres, laundering does go on there. As they open their economies, take forward their privatisation programmes and move towards convertible currencies, they are becoming increasingly attractive to international money laundering operations, and with the growth of organised crime in the region, there is obviously a lot of dirty money being generated in the region itself. But second, and on a more positive note, the restructuring of their financial systems provides the opportunity to put in place measures to protect themselves against laundering. In our contacts with the countries in the region we have been emphasising that effective anti-money laundering laws and controls are part and parcel of modernising their financial systems. We have held two seminars in Budapest and Warsaw-and produced detailed recommendations on the best way forward. We also plan to mount a seminar for Russia and other CIS countries in the Autumn. I think that awareness among Central and Eastern European States of the money laundering problem is now widespread but progress in actually implementing antimoney laundering measures has been more variable. Both Hungary and Poland have drafted laws to make money laundering a criminal offence and Hungary has also taken action in the banking sector. Bulgaria has ratified the Council of Europe Money Laundering Convention-indeed it was the fourth country to do this. Elsewhere, in general, little action has been taken. But the European Community has included in its Association agreements with Eastern European countries specific clauses committing them to apply the FATF Recommendations so we can look forward to greater progress in the region and the FATF will certainly be following up the contacts we have established. In Asia and the Pacific our work has concentrated mainly on raising awareness of the money laundering problem. In conjunction with the Commonwealth Secretariat and the UNDCP we held a major seminar in Singapore in April for some 23 Asian countries and this has provided a good springboard for future action in the region. In particular we have now initiated a dialogue with the PRC. One factor I would mention in our external relations work is the good co-operation we have established with other international organisations active in the field, such as

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Commonwealth Law Bulletin

the Council of Europe, the Customs Co-operation Council, INTERPOL, the Commonwealth Secretariat and the UNDCP. Overlap and duplication of efforts-not to say rivalry between different bodies-is an ovious threat to action at the international level where a number of organisations are involved. We have avoided this and, besides coordinating our various activities, we are increasingly mounting joint missions. Assessment of the Progress Made by the Task Force To return to the question with which I opened my speech: what impact has the FATF had on the fight against money laundering. If the Task Force did not exist, it would be necessary to invent it. Combating money laundering needs the bringing together of all the relevant disciplines-financial, regulatory, external affairs, legal, judicial as well as law enforcement. This is best done in a single issue body such as the Task Force. It promotes not only co-operation between countries-vital given the international nature of the money laundering problem-but between the individual groups within countries. One of the effects of our seminars, particularly in Eastern Europe, has been to get the financial community and the law enforcement agencies talking to each othersomething which would not have occurred if we had just focused on one sector. The 40 FATF Recommendations, while not final word on combating money laundering, have proved their worth as a blueprint for effective action in this field. And, although they have no binding legal force, the moral and political commitment which FATF members and others have made in adopting them is being translated into action. Implementation of the Recommendations by FATF members is well under way. Naturally we would like progress to be quicker but-at the risk of sticking my neck out-I think that by the end of next year virtually all members will have put into effect the key measures. In the rest of the world too a good start has been made in promoting awareness of the problem and encouraging the adoption of counter-measures. This is a long-term process and there is still a vast amount still to do. But the Caribbean FATF process has shown that, over time, substantive commitments can be achieved. Prospects for the Future Looking to the future, we can be certain that the money laundering problem will not become any easier to solve. Crime and drug trafficking in particular will continue to generate large amounts of financial proceeds and the criminals will have a continuing need to find ways of disguising the source of their income. The major money laundering organisations have shown that they are sensitive to national law enforcement initiatives and we can expect the trend towards increasing use of non-bank financial institutions and non-financial institutions to continue. Hence there has to be a continually evolving strategy for combating money laundering. Over the next few years we need to ensure not only that all FATF membes have implemented the Recommendations but to check that their anti-money laundering systems are affective in practice. It is, of course, one thing to pass laws and another to enforce them. We also need to keep the counter-measures under review, revising and supplementing them as required in the light of changing circumstances. As the focus of our work shifts more outside the traditional financial sector, it will inevitably become more difficult to achieve a consensus on the measures to be taken. The various areas are much more diverse, as are the laws and practices of different countries. But we have to address the problems in these areas if we are to keep up the pressure on the money launderers. Outside our membership, there are still many areas where anti-money laundering message has not yet penetrated and others where continuing contacts are necessary to ensure that effective action is taken. There is a requirement not only for advice and

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technical assistance but also for monitoring of progress to check that measures are being implemented. And at some point we will also need to consider what action should be taken in respect of governments who have failed to meet even a minimal standard of performance. One way forward is to set up further regional Task Forces on the Caribbean model. But before we can do this, we have to be satisfied that there is sufficient commitment to make this worthwhile. All this adds up to a very full agenda. The FATF was never meant to be a permanent organisation and we certainly want to avoid institutionalising ourselves. But, while not underrating what we have already achieved, it is clear that the work of the FATF is far from completed.