Chartered Wealth Manager Designation Course

Money Laundering, Terrorist Financing,
Forfeiture and Compliance

By

Robert J. Munro and J. Richard Duke
Table of Contents
________________________________________________

Chapter 1:	Research Guidance On Money Laundering
and Compliance……………………………………………………..

Chapter 2:	Introduction to Money Laundering:
Definitions, Stages, Players, Magnitude
and Significance…………………………………………………….

Chapter 3:	Methods, Trends and Typologies of Money
Laundering………………………………………………………….

Chapter 4:	Comparisons of Anti-Money Laundering Regimes
Of Key Nations and Offshore Financial Centers…………………….

Chapter 5:	International and Regional Configurations Against
Money Laundering…………………………………………………

Chapter 6:	Terrorist Financing: Law, Policy, and Strategies…………………….

Chapter 7:	The United States Law of Money Laundering
and Forfeiture……………………………………………………..

Chapter 8:	The USA Patriot Act………………………………………………

Chapter 9:	Compliance: Introduction, Reporting and
Record-Keeping…………………………………………………..

Chapter 10:	Advanced Topics in Compliance…………………………………..

Appendices:	Bank Secrecy Act (BSA),
Internal Revenue Code section 6050I
AML statutes
FATF Forty Recommendations

CHAPTER 1: RESEARCH GUIDANCE ON AML AND COMPLIANCE

U.S. Web Sites

1.	American Banker’s Association, http://www.aba.com: this particular site offers suggestions regarding compliance on behalf of financial institutions.  1120 Connecticut Avenue, NW, Washington, DC 20036.  Phone #: 1-800-bankers.

2. 	Bank Secrecy Act, http://cfr.law.cornell.edu/cfr/cfr.php?title=31&type=part&value=103:  site contains information regarding specified legislation regarding the Bank Secrecy Act. 
 
3. 	Central Intelligence Agency (CIA), http://www.cia.gov:  Official website for the Central Intelligence Agency.  The website contains several useful links for researching financial crimes, and the role that the CIA plays in combating such crimes.

4.  	Department of State’s International Narcotic Control Strategy Reports (INCSR),  http://www.state.gov/g/inl/rls/nrcrpt: U.S. Department of State’s official website.  On the left-hand column of the site, a visitor can choose from multiple INCSR reports from previous years as issued by the Bureau of International Narcotics and Law Enforcement Affairs.

5.         Drug Enforcement Administration (DEA), http://www.dea.gov:  Official website for the U.S. Drug Enforcement Administration.  The DEA combats money laundering by attempting to deny criminals the ability to produce, and denial of access to illegal activities that are the source of the illicit funds of which money launderers scheme to avoid detection.

6.	Federal Bureau of Investigation (FBI), http://www.fbi.gov/hq/cid/fc/ml/ml_about.htm, website hosted by the FBI with general content  devoted to the purpose, mission and capabilities of the FBI’s anti-money laundering unit.

7.	Federal Deposit Insurance Corporation (FDIC), http://www.fdic.gov 

8.	Financial Crimes Enforcement Network (FINCEN), http://www.fincen.gov 
Hosted by the Financial Crimes Enforcement Network, whose overall goal is to support the myriad of domestic and international law enforcement agencies, in the global war against money laundering.  FINCEN’s mission is to support law enforcement investigative efforts and foster interagency and global cooperation against domestic and international financial crimes; and to provide U.S. policy makers with strategic analysis of domestic and worldwide money laundering developments, trends and patterns.  FINCEN works towards those ends through information collection, analysis, and sharing of technological assistance and innovative and cost-effective implementation of Treasury authorities.  

FINCEN’s Office of Enforcement and Regulation; U.S. Department of the Treasury; 270 Chain Bridge Road, Suite 200; Vienna, Virginia 22182; 800-949-2732 (Regulatory Help Line); 866-556-3974 (Hotline for Suspected Terrorist Related Activity) http://www.ustreas.gov/fincen/

FinCEN – Regulatory / BSA Forms and Filing Information http://www.treas.gov/fincen/bsaf_main.html

FinCEN – Publications / Advisories, Bulletins, Rulings, Fact Sheets
http://www.treas.gov/fincen/pub_external_reports.html

FinCEN – Publications / External Documents
http://www.treas.gov/fincen/pub_external-reports.html

FinCEN – SAR Bulletin – Issue 4 “Aspects of Financial Transactions Indicative of Terrorist Funding” (January 2002): http://www.treas.gov/fincen/sarbul0201-f.pdf

FinCEN Follows the Money: A Local Approach to Identifying and Tracing Criminal Proceeds (January 1999): http://www.treas.gov/fincen/followme.pdf

9.	IRS Criminal Investigative Division, http://www.ustreas.gov/irs/ci/:  Official site of the Internal Revenue Service featuring the criminal investigative arm of the administration.	

10.	 Justice Department, http://www.usdoj.gov, The justice department is responsible for ensuring the success, and oversees the Department of Homeland Security 

11..	Office of the Comptroller of the Currency, http://www.occ.treas.gov/:  This office serves to supervise and regulate financial institutions (specifically banks) to ensure a fair and equitable banking system.

12.	Office of Foreign Assets Control, http://www.treas.gov/offices/enforcement/ofac/:  
Subdivision of the U.S. Department of Treasury, administers economic and trade sanctions against international narcotic traffickers and terrorists among others, based on U.S. foreign policy as well as national security goals.

13. 	Treasury Department, http://www.ustreas.gov:  The Office of Terrorism and Financial Intelligence (TFI) develops and implements U.S. government strategies to combat terrorist financing domestically and internationally, develops and implements the National Money Laundering Strategy as well as other policies and programs to fight financial crimes.

14.	U.S. Customs and Border Protection, http://www.costoms.ustreas.gov: U.S. Customs works in conjunction with other federal agencies to prevent the flow of narcotics and bulk cash smuggling into this country.
  
15.	U.S. Postal Inspection Services, http://www.usps.com/postalinspectors/
 	
16.	U.S. Securities and Exchange Commission, http://www.sec.gov/:  

International Web Sites

1.	The Asia Pacific Group on Money Laundering, http://www.apgml.org/: 
The purpose of the Asia/Pacific Group on Money Laundering (APG) is to facilitate the adoption, implementation and enforcement of internationally accepted standards against money laundering and the financing of terrorism, in particular the Forty Recommendations and Eight Special Recommendations on Terrorist Financing of the Financial Action Task Force on Money Laundering (FATF). This includes assisting jurisdictions in the region to enact laws criminalising the laundering of the proceeds of crime and dealing also with mutual legal assistance, confiscation, forfeiture and extradition. It also includes the provision of guidance in setting up systems for reporting and investigating suspicious transactions and helping in the establishment of financial intelligence units. The APG recognizes that regional and country factors would need to be taken into account in the implementation of measures against money laundering and the financing of terrorism and provides for peer review by means of a mutual evaluation process. (The previous paragraph was copied from the introductory paragraph as found on the website).

2.	Basel Committee on Banking Supervision – Customer Due Diligence for Banks (Basel, October 2001), http://www.bis.org/publ/bcbs85.htm 

3.  	Basel Committee on Banking Supervision – Prevention of Criminal Use of the Banking System for the Purpose of Money Laundering (Basel, October 2001), http://www.bis.org/publ/bcbsc137.pdf

4. 	The Caribbean Financial Action Task Force,  http://www.catf.org/: 
The Caribbean Financial Action Task Force is a collection of Caribbean Island nations (some of whom have been labeled “tax havens”) which have agreed to implement common countermeasures against launderers.

5.	(FATF) Financial Action Task Force, http://www1.oecd.org/fatf: The FATF is a group organization comprised of numerous Nation-States, in the joint effort to combat international money laundering through collective efforts, including the act of shaming nations that have done little to nothing (ie: tax havens) to curb this illegal activity.

6.	Global Anti-Money Laundering Guidelines for Private Banking “The Wolfsberg Statement” (Wolfsberg, January 2002),  http://www.wolfsberg-principles.com/wolfsberg_principles_1st_revision.htm.

7.	The United Nations,  http://www.un.org/ 

International Convention for the Suppression of the Financing of Terrorism (New York, December 9, 1999): http://untreaty.un.org/English/Terrorism/Conv12.pdf
Link to current participant list: http://untreaty.un.org/ENGLISH/Status/Chapter_xviii/treaty11.asp

UN Security Council Resolution 1373 (New York, September 28, 2001): http://daccess-ods.un.or/doc/UNDOC/GEN/N01/557/43/PDF/N0155743.pdf?OpenElement

UN Security Council Resolution 1373 – Counter Terrorism Committee: http://www.un.org/Docs/sc/committees/1373/

UN Convention Against Transnational Organized Crime (Palermo, December 12-15 2000): http://www.undcp.org/palermo/convmain.htm 

UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (Vienna, December 20, 1988): http://www.incb.org/e/conv/1988/index.htm

BIBLIOGRAPHY
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"Combating Money Laundering: Opportunities Exist to Improve the National Strategy." U.S. General Accounting Office. Washington, D.C.: GAO, 2003. 
"Money Laundering: FinCEN Needs to Better Communicate Regulatory Priorities and Timeliness." U.S. General Accounting Office. Washington, D.C.: GAO, 1998. 
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"Money Laundering: Observations on Private Banking and Related Oversight of Selected Offshore Jurisdictions." U.S. General Accounting Office. Washington, D.C.: GAO, 1999.
"Oversight of Suspicious Activity Reporting at Bank-Affiliated Broker-Dealers. Ceased." U.S. General Accounting Office. Money Laundering: Washington, D.C.: GAO, 2001.
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"Money Laundering: Regulatory Oversight of Offshore Private Banking Activities." U.S. General Accounting Office. Washington, D.C.: GAO, 2001.
"Suspicious Bank Activities: Possible Money Laundering by U.S. Corporations for Russian Entities." U.S. General Accounting Office. Washington, D.C.: GAO, 2000.
B. Frederic Williams and Frank D. Whitney, Federal Money Laundering: Crimes and Forfeitures (Lexis Law Publishing 1999).
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Patrick Moulette, , "Money Laundering: Staying Ahead of the Latest Trends", OECD Observer, no. 220 (April 2000), pp. 28-30.
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CHAPTER 2: INTRODUCTION TO MONEY LAUNDERING: DEFINITIONS,
STAGES, PLAYERS, AND SIGNIFICANCE
Definition of “Money Laundering” *
The origin phrase “money laundering” is somewhat uncertain.  One source reports it was coined in connection with the failed U.S. experiment with prohibition during the 1930’s.  Another source reports the phrase was first used in 1961 and came into widespread use during the Watergate scandal.  The latter date seems more likely, since the phrase did not appear in print until Watergate.  The phrase is an interesting word usement, since it functions as many different parts of speech.
The United Nations website defines money laundering as a noun phrase.  "Money Laundering: A three-stage process which disguises illegal profits without compromising the criminals who wish to benefit from the proceeds. This requires: first, moving the funds from direct association with the crime; second, disguising the trail to foil pursuit; and third, making the money available to the criminal once again with the occupational and geographic origins hidden from view (see also placement, layering, integration)."
The FATF website conspicuously displays a definition of money laundering as a verb phrase.  "Money laundering is the processing of … criminal proceeds to disguise their illegal origin.”  It may come as a surprise, therefore, that the real interest of this group is somewhat different.  “The fundamental objective of this effort is to ensure that criminal misuse of the financial system is detected and defeated.”  Thus, the real goal of this group is to protect the “financial system” from “criminal misuse.”
The March 2003 INCSR report does not specifically define money laundering.  The report does, however, use the phrase as an adjective.   “A major money laundering country is defined by statute as one “whose financial institutions engage in currency transactions involving significant amounts of proceeds from international narcotics trafficking.” FAA § 481(e)(7). However, the complex nature of money laundering transactions today makes it difficult in many cases to distinguish the proceeds of narcotics trafficking from the proceeds of other serious crime.”  Thus, money laundering is a currency transaction involving significant amounts of proceeds from serious crimes.
It seems apparent, though not stated, that only individuals and associations can engage in money laundering, not governments.  Since “money laundering” can be used so many different ways, it is probably best to describe money laundering on an analytic basis.  Fortunately, there is an analytic model of money laundering that is widely agreed upon.
Stages of Money Laundering

Money laundering is commonly divided into three stages or elements: layering, placement, and integration.  Each stage is addressed in turn.

Placement

Placement is the “first stage of the money laundering process, whereby the launderer disguises the provenance of criminal proceeds, often by a complex series of financial transactions.”  "This might be done by breaking up large amounts of cash into less conspicuous smaller sums that are then deposited directly into a bank account, or by purchasing a series of monetary instruments (cheques, money orders, etc.) that are then collected and deposited into accounts at another location."

Layering

Layering is the “second step in the process of money laundering, whereby the launderer attempts to remove the funds from direct association with the crime by a series of financial transactions, thus making it harder to connect the proceeds to its origin.”  "The funds might be channeled through the purchase and sales of investment instruments, or the launderer might simply wire the funds through a series of accounts at various banks across the globe. This use of widely scattered accounts for laundering is especially prevalent in those jurisdictions that do not co-operate in anti-money laundering investigations. In some instances, the launderer might disguise the transfers as payments for goods or services, thus giving them a legitimate appearance."

