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Crackdown on Money Laundering: a Comparative Analysis of the Feasibility and Effectiveness of Domestic and Multilateral Policy Reforms Kathleen A Northwestern Journal of International Law & Business Volume 23 Issue 2 Winter Winter 2003 Crackdown on Money Laundering: A Comparative Analysis of the Feasibility and Effectiveness of Domestic and Multilateral Policy Reforms Kathleen A. Lacey Barbara Crutchfield George Follow this and additional works at: http://scholarlycommons.law.northwestern.edu/njilb Part of the Banking and Finance Commons, Comparative and Foreign Law Commons, and the International Law Commons Recommended Citation Kathleen A. Lacey, Barbara Crutchfield George, Crackdown on Money Laundering: A Comparative Analysis of the Feasibility and Effectiveness of Domestic and Multilateral Policy Reforms, 23 Nw. J. Int'l L. & Bus. 263 (2002-2003) This Article is brought to you for free and open access by Northwestern University School of Law Scholarly Commons. It has been accepted for inclusion in Northwestern Journal of International Law & Business by an authorized administrator of Northwestern University School of Law Scholarly Commons. ARTICLES Crackdown on Money Laundering: A Comparative Analysis of the Feasibility and Effectiveness of Domestic and Multilateral Policy Reforms Kathleen A. Lacey* Barbara Crutchfield George** TABLE OF CONTENTS I. INTRO DUCTIO N ................................................................................... 265 II. B ACKG RO UN D .................................................................................... 267 A. Definition of Money Laundering ................................................. 267 B. Negative Consequences of Money Laundering ........................... 268 C. Brief Review of Existing Money Laundering Initiatives ............. 269 D . L ink to B usiness ........................................................................... 271 E . L ink to T ax Issues ........................................................................ 274 * Associate Professor, Department of Finance, Real Estate & Law, College of Business Administration, California State University, Long Beach, M.B.A., J.D., University of South- ern California. ** Professor, Department of Finance, Real Estate & Law, College of Business Admini- stration, California State University, Long Beach, J.D., University of Iowa. Northwestern Journal of International Law & Business 23:263 (2003) III. COMMON CHALLENGES TO THE ERADICATION OF MONEY LA UN DERIN G ................................................................................... 277 A. Bank Secrecy and Tax Havens .................................................... 277 B. Privacy Protection as an Impediment .......................................... 278 C. Lack of Diligence by Financial Institutions ................................. 280 D. Insufficient "Gatekeeping" by Attorneys and Accountants ......... 281 E. Unregulated Financial Services ................................................... 282 F. Correspondent B anks ................................................................... 283 G . Shell B anks .................................................................................. 285 H . Private B anks ............................................................................... 285 I. O th er ............................................................................................ 2 8 7 IV. CHART SUMMARIZING THE EXTENT TO WHICH THE MAJOR INITIATIVES RESOLVE THE CHALLENGES TO THE ERADICATION OF MONEY LAUNDERING .................................................................. 288 V U.S. INITIATIVES TO CURB MONEY LAUNDERING .............................. 290 A. Overview of the Legislative Framework 1986-2001 ................... 290 B. Shortcomings in the Legislative Framework and the U.S. Congressional Response to Shortcomings through Adoption of the PATRIOT Act, Title III, the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 ................. 302 C . Rem aining Loopholes .................................................................. 312 D . C urrent Status .............................................................................. 3 13 VI. EUROPEAN INITIATIVES TO REGULATE MONEY LAUNDERING ........... 314 A . European U nion Initiatives .......................................................... 316 B . The C ouncil of Europe ................................................................. 324 VII. INITIATIVES OF MULTILATERAL ORGANIZATIONS ............................ 329 A. Organization for Economic Cooperation and D evelopm ent ................................................................................ 329 B . U nited N ations ............................................................................. 332 C. Organization of American States ................................................. 