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SPECTRUM Av. HAKAN HANLI "FINANCIAL DIGI-CRIME" "Money, money, money" Napoleon Bonaparte "There is a direct link between those who are prepared to turn a blind eye and launder profits - and organised crime and its victims". David Locke "Virtue does not come from money; but from virtue comes money and all other good things to mankind, both to the individual and to the state" Socrates "Where there is no vision, the people perish" "Trust but Verify" Proverbs I. Introduction: "Money & Dirty Money" The word money came from the Latin word "MONETA" which originally meant, "WARNING". Karl MARX said that; "Money plays the largest part in determining the course of history". Money laundering can be defined generally as the process of concealing the existence, illegal source, or application of income derived from criminal activity, and the subsequent disguising of the source of that income to make it appear legitimate. Deception is the heart of money laundering: deceiving the authorities by making assets appear to have been obtained through legal means with legally-earned income or to be owned by third parties who have no relationship to the true owner. Nowadays, money laundering scandals sap economies and destabilize governments from Washington to Tokyo, from Cape-Town to Copenhagen, from Brussels to Ankara, from Buenos Aires to Moscow... Policy and decision-makers blame crime cartels, tax havens, and new techniques like cyber-laundering. But dirty money long predates such influences. Without unified rules governing global finance, outlaws will always exploit disparate legal systems to stash the proceeds of their crimes. II. Money Laundering is a Post-Modern Phenomenon: "Definition & Origin" Protecting legitimate or illegitimate wealth from the unwanted attentions of government has a long history. Historians describe how, more than three centuries ago, merchants in China hid their wealth for fear that rulers would take the profits and assets they had accumulated through trade. The techniques they describe (converting money into readily movable assets, moving cash outside the jurisdiction to invest it in a business, and trading at inflated prices to expatriate funds) are used today by sophisticated money launderers. The laundering of money means ; ¥Converting or transferring money or other assets for the purpose of concealing or disguising their illicit origin or assisting any individual involved in the offence from which this money or these assets derive to avoid the legal consequences of his actions, ¥Concealing or disguising the nature, origin, location, use, movement or ownership of money or assets known to be of illicit origin, ¥Acquiring, holding, or using money or assets known to be of illicit origin, ¥Participating in any of the acts referred to in the foregoing three points, association for the purpose of committing said acts, attempting to commit said acts, assisting in their perpetration, inciting or advising someone to commit said acts or facilitating their commission. The origin of illicit money or assets are ; ¥Terrorism, organised crime, exploitation of prostitution, ¥illicit trafficking in weapons or in narcotics or in human beings, human organs and tissues, ¥fiscal fraud, bribery of public officials, etc.. Illegal money can be moved by all manner of means. Individuals have been convicted of laundering for transporting diamonds bought with the proceeds of crime and destined for criminal groups; cash deposited in a checking account can be withdrawn worldwide with debit cards; even simple methods, such as wire transfers, can facilitate money laundering. Economic and financial globalization has also made the life of a launderer easier. The high volume of legal funds circulating around the globe makes the movement of dirty money less conspicuous. And the globalization of financial-services companies means that "money placed in a bank branch in a less regulated jurisdiction is easily transferred internally within the organization to a branch in a more regulated jurisdiction". How much money is laundered throughout the world every year? By its very nature, money laundering occurs outside of the normal range of economic statistics. Nevertheless, as with other aspects of underground economic activity, rough estimates have been put forward to give some sense of scale to the problem. There are various estimates of the global scale of money laundering. The Financial Action Task Force on Money Laundering (FATF), under the auspices of the Organisation for Economic Co-operation and Development (OECD), sites the common estimate that the aggregate size of global money laundering is %2 to 6 of world economic output, or, using 2000 statistics, equal to anywhere from $650 billion to $1.8 trillion. The lower figure is roughly equivalent to the value of the total output of an economy the size of Spain. It is impossible to tell whether money is being counted for the first or 100 times as it passes through financial centers. And, of course, it is impossible to tell how much money is successfully laundered and therefore left out of accounts completely. But, whatever the exact scope, money laundering is an enormous problem endemic to any financial system. III. Juridically: Money Laundering is criminal and immoral: "legal or illegal" By