Public Sector Governance

Money Laundering

On this page

• FATF at Abu Dhabi Conference Releases Report on Countries
• Robert Morgenthau on the Iran - Venezulean Connection
• Critical Review of UK Actions by TI-UK
• Liechtenstein Agrees to Cooperate
  
• Banks Confront Money Laundering in the Gulf Region
• Report Highlights How Corporate Tax Dodging Contributes to Global Poverty
• ABN Amro Money Laundering Scandal
• Raymond Baker on Money Laundering
  

* * *

Financial Action Task Force (FATF) Releases Reports on Compliance - Extensive Range of Countries Found to Have Sderious Issues - from Iran to Equador
FATF holds meeting in Abu Dhabi - FATF is the global standard setting body for anti-money laundering and combating the financing of terrorism.

FATF stated, As part of its ongoing review of compliance with the AML/CFT standards, the FATF has to date identified the following jurisdictions which have strategic AML/CFT deficiencies for which they have developed an action plan with the FATF. The FATF calls on these jurisdictions to complete the implementation of action plans expeditiously and within the proposed timeframes. Considerable deficiencies are detailed by FATF in Anti-Money Laundering (AML) for:

Antigua and Barbuda, Azerbaijan, Bolivia, Greece, Indonesia, Kenya, Morocco, Myanmar, Nepal, Nigeria, Paraguay, Qatar, Sri Lanka, Sudan, Syria, Trinidad and Tobago, Thailand, Turkey, Ukraine, Yemen.

In another report issued by FATF highlights particularly serious problems with Iran, North Korea, Pakistan, Ecuador, Angola, Ethiopia, Turkmenistan, São Tomé and Príncipe.

Posted 02/22/2010

* * *

Veteran New York District Attorney Robert Morgenthau Warns of Iran-Venezuela Dangers - Points to Military Cooperation and Money Laundering

The growing presence of Iran in Latin America is a threat to national security and demands greater scrutiny and action by the United States and Venezuelan's Latin American neighbors was the message delivered by New York Country District Attorney Robert Morgenthau at a Washington DC event organized by Global Financial Integrity and the American Interest.

Excerpts from the speech (full text at the Office of the NY District Attorney):

 Iran and Venezuela are beyond the courting phase.  We know they are creating a cozy financial, political, and military partnership, and that both countries have strong ties to Hezbollah and Hamas.  Now is the time for policies and actions in order to ensure that the partnership produces no poisonous fruit.

Scores of Memoranda of Understanding between the two Nations have been signed in recent years relating to:

• joint technology development
• military cooperation
• banking and finance
• cooperation with oil and gas exploration and refining
• mineral exploration
• agricultural research

In April 2008, Venezuela and Iran entered into a Memorandum of Understanding pledging full military support and cooperation.  It has been reported that since 2006 Iranian military advisors have been embedded with Venezuelan troops.  Asymmetric warfare, taught to members of Iran’s Revolutionary Guard, Hezbollah and Hamas, has replaced U.S. Army field manuals as the standard Venezuelan military doctrine.     

According to a report published in December 2008 by the Carnegie Endowment for International Peace, Venezuela has an estimated 50,000 tons of un-mined uranium.  In the area of mineral exploration there is speculation that Venezuela could be mining uranium for Iran.

Financial Issues

On the financial front, in January 2008, the Iranians opened International Development Bank in Caracas under the Spanish name Banco Internacional de Desarrollo C.A. (BID), an independent subsidiary of Export Development Bank of Iran (EDBI).   In October 2008, The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) imposed economic sanctions against these two Iranian banks – BID and EDBI - for providing or attempting to provide financial services to Iran's Ministry of Defense and its Armed Forces Logistics, the two Iranian military entities tasked with advancing Iran’s nuclear ambitions.   

Based on information developed by my office, the Iranians with the help of Venezuela are now engaged in similar economic and proliferation sanctions-busting schemes.

