World Money Laundering Report: Volume Two

Editorial: the Y2K bug didn't happen, for most people, but the fact that it might have done creates the conditions that might help launderers in the short term.

Offshore Update: Offshore is Everyone's Favourite Aunt Sally - This is Why. WMLR decided to find out how easy it was to form a tax free company and then hide it behind nominees. But we didn't choose a hole in the wall jurisdiction. We chose a leading EU country. And despite the decision of a UK Court that makes "the Sark Lark" of nominee directors less attractive, the price of respectable anonymity remains remarkably low.

Legislation. Labuan and Malaysia. A major analysis of company, banking and securities law, coupled with cross referencing of criminal laws, shows that Malaysia does have much of the ideal legislative infrastructure that appeals to launderers. However, far from the view of Malaysia as having no laws to prevent laundering, there are in fact strong provisions that can be used to much the same end as laws expressly drafted for that purpose.

Technology: USA Loosens its Hold on Strong Encryption. The USA has fought a rearguard action against the use of strong encryption. But it has been available outside the USA for some time and US commercial interests were claiming disadvantage. So, the USA has amended its rules on export of strong encryption software. How do we know? WMLR downloaded some to a UK server - and that was prevented by technology only a matter of weeks ago. But now the question arises, is it legal to use it? We have registered it with a server in the USA and we wait to see what happens.

Compliance: UK's FSA Issues Position Paper. The FSA's Chairman has admitted that the Financial Services Authority has no statutory powers but says "the FSA has been the de facto regulator for the past eighteen months". The FSA's position paper is therefore a strong indication of just what the FSA will do if the Financial Services and Markets Bill is passed in much the same form as now. But in January there were dozens of amendments, including one to provide for the Lord Chancellor's Department to make legal aid available for proceedings before the FSA's tribunal. But this is a "find the lady" trick - for the industry will have to indemnify the Government.

Conference Notebook. First Asia Pacific Conference on Cyber Law, Malaysia November 1999. What can be done about law when technology and society move faster than laws can be drafted, put in place and interpreted?

Basics. It's a simple concept. If you willingly turn a blind eye to something instead of asking natural questions, you are likely to be held to have had suspicion. It's called Wilful Blindness.

Book Review - A Practitioner's Guide to the Regulation of the Internet. Rowe (ed)

Flip Side. A UK minister orders an inquiry into the activities of one of his colleagues - but chooses the one department that the Courts have already said can compel replies to questions - but cannot then pass that information on to be used as the basis of a criminal investigation.

Editorial: The FATF says Austria will be expelled if it does not take steps to abolish anonymous, that is passbook, bank accounts. WMLR asks whether Austria should decide to go it alone.

Offshore Update: International Business Corporations. IBCs are used by tax dodgers, including large highly respected corporations, those seeking asset protection and criminals. But they also generate considerable income for the jurisdictions where they are based. So, what are they?

Basics: The Nature of Suspicion. If you are asking "am I suspicious?" it is probably too late. Laws leave little room for debate. The real question is what to do within an organisation when someone asks that question of the reporting officer.

Flip Side. More off the wall than offshore is the proposal to anchor large concrete blocks to the top of undersea mountains and then form a country there. And we experiment with dressing down in the style of Arthur Andersen, and almost get knocked over for our trouble.

The Scoop: The UK interprets the UN convention on Funding of Terrorism in a new Terrorism Bill. The United Nations Convention on funding of terrorism was signed in 1999 and it has a far wider ambit that many would expect. The UK is has signed that convention and has sought to implement it in a new Bill, which also updates the UK's money laundering laws in terrorism cases. But there are some inconsistencies between the UK approach and that of the UN convention, not least being an apparent restriction on the wide use of anti-terrorist laws.

Legislation: Jersey (part 1). Jersey has embarked on a legislative programme that will put it at the forefront of money laundering prevention laws. But there are some areas that could have been better covered.