Integration: 

"Having successfully processed his criminal profits through the first two phases of the money laundering process, the launderer then moves them to the third stage – integration – in which the funds re-enter the legitimate economy. The launderer might choose to invest the funds into real estate, luxury assets, or business ventures."
III. The Magnitude, Economics and Impact of Money Laundering
	Money laundering is associated with the so-called “underground economy.”  Unfortunately, there is little empirical evidence available to estimate the amount of size of the underground economy.  The International Monetary Fund has described a direct and indirect estimation approach to estimate the size.    Both methods rely heavily on statistical interpretation of data sources and are thus subject to “spin” by their promoters.
The “direct approach” analyzes information obtained in criminal investigations to build up sector-by-sector estimates of the size of the underground economy.  A 1974 study put the figure at 4% to 9%of gross domestic product (GDP).  The FATF has conducted studies on Italy, Australia, Canada and The Netherlands and estimates the size of the underground economy at 2%, 0.75%, 2-3% and <1%, respectively.  The FATF does not believe these figures accurately represent the worldwide figures, however.  This is somewhat surprising, since the FATF stopped trying to estimate the scale of money laundering a year before the report came out.  Thus, it seems that the FATF was not coming up with the desired result so it stopped trying.
The indirect approach described by the IMF report involves using the principles of macroeconomics to estimate the size of the underground economy from five indicators.  These indicators include:

(i) the discrepancy between income and expenditure statistics, assuming that the income measure of GDP should be equal to the expenditure measure of GDP reported in the national accounts; (ii) the discrepancy between the official and actual labor force—assuming that a decline in participation to the official market may reflect increasing activity in the underground economy; (iii) the discrepancy between official GDP and total nominal GDP (transactions approach) assumes a constant relationship over time between the volume of transactions and official GDP (Fisher’s quantity equation); (iv) the discrepancy between actual or “excess” demand for money and the demand for money that can be explained by conventional or normal factors (currency demand approach) considers that currency is the main (only) means of payment used to settle transactions in the underground economy; (v) the discrepancy between actual and official GDP estimated on the basis of electricity consumption—assumes that economic activity and electricity consumption move together, with an electricity/GDP elasticity close to one.
The net result of such studies is summarized below:

Country Group				Range (% of GDP)
Developing Countries
Africa						20-76
Central and South America			25-61
Asia						13-71
Transition countries				8-63
OECD countries				5-28

One has to wonder about the significance of a study that has a range of error of 25% of GDP in the OECD countries and 36 % to 58% in the rest of the world.  The worldwide GDP is estimated at $21 trillion.  The above statistics imply that the worldwide size of the underground economy is in excess of $1 trillion at the low end and $3 trillion at the high end.  Thus, these statistics appear to be completely unbelievable because there is no way this amount of money can move around unnoticed without the help of complicit governments.  Of course, if governments are involved, then the activity is not really money laundering.

Money Laundering: Introductory Concepts
Written By:  R. LeWayne Johnson, J.D.  

“Money laundering can have devastating economic consequences. Fighting it should be a priority for all countries and is not incompatible with financial market liberalization.”1 

Contents:  (1) International and Local Definition for Money Laundering; (2) Stages of Money Laundering; (3) Impact of Money Laundering; (4) Proposed International Solutions; (5) Conclusion   
International and Local Definition for Money Laundering
Money laundering according to the definition in the “International Guide to Money Laundering: Law and Practice” is “…the criminal process whereby the proceeds from crime are hidden and transformed by attempts to integrate them into the financial system in order to give them the appearance of legitimate funds”.2  

Activities and persons constituting money laundering as defined by the U.S. Money Laundering Statute, 18 USC §1956 are as follow in pertinent part:

 (a)(1) Whoever, knowing that the property involved in a financial transaction represents the proceeds of some form of unlawful activity, conducts or attempts to conduct such a financial transaction which in fact involves the proceeds of specified unlawful activity – 

         (A)(i) with the intent to promote the carrying on of specified unlawful   
                activity; or 
              (ii) with intent to engage in conduct constituting a violation of section  
                    7201 or 7206 of the Internal Revenue Code of 1986; or 

         (B) knowing that the transaction is designed in whole or in part – 

               (i) to conceal or disguise the nature, the location, the source, the  
                    ownership, or the control of the proceeds of specified unlawful     
                    activity; or 
              (ii) to avoid a transaction reporting requirement under State or Federal    
                    law,… 
         
            (2) Whoever transports, transmits, or transfers, or attempts to transport, transmit,    
                  or transfer a monetary instrument or funds from a place in the United States to  
                  or through a place outside the United States or to a place in the United States 
                  from or through a place outside the United States – 

     (A) with the intent to promote the carrying on of specified unlawful activity; or 
     (B) knowing that the monetary instrument or funds involved in the    
           transportation, transmission, or transfer represent the proceeds of some 
           form of unlawful activity and knowing that such transportation,  
           transmission, or transfer is designed in whole or in part – 

          (i) to conceal or disguise the nature, the location, the source, the ownership,  
               or the control of the proceeds of specified unlawful activity; or 
         (ii) to avoid a transaction reporting requirement under State or Federal  
               law,….3

Stages of Money Laundering

Generally occurring in a series of transactions, money laundering is used to disguise the source of financial assets so that those assets may be used without compromising the criminals who seek to use the funds.  

The Financial Action Task Force on money laundering (FATF) defines money laundering as falling into three stages:

Placement: the process of placing, through deposits, wire transfers, or other means, unlawful proceeds into financial institutions;
Layering: the process of separating the proceeds of criminal activity from their origin through the use of layers of complex financial transactions; and 
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.4 

Impact of Money Laundering
Money laundering and the financing of terrorism are worldwide concerns that increase the risks to domestic and global financial systems and can impact national security.  According to the Financial Action Task Force (FATF), estimates of the amount of money laundered annually worldwide from the illicit drug trade alone range between $US 300 billion and $US 500 billion. The inclusion of laundered illicit funds from economic and other non-drug crime could potentially double these figures.
Vulnerability Factors

The current ability of money launderers to penetrate virtually any financial system makes every jurisdiction a potential money-laundering center.  There is no precise measure of vulnerability for any financial system, and not every vulnerable financial system will, in fact, be host to large volumes of laundered proceeds, but a checklist of what drug money managers reportedly look for provides a basic guide. The checklist includes:
Failure to criminalize money laundering for all serious crimes or limiting the offense to narrow predicates. 
Rigid bank secrecy rules that obstruct law enforcement investigations or that prohibit or inhibit large value and/or suspicious or unusual transaction reporting by both banks and non-bank financial institutions. 
Lack of or inadequate "know your client" requirements to open accounts or conduct financial transactions, including the permitted use of anonymous, nominee, numbered or trustee accounts. 
No requirement to disclose the beneficial owner of an account or the true beneficiary of a transaction. 
Lack of effective monitoring of cross-border currency movements. 
No reporting requirements for large cash transactions. 
No requirement to maintain financial records over a specific period of time. 
No mandatory requirement to report suspicious transactions or a pattern of inconsistent reporting under a voluntary system; lack of uniform guidelines for identifying suspicious transactions. 
Use of bearer monetary instruments. 
Well-established non-bank financial systems, especially where regulation, supervision, and monitoring are absent or lax. 
Patterns of evasion of exchange controls by legitimate businesses. 
Ease of incorporation, especially where ownership can be held through nominees or bearer shares, or where off-the-shelf corporations can be acquired. 
No central reporting unit for receiving, analyzing and disseminating to the competent authorities information on large value, suspicious or unusual financial transactions that might identify possible money laundering activity. 
Lack of or weak bank regulatory controls, or failure to adopt or adhere to the Basle Principles for International Banking Supervision, especially in jurisdictions where the monetary or bank supervisory authority is understaffed, underskilled or uncommitted. 
Well-established offshore financial centers or tax-haven banking systems, especially jurisdictions where such banks and accounts can be readily established with minimal background investigations. 
Extensive foreign banking operations, especially where there is significant wire transfer activity or multiple branches of foreign banks, or limited audit authority over foreign-owned banks or institutions. 
Limited asset seizure or confiscation authority. 
Limited narcotics, money laundering and financial crime enforcement and lack of trained investigators or regulators. 
Jurisdictions with free trade zones where there is little government presence or other supervisory authority. 
Patterns of official corruption or a laissez-faire attitude toward the business and banking communities. 
Jurisdictions where the U.S. dollar is readily accepted, especially jurisdictions where banks and other financial institutions allow dollar deposits. 
Well-established access to international bullion trading centers in New York, Istanbul, Zurich, Dubai and Mumbai. 
Jurisdictions where there is significant trade in or export of gems, particularly diamonds. 
Jurisdictions with large parallel or black market economies. 
Limited or no ability to share financial information with foreign law enforcement authorities.
Various Impacts
Tax Impact
With regard to a country’s economy, a significant impact of money laundering might be in the area of tax collection, due to misreporting and underreporting of one’s income.  However, it is still not clear how moving funds from the illicit economy, where they would not be taxed, into the licit economy where by definition they would be declared and liable for taxes, would result in tax losses.  An exception to this situation, however, would be instances in which illicit proceeds are moved out of the country, surface elsewhere as licit funds and are taxed in that jurisdiction. 
Overall Economic and Commercial Impact
The uncertainty regarding the magnitude of illicit funds laundered throughout the international community and the precise nature of the economic and commercial impact of the money laundering process renders a true assessment of the economic and commercial impact of money laundering extremely difficult.  Money Laundering, therefore, given the current uncertainties surrounding the impact of the process, cannot be assessed to have more than some economic and commercial impact on the international community.
Social-political Impact of Money Laundering
Money laundering as defined by 18 USC 1956 is a criminal activity.  At least this is the case in the United States.  As such, it has an enormous impact on the basic values of a society because, to the extent that it is allowed to continue, it is a clear signal that crime does indeed pay.  Ultimately money laundering must be controlled not because it causes significant economic distortions (in many cases it may not) but because it is recognized as morally unacceptable that individuals profit from criminal activities.  A key component of effective anti-organized crime enforcement is removing profits from the criminals.
Proposed International Solutions 

The Financial Action Task Force	

At the July 1989 economic summit in Paris, the Group of Seven countries set up the Financial Action Task Force (FATF), whose brief is to prevent banks and financial institutions from laundering the proceeds of criminal activities--in particular, sales of controlled substances, organized criminal activities, and manipulation of markets by insiders. The FATF, which has 28 member countries and governments, primarily from the industrial world, encourages countries to make money laundering a criminal activity in itself (many have already done so); it also seeks to strengthen international cooperation between criminal investigation agencies and the judiciaries in different countries.5 	

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 (see International Narcotics Control Strategy Report -2001 at http://www1.oecd.org/fatf/).
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. 
Conclusion
Money laundering as defined by the International Guide to Money Laundering: Law and Practice, the FATF, statutory and case laws both in the U.S. and the international community, is a crime. 

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.  

Combating this progressive activity will require attacking it from at least two fronts:

Fighting money launderers and
Strengthening anti-money laundering regimes globally.

This strategy will reduce financial crime by depriving criminals of the means to commit other serious crimes.  Further 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. 

Gil Manzano, Jr.
572-59-1212
Module 2B

Introduction of Money Laundering

[1] Money Laundering  - Money laundering is a process whereby the origin of funds generated by illegal means is concealed (drug trafficking, gun smuggling, corruption, etc.). The objective of the operation, which usually takes places in several stages, consists in making the capital and assets that are illegally gained seem as though they are derived from a legitimate source, and inserting them into economic circulation. The crime of money laundering consists of knowingly disguising the source, origin, or ownership of illegal funds. 
There are three stages involving in money laundering; placement, layering and integration.
Placement –This is the movement of cash from its source. On occasion, the source of the money is disguised and/or misrepresented followed by placing it into circulation through financial institutions, casinos, shops, bureau de change and other businesses. The process of placement can be carried out through many processes including:
Currency Smuggling – This is the physical illegal movement of currency and monetary instruments out of a country. The various methods of transport do not leave a discernible audit trail.
Bank Complicity – This is when a financial institution, such as banks, is owned or controlled by unscrupulous individuals suspected of conniving with drug dealers and other organized crime groups. This makes the process easy for launderers. The complete liberalization of the financial sector without adequate checks also provides leeway for laundering. 
Currency Exchanges – In a number of transitional economies the liberalization of foreign exchange markets provides room for currency movements and as such laundering schemes can benefit from such policies. 
Securities Brokers – Brokers can facilitate the process of money laundering through structuring large deposits of cash in a way that disguises the original source of the funds. 
Blending of Funds – The best place to hide cash is with a lot of other cash. Therefore, financial institutions may be vehicles for laundering. The alternative is to use the money from illicit activities to set up front companies. This enables the funds from illicit activities to be obscured in legal transactions. 
Asset Purchase – The purchase of assets with cash is a classic money laundering method. The major purpose is to change the form of the proceeds from conspicuous bulk cash to some equally valuable but less conspicuous form.
Layering – The purpose of this stage is to make it more difficult to detect and uncover a laundering activity. It is meant to make the trailing of illegal proceeds difficult for the law enforcement agencies. The known methods are:
Cash converted into Monetary Instruments – Once the placement is successful within the financial system by way of a bank or financial institution, the proceeds can then be converted into monetary instruments. This involves the use of banker’s drafts and money orders. 
Material assets bought with cash then sold – Assets that are bought through illicit funds can be resold locally or abroad and in such a case the assets become more difficult to trace and thus seize. 
Integration – This is the movement of previously laundered money into the economy mainly through the banking system and thus such monies appear to be normal business earnings. This is dissimilar to layering, for in the integration process detection and identification of laundered funds is provided through informants. The known methods used are:
Property Dealing – The sale of property to integrate laundered money back into the economy is a common practice amongst criminals. For instance, many criminal groups use shell companies to buy property; hence proceeds from the sale would be considered legitimate. 
Front Companies and False Loans – Front companies that are incorporated in countries with corporate secrecy laws, in which criminals lend themselves their own laundered proceeds in an apparently legitimate transaction. 
Foreign Bank Complicity – Money laundering using known foreign banks represents a higher order of sophistication and presents a very difficult target for law enforcement. The willing assistance of the foreign banks is frequently protected against law enforcement scrutiny. This is not only through criminals, but also by banking laws and regulations of other sovereign countries. 
False Import/Export Invoices – The use of false invoices by import/export companies has proven to be a very effective way of integrating illicit proceeds back into the economy. This involves the overvaluation of entry documents to justify the funds later deposited in domestic banks and/or the value of funds received from exports. 
Economic Impact

Money Laundering has the Capacity to undermine world financial markets.
The major economic argument is that laundering has a detrimental effect on the operation of markets. [2] Tanzi, an IMF economist, argues that the resources that go into illegal activity might otherwise be directed legally. [3] Money laundering allocates “illegal money” around the world based on the ease of avoiding controls. [4] 
A large stock of laundered capital might bring instability to the world market. At the national level, this will affect exchange and interest rates. Integration of financial markets implies that difficulties can spread from market to market, transforming a national problem into a systemic one. This is the thesis which, if correct, accounts for the harm of money laundering. It only ever argues, however, for the criminalization of international laundering, not laundering in one jurisdiction only.

The microeconomic effect of laundering remains more tangible and significant. The effect upon the identifiable business may result in employees losing their jobs due to their bosses laundering drug money or other illegal sources. [5] Nonetheless, the argument is not overwhelming. There are two sorts of responses available. One is to challenge the stereotypes of how the money is deployed. This can only be done by attention to the micro data. Petrus van Duyne [6] suggests that the incidence of this sort of competition is far less than is suggested by the law enforcement agencies. 