definition, money laundering involves hiding, moving, and investing the proceeds of criminal conduct. Even legal money can become illegal, for example, if moving it violates a country's foreign-exchange controls or other financial regulations. For instance, all foreign-exchange transactions out of Germany must be reported to the Bundesbank. Failure to do so renders the exported money illegal. Clean money can also generate dirty money through Tax evasion. The U.S. & EU committees reports titled; "Correspondent Banking: A Gateway for Money Laundering", cited examples of people who placed sums of more than $100,000 in a Cayman Islands bank without paying tax on that money. Even if the money itself was lawfully earned, the sums that should have been paid in taxes are considered laundered. But legitimacy often resides in the eyes of the beholder. What may be illegal in one country represents a moral victory in another. Parallel Economy: Nigeria were such a case. The national currency was not convertible, exchange controls were extremely strict, and goods were subject to stringent inspection, making those who could circumvent the system wealthy through both the premiums they could command and, in other cases, simply by corruption. Nigerian businesses created a parallel economy operating outside Nigeria conducted in hard currency and developed banking and commercial contacts in all manner of industries. Unfortunately, a number of Nigerian traders used these external mechanisms to commit theft, fraud, and money laundering, hiding behind Nigeria's tortuous and uncertain enforcement proceedings. Such instances notwithstanding, money laundering generally harms society by oiling the wheels of financial crime, and financial crime affects everyone. As a result of insurance fraud, we all pay more for insurance. As a result of robberies and fraud, we all receive less interest on bank deposits and pay more interest on loans. Because of fraud on social security, other benefits, and in government grants for welfare and education, we pay more in taxes. We also pay more taxes for public works expenditures inflated by corruption. And those of us who pay taxes pay more because of those who evade taxes. So we all experience higher costs of living than we would if financial crime (including money laundering) were prevented. IV. Money Laundering Sector : Banks Are the Primary Agents; "KYC Rule & Shell Companies" All laundered money passes through the financial system and therefore, by definition, passes through banks. Hence, the banking sector is often the focal point for anti-money-laundering initiatives. But banks are nothing more than the pipes through which money flows. Consider this analogy: "Pour a glass of water and release a drop of ink into it. gradually, the ink will mix with the water, dissolving to the point of invisibility". That is the problem banks face. They know dirty money is in their system, but they cannot separate it from the clean money. Dirty money generally is most visible when it is first introduced into the financial system. As a result, counter-money-laundering laws often require bankers to identify money that may be tainted so-called "Know Your Customer- KYC" rule. KYC goes further than simply knowing the names and addresses of customers; it also involves knowing something of their background and activities. If transactions passing through an account are inconsistent with what the bank would expect from what it knows of a customer, then the bank may be required to report such transactions to supervisory authorities. Reports are based either on a specific trigger figure (in the US, transactions of $10,000 or more) or on the more subjective standard of a "suspicious" transaction. The European Union (EU) and much of the rest of the world employ suspicion-based reporting; after some initial resistance, the United States adopted it as well, in addition to transaction-based reporting. However, banks and other financial-service businesses remain reluctant to release information about their customers. In late 2000, public concernÑor, in some cases, public hysteriaÑover attacks on privacy forced US & EU legislators to back down on KYC requirements for banks. Such instances reflect widespread public resistance to allowing personal financial information to fall into state or commercial hands. The irony of this debate is that the ability of launderers to move and conceal money once it has already penetrated the financial system is at least as important as the initial role of the banks. Criminals move money between banks, between different financial instruments, and in and out of tangible assets such as businesses or property. They try to change the shape and size of the financial holding by using different currencies and by adding to and subtracting from the amount so that it is more difficult to identify. Criminals also use "shell companies" (entities that have no physical presence or staff and exist purely to create invoices and to receive money for non-existent services) to launder money. The obsessive focus on banks displays a fundamental lack of understanding of the mechanisms of laundering. V. Money Laundering Industry: "On-shore or Off-shore financial centers" U.S. & EU Officials boasted that the Treasury Department has exerted "much time and effort in working