Book Review: International Tracing of Assets. Ashe et al

Editorial: The current attack on offshore centres is misplaced and ill judged, risking the creation of civil unrest in formerly stable environments. And it is an attack on sovereignty of nations. If these nations were people, the treatment meted out to them would be a clear infringement of their human rights. The attacks are sold, politically, as attacks on laundering the proceeds of drugs trafficking and other offences that all right-thinking people deplore - but the reality is different - the primary aim is to prevent leakage of tax revenues from high taxing-high spending governments. And in any case, the attacks don't work. Maybe it's time for a radical rethink.

The Scoop: The background to the Financial Action Task Force.

Analysis 1: The Financial Action Task Force's Report on Non-Co-operative Jurisdictions published in February 2000 sets out a blue print for the international application of the Forty Recommendations and warns those who do not fall into line of negative public relations and threats to international aid and financial assistance. And makes an assumption that "offshore centres" are leaders in the problems.

Analysis 2: The OECD's report "Harmful Tax Competition" adopts the standpoint that all countries should have comparable tax regimes and that any jurisdiction that chooses to attract investment into savings or capital projects by the creation of a favourable tax regime should be subjected to international criticism. WMLR considers the implications of the Report for offshore and onshore jurisdictions, many of whom fall within the criteria laid down by the OECD.

Hot Seat: The WMLR Interview: Patrick Moulette, Executive Secretary, Financial Action Task Force. A rare interview with the administrative head of the FATF in which he sets out the successes and intentions of the FATF.

Offshore: The UK has stated its intentions and taken steps to become the World's Favourite Offshore Centre. And in doing so, Chancellor of the Exchequer Gordon Brown has set the UK on a collision course with the OECD and the EU. As a sweetener to divert attention from this and, presumably, to reduce competition he appears to be willing to throw traditional offshore centres to the pack.

UK: The UK Treasury has published a paper that makes it clear for once and for all that the real current motivation for counter-money laundering laws is tax collection and makes public some schemes that are perhaps not entirely within the law - but it's the British government that is doing them. More, it makes it announces an intention to make lawyers, accountants, bankers and financial advisers responsible for reporting suspicions of tax evasion.

Analysis 3: The Forty Recommendations are the bedrock of the FATF's achievements to date. But they are outmoded and have failed to address some fundamental issues. But to bring them up to the standard of the best legislation would require a significant shift in policy in some member countries - and the biggest is the least likely to move.

Flip Side: "We are from the FSA, your regulator, and we are here to help you…what do you mean - which FSA?"

Editorial: The G8, OECD, The FATF and the EU all want access to banking information, for tax investigation purposes, using counter-money laundering laws to permit access by administrative request rather than risk judicial interference in their tax collecting collecting activities. But this opens risks for those who have a legitimate need to protect their capital. The effects of the confiscation by the State and of the effect of assets hidden from such activity rumble on more than fifty years after the end of "the war to end all wars" that failed to achieve its objects. And now, as armed thugs drive minorities from their land, there are proposals that would permit the tracking of money into foreign banks, with limited rights for a Judge to say "we don't like what you have done to these people." Is that why we signed up to counter-money laundering laws? WMLR suspects not.

Analysis: The OECD has produced its report on bank secrecy - and no OECD members have dissented. Aside from its obsession with tax collection, the Report has much to recommend it.

Compliance: The UK's de facto pan-financial industry regulator has at last published its money laundering prevention guidance consultation paper. It makes fascinating reading.

A fundamental change of view: WMLR, and its editor for several years before coming to the post, has taken the view that the UK law does not require financial services businesses (or anyone else for that matter) to make a report of suspicion of the laundering of any offence other than those related to drugs trafficking and terrorism. In the light of assertions from the UK Treasury and the FSA, WMLR has reconsidered the law and, whilst not abandoning the previous view, can see how an argument can be raised that financial services businesses have a responsibiity to make such reports. But, if that is right, there are a number of complex and worrying results which create compliance problems and disparity between compliance burdens in different businesses even within the same financial services sector.

Legislation Review: Jersey part 2 The latest laws were passed on 19th May. WMLR examines what is without doubt one of the most heavily legislated financial services regimes anywhere in the World.

