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Dedication to Miriam Introduction 1 Laundering at War 2 Russian Mafia 3 BoNY Gate 4 Al Qaida 5 Funding War... 6 Diamonds and Arms 7 Columbia's Half Trillion 8 Smoking Guns 9 Citibank... 10 The Casablanca Sting 11 Laundering Footmen 12 Global Clampdown 13 Can the PaTriot Act Work 14 London OnShore 15 Cyber Launders, Cyber Police Conclusion Glossary Sources Bibliography Index To Miriam Kochan Introduction Money laundering has become the vogue word of our age. Politicians use it to describe any abuse of the financial system--abuse by terrorists, by financiers, by banks, by small individuals who have to illicit cash from whatever dubious source. In this context, money laundering involves the use of financial devices to hide money, such as offshore companies, multiple bank accounts, hedge funds and forged passport and identities. Lawyers and law enforcers also use it to describe the handling or investing of drugs money, or funds with a criminal history. In this context it acquires legal clothes and enables police to exercise special powers and judges to impose harsh sentences when the 'money laundering' is linked, or said to be linked, to drugs. Section One: The victims of laundering Money laundering for the purpose of this book goes much further than either the politicians or the police. But it includes both elements. Here we examine the use and abuse of the global financial system by politicians, terrorists, criminals and organized criminal gangs. The key players in this tale of multiple intrigue and subversion are skilful players in the developing world who apply the tools of finance to steal from their home countries. The aiders and abetters in this process of laundering and plundering money are Western financial institutions: Our banks and Our markets. Where does the black money come from? Money laundering thrives in countries where the economic and social systems have broken down. Shambolic governments, like those in much of Africa or in Russia, enable crooks to ride roughshod over democratic and regulatory controls. Governments which lack credibility also lack ethics and are prone to corruption. This is the backdrop for two forms of criminal money-making. First, corruption puts dirty money into the hands of politicians through bribery. Second, local mafiosi exploit corrupt politicians to accumulate wealth, which they cannot legitimately possess. The second category ranges between small-time hoodlums at one end of the spectrum and oligarchs (including, but not exclusively Russians) at the other. The two forms of black money transfer link together in a vicious cycle of corruption and greed. Wealth that has been criminally obtained, whether by bribery or fraud, needs to be hidden and moved if it is to be enjoyed. There are many reasons for this. Politicians fear that a government will be changed and their records and bank accounts examined; fraudsters are vulnerable to investigation by police or tax authorities. Both parties look to Western banks for a huge array of devices that include offshore companies and tax structures, false names for their bank accounts, and lawyers and accountants for their complex financial structures. After some perfunctory due diligence to satisfy regulators, banks provide them willingly, When such wealth is moved, the bank participates in a theft, even if it has been duped by a criminal who is skilled hiding the source of his funds. Yeats asked in his poem Byzantium, 'Who can distinguish the dancer from the dance' The maker of the corrupt or fraudulent money and the financial institution who helps moves it are part of a process, where both parties are conspirators, in both parts of the activity, though not of course to the same extent. Banks may get sucked into different forms of laundering and financial crime. They will be asked to invest dirty money for fraudsters as well as hide it in off-shore accounts. Either way, they will be beneficiaries of the laundering when they gain a fee, paid from crooked funds. The key losers in this Faustian Pact between bank and launderer is the developing country that suffers massive short-term loss. Western financing schemes hollow out the wealth of poor countries, leaving behind economic blackholes and political instability. This form of wealth transfer by deception benefits a few sharp or crooked entrepreneurs to detriment of the larger economy. The irony is that it occurs in countries where there is least economic activity. Indeed, it might be argued that if there were more economic activity, there would be less scope or need for laundering activity as the financial system would be more liquid. So if the countries of Africa where diamonds are mined had their own viable diamonds markets, would sharp local operators (in league with politicians and Russian crooks - see Chapter 3) need to ship them off to Antwerp or Beirut under the cover of bogus companies, to launder them? Short term theft has long-term implications for these poor countries. Mafiosi and oligarchs use their illegally gained prosperity stored outside the country in secret offshore centers to rebuild their local reputations, and so wipe out the evidence of how the wealth was obtained. The shrewdest will take political office and