For years I have stressed the importance of transparency in financial transactions.  In the realm of preventing money laundering and terror financing, the concept of “know your customer” is the starting point in any scheme designed to detect suspicious transactions. For wire transfers denominated in U.S. dollars, the transactions almost always clear through correspondent accounts in the United States, and usually at banks based in Manhattan.  Ideally, Manhattan banks have a clear picture of the sender and beneficiary of the funds, even in cross-border transactions.

Venezuela is not currently the subject of a U.S. or international economic sanctions program that places significant restrictions on the ability of Venezuelan banks to conduct business with the United States, including accessing U.S. banks to clear international U.S. dollar transactions. Presently, banks in the U.S. processing wire transfers from Venezuelan banks rely almost exclusively on the Venezuelan bank to ensure the funds are being transferred for legitimate purposes.  I have little faith that this is effectively being done, and the Iranians, aware of this vulnerability, appear to be taking advantage of it.
 
The ostensible reason the Iranian-owned bank Banco Internacional de Desarrollo (BID) was opened in Caracas was to expand economic ties with Venezuela.  Our sources and experiences lead me to suspect an ulterior motive.  A foothold into the Venezuelan banking system is a perfect “sanctions-busting” method - the main motivator for Iran in its banking relationship with Venezuela.  Despite being designated by OFAC we believe that BID has several correspondent banking relationships with both Venezuelan banks and banks in Panama, a nation with a long-standing reputation as a money laundering safe-haven.  

This scheme is known as “nesting.”  Nested accounts occur when a foreign financial institution gains access to the U.S. financial system by operating through a U.S. correspondent account belonging to another foreign financial institution.  For example, BID who is prohibited from establishing a relationship with a U.S. bank could instead establish a relationship with a Venezuelan or Panamanian bank that has a relationship with a U.S. bank.  If the U.S. bank is unaware that its foreign correspondent financial institution customer is providing such access to a sanctioned third-party foreign financial institution, this third-party financial institution can effectively gain anonymous access to the U.S. financial system.

Mr. Morgenthau underscored in a question and answer session after hjis presentation that his office is working with overseas authorities, such as those in the UK, to pursue investigations into illicit transfers of funds into key money centers by the Iranians via Venezuelan banks or their counterparts.  He noted that his office has found offshore accounts in Curacao that belong to “henchmen” of President Chavez and that the Government of Venezuela is “extremely corrupt.”

Posted 09/9/09

* * *

Combating Money Laundering and Recovering Looted Gains

Traqnsparency International - UK Publishes Hard-Hitting Report on British Failures

(Transparency international also published on June 24, 2009 a working paper on Recovering stolen assets: A problem of scope and dimension the broad subject of asset recovery).

The TI-UK report - A review and a critique of the UK system, which has been strengthened recently to meet the additional challenges of tackling the financing of terrorism.

The report says that despite recent improvements many flaws still exist - weakening the UK’s defences and allowing corrupt foreign politicians to find sanctuary for their ‘dirty money’ in the UK.

Once mingled with funds in a large financial centre like London, dirty money – whether the proceeds of looting by corruption, procurement bribery or other criminal activities – is easier to launder. The report therefore focuses on how robust the UK’s current defences are against money laundering, what should be done to strengthen them, and how – once those defences are breached – the UK should co-operate promptly to ensure looted funds are returned to the victim countries.

The team of experts who assisted in the preparation of the analysed the workings of the myriad laws, regulations, guidance, conventions and initiatives that make up the UK’s current defences, the interaction between the many organisations and institutions responsible for their implementation and enforcement, and their effect on real case studies.

The report reveals several serious weaknesses in the current system. For instance:

• A corrupt foreign politician can still stash stolen money in a UK bank account
• Trusts and shell companies can still be used to launder dirty money
• The UK’s Overseas Territories can still provide havens for the proceeds of corruption.