Vox Pops: Some of Jersey's financial services community are worried at the effects of such comprehensive legislation - and a worst case scenario, they fear, is a short term upsurge in fraud by those about to lose their previously well run small businesses as regulation drives them out of practice.

Flip Side: Another bizarre "country" rises from the waves.

Reviews and Lecture Issue

Editorial - at its simplest, money laundering is an easy topic to grasp. But, as always, the devil is in the detail. The lack of consistency between the approaches taken by various governments and legal procedures makes it difficult to trace and secure money and assets moved across borders. Can anything be done about it? Perhaps, says WMLR.

Compliance: UK FSA CP46 contains notes and a draft sourcebook. In WMLR Vol. 2, No. 4 the notes were considered in detail and in this issue the draft sourcebook receives close analysis. There are some good things and some bad things, including questions as to the application of professional rules that go beyond the legal duties set out in the criminal law, with disturbing consequences for Money Laundering Reporting Officers. The Sourcebook is expressed to be complimentary to the Guidance issued by the UK's Joint Money Laundering Steering Group. That Guidance has formed the basis, sometimes unquestioned, of rules by Regulators and financial institutions around the World, but the Sourcebook should make that irrelevant within the UK sector. However, one or two major omissions from the Sourcebook, and an express statement that it is not intended as guidance for production in criminal proceedings brought against the organisation appear designed to maintain the JMLSG as an arbiter of the UK law.

Due Diligence: a list of several dozen financial institutions that may be doing illegal or unauthorised business in the USA and/or Canada, as provided by Regulators.

Reputational Risk: an internet bulletin board names those who are thought of as fraudsters or simply useless with other people's money. The postings are often anonymous but there are worries for compliance departments and those concerned with the risk to the reputation of the organisation

Book reviews: (comments in WMLR Digest are extracts from full reviews) (1) Digital Evidence and Computer Crime; Casey; Harcourt/Academic Press. USA "…a work of wondrous -and totally misleading - simplicity, taking the reader into a world that might as well be science fiction for most people, except that this is science fact for everyone." (2) Asset Protection; O'Sullivan, Butterworths UK "…not just a narrative but precedent forms for trust busting in the English Courts and a good mix of legislation from most of the territories that the OECD and others complain about for, amongst other things, their trust laws that tend to make asset tracing difficult. (3) "International Tax Planning (ed 4), Tolley, UK "…if law books are traditionally difficult to read, those for (and by) accountants are mind-numbing…[but] the content of this work is useful." (4) KPMG Money Laundering Control Service, Butterworths, South Africa "…any reader with access to the statutory material will find little addition to his store of knowledge …although, in time, when the case bundle has built up and if the legislation bundle has been significantly expanded, it is probable that it will become a valuable resource."

Seminars and lectures:(1) The UK's Financial Services Authority organised a seminar for those who wished to discuss CP46 before filing responses to the consultation paper. It highlighted a number of shortcomings and duplications between competing compliance regimes. (2) Combating 21 Century Commercial Fraud: International Chamber of Commerce, London May 2000: a paper presented by Judge Alan Wilkie, Law Commissioner. A wide ranging paper dealing with issues of security, legislation, jurisdiction and other computer-related topics plus the Regulation of Investigatory Powers Bill and sentencing of offenders in white collar crime. (3) White Collars and Dirty Business: are today's lawyers sufficiently equipped to meet the challenges of modern practice? - The Gresham Lecture, London May 2000. A paper by The Right Honourable Lord Justice Potter dealing with legal ethics and the pressures on lawyers in large and small firms, in corporate, private and state funded work, both at the bar and as solicitors and those in employed positions and the causes including fragmentation and the arrival of those more interested in making money than upholding the standards of the profession.

Basics: A primer level outline of the law of trusts and why, and how, trusts are used as an aid to money laundering.