run their criminal businesses under the cover of legitimate authority. This last scenario is the most ominous as it destroys trust in political leadership. Governments that are 'up for sale' to the highest bidder must be prone to terrorist or mafia intervention, as we saw in Afghanistan where an alliance between drugs dealers and terrorists brought us the Taliban and then Al Qaida. They are also in hoc to international banks, that supported the leaders on their way up, and now extract their pound or dollar of flesh when their man is in charge. Western governments and multilateral bodies have understood these dangers and sought to introduce some standards into banks' relationships with politicians and those close to them. These standards are embodied in the Wolfsberg Principles and all large banks subscribe to them. The implementation of such standards -even if they may seem idealistic -- offers the best hope for poor countries eager to rebuild their economies without the depradations of mafia and their Western abbeters. 2. Who are the money launderers? Those who secretly manipulate the sources and movement of money affect the security of nations and the wealth of people. These financial fixers also terrify governments with their political and financial power. The most successful of these operators have obtained wealth that is both sustainable and capable of appearing honest. They are in our midst; more horrifyingly, they are 'upright citizens'. Money launderers understand the financial system at least as well as the best genuine practitioners; they use the language and instruments of the legitimate system to explain the provenance of their wealth. They are capable of sending stolen money along the same byways as legitimately gained wealth, harnessing technical developments such as the global electronic movement of money and complex financial derivatives. By diverting funds across borders or within financial or governmental institutions, they dodge police who challenge the validity or history of their illegal financial documents or instruments. Their corrupt money mingles with the hard-earned funds of genuine citizens who pay their taxes and trust their banks. American and Russian tycoons, like Victor Bout and Bruce Rappaport worked with intelligence agencies to impede economies or particular economic or political groups in countries considered inimical to national or Western interests. It is argued, with some evidence, that intelligence agencies are among the most active of all money laundering groups. After all, they have the financial resources of the state at their disposal. Money launderers operating on this global scale have great intellectual ability. They are also intriguing and complex personalities. Friends of both Rappaport and Bout say they are charming, very talented and gregarious. They hobnob well with powerful politicians, attracting admiration and trading favours with aplomb. Powerful individuals have proved important fixers of financial flows over the last decades. But perhaps more sinister yet is the growth of organised gangs which have targeted the movement of funds from West to East. These gangs team up with truly sinister forces such as cartel chiefs and terrorist elements. They target, among many other money flows, funds acquired by expatriot workers as they are moved by informal operators from wealthy countries to Asia and China. They employ violence and they operate outside the law, well beyond any social control. 3. The size of the black economy For reasons of global political and economic instability at all levels, financial crime is resurgent. The amount of money laundering shuffled around the powerful individual launderers and the organised gangs discussed above is as vast as it is unquantifiable. Many inflated figures are proposed to scare governments, populations and bankers. But here are a few that may be more trustworthy. For example, The International Monetary Fund has estimated that drug use alone accounts for 5% of the Global gross domestic product of some $33 trillion. That is some $1.65 trillion. It is further estimated that $100 billion of illegal money moves annually from the 'undeveloped' world to the 'developed' world through illegal trade. These two numbers do not include the many unquantifiable figures like the value of trade in illegal arms, the scale of illegal commissions and the value of illegal trade in precious stones. They further do not include the amount spent by terrorists or the amount lost to the world's economy through fraud. It would not under- estimate the scale of the problem to say that $2.5 trillion is now swilling around the black economy as well as white. The following pages also seek to show the way money launderers work. These illustrate not just the ingenuity of organised criminals but also the challenge facing law enforcers. I show how hot money, as the illegal money has been described, is constantly on the hunt for hiding places, where it might evade controls. It is also seeking out corruptible banks and institutions which will provide gateways to stronger economies. This book analyses the sources of hot money, and the gateways. It shows how easily Western institutions are probed and prised open by flight capital. The principles of due