with the FATF to 'name and shame' those jurisdictions who allow money laundering activity to flourish." But it is a fallacy to single out any one place as "the money laundering capital of the world" and it ill behooves, the US, EU, UK and other advanced economies to point fingers at small countries and blame them for money laundering. Laundering is a global problem from which no jurisdiction is immune. The common reason that so-called "off-shore financial centers" (such as the Bahamas or the Cayman Islands) are usually cited as money laundering havens is that they have tax regimes that are structured differently from those of the so-called "advanced economies". (For example, they may lack personal income taxes.) Some island economies have facilities that could constitute legitimate tax avoidance mechanisms under, for example, British tax law but are exploited by U.S. residents for illegal tax evasion. But these differences alone do not make such locations more likely to be involved in laundering than so-called "on-shore centers". In fact, money launderers seeking a legal framework that provides them with shelter could do worse than to choose the US. Once the money goes from cash into electronic form, the US has many structures that can assist launderers. For instance, launderers can use the shield provided by minimal corporate reporting in, say, the state of Delaware. They can take advantage of the lack of identity checks on persons forming companies. They can use lawyers, who have no legal requirement to check the identity of any person asking to do business with them or to make reports of any suspicious transactionsÑand then use confidentiality to buy time in the event of an investigation. In March, U.S. Senate sub-committee report found that several major U.S. banks (Bank of America, Chase Manhattan, Citibank, and The Bank of New York) had not paid sufficient attention to correspondent accounts held by foreign banks that were linked to money laundering, tax evasion, and fraud. VI. The Internet Makes Money Laundering Easier: "Cyber-laundering" and "Digital divide" The popular notion that the Internet provides new and undetectable methods of money laundering; "cyber-laundering" has no place in serious consideration of the interface between money laundering and technology. In essence, the internet is nothing more than a messaging system. To move money, banks move information by whatever messaging system availableÑfrom physically moving lumps of gold from one place to another to processing checks. In this context, the Internet is simply an updated check system or a more efficient, cheaper, and more secure means of moving financial information. The FATF has pointed out that identifying customers is the primary problem arising from internet usage, and that problem is just the same in any relationship conducted at a distance. Linda DAVIES says in her book titled "Nest of Vipers"; "The money screamed across the wires, its provenance fading in a maze of electronic transfers, which shifted it, hid it, broke it up into manageable wads which would be withdrawn and redeposited elsewhere, obliterating the trail". However, some use claims of cyber-laundering as an excuse to move toward more extensive regulation of the internet. Even if it were possible to create effective regulation of the Internet, a dubious proposition, such an undertaking merely would raise the barriers to entry for poor nations. The Internet can benefit large parts of the world at a low cost by reducing isolation and allowing remote communities the chance to provide services and publish catalogs of locally produced goods. Tighter regulation would only exacerbate the "digital divide" between rich and developing economies. VII. The U.S. Dollar is the Money Launderer's Currency of Choice: "The Euro & The New Turkish Lira" The U.S. dollar has been the currency of choice for legitimate international traders for many years because of its large domestic market, its ready convertibility, and its high recognition factor worldwide. A sign of the currency's global usage is that more than half of the approximately $400 billion in U.S. dollar bills and coins circulating are held outside the US. Since money launderers wrap their activities inside those of legitimate traders, it is conventional wisdom that the U.S. dollar, as the most widely used currency in legitimate trade is also the most widely used currency for illegal transactions. In January 1, 2002, after the introduction, the euro, however, has rivaled the U.S. dollar. It has a domestic user base of around 450 million people, it will immediately have all the international and european trade (other than that denominated in U.S. dollar) of its member countries (euro zone), the largest EU economies excluding the British Sterling. It has immediate recognition in all the nations that traditionally trade with European countries in a variety of currencies. The Turkish liras, however, soon will rival the Euro and U.S. dollar. It will have a domestic user base of around 70 million people. Businesses within the lira zone, and those bordering it, will use the liras because they will no longer have to risk currency exchange movements at different points in the manufacturing process. By reasons of sheer volume usage, the lira will become a currency of choice for launderers. If