News from OECD/FATF, Hong Kong, UK, Germany, England, Viet Nam, Singapore, Japan

Flip Side: (1) the English Courts have, it appears, noticed the hypocrisy of the UK's government in the way it demands one thing of the British people generally but its friends do as they please. And the Courts do not like it. (2) Spanish and other police are investigating money laundering in Madrid and elsewhere where there are, allegedly, links to a lump of concrete in the North Sea. Sealand is a former fort 120 metres by 40 that has had a colourful history. It has fought off invasion only to find that its identity is being usurped. And its Prince and Princess are not best pleased. (3) The UK's FSA should get some sleepless knights from reading the Bank of England's Financial Stability Review, seen by some as a comment on the performance of the new Regulator by the old. (4) More from the mad numbers department. Allegations that there were 17,000 victims of a fraud meant the case took five years to bring to trial, took eight months to hear and cost millions of pounds. And the UK Government has decided to bring Crown Prosecution Service and police closer together in an attempt to reduce the number of aborted and failed cases. Defence lawyers don't like it. It's not surprising - when the police did both jobs, anecdotal "evidence" suggests, cases got on faster, were more likely to result in a conviction and were more directed to the issues. But the new experiment is to be funded, in part, by removing money from the police budget.

Feature: How could it all have gone so wrong, so fast? In 1997, Grenada launched itself onto the international financial services stage with a package of measures designed to bring much needed wealth and high quality jobs to the small Caribbean community. In 1998, it granted a full service licence no. 0005 to First International Bank of Grenada. Grenada began a programme of economic citizenship and one of the early passports was to one Van A Brink, who became the inaugural chairman of First International Bank of Grenada. Over the next two years, Grenada saw the arrival of a revolutionary new stock market and First International Bank of Grenada worked with a company called International Deposit Indemnity Corporation to offer insured deposits and a secure means of investing in the companies listed on the stock exchange. In 1999, the Governor-General in his September 1999 Throne Speech for the State Opening of Parliament said " To date, less than three years after the first international business company was registered in Grenada, this sector has contributed more than EC$15 million to Government revenues and has created approximately 150 direct jobs for Grenadians." First International Bank of Grenada was lauded in the international press. In early 2000 criticisms of it were deflected by members of the Government. But by April, the Government was concerned that audits were not completed and compliance reports not filed. Now the government is in de facto control of the bank, Van Brink is allegedly trying to gain control over significant aspects of the financial system of an African country, the Government's investigators have accused senior officers and others of having siphoned off millions of dollars and of issuing certificates of deposit for more millions, claiming that the money to cover those CDs does not appear in the books of the bank and Grenadian authorities have commenced prosecutions against several people connected with the bank. The Insurance scheme is being shown up as having no merit and depositors can see little chance of money being returned. And in the face of all of this, FIB's website is back up and seemingly inviting business.

In a major analysis, World Money Laundering Report examines the facts and rumours surrounding the anatomy of a scandal that will rock the offshore world and damage the reputation of Grenada so causing those dealing with it to assume that dealings with its new financial sector should be viewed with suspicion.

Compliance: We've all heard the jokes and nobody likes lawyers. Except money launderers and they positively love the facilities lawyers make available either innocently or for payment. WMLR examines how lawyers are at risk and how they create risk for others.

Flip Side: You can learn a lot off the internet - in particular how little some who self promote themselves as experts really know. And, talking of those who know little, some of those recruiting staff in compliance are advertising for a wide range of competence and responsibility and offering low pay.

News: from Manila, New Delhi, London, Kuala Lumpur, Washington DC, Tokyo, Cayman Islands.

Basics: Identity - the question of identification of those who seek to deal with financial services businesses is central to compliance systems. But it's not as easy as it seems.

Comment: The fuel tax protests are not so much about high tax per se as against regressive taxation. But the problem is that progressive taxes are more easily avoided. WMLR explains why this is a major driver in the move towards tax harmonisation and the use of counter-money laundering laws to collect tax revenues.

Special Issue : When 700 representatives of regulators, legislators and the enforcement community from all around the Pacific Rim met in Vancouver for the Pacific Rim Financial Crime and Money Laundering conference, this was no ordinary rent-a-mouth conference. Serious stuff was on the agenda.

World Money Laundering Report covered the conference as it happened. This is the issue that makes it like you were there.