Masciandaro [7] argues further that laundering has a pollutant effect. Once it takes place, then more and more property will become tainted. [8] This is true, and particularly true if tax evasion is to be treated like other forms of "criminal conduct" for the purposes of money laundering. [9] But the very rate at which the pollution spreads might be regarded as an indication of the high degree of criminogenesis attributable to attempts to regulate laundering.

Money laundering activities can corrupt parts of the financial system and undermine governance of banks. Once bank managers have become corrupted by the sizeable sums of money involved in money laundering, non-market behavior can be introduced into operating areas other than those directly related to the money laundering, which creates risks for the safety and soundness of the bank. Bank supervisors also can be corrupted or intimidated, which would reduce the effectiveness of supervision. [10]
 
Amongst the wider consequential claims, the effect of laundering upon the banking system is frequently a particular concern. Smith writes, “the fear of financial regulators is that when credit and financial institutions are used to launder proceeds from criminal activities ... the soundness and stability of the [particular] institution concerned and confidence in the financial system as a whole could be seriously jeopardized.” [11] Likewise, Cranston asserts that, "[money laundering] affects public confidence in, and the stability of, the banking system.” [12]

A major concern is banking liquidity. The argument remains: If a bank deals with investors, the provenance of whose money is illegal, then the kinds of demands which those investors will make are less predictable than those coming from more conventional investors. The sorts of clients with whom they choose to do business affect the proportion of its assets, which a bank will need to keep liquid to meet such eventualities without entirely collapsing. It is, however, by no means clear that these kinds of effects have arisen in banks that launder money.

FOOTNOTES

[1] http://swiss-bank-accounts.com/e/index.html 

[2] See Performance and Innovation Unit, Cabinet Office, Recovering the Proceeds of Crime para. 1.3 (2000), at http://www.cabinet-office.gov.uk/ innovation/ 2000/crime/recovering/01.htm 

[3] See Vito Tanzi, International Monetary Fund Working Paper 96/55, Money Laundering and the International Financial System 5 (1996) (noting that "recently some small countries have almost advertised their willingness to accept laundered money."). 

[4] See Recovering the Proceeds of Crime, supra. 

[5] See Vito Tanzi, International Monetary Fund Working Paper 96/55, Money Laundering and the International Financial System 5 (1996) (noting that "recently some small countries have almost advertised their willingness to accept laundered money."). 

[6] See Petrus C. Van Duyne, The Emperor's Clothes of Disclosure: Hot Money and Suspect Disclosures, 31 Crime L. & Soc. Change 245-71 (1999). 

[7] Donato Masciandaro, Money Laundering: The Economics of Regulation, 7 Eur. J.L. & Econ. 225-40 (1999); see also Donato Masciandaro, The Economics of Money Laundering 

[8] See Gianandrea Goisis, Economic Impact of Rules Against Money Laundering, 43 Riviista Internazionale di Scienze Economiche e Commerciali 303-30 (1996). 

[9] See Peter Alldridge, Are Tax Evasion Offenses Predicate Offenses for Money Laundering?, 4 J. Money Laundering Control 6 (2001). 

[10] Peter Quirk, International Monetary Fund Working Paper 96/66, Macroeconomic Implications of Money Laundering 24 (1996). 

[11] Geoffrey Smith, Competition in the European Financial Services Industry: The Free Movement of Capital versus the Regulation of Money Laundering, 13 U. Pa. J. Int'l Bus. L. 101, 111 (1992).

[12] Ross Cranston, Principles of Banking Law 75 (1997). 

Module 2B
Oliver Massmann
040804
---------------------
1. Definition: MONEY LAUNDERING - Conduct/acts designed in whole or in part to conceal or disguise the nature, location, source, ownership or control of money (can be currency or equivalents, eg. checks, electronic transfers, etc.) to avoid a transaction reporting requirement under state or federal law or to disguise the fact that the money was acquired by illegal means. 
------------------
2. Stages of money laundering:
placement - the process of placing unlawful proceeds into financial institutions through deposits, wire transfers, or other means; 
(2) layering - the process of separating the proceeds of criminal acti-vity from their origin through the use of lay-ers of complex financial transactions; and 
(3) integration - the process of using an apparently legitimate transaction to disguise illicit proceeds.

--------------------
2. Examples:
A. Large cash deposits by individuals and companies
1. The sum of 766 000 US dollars is deposited at Bank X in St. Petersburg from where it is transferred to Bank Y in a Scandinavian country. The account holder is a national trading company of this country. From Bank Y the money is then transferred to an account held by a person with a Russian passport in Bank Z, in the same Scandinavian country. From the latter bank account, the money goes to a foreign exchange service where it is collected in cash and in the currency of the Scandinavian country by the account holder of Bank Z.
2. In country X, suspicions were reported by two separate banking establishments. Investigation of the first report uncovered nothing suspicious or conclusive. the information was stored. The second report filed a year later by an establishment have no knowledge of the first report, have exactly the same information: the same type of transaction, the same pattern, the same outward transfer by citizens of the same country.
The scheme involved several citizens of a Middle Eastern country who attracted the banks' attention because of substantial foreign exchange transactions between to European countries, followed by short-term placements and subsequent transfers to North America of amounts totalling the equivalent of approximately USD 1 million. The investigation revealed that one of the people involved had financial connections with an individual under indictment in one country for drug trafficking and money laundering. Furthermore, a check on a funds courier by customs agents in this country established a connection between physical movements of cash and one of the transferees in North America. 
Source: AUSTRAC - Money Laundering and Financial Industry Regulator OECD/OCDE
Financial Action Task Force
Groupe D'Action Financire
Date: 14 March 1995
----------------
4.  – Techniques of money laundering
4.1 - Transfer by means of compensation by underground banks
4.2 - Transfer of the funds by means of transfer using faked identification
4.3 - Transfer by means of under/over invoicing
4.4 - Placement by deception/bribery
4.5 - Placement by conversion business
4.6 - Placement by Structuring/Smurfing
4.7 - Layering using assistance of international transactions and/or enterprises
4.8 - Integration by direct investments
4.9 - Integration by loans
4.10 - Integration by pretended speculations

source: German BKA webpage

I.	Definitions of Money Laundering: 

a.	The INCSR Report, March 2003:  “A major money laundering country is defined by statute as one “whose financial institutions engage in currency transactions involving significant amounts of proceeds from international narcotics trafficking” (FAA § 481(e)(7)).”

b.	An United Nations Document:  The United Nations Convention Against Transnational Organized Crime, Article 6, 1(a)(i) “The conversion or transfer of property, knowing that such property is the proceeds of crime, for purpose of concealing or disguising the illicit origin of the property.”  1(a)(ii) “The concealment or disguise of the true nature, source, location, disposition, movement or ownership of or rights with respect to property, knowing that such property is the proceeds of crime.”

c.	Definitions from the Financial Action Task Force (FATF):  “The goal of a large number of criminal acts is to generate a profit for the individual or group that carries out the act. Money laundering is the processing of these criminal proceeds to disguise their illegal origin. This process is of critical importance, as it enables the criminal to enjoy these profits without jeopardizing their source.”
“Illegal arms sales, smuggling, and the activities of organized crime, including for example drug trafficking and prostitution rings, can generate huge sums. Embezzlement, insider trading, bribery and computer fraud schemes can also produce large profits and create the incentive to “legitimize” the ill-gotten gains through money laundering.”
“When a criminal activity generates substantial profits, the individual or group involved must find a way to control the funds without attracting attention to the underlying activity or the persons involved. Criminals do this by disguising the sources, changing the form, or moving the funds to a place where they are less likely to attract attention.”  Definition from FATF, http://www1.oecd.org/fatf/MLaundering_en.htm, 9/10/03.

d.	Definitions of Typologies from the FATF:  The most common typologies used by both terrorist and criminal money launderers are:

1.	front companies:  companies which actually carry on business where illegal profits can be co-mingled with revenues from legitimate undertakings.
2.	shell companies:  businesses without substance or commercial purpose and incorporated to conceal the true beneficial ownership of accounts and assets.
3.	informal money of value transfer system:  black market money exchanges.
4.	nominees:  use of family, friends, or associates who are trusted in the community, and who will not attract attention, to conduct transactions and hide the source of income.
5.	structuring:  depositing cash or purchasing bank drafts at various institutions by various people, or conducting transactions below the reporting threshold.
6.	credit cards:  creating credit on a card by paying cash, and then withdrawing cash from this credit.
7.	EFT:  using wire transfer services to wire funds to associates.
8.	currency smuggling:  the movement of cash from one location to another to disguise its source and ownership.

FATF, Report on  Money Laundering Typologies, 
http://www1.oecd.org/fatf/pdf/TY2003_en.pdf, 2/14/03.

II.	Three Basic Stages of Money Laundering:

The three basic stages of money laundering are as follows:  placement, layering (washing), and integration.  

During the first stage, the launderer introduces the illegal profits into the financial system by a variety of methods (more fully discussed below).  Some examples include breaking up large sums into smaller sums and depositing them directly into banks.  Additionally, monetary instruments other than cash can be purchased and then deposited elsewhere.  This stage usually takes place close to the jurisdiction where the funds were originated.

The second stage consists of a series of movements of the funds recently entered into the financial system, preferably moving the money as far away from the source jurisdiction as possible.  This process is usually accomplished by money wiring, property purchases, or “payments” to import/export companies.  This stage usually takes place in locations with large business or financial infrastructures, or places with limited regulatory oversight of the financial or banking sectors.

The last stage extracts the funds back into the local economy once the source of the funds has been sufficiently obscured, or laundered (washed) in stage 2.  Some of the more common ways of reintroducing this clean money into the economy is by large luxury purchases, property purchases, etc.

Information obtained from:  SPGI, Money Laundering: A Practical Analysis With Particular Reference To Bahamian And Caribbean Offshore Institutions, 
http://www.spgi.org/articles/bain_APracticalAnalysis.shtml, 2002.

III.	List and describe 10 most-often used techniques of money laundering (entire list courtesy of:  Don Temple, Money Laundering 101:  Ten Ways to Place Dirty Money, SmartPros, Ltd., 7/26/02, available at: http://www.accountingnet.com/x34833.xml.

a.	Often exchange small denomination bills for one hundred dollar bills. This reduces the bulk of the currency several fold and makes it easier to conceal and transport.
    
b.	Purchase monetary instruments such as money order, travelers checks, bank drafts, cashiers checks, treasurers checks, and official bank checks with currency in amounts below the $3,000 record-keeping thereby reducing the bulk of currency.
    
c.	Purchase the monetary instruments mentioned above in increments just below the $10,000 Currency Transaction Report threshold. This will result in the financial institution identifying the purchaser and maintaining a log of these transactions; however, money launderers recognize that the log is not filed with the government.
    
d.	Bulk ship currency to a jurisdiction with bank secrecy laws. Although a Currency and Monetary Instrument Report must be filed with the U. S. Customs Service anytime currency and/or monetary instruments are exported from the U. S. or imported into the U. S. money launderers do not file the report. Section 371 of the USA PATRIOT Act makes bulk shipping cash into or out of the United States a crime.
    
e.	Recognize that financial institutions report repeated deposits of just under $10,000. Therefore many money launderers will open several accounts in the names of family members and possibly friends at several financial institutions and deposit small amounts of currency in each account. The deposited amount in these situations may be less than $1,000 on a daily basis or $2,000 to $3,000 twice or possibly three times a week. These deposited amounts remain below the thresholds of any known internally developed monitoring system and would probably only be detected using comprehensive technology along with a compliance team.
    
f.	May purchase a currency generating business to launder funds. Money launderers have used businesses such as restaurants and service/gasoline stations. These businesses serve as both a method to place and layer dirty money simultaneously.
    
g.	Use electronic transfers to move dirty money. A money launderer may fund an electronic transfer with up to $3,000 in currency without providing identification. These funds can be rapidly transferred anyplace in the world. In many cases the money launderer may request that a representative of a money service business (MSB) execute several wire transfers during the course of a day all below the $3,000 record-keeping threshold. The money launderer will normally offer the MSB employee a bribe for the accommodation.
    
h.	May elect to execute electronic transfers below the $3,000 record-keeping threshold at several financial institutions. Doing this will keep these transfers under the radar screen since they are small increments and they are being distributed to multiple places.
   
 i.	Purchase a big-ticket item such as a car and use currency to pay down loans at an accelerated rate. The dealership is required to file a currency report if the money launderer uses currency and/or monetary instruments with a face value of $10,000 or less and the total value of the currency and the monetary instruments aggregates to over $10,000. Financing the automobile and making accelerated payments on the loan will evade the filing of a currency report.
    
j.	Attempt to disassociate themselves from the proceeds of a fraud quickly. Money launders may deposit the fraudulent proceeds into an account and almost immediately withdraw those funds in the form of currency at various branches of an institution or via ATMs.