diligence required by an ever growing body of law are easily compromised by a banking system in hock to rich bearers of all shades of money, black, grey and white. Western institutions have been content to treat with mafia and private individuals who have gained corrupt access to newly privatised state industries in countries experiencing economic and political change. The speed and efficiency with which the West has absorbed capital released from the bankrupt former Soviet Union over the last decade is a remarkable case study in how financial manipulation can be institutionalised. Established banks in the West collaborated with some dubious operators in Russia in a systematic process of pillaging that took place under the noses of politicians both in Russia and in the United States. Both countries' political elites had reason to remain inactive; Western politicians were still exercised by the Communist bogey and treated the launderers and conmen who came out from under the Russian dungheap when Communism expired, as legitimate entrepreneurs. Russian politicians were content to let the scams continue because they were corrupt and in the crooks' pockets. Those who were disturbed by what they saw had no means to reverse it because the country's administrative systems were in a shambles. 4. Offshore: where the launderer feels at home The vehicle for Russian and other illegal money to move secretly and silently round the world is the 'offshore' system of tax-free havens and international banks. This system serves the interests of stateless and wealthy people who seek ways to dodge paying taxes to their home governments. But criminal money enters it with impunity while it looks for a safe haven. Russians have been quick to learn how to play this system and a few of course have become extremely rich on the back of it. The most famous organised criminal to play the offshore game was Al Capone. In the 1920s and 1930s, Capone invested the Mob's money in pizza joints, café's and in casinos in Cuba. He ran his businesses and banks out of the Bahamas, keeping the local government on his side by allowing a few select and corruptible ministers to share in his gains. Switzerland and Liechtenstein later provided a safe haven for the wealth of Jewish refugees when it was under threat of confiscation from the Nazi regime. Switzerland's role won general approval and for quite some time after the War, the West chose to neglect small countries that offered wealthy people scope to hide their wealth. Capone's friend, Meyer Lansky, who was dubbed 'the Mob's accountant', took over where Capone left off in 1931, riding roughshod over flakey governments in Haiti and Bahamas during the 1940s and 1950s. Lansky also exploited Swiss liberality with an innovative scheme he called a 'loan-back'. Couriers carried cash from the US to Switzerland to escape the US tax net. The money was deposited in a numbered Swiss bank account (that is a form of account - now discouraged-- which does not carry the name of the owner, only a unique number) from which Lansky 'borrowed' back his own money. The money returned to Lansky's accounts in the United States, without the US authorities realising that it was taxable. As part of their crackdown on the Mafia, US authorities stopped Lansky's schemes and put out a warrant for his arrest. He did a bunk for the Jewish homeland of Israel, but the US Inland Revenue Services sought and secured his extradition from Israel in 1975. He was subsequently convicted and imprisoned in the US. By this stage, Lansky had been joined in the pantheon of abusers of tax havens by two notorious financiers. Bernie Cornfeld and Robert Vesco were early fraudsters who saw how secret havens could be used to rob the public. Cornfeld, for example, offered investments in his company Investors Overseas Services. He called this a 'mutual fund' to provide his investors - most of whom were themselves tax evaders - with reassurance. The money was secreted in tax havens where it was invested in pyramid schemes, that is schemes where one fraudulent transaction is dependent on the last, until a brick is knocked out of the construction and it collapses in a heap. IOS duly collapsed in a heap, leaving its corrupt clients out of pocket. Their funds had been hidden in offshore centres where information was scarce, and money scarcer. Cornfeld invested the money in another hideyhole out of reach of the original investors. For obvious reasons they did not seek to retrieve their money. These schemes set the tone for much wider abuses during the last thirty years of the Twentieth century. This was an era when free-market economics reigned. It is no exaggeration to say that Western authorities - governmental as well as those in the financial markets-- turned a blind eye to tax evasion. They would call it financial entrepreneurism or some such euphemism. RT Naylor wrote in 'Hot Money and the Politics of Debt', of Cornfeld's schemes, 'The IOS "recycling" activities received virtual government endorsement when, from 1968 to 1971, US officials suggested that countries politically and financially embarrassed by the flood of dollars put some of their excess dollars in the US stock market.' The US government acquired a taste for financial manipulation of their own