Editorial: The Wolfsberg Agreement is a fascinating idea. What should we make of it?

When a number of the world's biggest banks put their heads together to come up with a common approach to AML in their private banking divisions, it may be a momentous event, creating a new order with high ideals and standards. Or it might just be a public / government / regulator relations event stating what they should have been doing all along.

Compliance: What to do if you think that you may be holding dirty money.

The English High Court has given guidance to financial services businesses who have to make decisions about active accounts. The results are instructive for financial services businesses worldwide. A detailed commentary on the judgment.

Editorial note: explaining cross undertakings in damages.

Flip Side

Microsoft's embarrassment over security lapse; the irony of the Laddie Lads; are intellectual property offences a self-inflicted injury on the part of the software industry and if things changed could we make deep inroads into organised crime?

Spam and fraud

Why, and how, it works to create profits for fraudsters and market manipulators.

Basics

About constructive trusts; tipping off.

International Initiatives: Wolfsberg

A commentary on the Wolsfberg Principles.

News from Ireland, Switzerland, USA, Indonesia, Philippines, Zambia, UK, S. Korea, Uganda.

Editorial: The cracks are beginning to show in the united front until now shown against so called harmful tax competition. A UK Minister known for her blunt speaking, clarity of thought and honesty has said that developing countries can use tax incentives to attract investment for international businesses - and that this is a good thing. Have the countries that rolled over at the behest of the OECD et al given in too easily?

The Bank -v- A Limited: the milestone UK judgment concludes with a costs order against the bank, as well as a finding that damages may be in prospect, implied criticism of the prosecution authorities and a suggestions for how to deal with such circumstances in the future. WMLR examines the suggestions and concludes that following the Judge's recommendations could put some small financial services businesses, including law firms and accountancy practices, out of business.

Phoenix: Who knows what it going on at First International Bank of Grenada? But whatever it is, its original promoter is back in the saddle and from his current base in Uganda, has started work on putting the structure built up in the Caribbean back together. And the astounding thing is that, if all the signs are indeed pointing where they seem to be pointing, it's with the connivance of the Grenadian government. Also: Uganda is desperately poor. It needs inward investment - but it needs risky investment like it needs a hole in the head.

Spam Wars: offers to "legally" avoid paying taxes pepper e-mail in-boxes but they are not all they seem. WMLR chases down the information behind one of the current crop of spam offering to make it impossible for anyone to recover assets. In short, offering to sell protection for launderers.

Proceeds of Crime: After nearly three years of talking about it, the UK's Labour Government has announced what it plans to do about updating the proceeds of crime legislation - it intends to achieve nothing until at least after the next election. But, as a result of problems with asset forfeiture laws in other jurisdictions, this approach may not be as flawed as it first seems.

News from China, Philippines, Hong Kong, Slovenia, USA, Cyprus.

Uncharitable: Oxfam, the UK based internationally active charity, has waded into the argument over so called tax havens with a report that parrots the comments of the OECD et al, and then makes suggestions for amongst other things a global tax system. WMLR analyses one of the proposals and concludes that in some cases such a scheme would result in a higher tax return for the G7 countries and a lower share of the payable tax for the poor countries Oxfam aims to help. Oxfam also criticises "harmful tax competition" as a cause of poverty, taking tax revenues that would otherwise be spent in poor countries. So WMLR looked at Oxfam's accounts and learns that in the year to April 2000 it received grants from government and intergovernmental sources that exceeded its expenditure on health & nutrition, water supply & sanitation, agriculture, shelter, logistics support. So, where did the UKP43m earned from sales of donated goods and UKP57m donated as a result of Oxfam's appeals actually go?