I. Definition of “Money Laundering”
The origin phrase “money laundering” is somewhat uncertain.  One source reports it was coined in connection with the failed U.S. experiment with prohibition during the 1930’s.  Another source reports the phrase was first used in 1961 and came into widespread use during the Watergate scandal.  The latter date seems more likely, since the phrase did not appear in print until Watergate.  The phrase is an interesting word usement, since it functions as many different parts of speech.
The United Nations website defines money laundering as a noun phrase.  "Money Laundering: A three-stage process which disguises illegal profits without compromising the criminals who wish to benefit from the proceeds. This requires: first, moving the funds from direct association with the crime;  second, disguising the trail to foil pursuit; and third, making the money available to the criminal once again with the occupational and geographic origins hidden from view (see also placement, layering, integration)."
The FATF website conspicuously displays a definition of money laundering as a verb phrase.  "Money laundering is the processing of … criminal proceeds to disguise their illegal origin.”  It may come as a surprise, therefore, that the real interest of this group is somewhat different.  “The fundamental objective of this effort is to ensure that criminal misuse of the financial system is detected and defeated.”  Thus, the real goal of this group is to protect the “financial system” from “criminal misuse.”
The March 2003 INCSR report does not specifically define money laundering.  The report does, however, use the phrase as an adjective.   “A major money laundering country is defined by statute as one “whose financial institutions engage in currency transactions involving significant amounts of proceeds from international narcotics trafficking.” FAA § 481(e)(7). However, the complex nature of money laundering transactions today makes it difficult in many cases to distinguish the proceeds of narcotics trafficking from the proceeds of other serious crime.”  Thus, money laundering is a currency transaction involving significant amounts of proceeds from serious crimes.
It seems apparent, though not stated, that only individuals and associations can engage in money laundering, not governments.  Since “money laundering” can be used so many different ways, it is probably best to describe money laundering on an analytic basis.  Fortunately, there is an analytic model of money laundering that is widely agreed upon.
I. Stages of Money Laundering
Money laundering is commonly divided into three stages or elements: layering, placement, and integration.  Each stage is addressed in turn.
A. Placement
Placement is the “first stage of the money laundering process, whereby the launderer disguises the provenance of criminal proceeds, often by a complex series of financial transactions.”  "This might be done by breaking up large amounts of cash into less conspicuous smaller sums that are then deposited directly into a bank account, or by purchasing a series of monetary instruments (cheques, money orders, etc.) that are then collected and deposited into accounts at another location."
B. Layering
Layering is the “second step in the process of money laundering, whereby the launderer attempts to remove the funds from direct association with the crime by a series of financial transactions, thus making it harder to connect the proceeds to its origin.”  "The funds might be channeled through the purchase and sales of investment instruments, or the launderer might simply wire the funds through a series of accounts at various banks across the globe. This use of widely scattered accounts for laundering is especially prevalent in those jurisdictions that do not co-operate in anti-money laundering investigations. In some instances, the launderer might disguise the transfers as payments for goods or services, thus giving them a legitimate appearance."
C. Integration: 
"Having successfully processed his criminal profits through the first two phases of the money laundering process, the launderer then moves them to the third stage – integration – in which the funds re-enter the legitimate economy. The launderer might choose to invest the funds into real estate, luxury assets, or business ventures."
III. The Magnitude, Economics and Impact of Money Laundering
	Money laundering is associated with the so-called “underground economy.”  Unfortunately, there is little empirical evidence available to estimate the amount of size of the underground economy.  The International Monetary Fund has described a direct and indirect estimation approach to estimate the size.    Both methods rely heavily on statistical interpretation of data sources and are thus subject to “spin” by their promoters.
The “direct approach” analyzes information obtained in criminal investigations to build up sector-by-sector estimates of the size of the underground economy.  A 1974 study put the figure at 4% to 9%of gross domestic product (GDP).  The FATF has conducted studies on Italy, Australia, Canada and The Netherlands and estimates the size of the underground economy at 2%, 0.75%, 2-3% and <1%, respectively.  The FATF does not believe these figures accurately represent the worldwide figures, however.  This is somewhat surprising, since the FATF stopped trying to estimate the scale of money laundering a year before the report came out.  Thus, it seems that the FATF was not coming up with the desired result so it stopped trying.
The indirect approach described by the IMF report involves using the principles of macroeconomics to estimate the size of the underground economy from five indicators.  These indicators include:
(i) the discrepancy between income and expenditure statistics, assuming that the income measure of GDP should be equal to the expenditure measure of GDP reported in the national accounts; (ii) the discrepancy between the official and actual labor force—assuming that a decline in participation to the official market may reflect increasing activity in the underground economy; (iii) the discrepancy between official GDP and total nominal GDP (transactions approach) assumes a constant relationship over time between the volume of transactions and official GDP (Fisher’s quantity equation); (iv) the discrepancy between actual or “excess” demand for money and the demand for money that can be explained by conventional or normal factors (currency demand approach) considers that currency is the main (only) means of payment used to settle transactions in the underground economy; (v) the discrepancy between actual and official GDP estimated on the basis of electricity consumption—assumes that economic activity and electricity consumption move together, with an electricity/GDP elasticity close to one.
The net result of such studies is summarized below:
Country Group				Range (% of GDP)
Developing Countries
Africa						20-76
Central and South America			25-61
Asia						13-71
Transition countries					8-63
OECD countries					5-28
One has to wonder about the significance of a study that has a range of error of 25% of GDP in the OECD countries and 36 % to 58% in the rest of the world.  The worldwide GDP is estimated at $21 trillion.  The above statistics imply that the worldwide size of the underground economy is in excess of $1 trillion at the low end and $3 trillion at the high end.  Thus, these statistics appear to be completely unbelievable because there is no way this amount of money can move around unnoticed without the help of complicit governments.  Of course, if governments are involved, then the activity is not really money laundering.

The Players – Primary, Secondary, Governments and Organizations

In the jargon of money laundering, the primary players are the persons directly engaged in some revenue-generating unlawful activity.  The secondary players are those persons who facilitate laundering illicit proceeds.
I.  THE PRIMARY PLAYERS
A. Narco-Traffickers
A narco-trafficker is just a smuggler specializing in illicit narcotics.  Seemingly every nation and ethnic has its own black market supply for narcotics.  Thus, one has to wonder whether “mafia” groups are just the natural response to intrusive government.
B. Sicilian Mafia
The Sicilian mafia is the largest of four organized crime groups originating in Italy.  These groups formed over the course of 3000 years in response to oppressive invaders in order to help the people cope with their situation.  The present incarnation of the Italian organized crime groups began in the 1800s and has now spread all over the world.  The FBI estimates that the total number of people involved in these groups is approximately 275,000 people worldwide, with 2,500 in the United States.  Over the last two decades, the primary emphasis has been on heroin smuggling.  Italian industry experts put the value on their worldwide activity at $100 billion.
C. Russian Mafia
The Russian mafia is one of the many organized crime groups originating in the former Soviet Union and Warsaw Pact nations.  The FBU refers to these group collectively as Eurasian Organized Crime (EOC).  During the Soviet period, the "Vory V Zakone" or Thieves-in-Law groups began to secure scarce consumer goods to the elite.  When the Soviet Union fell, the EOC groups used their political connections to acquire the state-owned businesses.  This supplied a large infusion of cash to the system and an ongoing supply of funds to the EOC.
The EOC groups also began to spread across the world after the fall of the Soviet Union.  The FBI estimates the effect of the EOC groups on the U.S. in the hundreds of millions of dollars.  The main crimes these groups have been detected in are “health care fraud, auto insurance fraud, securities and investment fraud, money laundering, drug trafficking, extortion, auto theft, and Interstate Transportation of Stolen Property.”  Of course, the biggest concern is the proximity of the EOC groups to nuclear weapons still deployed in the former Soviet Union.
D. Turkish Mafia
The Turkish government estimates the Turkish mafia is involved in 100 different business sectors and have total revenues of $60 billion per year.  It is estimated that the Turkish mafia is responsible for smuggling more than 90% of the heroin that enters Great Britain.  This is because Turkey is geographically located at the crossroad of southwest Asia and Europe.  The Turkish mafia has been in the news lately because some of its leaders have been convicted in European courts.
In July 2004, the repute head of Turkish herion smuggling in Britain, Recip Yilmaz, was convicted and sentence to thirty years in prison.  Along with Yilmaz, his wife, son and seventeen other people were convicted on charges of smuggling and money laundering.  Also, Alaattin Cakci was arrested in Austria.  Cakci’s claim to fame is that he brought down the Turkish government in 1998 claiming he had ties to the Prime Minister, Mesut Yilmaz.  Mesut Yilmaz was himself saved from prosecution in a banking scandal because of procedural errors in the case.  It is unknown whether there is any familial relationship between Recip and Masut Yilmaz.
E. Chinese Mafia - Triads
The FBI labels the Chinese Triads as traditional criminal organizations.  It is unsurprising that the Triads formed as secret societies in response to the Han dynasty in 206 BC to 220AD, which is similar to the roots of the Sicilian mafia.  The current organization, the Hung League, formed to resist the Manchu Emporers in the late 17th century.  While the Triads are envolved in similar business as other organized crime groups, the Chinese Triads are more subtle than other groups and tend to be associated with corrupt but highly placed public and private persons.
F. Japanese Mafia - Yakusa
Similar to the Chinese Triads, the FBI labels the Japanese Yakusa (also spelled Yakuza) as traditional criminal organizations.  The Japanese Yakuza appear to be more brutal and less subtle than any other organized crime group.  When a henchman makes a mistake, he loses a finger joint to his boss.  The Yakuza control the Japanese pornography industry, but recent anti-organized crime legislation has loosened the Yakuza’s grip on the industry.
Similar to the Sicilian mafia and the Chinese Triads, the Japanese Yakuza formed at the end of the Japanese shogun era in the 17th century.  There are three general categories of Yakuza members: tekiya (street peddlers), bakuto (gamblers), and gurentai (hoodlums).   The gurentai formed after World War II to supply the post-war black market in goods and are based on American prohibition-era gangsters. 
The shear numbers of Yakuza members makes them worrisome the Japanese government.  While the population of Japan is roughly half of the United States, there are 110,00 Yakusa members divided among 2,500 families.  By way of comparison, there are only a total of 20,000 members of organized crime families in the entire United States.  
G. Colombian Narco-Traffickers
Colombian-based mafia groups are responsible for most of the cocaine production and distribution in the world.  There are currently 20 cartels wielding power in Colombia, collectively known as the Cali mafia.  However, only five groups dominate the industry.  While other South American countries produce coca, only Colombia has access to the Pacific Ocean which gives it transportation options.  The other entry into the United States is through Mexico.  In recent years, the Cali mafia has begun using its transportation network to smuggle other drugs, such as heroin, into the United States.
H. Jamaican Posse
The Jamaican posses are the most recently organized crime groups.  The posses were originally organized by corrupt politicians in the 1960s and 1970s to terrorize their constituencies.  The Rastaferian religion, dominant in Jamaica, uses marijuana as part of its meditation ritual.  Thus, the posses naturally became involved in marijuana smuggling, which has lead to other smuggling activities.
II.  THE SECONDARY PLAYERS:
The Gatekeepers: Attorneys, Accountants, Counselors
Certain professionals, such as lawyers and accountants, are useful in the implementation of the laws in ways favorable to their client’s position.  Regarding lawyers and accounts, the has the following table comparing the roles of lawyers and accountants:
Professional Services Provided by . . .
Lawyers	Accountants
Legal advice	Financial advice
Advocacy	Audit practice
Wills / probate	Tax advice and tax structuring
Property transactions	Property transactions 
Investment services	Bookkeeping
Trust	Trust
Company formation	Company formation
Company administration	Company administration
Introduction to banks	Introduction to banks
Furthermore, computer specialists are used to create automated systems to handle financial transactions and encrypt data files.
Professionals and technical experts cross the line when they willfully ignore how the client is using their work product.  Thus, many nations want to regulate such professionals through anti-money laundering laws.  The common ways professionals are regulated through money laundering laws are through Susupicious Activity Reports, Know Your Client Regulations, and ethical rules on “tipping off” a client.
III. OTHER PLAYERS
Corrupt Government Officials
Government officials can be drawn into corruption in a number of ways.  For example, an official charged with enforcement of criminal laws has some discretion in what infractions to penalize.  Thus, the official maybe induced to look the other way.  A military official entrusted with equipment may be induced to use that equipment for a nefarious purpose.  Since military maneuvers are often official secrets, the official may be able to hide their activities behind the secrecy laws.  Furthermore, officials entrusted with unaccounted funds may use the funds for different purposes than those intended.

Oliver Massmann
Assignment  re questions on primary and secondary players and professional responsibilities:

Who are the primary players and who are the secondary players?

Primary players:
Individuals or juridical persons engaged in a process of money laundering who own illegal money and benefit from these activities.

Secondary players:
Individuals or juridical persons who support or assist primary players voluntarily.

a.	The roles of user-friendly nations, attorneys, money managers,
accountants, compliance and trust advisors, computer specialists?

Following the given definition all of the above can be secondary players. 
Due to the fact that money launders often use usual business activities to obtain their aims the terms “support” and “assist” cover a very wide area of activities. 
Therefore it might be difficult to punish these individuals and juridical persons without any distinct rules or statues of behavior that state the borderline between correct and incorrect professional behavior.

User-friendly nations: 
although creating a “haven” for money launderers might be obvious these states can only be punished on grounds of an international agreement and an international court. 
Due to fact that a ratification of these agreements is necessary it is rather unlikely that an user-friendly nation will also join international efforts to fight users.
The remaining way of punishing these states is to target them on other international agreements. 

Money managers, accountants:
Assisting or supporting money launderers will be done by “normal ways of business” that is as long as there is no explicit law stating that this kind of professional activity is punishable it will be almost impossible to exert any pressure on these professionals.
The only other way of restricting this kind of business is to use the relevant professional organizations to state and enforce statutes (guidelines for professional behavior).

Attorneys:
The same problems as above occur. Considering statues of professional behavior the statues of national and international bar associations have to be taken into account:
	
-International bar associations: 
		CCBE:
All the national bars and law societies of the European Union and the European Economic Area are members of the CCBE
http://www.ccbe.org/en/documents/positions_en.htm#moneylaundering

the International Bar Association (IBA), see
http://www.ant-moneylaundering.org
(The International Bar Association Money Laundering Forum)
the Union Internationale des Avocats (UIA)
the American Bar Association (ABA)
the Japanese Federation of Bar Associations (JFBA)

		- national bar associations
	  
The multitude of these organizations may serve as any indicator to the problems of diverging statues, enforcement practices etc.

b. 	When do these secondary players "cross the line"? What are the liabilities and the rules of professional ethics?

They definitely cross the line when Criminal Law is broken.
Referring to the Legislation in the European Community the implications of the SECOND EU MONEY LAUNDERING DIRECTIVE can serve as an example.

http://www.anti-moneylaundering.org/countrylisting.asp
(The International Bar Association Money Laundering Forum with details about Germany)

“Problems for lawyers arise not only with the rules of the Money Laundering Act. Separate from this new law the legislation has created a criminal offence of money laundering described in § 261 of the traditional German Penal Code. The new penal regulation was put in force in 1992. The statutory definition of this offence is extremely wide. It includes many 
activities of persons who assist in the business of money laundering without knowing exactly the facts. If anybody has contact with “infected money”, he runs the risk of committing a crime. Money laundering is possible as a result not only of drug trafficking, but also of many other offences, even fiscal fraud. There is no exemption for any profession. Every lawyer runs the risk of being punished if he gets in contact with the money of his client who could be under suspicion from an earlier crime. The problem has been discussed for ten years. Now the highest criminal court in Germany (Bundesgerichtshof) sentenced two lawyers for violation of § 261 Criminal Code. The lawyers had accepted “infected” money as fees for defending their clients in a criminal case.”

-	Apart from that by breaking rules set up by professional organizations 
(i.e.: statue of international or national bar associations, policies).
		
The liabilities and rules of professional ethics:

	The Sarbanes Oxley Act may be used as a reference for defining those terms:
“Code of ethics means such standard as are reasonably necessary to promote
honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; full, fair, accurate, timely, and understandable disclosure in the periodic reports required to be filed by the issuer, and compliance with applicable governmental rules and regulations.”