Key recommendations to close the gaps identified in the TI-UK report are particularly focused on ensuring that cash and assets misappropriated by corrupt foreign politicians don’t get washed clean here in the UK, and can be repatriated speedily to their rightful owners. They include:
On preventing money laundering

• The UK government should work with its smaller Overseas Territories (OTs)2 to ensure their financial centres and enforcement authorities have the necessary resources and capacity to prevent money laundering. If not, the UK should either invest in boosting their capacity or wind down weak OT financial centres.
• Tighter systems to reinforce the efforts of UK banks and other institutions in identifying and doing due diligence on their high-risk customers – ie those whose profiles suggest they may be money launderers.
• The establishment of a central database of other countries’ domestic restrictions on asset ownership by their citizens that could help UK institutions more easily identify customers who have breached those restrictions and are likely to be corrupt.

On more effective UK help for foreign countries in recovering stolen funds

• The UK should do more to help return recovered stolen funds to their rightful owners, particularly through civil (as opposed to criminal) recovery routes.
• A Memorandum of Understanding between all the UK organisations involved in combating money laundering and recovering stolen money should be agreed, aimed at improving co-operation and speeding up the process.
• The UK should cushion the high cost of asset recovery for claimant states by supporting an international trust fund or providing loans and grants to meet those costs – which would be repaid once the stolen assets are released.
• The UK should be more proactive in raising awareness of its asset recovery process among foreign countries to address current confusion and uncertainty.
• The Department for International Development (DFID) should help developing countries increase their capacity for asset recovery - including investment in recovery specialists.
  
  

Commenting on the report, Chandrashekhar Krishnan, Executive Director of TI-UK said: ‘It’s clear from this report that despite much recent effort to tighten up its defences against money laundering and combat the financing of terrorism, the UK cannot rest on its laurels.

‘The UK is the world’s largest financial centre and is therefore vulnerable to reputational damage from allowing dirty money to circulate. What’s more, giving looted foreign funds a safe haven in this country only attracts more to its shores. That’s why the UK’s defences against dirty money must be robust and – if those defences are breached - an energetic and proactive system should be in place for repatriating looted funds.Failure to tackle the weaknesses identified in our report will let down the citizens of those countries where politicians are corrupt, by continuing to allow them to stash stolen assets in the UK.’

Posted 06/25/2009

* * *

Following Huge Scandal, Liechtensetin Agrees to Cooperate on International Anti-Money Laundering Efforts

Months ago German police and tax authorities obtained reams of documents providing the names of German nationals that maintained secret bank accounts in the tiny sovereign European state of Liechtenstein. How the documents were obtained has been the subject of intense reporting (see note below on an August 15, 2008 article in The New York Times) and prominent German businessmen have been the subject of intense public scrutiny for using Liechtenstein to avoid taxes. The scandals brought to the fore the independent approach to bank secrecy by the banks in Liechtenstein and its lack of cooperation with the Organization of Economic Cooperation and Development and other multilateral organizations that have sought to tighten official international cooperation to combat money laundering.

Finally, on August 15, 2008, the country’s Crown Prince Alois, according to press reports, announced that his country is willing to join the tax evasion fight.  Reporter Emma Thelwell of The Daily Telegraph (UK) wrote, “Alpine tax haven Liechtenstein has bowed to international pressure to co-operate more fully against foreigners who hide cash in its banks." The reporter said the Prince is willing to join the tax evasion fight.

Prince Alois, said: “In the future, we should offer all states comprehensive cooperation if they are willing to find sensible solutions with us for the client relationships we have built up, and if they are interested in fair and constructive cooperation for the future.” He added, Liechtenstein was “not an offshore centre as such”, listing the state’s “increasingly strong onshore sector” of the financial system.

And, he went on to say, “We have the opportunity in our hands to show the world that not only individual institutions, but also the entire financial sector can be successful within the framework of greater cooperation in tax matters.” But, as The Daily Telegraph noted, he did add, Liechtenstein would continue to “practice a culture of privacy that goes far beyond bank client secrecy in tax matters."

