MONEY LAUNDERING AND FINANCIAL CRIMES XII-1 INCSR 2002 XII-2 Money Laundering and Financial Crimes Introduction The terrorist attacks of September 11 vividly illuminated the importance of anti-money laundering laws and controls. The attacks fostered an even greater recognition of the importance of anti-money laundering cooperation around the world. This recognition galvanized international cooperation and led to significant modifications to anti-money laundering laws. The framework of laws and regulations enacted during the last decade to address money laundering paid prompt dividends in the world community’s ability to trace the funds of those who finance international terrorism. The developments that have taken place since September 11 will further enhance global efforts against terrorist financing and the full range of money laundering challenges. 2001 was a year of domestic and international advances in the fight against money laundering. The terrorist attacks of September 11 added urgency and intensity to a robust process already underway. In 2001, the United States continued its vigorous inter-agency international anti-money laundering training program, totaling more than $3.5 million, to improve worldwide efforts to combat money laundering and financial crime. Other governments and international organizations also strengthened anti-money laundering programs in 2001. The European Union broadened its anti-money laundering directive and imposed anti-money laundering obligations on “gatekeepers”—professionals such as lawyers and accountants who help place dirty money into the financial system. Regional anti-money laundering bodies in Europe, Asia and the Caribbean continued working effectively, and nascent anti-money laundering regional organizations in South America and Africa became operational. A major money laundering focus of the year was the work of the Financial Action Task Force (FATF), the world’s preeminent multilateral anti-money laundering body, which continued its non-cooperative countries and territories exercise. By year’s end, all fifteen jurisdictions on the original list had passed anti- money laundering legislation and four jurisdictions were removed from the list, while eight additional jurisdictions were identified as being non-cooperative. Thanks largely to the anti-money laundering experience and expertise accumulated by FATF over the past dozen years, many jurisdictions were well-positioned to react quickly to the threat of terrorist financing. FATF moved quickly after September 11 to convene an extraordinary Plenary on the Financing of Terrorism. At this October Plenary in Washington, the FATF decided to expand its mission beyond money laundering, and to focus its energy and expertise on the worldwide effort to combat terrorist financing. The FATF adopted eight special recommendations regarding terrorist financing and prepared an extensive questionnaire that requested members to describe what legislation they have in place, or intend to pass, to thwart terrorist financing. FATF agreed to distribute the questionnaire to all countries worldwide and analyze their responses in 2002. Anti-money laundering measures played a critical role in efforts by law enforcement officials immediately after the September 11 attacks to help identify the perpetrators and determine who organized and financed them. The FBI, recognizing the important role of financial records, established an interagency review group to focus on the financial aspects of the terrorist network. The regulatory and investigative systems established over the past ten years were key to unraveling this network. As the terrorists were identified, various records, including credit card transactions, provided immediate information in retracing the terrorists’ movements prior to the attacks, as well as the links between them. Banks in the United States worked with law enforcement to provide swift access to information about bank accounts that were linked to the credit card accounts. Simultaneous with the establishment of the FBI Financial Review Group and a Treasury task force, the Department of State convened an interagency task force to determine which countries’ financial systems were most heavily involved with funding these terrorists. Diplomatic outreach to those countries ensued. Teams comprised of U.S. Government technical experts were formed to assess the capabilities and XII-3 INCSR 2002 technical assistance needs of those countries that exhibited the political will to block terrorist financing and to develop viable anti-money laundering regimes. The September 11 attacks led the world’s international organizations to take prompt action against terrorist financing. On September 28, 2001, the United Nations Security Council (UNSC) adopted Resolution 1373 which reaffirmed earlier UN counterterrorism resolutions 1269 and 1368 and requires states to take prescribed actions to combat terrorism and the financing of terrorism. The Egmont Group of Financial Intelligence Units (FIUs) provides a network for sending out leads and requests for information to FIUs around the world. Cooperation among the Egmont Group’s 58 members and their prompt responses to these requests were unprecedented. The terrorist attacks gave strong impetus to many countries to amend and strengthen their money laundering laws. In the United States, Congress passed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (“USA PATRIOT”) Act of 2001 on October 26, 2001. This landmark piece of legislation made major changes to the U.S. anti-money laundering regime. The broad new authorities provided in the USA PATRIOT Act will have significant influence on the relationships between U.S. financial institutions and their individual and institutional customers. While the investigations of the financial links underlying the September 11 attacks demonstrate the value of measures that have been taken to identify, prevent and attack money laundering, they also reveal shortcomings. For example, after years of discussion, far too many countries still do not require identifying information about originators of international funds transfers. While most developed countries of the world now require banks to file suspicious activity reports, many still do not require non-bank financial institutions to do so. Some countries have yet to criminalize money laundering beyond drug- related offenses and many more do not have laws that address terrorist financing. September 11 demonstrated the need to do both. And many new initiatives that will be featured in anti-money laundering efforts in 2002 are now underway to try to overcome all of these deficiencies. Why We Must Combat Money Laundering Money laundering is organized crime’s way of trying to disprove the adage that “crime doesn’t pay.” It is an attempt to assure drug dealers, illegal arms dealers, corrupt public officials and other criminals that they can hide their profits and to provide them the fuel to operate and expand their criminal enterprises. Fighting money launderers and strengthening anti-money laundering regimes globally will reduce financial crime by depriving criminals of the means to commit other serious crimes. To a lesser but real extent, strengthening anti-money laundering regimes, particularly in the areas of identifying the originators of international wire transfers, will impact terrorist financing as well. At a minimum, strong anti-money laundering measures help to create a body of evidence that exposes criminal behavior and help law enforcement identify perpetrators and build cases against them that lead to their arrests and convictions. As the tragic events of September 11 graphically demonstrated, crime has become global, and the financial aspects of crime have become more complex, due to rapid advances in technology and the globalization of the financial services industry. Modern financial systems, in addition to facilitating legitimate commerce, permit criminals to transfer millions of dollars instantly, using personal computers and satellite dishes. Only his or her creativity limits the criminal’s choice of money laundering vehicles. Money is laundered through currency exchange houses, stock brokerage houses, gold dealers, casinos, automobile dealerships, insurance companies, and trading companies. Private banking facilities, offshore banking, shell corporations, free trade zones, wire systems, and trade financing all have the ability to mask illegal activities. In so doing, criminals manipulate financial systems throughout the world. Money laundering generally involves a series of multiple transactions used to disguise the source of financial assets so that those assets may be used without compromising the criminals who seek to use the XII-4 Money Laundering and Financial Crimes funds. These transactions typically fall into three stages: (1) Placement, the process of placing, through deposits, wire transfers, or other means, unlawful proceeds into financial institutions; (2) Layering, the process of separating the proceeds of criminal activity from their origin through the use of layers of complex financial transactions; and (3) Integration, the process of using an apparently legitimate transaction to disguise the illicit proceeds. Through this process the criminal tries to transform the monetary proceeds derived from illicit activities into funds with an apparently legal source. The United States and other nations are also victims of tax evasion schemes