during this period. The Campaign for the Re-election of the President (CREEP) in 1972, made up of associates of former President Richard Nixon, arranged for money to bypass government checks on election funding by putting a $100,000 campaign contribution through a series of offshore centres, Nassau, Lebanon, Panama and Switzerland. This money was used to fund the bugging of Nixon's political opponents. The Nixon aides described their activity (apparently without so much as a blush) as 'money laundering', and the term then entered the common currency. Between 1970 and 2000, the number of offshore centres - and schemes to use them-- grew like topsy. Hidey holes for the rich could be numbered on two hands in the Forties and Fifties, but by 1980s the number had grown ten fold, with obscure places like Nauru (in the South Pacific) and Anguilla in the Caribbean coming into their own. The political free-marketeers, who were content to see the expansion of the 'offshore' world, also allowed levels of regulation in the traditionally more conservative countries, including the UK and United States, to decline. By the 1980s, the offshore ethos had moved onshore into the World's largest markets, such as London and Tokyo. Blue chip corporations applied tax avoidance schemes (often devised by London-based accountants) using the most obscure tax havens to satisfy shareholder demands for profits. For example, an international corporation could set up companies in Panama, Liberia and Caribbean centres to defer paying tax on dividends owing to the UK government. These were offshore or 'nameplate' companies without physical presence anywhere on the globe, but the scheme was accepted as legal by the UK's Inland Revenue. Similar schemes were applied by accountants and financiers working on behalf of the Colombian cartels to hide the proceeds of drugs around the offshore world. The amount of money invested in these schemes grew to such a size that tax authorities and US law enforcement pushed for new and stronger powers to curtail them. In 1986 the first money laundering law was passed in the US. This tightened up the penalties for financial advisers who were found setting up devices for hiding drug money. Later legislation passed in Europe and the US widened the definition of black money to include the proceeds of tax evasion and terrorist finance. The money that used the offshore world to dodge their own countries' authorities was as diverse as crime itself. So Panamanian drugs money was joined by Russian flight capital and bribes destined for oil ministers in Middle Eastern countries in a glorious whirligig of tax evasion and legal obfuscation. Dealers in goods like illegal arms and blood diamonds - those mined in conflict zones - were able to use paperwork provided by banks, trusts or other legal fictions to disguise trades that could not be legitimately disclosed. (See Chapter 3 on Victor Bout in Africa). The operators who made money from trading these commodities needed to find ways to take money out of the black economy to fund bribes to politicians, to buy investments or simply to fund an 'honest' lifestyle. The process of extracting the money, and of hiding its source by putting it through many different guises, is typically called 'laundering'. Laundering itself is perhaps an ironic term as money that has been treated in this deceitful way attracts the suspicions of financial investigators who can pick away the layers and reach the original criminal source. For this reason, if for no other, 'laundered' money is never quite as safe as those that handle it might like to claim. Companies that have advised a list of blue chip clients how to play the offshore laundering game have been no less famous than many of their clients. Bank of New York (see Chapter 2) has played on the same money-go-round as Citibank (Chapter 9) to please a bunch of hoodlums who had made their money out of drugs, weapons, political extortion and the like. As the Twentieth Century drew to a close, Western Governments began to register some of the consequences of low regulation and excessive offshore freedom. The most worrying concern was that global terrorist groups were using offshore structures to fund and organise their activities. Controls had been lost on the movement of funds through the black economy and governments suspected that money had leaked into some particularly unsavoury hands. Low regulation of the financial markets coincided with under-funding of the intelligence community leading to some glaring mistakes. The proliferation of offshore schemes to 'avoid' tax (as opposed to evading tax when the scheme is breaking the law) also began to deplete the revenues that were scooped up by National Treasuries. Governments lacked the funds to develop public services and fund public pension schemes when both were adjudged political priorities. This convergence of security and financial concerns has led to a new concern about financial abuse and a new insistence on regulation. Today's attack by governments and the financial community on money laundering should be seen in this context. Financial secrecy and manipulation is today viewed as a genie that escaped from the bottle during the free-wheeling 1980s and 1990s. Now it needs to be returned to its