The forces of 'globalization' have had a profound impact on the world's leading economies. Today, the leading countries of Asia know this lesson well, and North America and Europe are rapidly feeling the effects of the difficulties faced by Asian economies.
High-tech currency trading, growth in overseas investment, lowering of tariff barriers and other integrating trends have created a world where economic autonomy for the nation-state is impossible and financial stability cannot be taken for granted. However, beyond economic fluctuations, even greater anxieties loom in the form of new opportunities for organised crime, fraud and corruption. Many forms of crime greatly depend on the presence of business opportunities, if illegal ones, and it is only logical that the new markets and global opportunities present increased opportunities to criminal and corrupt economic actors.
Almost none of the transnational crimes which now preoccupy the international community are new. Illegal trafficking in firearms and other weapons, in migrants, in illicit substances, in human beings to exploit their labour (a modern form of slavery), in children and other human beings for their sexual exploitation, or terrorism, tax evasion, crimes against the environment, counterfeiting currencies, financial and credit fraud, stock market manipulations, securities fraud, and corruption of public officials are hardly new forms of criminality. They simply have been transposed to a new mammoth scale by the same process of deregulation of transnational exchanges and the greater freedom of movement of goods, information, and people which is demanded by a globalise economy lead by free-trade imperatives. The magnitude of their detrimental consequences, both in terms of human suffering and social and economic costs, has also increased proportionally if not exponentially.
To be sure, some of these crimes have taken new orientations and new dimensions due to concurrent technological developments. In the absence of the relevant technology, some crimes could simply not be committed a decade ago, neither could some dangerous genetic manipulations. Trafficking in human beings for the purpose of stealing their vital organs and AML/CTF only became a viable criminal activity, in the recent past. Likewise some new forms of criminal invasion of an individual's privacy have been made possible by new electronic and laser technology. The predicted huge and rapid advances in biological technology might yet produce new varieties of old crimes.
Historically, the dual concepts of national sovereignty and exclusive state jurisdiction over criminal law matters have played a crucial role in the development of modern criminal justice systems. These notions continue to be reinforced by the United Nations Charter and by international law in general. Several observers, however, are now expressing their preoccupation with the potential consequences of the continued strict application of these principles in an era where national borders are becoming increasingly obsolete and irrelevant to criminal activities.
It is easy to understand how international co-operation has become, more than ever before, an essential prerequisite to the effective repression of transnational crime. However, a history of nation states jealously safeguarding their jurisdiction over criminal justice matters has produced a world where criminal justice policies, institutions, procedures and laws vary widely and deeply between the many countries of the world, and even between the countries of a single region. These fundamental differences between national systems can of course complicate co-operation between countries and even render it impossible in some cases.
While there are a number of important points in the development of an international response to transnational crime, the single most important development to date may have been the 1988 UN Convention on Trafficking in Narcotic Drugs and Psychotropic Substances.
The Convention established the benchmark for national action and international co-operation against the global trade in drugs, reputedly the most profitable activity of organised crime. For drug-related crimes, the convention established standards for mutual legal assistance, criminalization of offences, and provisions against money laundering.1
Since the 1988 convention, the most obvious additional international efforts against organised transnational crime, and drug trafficking in particular, have come in the form of action against money laundering2. In this regard, the work of two important organizations is worth noting here:
BASLE COMMITTEE The Basle Committee on Banking Supervision consists of representatives from the central banks and supervisory authorities of the G-10 group of industrialised nations. It exists to improve banking supervision and strengthen prudential standards in member, and increasingly in non-member, countries. In December 1988, it issued its Statement of Principles on the Prevention of Criminal Use of the Banking System for the Purpose of Money Laundering. That represented the first significant step towards the international preventive regulation of financial institutions with respect to money laundering.3
FATF It was the Financial Action Task Force (FATF) that provided and continues to provide the impetus to give a legislative form to the policy framework set up by the Basle Committee. It was established by the G7 at the Paris Economic Summit in 1989. It has since grown and now is the leading international body on money laundering policy. Its most important report, and the one to which later reports have largely provided only a gloss, was its well known recommendation.4 FATF periodically reviews the nature and extent of money laundering, considered programmes in place nationally and internationally to address it, and made recommendations for states to follow in combating money laundering. The recommendations fall into three main areas: the improvement of national legal systems, the enhancement of the role of the financial system, and the strengthening of international co-operation.