For a similar set of rules set up by an organization see the Bundesrechtsanwaltskammer: brakstandesregelngeldwaesche.pdf

2. 	If and when we move to "All Crimes" Anti-Money Laundering Legislation, how will the role of secondary players change? When is Civil Tax Avoidance "All Crimes"? When is Criminal Tax Avoidance "All Crimes"??

a)	Change of role:
They can and will be punished according to the provisions of law. 

b)	When is Civil Tax Avoidance “All Crimes”   

The United States and other nations are victims of tax evasion schemes 
      that use various financial centers around the world and their bank secrecy 
      laws to hide money from tax authorities, thus undermining legitimate tax 
      collection. Financial centers that have strong bank secrecy laws and weak 
      corporate formation regulations, and that do not cooperate in tax 
      inquiries from foreign governments, are found worldwide. These financial 
      centers, known as "tax havens," thrive in providing sanctuary for the 
      deposit of monies from individuals and businesses that evade the payment 
      of taxes in their home jurisdictions and allow them to keep the money they 
      have deposited from the knowledge of tax authorities. Billions of funds on 
      which tax is properly due, denominated in various currencies, are held on 
      deposit in these tax havens. 
      This demonstrates that civil tax avoidance is already considered to be all 
crimes. 

c)	Criminal Tax Avoidance:
This term implies that tax avoidance is a criminal act therefore it definitely is all crimes.

3. When is the attorney, banker, accountant and trustee a "gatekeeper" and
what are the legal consequences of being a gatekeeper??

There is a growing concern that criminals are increasingly enlisting the services of unethical lawyers, accountants and other  professionals to help them discover and manipulate new money laundering opportunities. (FATF Report 2003/2004 S.50).

The term “gatekeeper” has frequently been used to describe the independent professionals who serve investors by preparing, verifying, or assessing the disclosures that they receive. Examples of gatekeepers include:
(1) the auditor who provides its certification that the issuer’s financial
statements comply with generally accepted accounting principles;
(2) the debt rating agency that evaluates the issuer’s creditworthiness; 
(3) he securities analyst who communicates an assessment of the corporation’s
technology, competitiveness, or earnings prospects;
 (4) the investment banker who furnishes its “fairness opinion” as to the pricing of a
merger; and 
(5) the securities attorney for the issuer who delivers an opinion to the underwriters that all material information of which the attorney is aware concerning the issuer has been disclosed properly. The underwriter in an initial public offering also performs a gate keeping function, in the sense that its reputation is implicitly pledged and it is expected to perform due diligence services.
Structurally, gatekeepers are independent professionals who are so positioned that, if they withhold their consent, approval, or rating, the corporation may be unable to effect some transaction or to maintain some desired status.

The legal consequences of being a gatekeeper depend on the area of jurisdiction. 
In the European Community the  ratification of the Second Directive on Money laundering changed the German Criminal Code, so that “gatekeepers” esp. attorneys can be punished.

4. Knowing Your Client?
	Becomes a necessity, once “All Crimes” Money Laundering Legislation is imposed.
	Until then it must be a policy of any honorable businessman or entity.
 
 5. Suspicious Activities Reporting (SAR), Professional Privilege and
Statutory Confidentiality - What Must You Do and When?

As soon as one does receive information that indicates that a customer or client might be a money launderer or terrorist financier information this information has to passed law enforcement authorities.

6. When Are You "Tipping Off" Your Client? What are the Consequences? How to
Avoid the "Catch 22" of "Tipping Off" and Professional Responsibility?

Companies should be very conscious of their clients’ confidentiality concerns. This means that even in cases where they deem the release of client information to be appropriate, companies should always make sure that only the appropriate, relevant, and necessary information is disclosed. 
It is therefore important to have internal policies and procedures that specifically address situations where the government requests client information. Specifically, client information should only be released upon receipt from the government of a written request for information along with reasons for this request. 

Module 4B: Players, Primary, Secondary, Government & Organizations - Criminal Entrepreneurs in Africa

                                                                   Written by R. LeWayne Johnson, J.D.

Contents:  (1) Overview:  RICO and Case law definition of Enterprises; (2) Committee on International Relations views of Crime Enterprises in Africa; (3) Primary Players; (4) Secondary Players; (5) Gate Keepers & Government    

OVERVIEW

 18 U.S.C.S. § 1961 provides that “enterprise” includes any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity.

Further, 18 U.S.C.S. § 1962 makes it unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity or collection of unlawful debt.
 
In the furtherance of this concept, the U.S. Supreme Court ruling in U.S. v Turkette, 452 U.S. 576 (1981), where an individual and several others were indicted, among other things, on the charge that they conspired to conduct and participate in the affairs of an enterprise engaged in interstate commerce through a pattern of racketeering activities.  The indictment described the enterprise as “a group of individuals associated in effect for the purpose of illegally trafficking in narcotics and other dangerous drugs, committing arsons, utilizing the United States mails to defraud insurance companies, bribing and attempting to bribe local police officers, and corruptly influencing and attempting to corruptly influence the outcome of state court proceedings”.  This description of the group being ruled upon by the Supreme Court paralleled the statutory definition put forward by 18 U.S.C.S. § 1961.  

The Defendant was convicted under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C.S. §§ 1961-1968, for conspiracy to conduct and participate in the affairs of an enterprise, engaged in interstate commerce, through a pattern of racketeering activities.  The enterprise conducted illegal activities.  Where the appellate court reversed the judgment and held that the term “enterprise” as used in RICO applied to legitimate enterprises, not illegitimate enterprises, the Supreme Court reversed the appellate court’s judgment.  The Court ruled that the language and structure of RICO did not limit its application to legitimate enterprises.  Further, the Turkette Court ruled, that the legislative history indicated that Congress intended the term “enterprise” to include legitimate and well as illegitimate enterprises.

Committee on International Relations views of Crime Enterprises in Africa

Using the statutory and case law definition provided only as a backdrop while realizing that U.S. statutes and court decisions are not controlling in Africa, we proceed.

International crime in today’s society commands an estimated $1 trillion in business revenue. While the Mafia, cocaine cartels, and other criminal organizations may be better known, crime organizations are becoming big business in Africa.

Primary Players

The main sources of criminal proceeds in South Africa are generated by organised crime groups, which engage in narcotics and abalone smuggling, vehicle theft, arms and human trafficking, and mineral and precious stone trafficking.  One specific criminal operation tracked to South Africa is the use of “419” fraud schemes.  These schemes remain a threat, as well as other types of fraud using counterfeit cheques, credit cards, and pyramid schemes.  Violent crimes such as robbery and hijacking are also concerns.  The levels of serious crime have stabilised over the past several years.  But officials indicate that drug trafficking has been increasing at a high rate. African criminal organizations, to include the Nigerian drug cartels - which are among the most sophisticated in the world – are wreaking havoc throughout the world.  South African police estimate that their country is home to more than 190 criminal organizations, many of which are sophisticated and international in scope.  Swaziland is becoming a haven for drug traffickers and for gunrunners.1  

Criminal enterprises use several means to launder their proceeds in South Africa.  Included are the purchase of properties and goods (ranging from clothes to vehicles and real estate), the establishment of companies and trusts for laundering the proceeds of crime, the misuse of businesses, the use of casinos, and using the informal, cash-based sector.  The money laundering investigations that have occurred involved predicate offences of fraud, theft, corruption, racketeering, and gambling. 

Sophisticated criminals abuse front businesses and shell businesses to explain their affluence. 

Cash proceeds are often retained in cash form and it sometimes changed into foreign currency by foreign crime syndicates.  These criminal enterprises regularly abuse financial institutions in their laundering schemes, for instance by depositing their proceeds in bank accounts of family members or by purchasing life insurance policies.  The informal sector of the economy appears to be vulnerable to abuse by launderers and in a number of cases the front business of the criminal enterprises were operating in the informal sector.2  

 In 1992, South Africa government passed a statute that criminalized Money laundering.  Its initially was criminalized for drug trafficking.  However, the scope of the offence was broadened in 1996.  Currently, the main statutes are the Prevention of Organised Crime Act 1998 (POCA) and the Financial Intelligence Centre Act 2001 (FICA).  Although certain financial sector obligations existed under previous legislation, the FICA creates a broad and more organised framework of anti-money laundering measures.3 

According to the POCA 1998, predicate crimes for money laundering now apply to all underlying “unlawful activity”.  This definition covers crimes both within and outside of South Africa.  Further, POCA 1998 covers not only all criminal offences, but also other activity that contravenes South African law.  The offence applies to “own funds” laundering, acts committed intentionally (actual knowledge) or negligently (“ought reasonably to have known”).  This is also defined to include belief that a fact is reasonably possible.  Criminal liability also extends to legal entities, and there are severe sanctions for committing an offence. 

Secondary Players

United States law enforcement authorities have observed that as money laundering schemes become more complex, the perpetrators turn to the learned expertise of attorneys, accountants, consultants and agent representatives to aid them in the movement of illegal currency.  These professionals, using shell corporations, nominees and fictitious records, devise elaborate paper trails to disguise the true source of illegal income.  During Fiscal Years 1999 and 2000, 131 attorneys, accountants and consultants were sentenced as a result of money laundering convictions. 

Similar to the United States investigative mechanism used to identify these secondary players, South Africa has a number of agencies that investigate and prosecute cases involving money laundering.  The National Prosecuting Authority (NPA) provides a national framework for prosecutions.  Within the NPA, the Directorate of Special Operations (DSO), also known as “the Scorpions,” investigates and prosecutes a range of more serious cases.  The NPA’s Asset Forfeiture Unit (AFU) supports the police and other law enforcement structures in all aspects of forfeiture.  The South African Police Service (SAPS) investigates criminal activity generally, and has allocated the responsibility for investigating money laundering to specific units.  The South Africa Revenue Service (SARS), which includes the Customs Service, is responsible for revenue collection and the investigation of tax evasion and evasion of customs duties, and works closely with law enforcement agencies on money laundering matters.   

South Africa’s Government has granted investigators adequate legal means to obtain bank records and other information and evidence regarding alleged offences.  Investigators also have sufficient legal tools for a wide range of investigative techniques, including controlled delivery, undercover operations, and wiretaps. 

While the offence of money laundering is broadly worded and both investigative and detection agents have been established to detect the activities of these South African criminal enterprises, it is a matter of concern that there have been only two money laundering convictions since 1996.4 

Gatekeepers/Government 

In the United States (U.S.), pursuant to the 1999 Strategy, an interagency working group was created to examine the responsibilities of professionals, such as lawyers and accountants, with regard to money laundering.  The 2000 Strategy directed the working group to continue its review and to make recommendations—ranging from enhanced professional education, standards or rules, to legislation—as might be needed.  In April 2000, a meeting of representatives from the G-8 countries was convened in Washington, D.C. to discuss this issue. Because of the difficult legal and policy issues involved when considering the responsibilities of lawyers and accountants in this area, the working group is continuing to study this issue and prepare recommendations for the Steering Committee in 2001.

Similar to the U.S., the South Africa government has broad powers to provide a wide range of mutual legal assistance (MLA) and extradition related to money laundering matters, and can provide MLA even where there is no dual criminality.  Thus, it can exchange information relating to terrorist financing investigations, but cannot provide other types of assistance such as asset seizure or extradition for terrorist financing.  South Africa has acceded to the 1988 Vienna Convention, has ratified the 1999 UN Convention on the Suppression of Terrorist Financing, and is working to ratify the 2000 Palermo Convention.  It has also entered into many bilateral treaties and agreements, either for MLA or at a law enforcement level. 

Under the POCA 1998, South Africa has mandated that all businesses that suspect that property was the proceeds of an unlawful activity to make a report to the South African Police Service.  Further, under section 29 of the Financial Intelligence Centre Act 2001 (FICA), which came into effect on 3 February 2003, all businesses are required to report to the Financial Intelligence Centre (FIC) cases where they suspect that property is the proceeds of an unlawful activity.  Additionally, any transactions that have no apparent business or lawful purpose, are reportable under the Act where they are relevant to tax evasion, or are otherwise related to money laundering.  The reporting obligation is therefore very broad.  Similarly, the legal provisions concerning protection from proceedings, and no “tipping-off” are comprehensive.5   

ANTI-MONEY LAUNDERING: The Players – Primary, Secondary, Governments and Organizations

Haidar (Haggar) Alsaleh

	The United Nations and other international organizations such as Financial Action Task Force (FATF) had always recognized the danger of organized crimes of drugs trafficking as well as money laundering activities and as of recently organized crimes relating to terrorism activities.
	The strong reason for the international communities involvement in combating criminal activities by organized groups is the view that one country will not be able to fight this kind of crimes without the cooperation of the international communities.
	These groups include disciplined and savvy individuals. They run like a corporation with strict rules of conduct. The rule of conduct is so thorough that some organizations apply these rules literally for dealings among themselves, such as the following Thieves; Code example:
	A thief is bound by the Code to:
		1. Forsake his relatives – mother, father, brothers, sisters….
		2. Not have a family of his own – no wife, no children; this does not, however, preclude him from having a love.
		3. Never, under any circumstances work, no matter how much difficulty this brings; live only on means gleaned from thievery.
		4. Help other thieves – both by moral and material support, utilizing the commune of thieves.
		5. Keep secret information about the whereabouts of accomplices (i.e., dens, districts, hideouts, safe apartments, etc.).
		6. In unavoidable situations (if a thief is under investigation) to take the blame for someone else’s crime; this buys the other person time of freedom.
		7. Demand a convocation of inquiry for the purpose of resolving disputes in the event of a conflict between oneself and other thieves, or between thieves.
		8. If necessary, participate in such inquiries.
		9. Carry out the punishment of the offending thief as decided by the convocation.
		10. Not resist carrying out the decision of punishing the offending thief who is found guilty, with punishment determined by the convocation.
		11. Have good command of the thieves’ jargon (“Fehnay”).
		12. Not gamble without being able to cover losses.
		13. Teach the trade to young beginners.
		14. Have, if possible, informants from the rank and file of thieves.
		15. Not lose your reasoning ability when using alcohol.
		16. Have nothing to do with the authorities (particularly with the ITU [Correctional Labor Authority], not participate in public activities, nor join any community organizations.
	17. Not take weapons from the hands of authorities; not serve in the military.
	18. Make good on promises given to other thieves.