criminals are thinking ahead, and they generally do, they will have been using the two-year run-up to the introduction of lira bills to gather as much cash as they can. Once the money is in banks, it will be converted to new lira by January 1, 2005. At that point, money will become mobile across the entire country with no control over its records. The banks had the total responsibility for identifying suspicious transactions, and, at that time, no one will know "what was suspicious". Criminals thrive on uncertainty and will exploit it in order to conduct their business. The new lira"s introduction provides a significant opportunity for them. Although the EU and the U.S. dollar will remain important for money laundering activities, they will no longer be the single, dominant currencies for financial outlaws. VIII. Only Global & Unified regulations can stop money laundering In the absence of effective international cooperation, there will be no realistic chance of defeating or significantly curbing money laundering. The regulatory regimes operating from country to country are at best piecemeal and often are widely ignored. Lax controls in some countries permit easy access to financial services systems in more regulated jurisdictions, making a global minimum standard necessary for an effective reduction in laundering. However, we must consider how far those global standards should go in interfering with the domestic policies of sovereign countries. The FATF has made the best-known efforts to date toward creating such a global standard. In broad terms, its Forty Recommendations (now more of a brand name than an accurate count) on combating money laundering have formed the basis of counter-laundering legislation in its own 31 member states of the OECD and in many others. FATF has spawned look-alike organizations such as the Caribbean FATF and the Asia/Pacific Group on Money Laundering. Unfortunately, the FATF has taken on a hugely political role the last three years, attacking non-members that fail to comply with its demands and constraining the activities of small countries that depend on financial services, not just agriculture and tourism, for their livelihoods. Governments that fail to create financial intelligence units (FIUs) agencies that receive, analyze, and disseminate information on possible laundering activitiesÑrisk being branded "non-cooperative" jurisdictions by the FATF. Regulators in FATF member countries then advise banks and other businesses under their jurisdiction to show caution in dealing with non-cooperative countries. In a rush to avoid such criticisms, some governments have created FIUs without any realistic idea of how these agencies deal with the information they receive and without allocating the financial, technological, or human resources necessary to support or launch investigations. Finally, the FATF also has a deplorable tendency to place too little weight on its own members' failings. The only members to receive significant criticism have been Austria (over anonymous passbook accounts), Argentina and Turkey. IX. World-Wide Network: "Financial Intelligence Units / Egmont Group" The U.S. has also pursued an aggressive policy of promoting a worldwide network of Financial Intelligence Units in its overall strategy of fighting transnational crime. As United States' Financial Intelligence Unit or FIU, as it is more commonly called, FinCEN plays a lead role within the FIU network known as the Egmont Group. FinCEN provides training and technical assistance to countries around the globe in the development and operation of Financial Intelligence Units and the formulation and implementation of counter-money laundering strategies. An FIU can best be described as a central office that receives disclosures of financial information, analyses or processes them in some way and then provides them to appropriate government authorities in support of a national anti-money laundering effort. In 1996, there was less than a handful of FIUs in the world. Today there are 70 jurisdictions that comprise the Egmont Group of FIUs from all over the world; UK "NCIS/ECU", Belgium "STIF", Switzerland "MLRO", France "TRACFIN", Turkiye "MASAK", etcÉ FIUs was held in June of 1995 in Brussels, the Egmont Group serves as an international network, fostering improved communication and interaction among FIUs in such areas as information sharing and training coordination. The goal of the Group is to provide a forum for FIUs around the world to improve support to their respective governments in the fight against financial crimes. This support includes ; expanding and systematizing the exchange of financial intelligence information, improving expertise and capabilities of personnel employed by such organizations, and fostering better and secure communication among FIUs through the application of technology. An example of this cooperation is evidenced in a compilation of 100 actual money-laundernig cases from FIUs around the world. The "sanitized" cases focus on major money laundering schemes such as those that seek to conceal criminal funds within the normal activity of existing businesses or companies controlled by the criminal organization or the use of anonymous assets such as cash and gold. Egmont"s attempt to institutionalize the exchange of real law enforcement