Flip Side: Anticipatory Jurisdictions - WMLR has coined the term "anticipatory jurisdictions" for the latest "Flip Side" column which returns to the topic of floating lumps of concrete that someone wants to turn into countries. But the two in this issue are a little different because they are not anchored anywhere. WMLR concludes that the designs all seem to be more suited to a Thunderbirds set than to reality - and it anything ever goes wrong, International Rescue may well be the main hope for the residents.

e-mail horror: Her name is Claire. She claims to enjoy a particular sexual practice - one which is illegal in some parts of the world. And, as a result of someone's idea of a joke, now an estimated 10m people know about it. Forget the original messages, the real story is in how it took only five days for the message to circumnavigate the globe, splitting amoeba-like in order to populate the in-boxes of so many people in law, financial services and related fields and breaking out into the wider community. And firewalls and sniffers didn't spot it, IT departments didn't know it was being passed around and managers had no idea that their company name was being distributed attached to a document that they would not want to be associated with. There are lessons to be learned, and not just for Claire.

Compliance: The UK's FSA has decided that its prescriptive approach to customer identification needed overhaul - and chose the route many practitioners thought was the worst available option. A full look at how the FSA reacted to the issues raised on consultation.

Spam Wars : Bigfoot has taken steps to limit the amount of spam on the internet. But some people are concerned that commercial decisions over acceptability of mail from domains is a dangerous precedent.

Reputation: a disgruntled customer of a major UK bank has set up a website making a host of adverse comments about a bank, the legal system, the courts, the judiciary, lawyers and others - naming names. A number of issues arise.

Warning: another internet bank promotes services that seem to make no commercial sense. For example, it offers to pay interest on deposits at several times the interest it charges for loans. Supervision: A major US bank and a large brokerage firm deny wrongdoing but the bank agrees to pay a large fine and they both make provision against claims of mis-selling investment products.

Practical information - how to launder $10,000 without anyone noticing. A magazine (not this one!) decided to see how hard it was. It wasn't.

WMLR News from Vietnam, China, Philippines, Japan, Marshall Islands, New Zealand, USA, Indonesia.

Book Reviews:

- Responding to money laundering - international perspectives Savona (ed) (Harwood Academic Publishers.)A collection of seminal papers - which again emphasis the gap between the theory and reality. It's not rocket science. This is what practitioners should have been learning - but rarely are they exposed to it.

- European Money Trails - Savona and Manzoni (Harwood Academic Publishers). An update of Savona's contribution to the "Responding to money laundering" book. In the meantime, much has changed but a surprising amount remains the same.

- Fighting money laundering - Schaap (Klewer Law International)The counter-money laundering laws of Aruba and Netherlands Antilles

- How not to be a money launderer - the avoidance of fraud and money laundering in your organisation (2nd ed) - Morris-Cotterill (Silkscreen Publications)An easy to read guide to laws and regulations, and compliance and risk management written for the non-lawyer.

Book Reviews:

This special reviews issue contains full reviews of each of the following titles.

- Tolley's Tax Havens (ed 3) (Butterworths)A review of the facilities provided by offshore financial centres.

- The essential elements of the prevention of money laundering - Temple (Securities Institute Services (UK) Limited)A small book with big mistakes.

- Money Laundering - the practitioner's guide - Ashton - Keyhaven PublicationsA detailed examination of the laws of Guernsey.

- Dirty Dealing: the untold truth about global money laundering - Lilley (Kogan Page)Hackneyed research and ageing examples give the lie to the title of this book.

- Blanchiment d'argent et secret bancaire/money laundering and banking secrecy - Bernasconi (ed) (Klewer Law International It is surprising how much of the papers in this book remain topics under discussion. Was no one listening in 1994 when the conference was held?

- Lords of the Rim - Seagrave - PenguinA masterly examination of how money laundering has developed over the millennia.

- Funny Money - Boyle (Harper Collins)Alternatives to cash economies.

- Money Space - Leyshon and Thrift (Routledge)Money and geography and society and politics are bound together in a way that gives some indication of how money moves around the world, not always within anything we would recognise as the financial services sector.

- Money, information and uncertainty - Goodhart (MacMillan)An explanation of how money does not necessarily mean cash. The economist's definition of money is far nearer to that now being used in legislative drafting than the traditional banker's or even lawyer's definition.

- Federal money laundering: crimes and forfeitures - Williams and Whitney (Lexis Law Publishing)A heavyweight in all senses of the word examination of the federal laws of the USA and cases arising out of them.