The FATF has been and remains the most significant nexus in the emerging international regime against money laundering. It designed the regime, it administers the process whereby member states review each other's implementation of it, and it undertakes the research necessary to ensure that the regime responds adequately to emerging technologies, new laundering trends, and law enforcement needs.
THE FOREIGN ACCOUNT TAX COMPLIANCE ACT (FATCA) The Act is a new US Law taking effect on 1 January 2013. The primary goal of the legislation is to identify assets held and income earned by US citizens from offshore sources to ensure that the relevant taxes have been assessed and paid. Foreign Financial Institutions ("FFIs") which do not comply with the new rules are subject to withholding tax of 30% on US sourced income.5
FATCA is complex legislation which is expected to have a dramatic and wide sweeping impact on non-US financial institutions, including banks, custodians, offshore funds, insurance companies and trusts.
Foreign Financial Institutions (FFIs) and other foreign entities will be affected as reporting, and withholding requirements have been placed on them. They will also be required to determine who is a US account holder and is keeping its account outside and reporting it to IRS. However, the threshold for reporting and withholding will be US $50,000/-. In case these legal provisions are not met the FFIs and foreign entities will have to deduct a 30% withholding on US account holders. This new withholding tax will apply to US-sourced income, gross proceeds from the sale of investments that produce US-sourced interest or dividends and certain pass-thru payments paid to an FFI unless the FFI is compliant with FATCA. The withholding tax may be avoided if the FFI enters into an agreement (FFI agreement) with the US government and complies with new documentation requirements, due diligence procedures, and reporting and withholding obligations. These new requirements are aimed at detecting US citizens and residents that may be evading US federal income tax by holding certain investments through an FFI. There are defects and difficulties in our existing system and the same are being discussed here:
THE SCALE OF THE PROBLEM The scope and scale of money transfer in the international economy is overbearingly large. The cost of financing financial crimes, money laundering and terrorism is small, even relative to everyday business expenses. For example, the cost of carrying out a terrorist attack is estimated to be in the range of $10,000 to $2,000,000.6 In contrast, the estimated amount of money laundered each year world-wide is between $500 billion and $1 trillion.7 Even this amount pales in comparison with the total volume of money moved inter-jurisdictionally through ordinary financial transactions. Despite these problems, it has been possible to use financial reporting to trace back the flow of terrorist money after a terrorist event, particularly in the Madrid bombings and after September 11.8 However, these case by case ex-post analyses do little to prevent attacks and provide minimal data with which to evaluate the true sensitivity and specificity of the algorithms we use to identify terrorist money. As in many other areas, the lack of human intelligence makes the problem more difficult. Flows of terrorist money could be better identified through specific information from within terrorist cells rather than using 'brute force' algorithms and record keeping.
COMPETING IMPERATIVES Competing imperatives regarding the identification and treatment of terrorist money compound the difficulties associated with formulating policy in this area and create problems within the government systems. On the one hand, terrorist activities require money, creating an imperative to freeze assets and dry out funding. On the other hand, the long term prevention of terrorist attacks will be achieved through better intelligence. Many argue that such intelligence can be obtained by tracing the flows of money that has been identified as terrorist money. Clearly, this logic dictates that assets are not frozen. Current stated policy favours tracing money9 but that policy has not been pursued consistently. Assets have been frozen on several occasions.10 It is not clear what metric, if any, is used to decide when to freeze money and when to trace.
COMPETING AGENCIES AND AUTHORITY The problem of competing imperatives is compounded by the diffuse responsibility that exists within the area of corrupt practices. Multiple agencies operate under different paradigms and different sources of authority, including legislation and executive orders. As it currently stands, responsibility for creating and implementing elements of money laundering, terrorist financing and tax evasion policy is shared across: there are Divergent departments of each state engaged in the prevention of tax evasion and corruption.11 There is no single chain of command to evaluate issues concerning these offences. Further, each agency is likely to reflexively operate according to its core competency. For example, intelligence agencies are likely to trace money and law enforcement agencies are likely to freeze assets and attempt to bring criminal charges. There is no process or structure for cross-agency decision-making and in the absence of such a process decisions about tactics and strategy, such as whether to trace or freeze, the best way to monitor money flows, etc, will be done in a piecemeal manner, according to which agency first identifies terrorist moneys, rather than systematically and in keeping with a coherent national strategy.