bottle before greater damage is done to the financial and security infrastructure. The task is considerable and carries the risk of upsetting sectors of society that governments want to keep sweet, namely Western corporations and wealthy individuals. Financial authorities and governments today have adopted what may appear to be a safer route. This involves using financial institutions and other players in the commercial markets to some degree as government servants. They have a two-fold brief: first, they must check the identities of their customers; second, they must scrutinise their financial activity for evidence of suspicious transactions. This approach is flawed because the system concentrates on low level cash handlers rather than the dangerous money launderers. The latter shelter within corporations or legal structures that exploit the crevices in the global financial system. By concentrating on the small players in today's vast black economy, police attention is diverted from investigating the serious launderer and his team. The collection of masses of data is likely to serve only to muddy the law enforcement task rather than assist it. It also discredits the task with the public, leading some to regard it as a legalised 'fishing expedition' and others as a passport for police to intrude on individuals' financial behaviour. Very few regard it as an effective way of deterring organised criminals from abusing the financial system. In short, criminality by organised crime groups requires a sharp implement, rather than the blunderbuss currently levelled at it. 5. Laundering in the boardroom This sharp implement needs to be applied to complex laundering schemes which involve insider trading or accounts manipulations like those used by the failed American energy trader Enron, WorldCom, the telecommunications and media company, or the Italian food manufacturer Parmalat. More public money would be saved if money were applied to the anticipation of these scams than by staffing up banks with people who can tick boxes when a $10,000 cash payment is made. Finally, the sharp implement needs also to be applied to terrorist financing schemes. The blunderbuss approach is as flawed for finding terrorist money when it passes through the banking system as it is for finding the fruits of organised crime. Law enforcers need to stop the schemes that terrorists use for making money in the first place. By the time terrorist money enters the economic or banking system, law enforcers have lost the plot. For terrorists, unlike the executives of Enron, Tyco or WorldCom, are not interested in making crooked investments in the financial system, they are merely interested in using it to transfer money to pay for outrages. They seek a one-off hit, not a series of hits that might give their game away. Chapter 5 describes Irish terrorist use of the hospitality, counterfeiting and petrol smuggling sectors in Ireland; they show how the Turkish PKK uses the fruit canning industry in Thailand. Finally, they analyse how Al Qaida participates in narcotics production in Afghanistan. 6. How terrorists defy convention The threat posed by terrorist financing is quite different to that posed by criminal finance and Western law enforcement has yet to develop an appropriate response. This explains why law enforcement's attempts at thwarting terrorism have dramatically failed. There are two key differences between criminal and terrorist funding. The first is that terrorist money is not necessarily criminal. It may be derived from charitable or political sources, or merely from wealthy donors who have apparently honest businesses. The second, is that terrorists have no need to move money into or through the legitimate financial system in any quantity. Terrorist groups are not in the business of making or cleaning money, they are in the business of finding donors who can fund their activities, and then spending the money they are given on violent terrorist activities. These enterprises are well known to be inexpensive in monetary terms. Most terrorist money is spent in the black market buying arms, while small amounts are used to support terrorists while they prepare an outrage. The first form of purchase is not applicable to conventional anti-money laundering solutions because such deals take place only in the black market. The second, are unlikely to trigger suspicion because the amounts are very small and the transactions unlikely to be particularly complex. In short, retail solutions to anti-money laundering do not apply and should not be claimed to apply to terrorist funding as they cause alarm in civil society and devalue the real anti-terrorist campaign. The funding of terrorism can be stopped in two quite different ways. The first is by tracking down and putting out of business the donors to terrorist groups. That requires first the identification and then the deep penetration of these organizations by intelligence agencies working in conjunction with financially literate police. The second is by seeking to intercept the money flows between donors and terrorist groups. These take place in the underground economy, but intelligence agencies may be able to spot suspicious movements of cash or other valuable items like diamonds by using other