Cleaning up anti-money laundering strategies: current FATF tactics needlessly violate international law *.

• Author: Doyle, Todd
• Position: Financial Action Task Force

1. INTRODUCTION

   In recent months, the war against money laundering (1) has reached a crisis point. Especially after the events of September 11, 2001, the critical, if unwitting, role financial institutions play in assisting terrorist organizations to achieve their goals has gained prominence. (2) Though public attention to the matter is currently greater than ever, international regulators have been raising the stakes significantly in the war against illicit finance and the jurisdictions they view as nurturing it over the past three years. Specifically, in February of 2000, the Financial Action Task Force (FATF), (3) the most prominent international body engaged in eradicating the practice, (4) stepped up the stakes by issuing a "Report on Non-Cooperative Countries and Territories." (5) In an effort to "encourage constructive [anti-money laundering] action," (6) the report outlines a plan involving the singling out of jurisdictions which, the FATF believes, have not done their part in stamping out money laundering. (7) Ultimately, the FATF has threatened an economic embargo of any recalcitrant state refusing to mend its wayward ways. (8)

   This development is disturbing and suggests a policy redolent of extraterritorial bullying. From a policy perspective, economic sanctions have a history of negatively impacting the general populace without accomplishing the desired effects upon the behavior of those for whom the sanctions were intended. (9) More importantly, the FATF's hard-line approach violates both the letter and the spirit of at least two articles of the United Nations Charter, (10) as well as the United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (11) (Vienna Convention of 1988) and a host of international agreements which grew out of these. Viewed from this coign of vantage, the FATF's latest efforts risk alienating those jurisdictions whose cooperation is critical in stamping out money laundering worldwide. (12) What is more, any move to compel compliance with the FATF's recommendations that simultaneously violates these guidelines may well threaten the integrity and legitimacy of the decades-long international effort to clean up the flow of dirty money and eradicate the underlying crimes that are its source.

   Rather than coercing nations into compliance, the FATF should adhere to a policy of encouraging regulation at the national level and, in so doing, pass the costs of risks associated with illegal transactions onto the offending nations while simultaneously respecting national sovereignty. This essay will examine the attempts to eradicate money laundering from the late 1960's to the present day. Part I provides an overview of the major anti-money-laundering efforts of the last thirty years or so in the United States and abroad, culminating in the formation of the FATF in 1989. Part II casts a critical look at the FATF's latest enforcement strategy, emphasizing that strategy's inconsistencies with the letter and spirit of current international law. And part III will propose several alternative solutions that promise to meet the FATF's pronounced goal of global compliance with its Forty Recommendations, (13) but do so in a manner that is in keeping with international law.

2. BACKGROUND

   1. What Is Money Laundering?

      Money laundering is the practice of processing criminal proceeds to disguise their illegal origin. (14) The term derives from the fact that certain organized crime rings in the 1920's commingled the proceeds of their illicit operations with the practically untraceable proceeds from coin laundries operated by the ring, thereby making the funds appear to be legitimately derived. (15) Though the term "money laundering" may have originated in the twentieth century, the practice of disguising ill-gotten gains pre-dates recent history and indeed traces its roots back to the dawn of banking itself. (16) For instance, when the Roman Catholic Church in medieval times condemned usury, or lending money at interest, financiers devised methods to circumvent this restriction that are still in practice today. (17)

      In its simplest form, money laundering involves three stages; placement, layering, and integration. (18) The placement stage is the process during which criminally derived funds are used to purchase an asset or are deposited into a financial institution. (19) Next, launderers engage in one or a series of transactions to distance the funds from their original source. (20) This is the layering stage, which may include such transactions as multiple funds transfers between accounts and across state and international borders, complex loan arrangements, and purchases and resales of assets. (21) Finally, there is the integration stage. This is the point at which the illicitly derived proceeds are reintegrated with the legal financial system and made available for use without suspicion. (22) As with any criminal enterprise, the variations on these three steps are myriad and have evolved apace both with the sophistication of the financial systems upon which they depend and the law enforcement tactics which threaten their existence. (23) Thus, regrettably, the extent of the money laundering problem has increased in recent years. (24)