Reporter Marc Wolfensberger at Bloomberg News pointed out that Liechtenstein has been at the center of an international debate on tax havens since Germany's foreign intelligence service obtained data on account holders at LGT Group through an informant, whom it paid as much as 5 million euros ($7.4 million). Alois in February called Germany's probe of alleged tax evaders in Liechtenstein an ``attack'' on his country, a principality of 35,000 people wedged in the Alps between Switzerland and Austria.

Liechtenstein, Monaco and Andorra are on a list of ``uncooperative tax havens'' published by the OECD. Germany has been active in campaigning for strict bank-secrecy rules to disclose information about the identity of account holders, and favors EU-wide implementation of OECD tax guidelines.

While it remains to be seen just how far the changes will be in Liechtenstein, the background to these developments read like a mystery thriller, as The New York Times has pointed out. Reporter Lynnley Browning pointed out in an article on August 15, 2008 that Heinrich Kieber, a Viennese criminal psychologist, had stolen secret banking documents from Liechtenstein several years ago and may still have some of them. He is said to be in hiding and wanted by Interpol. The documents he sold to German and possibly other tax authorities, involving more than 1,400 names, include those of convicted felons and foreign officials, as well foreign banks.  The article, like many before it, suggested that Mr. Kieber only sold his documents to foreign authorities after failing to secure payment for them from the Liechtenstein authorities.

Posted 8/15/08

* * *

Banks in the Gulf Aware of Money-Laundering Problem, But Still Lack Capacity to Solve It

This article was reproduced with permission from the July-August edition of the London-based global business magazine Ethical Corporation. For a free trial or to subscribe to the magazine email: subs@ethicalcorp.com or go online www.ethicalcorp.com/subs/trial/

Banks in the Gulf are starting to tackle money laundering, but they could still be a lot tougher, according to an article published in the magazine Ethical Corporation. The rest of the article, which covers the progress the region is making along with its challenges, is reprinted here with permission.

Between 2001 and 2007 the number of suspicious transaction reports logged by banks and money exchanges across Bahrain rose from two to 621. But whether the statistics mean that there is more money laundering in the region, or just better disclosure, is not clear.

Hussam al-Abed, the Middle East representative for the Association of Certified Anti Money Laundering Specialists, notes growing awareness of the problem across the region’s finance sector. But he worries that some financial intelligence units remain ill equipped to spot the problem. “I’ve met people with no experience who have been made chief compliance officer at a major bank three months after joining,” he says. “Training of these people must be improved and be ongoing. Criminals constantly change tactic.”

According to Colin Lobo, KPMG partner for the UAE and Oman, there is a lack of anti money-laundering professionals globally. He says the Middle East and North Africa financial action task force, an anti money-laundering watchdog with 17 member countries, is actively recruiting, but that niche talent is expensive, and that the problem is made worse by the region’s rising costs of living.

Lobo says that money laundering in the region takes place through shell companies – those without assets set up to exchange false invoices – and through the acquisition of art, cars and land. But it is the hawala system that needs most attention, he says. Hawala is used primarily in the Middle East, Africa and Asia for transferring cash whereby the money is paid to an agent who then instructs a remote associate to pay the final recipient.

The UAE central bank’s controls are widely considered the region’s strictest. But cultural barriers continue to thwart its attempts to monitor cash payments, Lobo says. “People find it rude to be asked [for] personal details and can be uncooperative.”

There is disagreement over whether organised crime exists in the Middle East. Lobo says it is on the rise. But Dubai police deputy police chief major general Khamis Mattar al-Mazeina claims that “to say that Dubai is a hub for money laundering is untrue” and reports the city’s authorities have “chased [away] people who have tried to launder money in Dubai”.

Lobo says that since the introduction of the US Patriot Act in 2001, which demands that all foreign banks trading in US dollars conform with US standards, banks would be “crazy to launder as the penalties are just too big”.

Back in Bahrain, its authorities caught just two money launderers in 2001. This year, faced with America’s strongest expression of extra-territorial powers over the international dollar payments system yet, 18 have already been charged, with a further 73 said to be under investigation.