Russian Connection

	Of particular interest is the Russian organized crime. This group is with large amounts of money as a result of looting, fraud, extortion, and other criminal activities. These groups are taking advantage of unregulated and secretive Caribbean banks to launder their money. They use elaborate schemes and some not much elaborate but taking advantage of the secretive banking systems.

“St. Maarten in the Netherlands Antilles is a duty-free zone, and the relative lack of customs formalities makes it easier to bring in large amounts of cash…. The government recently enacted legislation against money laundering. But according to a March U.N. study of money laundering in the Caribbean, reporting of suspicious transactions is still voluntary in St. Maarten. The same study found 450 banks in the Cayman Islands with assets of about $400 billion, or about $15 million for each of the nation’s 26,000 residents. Only 68 of the offices have staff in the Cayman Islands, the study said, while ‘the vast majority have representative offices or brass plate offices, and some only exist on paper.’ While the problem is said to be widespread, U.S. and British officials are focusing their concern over Russian organized crime activities on Antigua. Several Caribbean law enforcement officials said they no longer share narcotics or money laundering intelligence with the Antiguan government. ‘Everything we give them is compromised,’ said one Caribbean official.”
	These Russian groups are so connected that some of their activities related to drug trafficking from South America as well as other groups such as the Italian Mafia. Members of this organized group include previous government and KGP officials.

Narcotics

	Even though trafficking in narcotics is a serious business, sometimes it is as innocent as satisfying the daily necessities of life, as in the case of bartering narcotics in Pakistan and Afghanistan for foodstuffs such as vegetable oils.
	Many methods are used to clean this kind of money, one of the key ones is where a broker would have a pool of funds in the target country such as the USA, where the broker sells or exchanges the money for legitimate trades.
	Another purpose the authorities have interest in the narcotic money is Taxation. As an example, “The IRS Narcotics Related Financial Crimes Program seeks to reduce the profits and financial gains of narcotics trafficking and money laundering organizations that comprise a significant portion of the untaxed underground economy.”

Sicilian/Italian Mafia

	Also known as (La Cosa Nostra) originating from the Central and Eastern Europe. These groups are very efficient in trafficking heroin and cocaine and also use its worldwide network advantage in the U.S. and the rest of Europe.
	This group also is known to be the money broker for less known groups. Or as a partner in crime for other groups such as the Russian Mafia. The Italian Mafia in recent years are building on the success of prior years in many countries around the world including their favorite target businesses such as the construction industry, utilizing resources from the many other mafia establishments, to buy material supplies.

Turkish Mafia

	Turkey is becoming a major hub for drug trafficking as well as money laundering in and out of Europe. The majority of the European heroin trade passes through Turkey. South Cyprus and North Cyprus, a neighboring jurisdiction that is known to have lax laws and open borders making it much harder for law enforcment to stop this new avenue for laundering money.

Chinese Mafia

	Chinese Mafia also known as Triads specializes in endangered species trade. This is a large and very disciplined network of individuals. New trends seem to be the underground market to transfer money between Taiwan and China. Another outlet for the money laundering is Vietnam where it is believed that the Chinese are investing and sponsoring large projects in that country.

Japanese Mafia – Yakusa

	The law in Japan with regards to money laundering seems to be behind the time. Money Laundering Laws are lacking in South East Asia, but Japan seems to be exceptionally behind the time.
	This group is considered to be one of the historical groups similar to the Chinese Mafia.

Colombian Narco-Traffickers

	Over 640 metric tons of cocaine is trafficked out of South America and into the United States every year. Colombian heroin account to a good part of that and demand higher prices since it is considered better quality, this results in over $2.5 billion funneled back into Columbia.
	These is so much money involved that unusual cases are detected in unexpected entities: “Unusual money laundering cases are becoming more commonplace as the lure of such large sums of money become more and more tempting. Just last month in New York City, a rabbi was indicted for taking cash proceeds from Colombian drug traffickers and, for a 15 percent commission, running them through the bank accounts of a synagogue and a religious school. A second rabbi was indicted in the same case for laundering money by writing checks from the same accounts to businesses that were known fronts for the Colombian drug dealers. The rabbis were also indicted for providing $3.4 million from U.S. and Swiss bank accounts to buy an aircraft for the Colombian drug traffickers.”
	It is estimated that the average immigrant family from Colombia in New York City earns $27,000 a year before taxes; while the amount sent to Colombia by each family each year is over $50,000, indicating that money transfers is used for laundering purposes.

Jamaican Posse

	They are known to be as a large and multi-state drug trafficking organization mostly involved in the Crack market.
	There are two basic Jamaican Posses, the “Spangler Posse” and the “Shower Posse.” “All Posses are politically aligned with either the People’s National Party (PNP) (socialistic tendencies rumored to be aligned with Fidel Castro) or the Jamaican Labor Party (JLP) (reportedly aligned with the U.S. and CIA). The Spangler Posse is aligned with PNP, and the Shower Posse is aligned with JLP.”
	Posse members are known for violent activities that include drive by shootings, targeted towards other competing gangs or anyone that comes between them and their goal.

Gatekeepers: Attorneys, Accountants and Counselors

	Many countries such as the U.S. and the UK making intermediary individual also responsible for the act of money laundering.
	The new recommendation from the FATF includes revised plan for its 40 Recommendations against money laundering. This revision is the first in 14 years so as to include anti-money laundering measures for non-bank financial businesses such as real estate agents, dealers in precious stones and metals, accountants and lawyers, and trust and company services providers:
	1. Real estate agents – when they are involved in transactions for their client concerning the buying and selling of real estate.
	2. Dealers in precious metals and dealers in precious stones – when they engage in any cash transaction with a customer equal to or above the applicable designated threshold.
	3. Lawyers, notaries, other independent legal professionals and accountants when they prepare for or carry out transactions for their client concerning the following activities: Buying and selling or real estate; Managing of client money, securities or other assets; Management of banks, savings or securities accounts; Organization of contributions for the creation, operation or management of companies; or Creation, operation or management of legal persons or arrangements, and buying and selling of business entities.
	4. Trust and company service providers when they prepare for or carry out transactions for a client concerning the activities listed in the definition.

Corrupt Government Officials

	Corruption used to be internal problem to the country with the corrupt official. But in this modern ear this is no longer the case since violation of the internal laws or lack of it, could be easily transformed into an international problem.
	Official corruption is a problem that most commonly is associated with South American countries. But a new trend developing where corrupt officials are appearing in Eastern Europe and the Old Russian Republics.
	It is understood that each country must have strong laws and better enforcement against corruption as such the U.S. had become the twentieth nation to ratify the Inter-American Convention Against Corruption. “This Convention binds signatory nations to criminalize a wide range of corrupt acts, including bribery of public officials, and was the first multilateral agreement against bribery to be adopted anywhere in the world.” Also 34 nations signed and 23 countries have ratified the Anti-Bribery Convention of the OECD, including the U.S. This convention monitors governmental implementations of anti-bribery legislation with independent official entities such as the U.S. Inspector General.

CHAPTER 3: TRENDS AND TYPOLOGIES IN MONEY LAUNDERING

FATF 1990

Typologies:  use of cash and need for cash conversion into larger denominations; banks and banking systems; use of currency conversion ATM’s; currency conversion centers; precious metal exchanges; cash shipments abroad; use of off-shore corporations and other corporate entities.

Solutions:  The Vienna Convention of 1988 dealing with drug trafficking and money laundering; The Basal Statement of Principles of 1988 outlining ways to combat money laundering through the banking system; various national programs outlawing money laundering; bank secrecy laws and reporting requirements; suspicious transaction reporting and reporting transactions over a certain amount; 40 Recommendations.

Trends:  Increased drug trafficking.

Geographic locations and concerns:  Southeast Asia, South America; drug trafficking.  Initial membership consists of Summit participants (United States, Japan, Germany, France, United Kingdom, Italy, Canada, and the Commission of the European Communities) and eight additional countries (Australia, Austria, Belgium, Luxembourg, Netherlands, Spain, Sweden and Switzerland).

FATF 1991

Typologies:  use of cash and need for cash conversion into larger denominations; banks and banking systems; use of currency conversion centers; precious metal exchanges; cash shipments abroad; purchase of casino chips; purchase of antique firearms; purchase of property through legal profession; “double invoicing”.

Solutions:  Agree to continue FATF for 5 years; 40 Recommendations implementation by all members, with most members already implementing the Recommendations through legislative means; proposal of “blacklist” of non-cooperating countries of several or all of the Recommendations, but placed responsibility of such a list in each jurisdiction based on local laws and concerns; cooperation between law enforcement agencies; reporting requirements; development of a “contact list” with the UNIDCP to facilitate cross-border searches and seizures; development of a “white list” of FATF-compliant countries to assist financial institutions; peer pressure; self-monitoring; 

Trends:  Increased drug trafficking; use of regulatory havens.

Geographic locations and concerns:  Southeast Asia, South America; regulatory havens (mostly dependent or loosely associated with FATF members); drug trafficking.  Membership increased to include: Denmark, Finland, Greece, Hong Kong, Ireland, New Zealand, Norway, Portugal, Turkey and the Gulf Co-operation Council.

FATF 1992

Typologies:  use of cash and need for cash conversion into larger denominations; banks and banking systems; currency conversion centers; precious metal exchanges; cash shipments abroad; lawyers using bank secrecy and attorney/client privileges to protect launderers.

Solutions:  Formal association with OECD; implementation of 40 Recommendations; only ten FATF members ratified Vienna Convention out of twenty required for formal implementation; mutual evaluation process; interpretive notes to the Recommendations.

Trends:  Non-compliance of non-bank institutions and reporting requirements for fiduciary transactions.

Geographic locations and concerns:  Caribbean; Central and Eastern Europe; Pacific; membership increased to all OECD countries with inclusion of Singapore and Iceland.

FATF 1993

Typologies:  same continued use of previous typologies discussed, such as use of cash and need for cash conversion into larger denominations; banks and banking systems; use of currency conversion ATM’s; currency conversion centers; precious metal exchanges; cash shipments abroad; use of off-shore corporations and other corporate entities; use of retail shops and import-export companies; control of legitimate established companies to commingle funds; increase in the laundering of non-drug smuggling proceeds from arms smuggling and white collar crimes.

Solutions:  Annual self-assessment exercises of members and detailed mutual evaluation process of each member to monitor compliance with implementation of the 40 Recommendations; additional interpretive notes to the 40 Recommendations rather than changing them; use of controlled delivery as law enforcement technique; cooperation with SWIFT for identifying originator of wire transfers.

Trends:  Increased arms smuggling and white collar crime.

Geographic locations and concerns:  Caribbean; Central and Eastern Europe; Asia.

FATF 1994

Typologies:  use of cash and need for cash conversion into larger denominations; banks and banking systems; use of currency conversion ATM’s; currency conversion centers; precious metal exchanges; cash shipments abroad; use of off-shore corporations and other corporate entities.

Solutions:  Missions and seminars in non-member financial centers and creation of a FATF for Caribbean States; close cooperation with UNIDCP and INTERPOL; nearly all members have enacted laws making money laundering an illegal act; increased transparency of corporate bodies.

Trends:  Increased arms smuggling and white collar crime; trafficking in animal hormones; prostitution; joint ventures with money launderers and financial professionals; underground banking structures.

Geographic locations and concerns:  Eastern Europe, South America.

FATF 1995

Typologies:  casinos; real estate purchases; corruption of banking officials; underground banking systems in Asia; bankruptcy, financial and advance fee fraud; single premium life insurance policies; import-export businesses.

Solutions:  Ongoing cooperation between member jurisdictions sharing crime information; seizing assets; recognizing money laundering as an extraditable offense; coordinating with Western Union for money transfers.

Trends:  Russian organized crime; use of non-financial businesses (gambling houses; bookies, antique dealers); increased uses of the bureaux de change.

Geographic locations and concerns:  Eastern Europe and Russia; creation of the FATF Secretariat for the Asian Region.

FATF 1996

Typologies:  use of cash and need for cash conversion into larger denominations; banks and banking systems; use of currency conversion ATM’s; currency conversion centers; precious metal exchanges; cash shipments abroad; use of off-shore corporations and other corporate entities.

Solutions:  Extending money laundering predicate offenses beyond narcotics trafficking; mandatory suspicious transaction reporting systems; expanded recommendations for identifying customers; all non-bank financial institutions (bureaux de change) should be subject to the same anti-money laundering laws or regulations as other financial institutions; easing the burden of proof regarding the illicit origin of funds.  40 Recommendations revised.

Trends:  use of new technologies for instantaneous, anonymous transactions.

Geographic locations and concerns:  Eastern Europe, Russia, Turkey.

FATF 1997

Typologies:  banks and banking systems; currency conversion centers; use of financial professionals; e-money.

Solutions:  Increasing focus on money laundering in non-FATF members; new SWIFT optional data formatting; providing feedback to financial institutions; creation of FATF website.

Trends:  drug trafficking; use of e-money (stored value cards and internet/web based transactions).

Geographic locations and concerns:  Eastern Europe, Russia, Turkey, Middle East.

FATF 1998

Typologies:  use of cash and need for cash conversion into larger denominations; banks and banking systems; use of currency conversion ATM’s; currency conversion centers; precious metal exchanges; cash shipments abroad; use of off-shore corporations and other corporate entities.

Solutions:  establishment of world-wide anti-money laundering network through expansion of FATF membership, closer cooperation with FATF-based bodies, and closer cooperation with relevant international bodies; almost all members of FATF are in compliance with the 40 Recommendations; policies for dealing with non-complying FATF members

Trends:  use of gold market; conversion of European currencies into Euro; additional cooperation with other groups (UN, Council of Europe), etc.

Geographic locations and concerns:  Eastern Europe, Russia, Turkey, Middle East.

FATF 1999

Typologies:  banks and banking systems; use of currency conversion ATM’s; currency conversion centers; precious metal exchanges; use of off-shore corporations and other corporate entities.

Solutions:  All members but one have ratified Vienna Convention of 1988, and all have implemented the money laundering components of the Convention.  Continuation of self and mutual monitoring, showing steady progress in implementing 40 Recommendations.  Cooperation with IFAC to bring awareness of FATF to accountants.  Increase membership of FATF as long as certain minimum standards were met by potential new members.

Trends:  Increased use of gold market and internet banking.