   2. The Scope of the Problem

      In 1990, at the outset of the world-wide push to hang money launderers out to dry, FATF officials estimated that "as much as $85 billion per year could be available for laundering and investment" from the proceeds of drug trafficking in the United States and Europe. (25) In 1993, official estimates placed the scope of the dirty money problem at some $300 billion. (26) Most recently, the figure was raised to more than $600 billion. (27) While some commentators have questioned the accuracy of these numbers, (28) this problem is one of enormous proportions--even after a decade of intense lobbying by the FATF to assure that banks and non-bank financial institutions adopt the FATF's Forty Recommendations. (29)

      And the stakes are high. Primarily, money laundering aids in the criminal enterprise; it helps criminals to do what they do best--commit crimes--with greater resources at their disposal and with less chance of detection. (30) More broadly, money laundering destabilizes the global economy. (31) Banks having ties to criminal activities (or the proceeds thereof) are likely to undermine public confidence in the safety and security of the financial sector. (32) Additionally, substantial amounts of laundered funds are misappropriated from the scant resources of developing or financially troubled nations. (33) As one commentator has characterized it, "[c]ombatting money laundering is not just a matter of fighting crime but of preserving the integrity of financial institutions and ultimately the financial system as a whole." (34)

   3. Efforts to Clean up Money Laundering

      While the idea of whitewashing the proceeds of illicitly obtained lucre is as old as crime itself, only in the last 25 years or so has the growth of money laundering prompted regulatory action on a major international scale. (35) Beginning in the United States and radiating toward the other major industrialized nations, anti-money laundering initiatives have become complex even during their comparatively short gestation period.

      1. The United States

         During the latter part of the 1960's, the U.S. government became increasingly concerned about the use of secret "offshore" bank accounts by Americans engaged in illegal activity. (36) One oft-cited Congressional report (37) concluded that these bank accounts were frequently used, among other things, to "act as a depository for money obtained from illegal activity" and to "bring money from illegal sources back into the United States as `clean' money loans." (38) When diplomatic efforts (most significantly involving Switzerland) to circumvent foreign laws prohibiting disclosure of banking information seemed unlikely to solve the problem, Congress introduced legislation aimed at curtailing the problem within the United States' borders and extraterritorially. (39)

         1. Domestic Initiatives

            The most notable domestic result of these efforts was the Bank Secrecy Act (40) ("BSA"). Under the provisions of this Act, financial institutions and securities brokers and dealers are required to keep extensive records of the transactions and accounts of their customers. (41) Briefly stated, financial institutions, as the act has been amended, are now required to file Currency Transaction Reports (CTRs) for every transaction in excess of $10,000. (42) Congress intended that these reporting requirements would create a paper trail of criminal proceeds, enabling government enforcement agencies to track down lucrative and illicit criminal enterprises without the assistance of bank secrecy jurisdictions. (43) The Bank Secrecy Act was also intended to make apprehension of criminals easier by establishing an alternative means of convicting criminal and tax and regulatory violators. (44) Further, Congress hoped that the imposition of these reporting requirements would deter the violations themselves. (45) Later, driven in large part by the explosive growth of the international drug trade in the 1980's, efforts to combat the problem generally expanded proportionately. (46) For example, the United States passed the Money Laundering Control Act of 1986, (47) which criminalized money laundering and knowing assistance in money laundering criminal acts. (48) Later amendments and expansions of the provisions of the Money Laundering Control Act followed in 1990, (49) 1992, (50) 1994 (51) and 1996. (52)

         2. Extraterritorial Efforts of the U.S. Judiciary

            Significantly, the United States has not limited its attempts at eradicating money laundering to efforts within its own borders. (53) Apparently, the problem has always been perceived as one of the utmost severity, and as one justifying extraterritorial efforts to stop it. (54)...