Posted 8/1/08

Back To Top

* * *

Christian Aid’s “Death and Taxes” – New Report Highlights How Corporate Tax Dodging Contributes to Global Poverty

Big business contracts are not just deals negotiated between huge multinationals and national governments – the effects of these deals have real consequences on local populations.  A sweeping report by Christian Aid, a UK-based aid and advocacy organization, gives an in-depth overview of how unequal tax systems in developing countries as well as illicit capital flows on the part of the corporations themselves drain badly needed revenue from developing countries.  The amount of money lost because of corporate tax exemptions or outright tax evasion doubles many times over the amount most countries give in aid, according to the report.  Christian Aid cites that the loss of corporate taxes to the developing world equals one and a half times the combined aid budgets of industrialized countries.

The report covers a number of key areas related to the mismanagement of global business deals, both on the part of the corporation and national governments.  It singles out the United Kingdom in particular for the number of tax havens located throughout its own dependencies, which enable tax dodging.  According to Christian Aid, it is hypocritical for the UK government to give large amounts of aid money to countries that enable tax evasion or allow the companies it works with to get away with unequal business transactions.  

The bulk of the report cites a number of case studies where the impact of tax evasion and lack of corporate accountability has a particularly dramatic impact.  It also focuses on countries where foreign investment actually has trickled down to the local populations.

Zambia – The study covers a deal brokered in 2004, which Christian Aid believe greatly contributes to the persistence of poverty in the country.  The report cites that mining companies only account for 12% of the corporate tax revenue, but in Zambia, these same companies walk away with 70% of the export revenues.

Tanzania – Gold accounts for 90% of the country’s exports, but more than half o f the population lives on less than one dollar a day.  Very often, according to the report, mining companies do not report the taxes they pay to the government.  A leaked report that came out in 2006 revealed that mining company Barrick evaded taxes that would have been worth US$132 million in corporate tax revenue.

Malawi – After a long, drawn out dispute over the country’s first mining contract, mining companies, the government and civil society organizations all sat down in November 2007 to negotiate a contract which satisfied all three groups.  The report cites observers who believe this deal could be a blueprint for future business deals in other countries.

India – The government has created a tax system which greatly attracts foreign companies to invest, but at the detriment of the local population.  The report says that in India, companies can operate tax free for the first five years and for nearly free thereafter.  Many Indians are forced to move to make way for new developments, and the United Nations stated the country is behind on its public health targets.

Peru – The government allows mining companies to pay only one to three percent, and in many cases companies have negotiated tax exemptions.  In 2007, the report states that the total mineral production in Peru was worth ₤11 billion, but the government only got ₤2 billion in tax revenue.

Bolivia – Recently, the Bolivian government has forced companies to pay a 50% royalty on every mining field, which in turn, boosted tax revenue for the government from 15% to 26%.  The report cites evidence that the increased corporate tax revenue is being used to improve health and education.

Considering the number of problems associated with global business deals, Christian Aid provides a number of recommendations to the UK government:

1. More transparency and regulation for tax havens
2. Institute a common accounting standard
3. Provide an honest assessment of illicit capital flows
4. Repatriate the funds to their home countries

Posted 5/29/08

Back To Top

* * *

The Top Managment and the Board Became Fully Involved - This Story Highlights the Importance of Internal Controls

Is the Wall Street Journal’s headline on the top of  Page 1 on December 30, 2005. The article by reporter Glenn R. Simpson provides a detailed account of alleged massive money laundering through branches of ABN Amro Holding NV, the world’s 20th largest bank. 

The case that is described goes to the heart of the “know your customer” issue that has been the central feature of action in striving to curb money laundering in recent years. At its core, the requirement is that banks take forceful actions to ensure that they know who owns the accounts in which money is deposited and that they are pro-actively engaged in investigating suspicious transactions. The ability of banks to put in place “know your customer” systems is a key aspect of corporate governance in banking and the dangers of inappropriate action are illustrated in the Wall Street Journal article.