Geographic locations and concerns:  Japan still had not implemented over half of the 40 Recommendations, and Austria still had anonymous passbook savings accounts.  Concerns over money laundering with the introduction of the euro, particularly from 1/02 to 6/02.  Increase in the use of gold in the hawala/hundi parallel banking systems; use of internet banking; inability to obtain information on beneficial owners of foreign corporations.  Increased use of professionals to create, run, and add a layer of respectability to money laundering schemes, and very little in the way of suspicious activity reporting requirements on these professionals.  Argentina, Brazil, and Mexico were invited to attend subsequent FATF meetings.

FATF 2000

Typologies:  banks and banking systems; currency conversion centers; precious metal exchanges; use of off-shore corporations and other corporate entities; import/export.

Solutions:  Continuation of development with FATF-style regional bodies throughout the world, including CFATF, APG, PC-R-EV, ESAAMLG, and ECOWAS.  UN Convention against Transnational Organized Crime earned FATF’s support.  Twenty five criteria approved by FATF for identifying non-cooperative nations.

Trends:  On-line financial transactions (purchases, banking); alternative remittance systems (hawala/hundi, Black Market Peso Exchange, and Chinese/East Asian systems); growing use of corporations and financial professionals; trade-related laundering not associated with alternative remittance systems.

Geographic locations and concerns:  Argentina, Brazil, and Mexico were made members of FATF.

FATF 2001

Typologies:  banks and banking systems; currency conversion centers; precious metal exchanges; use of off-shore corporations and other corporate entities; import/export.

Solutions:  Continuation of development with FATF-style regional bodies throughout the world, including CFATF, APG, PC-R-EV, ESAAMLG, ECOWAS, and GAFISUD.  UN Convention against Transnational Organized Crime earned FATF’s support.  Twenty five criteria approved by FATF for identifying non-cooperative nations; ongoing development of financial intelligence units (FIU) and suspicious transaction reporting (STR).  Obtaining records from the ISP for on-line banking.   Including lawyers with other financial intermediaries when their services are used for those purposes.

Trends:  Growing use of the internet, use of trusts.  Discussion on whether terrorist groups fall under money laundering laws or other laws.

Geographic locations and concerns:  Continued development of FATF-type of groups and other international bodies.

FATF 2002

Typologies:  Use of bearer securities.

Solutions:  Expansion of mandate to fight terrorism-linked money laundering.  Eight special recommendations against terrorism were adopted in addition to the 40 Recommendations previously provided.  Voluntary self-assessment exercise by all nations regarding implementation of eight special recommendations.  Egmont group of FIU’s given observer status; EU amends 1991 European Council Directive on Prevention of the Use of the Financial System for the Purpose of Money Laundering.  INTERPOL providing additional information to US and other agencies regarding terrorist related money laundering.

Trends:  Use of professionals; use of euro.

Geographic locations and concerns:  South Africa invited to join.

FATF 2003

Typologies:  Use of non-profit organizations (NPO) as source of funneling funds to terrorist groups.

Solutions:  40 Recommendations revised a second time to address terrorist financing, along with the Eight Special Recommendations.  Emphasizing due diligence, as well as professionals.

Trends:  Emphasis on tracking terrorist funding.

Geographic locations and concerns:  South Africa and Russia members.

Module 3B: Techniques, Typologies and Trends in Money Laundering*
 
Contents:  (1) International and Local Definition for Money Laundering; (2) Stages of Money Laundering; (3) 2003-2000 FATF Reports on Typologies and Trends in Money Laundering ; (4) Conclusion   

The aim of this submission is two fold:

1.	To define money laundering both on the national and international arena. 
2.	To identify the techniques, typologies and trends outlined in the FATF reports depicting money laundering activities.

International and Local Definition for Money Laundering

Money laundering according to the definition in the “International Guide to Money Laundering: Law and Practice” is “…the criminal process whereby the proceeds from crime are hidden and transformed by attempts to integrate them into the financial system in order to give them the appearance of legitimate funds”.1  

Activities and persons constituting money laundering as defined by the U.S. Money Laundering Statute, 18 USC §1956 are as follow in pertinent part:

 (a)(1) Whoever, knowing that the property involved in a financial transaction represents the proceeds of some form of unlawful activity, conducts or attempts to conduct such a financial transaction which in fact involves the proceeds of specified unlawful activity – 

         (A)(i) with the intent to promote the carrying on of specified unlawful   
                activity; or 
              (ii) with intent to engage in conduct constituting a violation of section  
                    7201 or 7206 of the Internal Revenue Code of 1986; or 

         (B) knowing that the transaction is designed in whole or in part – 

               (i) to conceal or disguise the nature, the location, the source, the  
                    ownership, or the control of the proceeds of specified unlawful     
                    activity; or 
              (ii) to avoid a transaction reporting requirement under State or Federal    
                    law,… 
         
            (2) Whoever transports, transmits, or transfers, or attempts to transport, transmit,    
                  or transfer a monetary instrument or funds from a place in the United States to  
                  or through a place outside the United States or to a place in the United States 
                  from or through a place outside the United States – 

     (A) with the intent to promote the carrying on of specified unlawful activity; or 
     (B) knowing that the monetary instrument or funds involved in the    
           transportation, transmission, or transfer represent the proceeds of some 
           form of unlawful activity and knowing that such transportation,  
           transmission, or transfer is designed in whole or in part – 

          (i) to conceal or disguise the nature, the location, the source, the ownership,  
               or the control of the proceeds of specified unlawful activity; or 
         (ii) to avoid a transaction reporting requirement under State or Federal  
               law,….3

Stages of Money Laundering

Generally occurring in a series of transactions, money laundering is used to disguise the source of financial assets so that those assets may be used without compromising the criminals who seek to use the funds.  

The Financial Action Task Force on money laundering (FATF) defines money laundering as falling into three stages:

Placement: the process of placing, through deposits, wire transfers, or other means, unlawful proceeds into financial institutions;
Layering: the process of separating the proceeds of criminal activity from their origin through the use of layers of complex financial transactions; and 
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.4 

Techniques, Typologies and Trends Outlined in the FATF Reports 

The FATF report on money laundering typologies, outline trends and developments compiled by law enforcement experts from its member countries. 

The reports focus on several typologies to include securities being purchased or sold, accounts manipulated, in an effort to cleanse criminal profits; money launderers using foreign exchange dealers; the laundering of funds through reinsurance companies; casinos and insurance companies being used to launder monies; criminal groups smuggling cash across borders via purchasing businesses engaged in the shipment of goods and hiding dirty money inside the product and the use of non-profit and charitable organizations in addition to informal money or value transfer (IMVT) entities by criminal and terrorist organizations to launder money and illicit proceeds.

1.	2003

The core of the 2003 report was the FATF focus on the use of non-profit and charitable organizations by terrorist organization and other criminal organizations to launder money and illicit proceeds from illegal activities.  The report identified several methods employed by terrorists/criminals in converting charitable and Non-Profit Organizations (NPO’s) into money laundering vehicles.  One method is to establish an NPO with a legitimate purpose and use it to channel funds to the terrorist organization.  Another method identified in the report suggests that the terrorist organization would infiltrate an existing NPO, having a legitimate purpose and use their status in the NPO to funnel money into criminal ranks.  The FATF recommended an increase in the transparency of alternative remittance systems by encouraging national authorities by bringing them under some sort of oversight.
 
       2.  2002

The 2002 FATF report outlined a set of due diligence guidelines suggested for use by financial institutions in an effort to detect and monitor suspicious activities that have been identified in use to launder money by terrorist organizations and networks.  

The 2002 report further the vulnerability of international corresponding accounts of major financial institutions.  Money launderers to gain access into the financial markets often utilize correspondent accounts.  The FATF suggested that this activity took effect in the layering phase of money laundering.  

The FATF’s report drew a parallel between suspicious transaction reports (STR) and money laundering cases.  Such reports, according to the FATF are often the first-step in generating such cases.  

      3.  2001

The 2001 FATF report advocated that financial institutions implement the element of due-diligence of knowing your customer.  The 2001 report recommended that in an effort of curving money laundering, financial institutions develop and implement safeguards for investigating its customers.  By implementing the Knowing your customer strategy a financial institution could obtain information about the customer and the customer’s transactions in a way of ascertaining that funds being deposited into the various types of accounts lack an illicit origin. 

      4.  2000

The 2000 FATF’s report focused on the continuing use and abuse of alternative remittance systems by money launderers and criminal organizations.  The report revealed a new trend used for money laundering purposes during the annual typology exercise.  This trend was the use of easily obtained documents (by criminals) as a means of setting up accounts or other entities for laundering purposes.  The report cited temporary accounts as being another trend by criminals in laundering money.

Further, in the 2000 report FATF published its first list of jurisdictions deemed to be noncooperative in the global fight against money laundering (NCCT).  The 
FATF used the following criteria to determine what jurisdictions would go on the list:

•	Loopholes in financial regulations; 
•	Obstacles raised by other regulatory requirements; 
•	Obstacles to international cooperation; and, 
•	Inadequate resources for preventing and detecting money laundering activities.

Conclusion

The various reports concern countries that range from major drug producing and drug-transit countries, where drug control is a critical element of national policy, to small countries or entities where drug issues or the capacity to deal with them are minimal.  

Combating this progressive activity will require attacking it from at least two fronts:

•	Fighting money launderers and
•	Strengthening anti-money laundering regimes globally.

This strategy will reduce financial crime by depriving criminals of the means to commit other serious crimes.  Further 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. 

3 – FATF Discussion

	The Financial Action Task Force has annual typologies, or round table discussions, to review and discuss recent trends in the laundering of criminal proceedings, emerging threats, and effective countermeasures.

FATF – 1996-1997

Typologies (Discussions) Raised

	Determinative percentages of money laundering activities within certain regions are difficult to quantify. Rough estimates of the size of money laundering activities to the amount of legitimate activities as anticipated the year’s losses to illegal activity. They further discussed principle sources of illegal laundered proceeds including principle money laundering methods detected in banking, non-laundering institutions, and non-financial transactions. They expressed their concerns with non-FATF members due to their lack of counter-measures. Finally, E-funds transfers and whether there are difficulties in identifying the ordering customer in e-funds transfer transactions.

FATF – 1998

Typologies (Discussions) Raised

The FATF focused its discussion to implement specific measures on the new methods of payment – fertile for money laundering. For example, electronic purse systems (electronic transfer funds), banking on-line, and direct (distance) banking activities are emerging as new technological advances, in which have not been contemplated as to properly regulation. Discussions further included non-professional activities through fund transfer companies, emerging threats, and effective counter-measures. Finally, the committee continued discussion of regions without FATF members.
	Implementing counter-measures would include how the existing laws could be adopted as opposed to implementation of new legislation. Also, encouraging international assistance from other FATF members to assist with implementing counter-measures. Other segments of concern are the gold market, insurance sector. And money changing.

FATF – 1999

Typologies (Discussions) Raised

	The implementation of the single European currency (Euro), large denomination banknotes, offshore financial centers, and potential use of the gold market in money laundering operations dominated the discussions. Another issue was the new payment technologies such as SmartCards and electronic funds transfers allow users to transfer monies without being identified.
	Many proposed solutions were discussed. For example, requiring designated jurisdictions and countries to “… require owners of legal entities of offshore accounts to register ….” As to disclose such information to global, investigative agencies dealing with offshore accounts. As such, the Caribbean region remains an extreme concern of its offshore, financial centers and shell corporations. “The analysis and discussion of methods and trends virtually all FATF members countries began with analysis of suspicious transaction reports.”

FATF – 2000

Typologies (Discussions) Raised

	Online banking was discussed once again due to previous years concrete indicators. Further, practical counter-measures had not been fully developed as to discuss. However, one definite concern regarding online banking remains the decreased face-to-face interactions bank clients. Thus, substantially identifying the online customer remains more difficult. Other issues were company formation and agents and their services, and trade related activities and money laundering.
	But, the discussion of “alternative remittance systems” was important because the FATF has recognized different regions have methods of money laundering. Some examples are: Black market peso Exchange in North and South Americas. Another remittance system is the Hawala/Hundi, a traditional method of money laundering in south Asia and India. Such methods have been known to pre-date any Western methods of moving money illegally.
	The United States has proposed certain solutions to the alternative systems. For example, restricting such activities to authorized financial centers, imposing licensing requirements, and more thoroughly regulating business in the regions.
	As previously discussed, the FATF will seek assistance from its members to monitor activities within their own region.

FATF – 2001

Typologies (Discussions) Raised

	The topics of discussion varied from online banking and Internet casinos (internet gambling). The topic of Trusts was discussed along with other corporate vehicles dealing with money laundering. Also, the duties of lawyers, notaries, and certified accountants dealing with client consultation of financial services were discussed due to the increase of assistance from such professionals to launder illegal monies.
	Also know as “gatekeepers,” they will be held to a high standard to disclose any and all illegal activities. The role of case verses other payment methods in money laundering schemes. Finally, terrorist related monies by use of money laundering. On the recent events of 9/11 in the United States, terrorist financing has become more of an issue to prevent any future terrorist attacks by disrupting their finances.
	Certain countries such as Japan and Canada have reinforced their “anti-money laundering regimes” based upon the recommendations of previous FATF meetings. Other organizations such as the Eastern and Southern Africa Anti-Money Laundering Group have generated reliable information regarding money laundering in Africa and the Middle East.

FATF – 2002

Typologies (Discussions) Raised

	Terrorist financing led the discussions of concern at the annual meeting. “The FATF extended its remit to include terrorist financing and issued eight (8) Special Recommendations for national governments …” to deal with global financing of terrorist activities.
	Other issues were correspondent banking, bearer securities, negotiable instruments, and the introduction of the euro banknotes. The euro banknotes were mentioned once again and analyzed whether any vulnerabilities exists from the introduction of the monetary notes. However, the Eurozone members are confident the current anti-money laundering systems are adequate to “… detect any attempts to use the physical euro introduction to conceal laundering operations.”

FATF – 2003

Typologies (Discussions) Raised

	The topics of discussion included, once again, terrorist financing and money laundering through the securities sector. The gold/diamonds markets in regards to money laundering, insurance sector, and the use of credit/debit cards with money laundering.
	The sectors of gold and diamonds have become a new sector of concern for money laundering. According to FATF, it has determined, “… the primary sources of illegal funds laundered through such markets are illegal narcotics, organized crimes, and smuggling.”
	Finally, the insurance sector remains a major area of concern, in which will warrant further discussion in the future. Both this sector and securities sector has shown to be vulnerable due to the lack of money laundering training to the agents.