participants in the black economy as sources. For example criminal gangs in the jewellery industry, might be persuaded to work with intelligence in breaking the link between the terrorist donor and the operating terrorists on the ground. Those money flows may issue suspicious signals if the donor creates complex trails to divert attention from his interest in the terrorist group. As will be seen later in the book, in particular in chapters four and five on terrorist financing, the funding of terrorism poses special challenges to law enforcement. But these challenges will only be met if governments equip themselves with financially literate and able police and intelligence forces. Funding is the life blood of terrorism and its interception and restraint requires officers who understand commercial markets, be they in the black or legitimate economies. Today's anti-money laundering policies are convenient and cheap for governments as they place most of the burden on the legitimate banking and financial system. However, as this short analysis demonstrates, this retail approach is quite inappropriate to terrorist financing. An effective approach requires government to train up and adequately fund its own officials. These in turn must be encouraged to work closely with the intelligence agencies. That way, the black economies and black markets described in the black markets section, Section Three, will be penetrated and ultimately flows of funds into terrorist financing will be staunched While terrorists create horrendous, but short-term damage, those who perpetrate bankruptcies, frauds, huge share scams and bogus schemes like Tyco, Enron and WorldCom, not to mention executives at the Bank of New York and Citibank involved in laundering scandals, do something quite different. They create insecure financial systems. Launderers who are allowed in through the gate undermine structures of governance and trust. Economic systems rely on the integrity of those who administer them and those who regulate them. When these key roles are shown to have been suborned by crooks and conmen, all participants in the economic system are weakened. Launderers menace a stable and fair society. The importance of keeping them outside the gate has never been greater. Likewise the need for a clearer and more focussed system of regulation is paramount. 7. The structure of The Washing Machine Money laundering is both and an imprecise subject. It is very difficult to define, very difficult to measure. It exists in every country and is perpetrated at some level by most of us at a minuscule level and by highly organised criminals on a large scale. This book deals predominantly with the second category. These criminal financiers affect the global economy. The chapters that follow deal with the four greatest threats posed by money laundering. Each threat is broadly encompassed within a section of the book. The sections do not run from the greatest threat to the least threat, or vice versa. The first section covers the specific threat to the safety of world markets posed by Russian criminals whose long arms and ruthless methods are practised as far afield as Africa, Europe and the United States. The West searches out Russian money eagerly, but such is the country's instability that each new investment brings with it commercial instability and risk. The section section deals with a quite different but related threat: terrorism. Their place in the global economy is far less tangible or evident than that of the Russians but its effect on the security of everyone is obvious. Western law enforcers are forced to follow the money trails, although many argue that the trails are less important than the places where the money is made. The third threat is that posed by the injection of black money into the financial system. This section examines three ways in which that money can be generated, namely through the sale of diamonds, drugs and cigarettes. It also shows how dealers use these three commodities, as well as other illegal goods and activities such as arms and people- trading, interchangeably. The fourth threat is that posed by corrupt banks. These are targeted by criminals with black money. When launderers succeed in using banks for laundering, crime is perpetuated. This section examines a number of banks and banking sectors to demonstrate how corporate policy, coupled with greedy or gullible bankers, undermine an effective and clean global economy. The book's final section deals with those people who seek to understand and curb the threats just described. These are the law enforcers in Government service and money laundering officers in banks across the globe. Their remit is vast and their resources are invariably stretched. But the section shows how September 11 transformed the way law enforcers work, and the tools they work with. Whether these measures have worked to make the world a safer place is the question all of us with any role whatsoever in the world's economy, need to ask. Nick Kochan London
Library of Congress Subject Headings for this publication:
Money laundering.
Money laundering -- Case studies.
Organized crime -- Economic aspects.
Transnational crime -- Economic aspects.
Money laundering investigation.
Money laundering -- Prevention.