335 VIII. OTHER ANTI-MONEY LAUNDERING EFFORTS ................................. 338 A . Transparency International .......................................................... 338 B. The Financial Action Task Force ................................................. 340 C . Financial Stability Forum ............................................................ 345 IX . RECOM MENDATIONS ........................................................................... 345 A. Recommendations to Address Concerns Regarding Secrecy of Tax H avens ................................................................ 346 B. Recommendations to Address Ongoing Privacy Protection C oncerns ...................................................................................... 346 C. Recommendations to Address Concerns Regarding Lack of Bank Diligence & Cooperation ..................................... 347 D. Recommendations to Address Loophole of Attorneys and Accountants as Facilitators of Money Laundering ...................... 348 Crackdown on Money Laundering 23:263 (2003) E. Recommendations to Address Remaining Statutory Loopholes in Various Jurisdictions and in the International Multilateral Framework through Adoption of a Comprehensive Multilateral Treaty ........................................................................................... 34 9 X . C ON CLU SION S .....................................................................................350 I. INTRODUCTION In the last decade, there has been increased global, domestic, and me- dia focus on the economic, political, and social costs associated with cor- ruption, such as the prevalent business practice of bribing foreign public officials in order to obtain lucrative contracts, with the resulting need of the bribe recipient to launder the illicit proceeds.' This increased focus on cor- ruption can be attributed to factors such as the end of the Cold War, the fur- ther integration of Europe, the increase in international business mergers, the borderless global market and a greater recognition of the economic costs of corruption.2 One of the most significant economic costs of corruption results from money laundering. Money laundering occurs when secret deposits of illicit funds move through a series of deceptive transactions designed to disguise the source of the funds and make them reappear in the market in a legiti- mate form, without a trace of their origin. As an integral part of numerous forms of business corruption, drug trafficking, arms smuggling, terrorism, and other illegal activities, the consequences of money laundering have a notable economic impact. With one estimate3 as to the annual global amount of money laundered calculated in a range between $500 billion and $1 trillion 4 and an estimate that such laundered funds are equal to approxi- mately two percent to five percent of the worlds' gross domestic product,5 it is obvious that decisive action needs to be taken to halt this flow of illegal 1See Carolyn Hotchkiss, The Sleeping Dog Stirs: New Signs of Life in Efforts to End Corruption in InternationalBusiness, 17(1) J. PUB. POL'Y & MARKETING 108 (1998). For a more detailed discussion, see Barbara C. George et al., On the Threshold of the Adoption of Global Antibribery Legislation: A CriticalAnalysis of Current Domestic and International Efforts Toward the Reduction of Business Corruption, 32 VAND. J. TRANSNAT'L L. 1 (1999). 2 George et al., supra note 1, at 4. 3 There are multiple figures and wide ranges available as estimates on the extent of funds involved in the laundering process. 4 Global Programme Against Money Laundering, available at http://www.undcp.org/ moneylaundering.html (last visited April 5, 2002). See also Money Laundering: A Banker's guide to Avoiding Problems, available at http://www.occ.treas.gov/ laundering/orig.htm (last visited Sept. 13, 2001). 5 Uniting and Strengthening America by Providing Appropriate Tools Required to Inter- cept and Obstruct Terrorism (USA PATRIOT Act) Act of 2001, Pub. L. No. 107-56, § 302(a)(1), 115 Stat. 272 (2001) [hereinafter "PATRIOT Act"]. This is estimated to amount to at least $600 million annually. See John Gibeaut, Show Them the Money, A.B.A. J., Jan. 2002, at 48. Northwestern Journal of International Law & Business 23:263 (2003) funds. This is a uniquely opportune time for anti-money laundering initiatives and policy reform to occur. Since the terrorist attacks in the United States in September, 2001, security agencies throughout the world have rushed to follow leads that may prove that Osama bin Laden financed the attack with massive amounts of laundered money. 6 Greater awareness of the harmful effects of money laundering, and public and governmental concerns regard- ing reverse-money laundering by terrorists, has resulted in a surge
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