experiences is intended to help increase the scope and global nature of the fight against money laundering. X. European Network & Turkiye: "Money Laundering, Anti-Corruption & Immunity" The government"s anti-corruption policies played a big role in the financial crisis that erupted in February 2001. Since then, Turkiye has ratified major International and European conventions in the area. In the field of money laundering, Turkiye ratified the Council of Europe Criminal Law Convention on Corruption in January 2004, which provides for the criminalisation of the laundering of proceeds deriving from corruption offences. Turkey joined the Group of States against Corruption (GRECO), which monitors compliance with European anti-corruption standards. Furthermore, it examines in detail the areas of banking, customs, energy, construction, tender proceedings, transportation, national defence, local administration, health, social security, privatisation, agriculture, tourism, associations, universities and the activities of certain Ministries such as the Ministry of Justice and the Ministry of Interior. A new Banking Law was adopted in December 2003 which widened the scope of predicate offences for money laundering and increased the limitation period for money laundering offences. Turkiye ratified the Council of Europe Convention "on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime" in September 2004. The number of suspicious transactions reported to MASAK (FIU) was 180 in 2003, compared to 194 in 2002. MASAK carried out 192 preliminary investigations in 2003, compared to 155 in 2002. Prosecutions were brought in 31 cases, compared to 17 cases in 2002. MASAK and the Turkish Union of Bankers(TBB) published guidelines on the fight against money laundering and terrorist financing for the banking sector. The scope of Parliamentary immunity has been identified as one of the problems in the context of corruption in Turkish public life. In spite of frequent debate, no development can be reported in limiting the scope of Parliamentary immunity. Since the EC 2004 Regular Report, Turkiye continued to make further progress in aligning its legislation with the EU acquis and practices in the area of Justice and Home Affairs. Turkish legislation is aligned to a certain extent with the EU acquis. Nevertheless, progress is needed in this area, such as the reform of the judiciary, intensified and active co-operation. XI. International Bar Association (IBA); Anti-Money Laundering Forum; "Lawyers Guide" International Bar Association (IBA), the Section on Business Law, has created the Anti-Money Laundering Forum; "The Lawyers Guide to Legislation and Compliance". The Anti-Money Laundering Forum aims ; ¥to ensure appropriate awareness amongst the profession and clients throughout the world; ¥to seek a dialogue with bar associations and others to share information and encourage co-ordination; ¥to analyse the impact of implementation of the Second EU Money Laundering Directive on international law firms and private practitioners as they provide legal advice across national borders; ¥to provide an information and education resource for practitioners and academics to further understanding of the practical implications of anti-money laundering regulations. European jurisdictions have no sub-division between members, future members and non-members of the EU. The information contained within each jurisdiction differs in its layout depending on whether they have followed the standards set by the second Eu Money Laundering Directive. Recently, the European Commission issued preliminary draft articles for a Third Money Laundering Directive. The aim of this directive is to consolidate and revise the previous EU Money Laundering Directive and bring it in accordance to the revised forty recommendations of the Financial Action Task Force of 2003. XII. Conclusion: "World-wide Single & Unified Set of Rules" Adam SMITH said that; "money is neither a material to work upon, nor a tool to work with". Global rule making on money laundering issues has become something of a growth industry, with a large number of non-governmental, multilateral, inter-governmental, and supranational organizations involved, despite the failings of the FATF, The Bank of International Settlements, the OECD, the G-7, G-8, G-20, US-EU members' finance and justice ministers, several departments in the United Nations, the World Bank, the International Monetary Fund-IMF, and the Financial Stability Forum are just a few examples. Their analyses, reports, and recommendations reveal a disturbing tendency to quote each other's work; since they enjoy substantially the same membership, this practice amounts to self-corroboration. Moreover, at times they offer overlapping sets of rules and best practices to deal with money laundering. It is ironic that the international community would fail to produce a single and unified set of rules to take on a criminal activity that thrives precisely on exploiting differences in laws and regulations. David LOCKE says; "There is a direct link between those who are prepared to turn a blind eye and launder profits - and organised crime and its victims". Socrates said that; "Virtue does not come from money; but from virtue comes money and all other good things to mankind, both to the individual and to the state". |