Further, as the complex nature of the problem requires multiple competencies, information sharing and joint problem solving, the absence of a mechanism through which to achieve this is a major concern. For example, although the authorised agencies collect large amounts of data in the form of Suspicious Activity Reports (SARs), intelligence and law enforcement agencies do not automatically gain access to such data. Instead, they must request it.12 Consequently, agencies whose core competencies include refining metrics and algorithms to identify criminal and terrorist activity do not have easy access to the information which would allow them to do this.
CROSS-JURISDICTIONAL REGULATION All the problems of inter-agency co-operation and information sharing exist on an international scale, but with further difficulties and fewer mechanisms for resolving the problem. US agencies have been effective in gaining international co-operation with many allies, criminals/tax evaders may simply go to jurisdictions where reforms have not been implemented. Secondly, even in states that appear to be co-operating, it can be difficult to evaluate the level of competence of agencies involved in implementing international strategies on terrorist financing. The US is trying to solve this problem through collaboration and funding13 but it is difficult to evaluate the effectiveness of this strategy.
MONEY LAUNDERING JURISDICTIONS International agencies are facing a specific problem in monitoring flows of money through any of several money laundering jurisdictions. Many small countries, such as the Channel Islands, Seychelles, the British Virgin Islands and the Seychelles, finance their economies by running opaque but secure financial institutions, taking advantage of wealthy companies and individuals seeking tax evasion and criminal and criminal groups wishing to transact anonymously and without detection. The continued existence of economies based on this process is a significant threat to any effort to track terrorist finance. However, the small scale of much terrorist financing works against terrorist groups in many of these jurisdictions, as most money laundering jurisdictions are only willing to transact with large amounts of money, often between $1-10 million dollars.14
HAWALA AND SUITCASES Transactions and money movement entirely outside the normal channels for movement of money threatens the ability of the international institutions to monitor movement of terrorist money. Hawala is a traditional system for transferring money used in much of the Muslim world. Based on reciprocal trust, it involves no engagement with the financial system.15 Thus it is virtually impossible to monitor or regulate in the absence of specific intelligence. Also falling outside financial regulatory reach, large sums of cash can be moved physically, on the person of a courier or similar. Whilst this may be detected by customs agents, this is far from guaranteed.
THE REPORTING BURDEN Finally, there is a significant concern about the burden of regulatory compliance on financial institutions.16 The cost of compliance with regulator's requests for SARs and other monitoring and security burdens becomes very large when scaled across the entire US and global financial systems. In the absence of useful metrics for effectiveness, it is difficult to evaluate whether the regulatory burden outweighs the benefit. Whatever the case, the large cost to financial institutions and the concomitant reduction in market efficiency should be taken into account when evaluating a criminal's financing regulation.
CONCLUSION There is a serious effort to curb corruption, tax evasion and money laundering on the part of nations of the world. However, the existing empirical evidence shows that progress has been made in certain areas like criminalizing money laundering, terrorist financing, corruption and tax evasion, yet there are problems related to availability of finances, political will, and co-ordination.
(The writer is an advocate; he's currently working as an associate with Azim-ud-Din Law Associates)
1. By 1997, 136 countries had signed and ratified the Convention, while 13 more had signed but not yet ratified it.
2. UNDCP, 1997.
3. The Statement proposed the expanded the role of national supervisory bodies to include a duty to discourage certain types of money laundering-related transactions.
4. FATF, 40+9 Recommendations, 2004.
5. Section 501(a) of the Hiring Incentives to restore Employment (HIRE) Act.
6. Maurer, Steve. Lecture 3, UC-Berkeley.
7. Stana, Richard M. Investigating Money Laundering and Terrorist Financing: Federal Law Enforcement Agencies Face Continuing Co-ordination Challenges. (Washington, D.C.: General Accounting Office, 2004).
8. "The Lost Trail." The Economist. (October 22nd, 2005).
9. Weiss, Martin A. Congressional Research Service. Terrorist Financing: US Agency Efforts and Inter-agency Co-ordination.
10. Weiss, Martin A. Congressional Research Service. Terrorist Financing: US Agency Efforts and Inter-agency Co-ordination.
11. "The Lost Trail." The Economist, (October 22nd, 2005).
12. Weiss, Martin A. Congressional Research Service. Terrorist Financing: US Agency Efforts and Inter-agency Co-ordination.
13. "The Lost Trail." The Economist, (October 22nd, 2005).
14. Personal Communication, Dr Geoff Stapleton, University of Melbourne Law School.
15. "The Lost Trail." The Economist, (October 22, 2005).
16. "The Lost Trail." The Economist. (October 22, 2005).