Money laundering is vital for criminals of all kinds engaged in corruption – they need to find ways to wash their ill-gotten gains and convert often vast amounts of local currency into dollars and euros that can be easily deposited across the world. “Know your customer” is at the core of the Wolfsberg Principles – a voluntary code of anti-money laundering principles stimulated by Transparency International in partnership with leading banks, including ABN Amro.

“Know your customer” became a critical focal point for U.S. and international financial regulators after the 9/11 terrorist attack in New York. The key concern is that criminals, transferring corrupt gains across the world can  “launder” their money by creating shell companies and by opening bank accounts in phony names – the “know your customer” rules require that banks know who their customers are, that they investigate suspicious accounts and transactions and so curb money laundering. But, as the Wall Street Journal article highlights, vast sums of cash flowed through ABN Amro without the bank knowing details about who sent the money and who received it.

The article noted: “All told, bank and government records show that the flagship bank of the Netherlands processed more than $70 billion in suspicious or illegal transfers through its New York office. The story of how ABN Amro ignored red flags and plunged into the world of shady finance illuminates the central role of the U.S. financial system in the global flow of black-market funds, even when foreign entities have no direct business in the U.S..”

The article also illuminates the failure of the Bank to act prudently in this area, to mensure that it had adequate internal controls in place and, in one incident, that there were even temptations by top managers to hide key information from regulators. The article does underscore that the bank conducted extensive internal investigations when it started to realize that massive problems were developing and that it has fully cooperated with U.S. regulatory authorities. Moreover, the bank has also put in place new control systems, involving costs running to more than $250 million on an annual basis, to guard against further similar critical problems.  Nevertheless, the newspaper reported that the U.S. authorities are pursuing a criminal investigation.

Illustrative of the “know your customer” issue is a case highlighted in the article where in 2002-03 “ABN Amro shipped more than $1 billion in 11,000 transactions to a single company in Lexington, Ky., called Allprex LLC, ABN Amro now acknowledges. The now-defunct company, which had no known offices or products, was incorporated by gynecologist Emilios Hadjivangeli, who hails from the Mediterranean island of Cyprus. Dr. Hadjivangeli, who is identified as a member of the Cyprus-Russian Business Association on the association's Web site, has incorporated 181 other companies in Kentucky and hundreds more in other states. Regulators in Cyprus and Kentucky say they haven't heard of Dr. Hadjivangeli or Allprex. He couldn't be located for comment.”

Capitalism's Achilles Heel: Dirty Money and How to Renew the Free Market System

Exclusive EthicsWorld article by author Raymond Baker
Senior fellow at the Center for International Policy

Enron.  Tyco.  WorldCom.  This list of tainted companies could go on for pages.  More than ever, our economic system is struggling to balance what is legal, what is ethical and what serves the common good.  The many disgraced corporations in the last five years have met with scandal in their own unique ways.  But there is a common thread that links many of them and countless other companies that operate “cleanly.”

That thread is the dirty money structure, which consists of tax havens, secrecy jurisdictions, abusive transfer pricing, dummy companies, anonymous trusts, hidden accounts, solicitation of ill-gotten gains, kickbacks and loopholes left in the laws of western countries that encourage incoming criminal and tax-evading funds.  Many global companies and banks use this structure to skirt customs, tax, financial and money laundering laws.  Roughly $11 trillion is stashed away in tax havens and secrecy jurisdictions.  About half of cross-border commerce involves some part of the dirty money structure, often to hide illicit proceeds.

The result is nothing less than the legitimization of illegality.  It is virtually impossible to do business using tax havens, secrecy jurisdictions, abusive transfer pricing, and secret accounts without breaking laws in many countries.

Why has so much bad behavior become business as usual?  One explanation is greed, but this does not adequately explain the phenomenon.  A better explanation is that we value “maximizing” our business operations over ensuring that they are fair and just.  The capitalist system is enormously productive, yet it could accomplish so much more.  We need to make a top priority of justice and fairness in business operations if capitalism is to achieve its fullest potential and spread prosperity to all.  Curtailing the dirty money structure is an essential first step.

Back to Top

* * *