FATF – 2004

Typologies (Discussions) Raised

	The major issues of concern were terrorist financing by the use of wire transfers, non-profit organizations linked to terrorist financing, vulnerabilities of insurance companies of terrorist financing, politically exposed persons, and the role of “gatekeepers” and non-professionals dealing with client money laundering. Professionals such as accountants and attorneys are being closely monitored to ensure they do not provide any assistance to clients as to launder their monies. Furthermore, they are obligated to report any client misappropriation of monies or laundering of monies they have actual knowledge. The theme of terrorism dominated the majority of the meeting, especially the potential activities that may financially assist terrorists.
	The insurance sector and the “gatekeepers” remains a continued concern requiring stricter guidelines and continued commitment to “… encourage the development of information technology systems that could look for objective indicators….”

                               Anti-Money Laundering:  Analysis of the FATF Reports*

CONTENTS

EXECUTIVE SUMMARY

1.	2003 Analysis

2.	2002 Analysis

3.	2001 Analysis

4.	2000 Analysis

5.	1998 Analysis  

6.	1997 Analysis

7.	1996 Analysis

EXECUTIVE SUMMARY

The aim of this submission is to identify the following issues as they pertain to the FATF reports of the years 1996 to 2003:

•	Which typologies are raised in each report?
•	What are the proposed solutions?
•	What trends are identified in each report?
•	What geographic locations and concerns are mentioned in each report? 

The FATF report on money laundering typologies, outline trends and developments compiled by law enforcement experts from its member countries. 

The reports focus on several typologies to include securities being purchased or sold, accounts manipulated, in an effort to cleanse criminal profits; money launderers using foreign exchange dealers; the laundering of funds through reinsurance companies; casinos and insurance companies being used to launder monies; criminal groups smuggling cash across borders via purchasing businesses engaged in the shipment of goods and hiding dirty money inside the product and the use of non-profit and charitable organizations in addition to informal money or value transfer (IMVT) entities by criminal and terrorist organizations to launder money and illicit proceeds.

2.	2003

The core of the 2003 report was the FATF focus on the use of non-profit and charitable organizations by terrorist organization and other criminal organizations to launder money and illicit proceeds from illegal activities.  The report identified several methods employed by terrorists/criminals in converting charitable and Non-Profit Organizations (NPO’s) into money laundering vehicles.  One method is to establish an NPO with a legitimate purpose and use it to channel funds to the terrorist organization.  Another method identified in the report suggests that the terrorist organization would infiltrate an existing NPO, having a legitimate purpose and use their status in the NPO to funnel money into criminal ranks.  The FATF recommended an increase in the transparency of alternative remittance systems by encouraging national authorities by bringing them under some sort of oversight.
 
       2.  2002

The 2002 FATF report outlined a set of due diligence guidelines suggested for use by financial institutions in an effort to detect and monitor suspicious activities that have been identified in use to launder money by terrorist organizations and networks.  

The 2002 report further the vulnerability of international corresponding accounts of major financial institutions.  Money launderers to gain access into the financial markets often utilize correspondent accounts.  The FATF suggested that this activity took effect in the layering phase of money laundering.  

The FATF’s report drew a parallel between suspicious transaction reports (STR) and money laundering cases.  Such reports, according to the FATF are often the first-step in generating such cases.  

      3.  2001

The 2001 FATF report advocated that financial institutions implement the element of due-diligence of knowing your customer.  The 2001 report recommended that in an effort of curving money laundering, financial institutions develop and implement safeguards for investigating its customers.  By implementing the Knowing your customer strategy a financial institution could obtain information about the customer and the customer’s transactions in a way of ascertaining that funds being deposited into the various types of accounts lack an illicit origin. 

 
      4.  2000

The 2000 FATF’s report focused on the continuing use and abuse of alternative remittance systems by money launderers and criminal organizations.  The report revealed a new trend used for money laundering purposes during the annual typology exercise.  This trend was the use of easily obtained documents (by criminals) as a means of setting up accounts or other entities for laundering purposes.  The report cited temporary accounts as being another trend by criminals in laundering money.

Further, in the 2000 report FATF published its first list of jurisdictions deemed to be noncooperative in the global fight against money laundering (NCCT).  The 
FATF used the following criteria to determine what jurisdictions would go on the list:

•	Loopholes in financial regulations; 
•	Obstacles raised by other regulatory requirements; 
•	Obstacles to international cooperation; and, 
•	Inadequate resources for preventing and detecting money laundering activities.

      5.  1998

In 1998 the FATF report focused on the use of offshore financial centers (primarily bank secrecy locations) to launder illicit proceeds of criminal activity.  FATF identified various nations that have failed to cooperate with the OECD and FATF’s recommendations on compliance.

      6.  1997

The 1997 report focused on money laundering as being an aggressive and evasive activity.  The use of the internet and wire transfers, according to the FATF’s report by criminals was a new and emerging tool to launder illicit proceeds.

      7.  1996

The 1996 report by the FATF had as its main focus the vulnerability of the securities market(s).  The report spoke to criminals using the securities market(s) as a means of layering their illicit proceeds.   

•	What geographic locations and concerns are mentioned in each report? 

The various reports concern countries that range from major drug producing and drug-transit countries, where drug control is a critical element of national policy, to small countries or entities where drug issues or the capacity to deal with them are minimal.  

The 2003 INCSR assigned priorities to jurisdictions using a classification system consisting of three differential categories titled Jurisdictions of Primary Concern, Jurisdictions of Concern, and Other Jurisdictions Monitored. 

Module 3B: Techniques, Typologies and Trends in Money Laundering

Topic:		 1. Topic:
Module 3B: Techniques, Typologies and Trends in Money Laundering

Cyber-Crime, Electronic Money Laundering and Critical Infrastructure Protection
Corruption - Private and Public
PLEASE COVER ALL ISSUES LISTED ABOVE!
 
2. memo must be 3 pages long
 
3. deadline
17th august
 
1)	Cyber-Crime:
The Prefix “Cyber” relates to new technologies in general and especially the internet. 
At the beginning of the spread of the internet and the rapid development of new means of communication and interaction (e-mails, e-commerce etc.) based on the internet, the prefix “cyber” was used to generally refer to this rapidly developing area. Apart from the euphoria affiliated with it, there has also been a wide spread feeling of concern about the unforeseeable developments and implications of these utterly new techniques.
It has been already indicated that the prefix “cyber”, having a rather science-fiction like connotation, is these days mostly replaced by the term “e-“, which might be due to the fact that these new techniques easily found their way into common day-life and are nowadays rather seen as an useful replacement of, or better, an addition to well-known ways of interaction and communication. 
“Cyber-Crime” can therefore be understood as any crime related to these new techniques.
The FATF-reports show a similar development as outlined above. The early days were marked by a profound concern considering “cyber-crime” and it’s relation to money-laundering. But, with time progressing (and the slow down of the cyber hype), the reports focussed on the characteristics of these new techniques and their actual occurrence in money laundering schemes.
The Time of Awareness,  FATF-report 1996:  
”…. beyond conventional laundering techniques, the experts have become alert to new developments occurring in the financial sector which may present significant money laundering threats:…
(iii) Emerging Threats: Banking Sector
24.	In addition to the more familiar money laundering methods discussed above, the emergence of new payment technologies has presented new challenges. The banking and financial services industry has been developing and testing an array of new products, referred to generally as “cyberpayments,” designed to act as cash surrogates or to provide alternative means of effecting transactions….

29.		    	 At present, the experts have no evidence to suggest that cyberpayments technologies are being manipulated by criminal interests. Still, there was general agreement that this issue must be addressed directly. Given the speed with which the cyberpayments industry is developing, and the fundamental threat its abuse would pose to existing anti-money laundering mechanisms, the FATF cannot afford to wait until the launderers have already begun to exploit cyberpayments products. Rather, the experts were adamant that the FATF must be proactive, working with the vendors and users of cyberpayments technology to identify vulnerabilities, and to build the appropriate safeguards into system design and operation.”

The following reports referred to “cyber-crime(s)” more specifically with regard to money laundering itself, which shall be discussed in detail later, and not as means of producing illicit revenues.
FATF –Report 1998:
“Although many members stressed that there had been little innovation relative to laundering, it was generally found that the new technology systems were in a phase of steady development or even rapid expansion. In Sweden, one of the country’s largest banks now has 100 000 customers with an account on the Internet, with the same 24-hour services as those offered at the counter. An increasing number of banks have their own website and some have even introduced virtual counters permitting most of the conventional banking operations: consultation of accounts, transfers, etc. In some countries (Belgium, for example) these services are at present confined to domestic transactions.

b.	How may the new technology systems facilitate money laundering?
7.	Although no case of laundering has been detected in this sector, the experts endeavoured to show what might be the risks posed by the new technologies. The fact that no laundering operation has been identified to date may mean that the appropriate services lack the necessary means and capability of detection or else that the new payment technologies do not carry any particular laundering risks. However, this second possibility should probably be discounted in view of several features of these technologies such as the rapidity of transaction performance, the numerous opportunities for anonymity that are offered, and the risk of a break in the audit trail and withdrawal from the traditional banking system. The experts exchanged views on these questions in regard to the following systems: electronic purses, banking on the Internet and direct (distance) banking. Most members saw more inherent danger in Internet transactions than in smart cards, although other delegations stressed the dangers of the latter.
14. Before introducing any countermeasures, law enforcement authorities should make certain that such measures will be of a nature compatible with the real risks and the constraints imposed on financial institutions and should engage in consultations with the private sector for this purpose. If one is to avoid the emergence of a two-speed system of anti-laundering action, with the traditional banking system on the one hand and the new technology systems on the other, controls will havc to be adapted to the latter.

15. A number of countries have set up task forces on this question: in Australia, following a 1996 report by AUSTRAC (Australian Transaction Reports and Analysis Centre) to the Commonwealth Law Enforcement Board, a research group on electronic trading has been established to provide advice to the Board and Government. In Belgium, a task force on the Internet has been set up by the Minister of Justice, notably to study prevention and indictment of all forms of criminal action committed on the network. In Sweden, a government commission is currently working on various problems connected with electronic money, including money laundering, and has produced a partial report. The final report is scheduled for the end of July 1998.”

In conclusion, “cyber-crime” itself seems not to be a major point of concern in FATF-reports until today. After a period of utter awareness of the new “cyber”-developments and a considerable fear of being outwitted and overtaken by the complexity and speed of these fast developing techniques, there has been no further proof of “cyber-crimes” being a new major threat to modern society. Either the awareness led to an effective prevention, criminals have not taken a liking for “cyberspace” or ,as stressed in some reports, “cyber-crimes” are due to their nature hard to detect.

The author tends to see a parallel in recent economic developments. After a period of exaggerated enthusiasm in almost any firm that started doing “cyber”-business, a major crash took place, proving, that there is no such thing as a “cyber-space” paved with golden tiles. Major concerns with regard to “cyber-space” as a new haven for criminal action seem to have vanished in the aftermath of the crash. The internet and it’s affiliated techniques are a new form of communication but not a dimension.

2)	Electronic Money Laundering:
It has already been mentioned that, from the very beginning of the evolving internet business, new techniques were eyed critically. Even before any misuse of electronic transactions took place, FATF Members were considering possible threats and scheming countermeasures.  
The following excerptions therefore highlight POSSIBLE THREATS as outlined in the FATF reports. 
FATF report 1997:
“However, it was agreed that the application of new technologies to electronic payment systems is still in its infancy, and that how these systems develop will depend on a combination of the effectiveness and efficiency of these technologies, the market and consumer acceptance. Therefore, it is premature to consider prescriptive solutions to theoretical problems. However, it is important for law enforcement and regulators to continue to work to understand the issues that need to be considered and perhaps addressed as markets and technologies mature.”
FATF report 2001:
“New payment technologies such as the electronic purse and Smartcards have been considered in previous FATF typologies work as these systems were first being developed and tested.17 A few of the FATF delegations mentioned these technologies as still being of concern for the future. However, the implementation of such systems has remained relatively limited up to now, and no new vulnerabilities have therefore been identified in this regard.
Society for Worldwide Interbank Financial Telecommunications, the leading international payment and messaging network.
See FATF-VI Report on Money Laundering Typologies, 1996-1997.” (see above)   
FATF- report 2002-3:
This might use as an example for the change in the FATF approach to electronic transactions.
“The securities sector on a global scale is characterised by its diversity, the ease with which trading can now take place (through electronic trading for example), and the ability to perform transactions in markets with little regard to national borders. These characteristics make securities markets attractive to the ordinary investor looking for a good return on his or her money. These same characteristics, along with the sheer volume of transactions in many markets, also make the securities sector a potentially inviting mechanism for the laundering of funds from criminal sources.”

FATF- report 2000 - 2001:
The most comprehensive approach to money laundering schemes via the internet is included in this report. A number of different possible ways of misusing electronic payments and internet business forms is outlined and discussed. 
 “(i)	On-Line Banking and Internet Casinos:

a.	General

5. When the FATF examined on-line banking during last year’s typologies exercise, most experts, along with their national delegations, expressed serious concern about the vulnerabilities that the Internet might offer for money laundering. Concrete indicators for such use by criminals were not available at that time, however, and practical countermeasures had not been fully developed. For these reasons, the FATF decided to address the on-line banking issue again during the FATF-XII typologies exercise and to expand consideration of web-based laundering to other areas including gambling through the Internet.

b.	Use of web-based financial services for money laundering

6.	During the past year, the number of financial institutions offering on-line banking facilities has continued to grow. Virtually all FATF members now report a presence, if not an increased one, of financial services offered in their jurisdictions through the Internet. The range of services available also appears to be growing – along with the acceptance and usage of electronic payment systems by the general public. However, these trends vary from one jurisdiction to another. In Hong Kong, China, for example, cash payments are the norm, and, although banks offer on-line banking services, the public currently favours the use of automated teller machines (ATMs) or direct contact with the financial institutions. In Finland on the other hand, almost half of the population has access to Internet, and some 85% of retail payment orders are transmitted to banks electronically.

7.	The discussions on on-line banking during the FATF-XII typologies exercise reinforced many of the concerns raised during last year’s exercise. Transactions performed by access to financial services through the Internet do not appear to present specific risks for money laundering in and of themselves. Rather, it is three characteristics of the Internet that together tend to aggravate certain “conventional” money laundering risks: (1) the ease of access through the Internet, (2) the depersonalisation of contact between the customer and the institution, and (3) the rapidity of electronic transactions. Although these factors could be considered as contributing positively to the level of efficiency and the reduction of costs of financial services, they also make customer identification and routine monitoring of accounts and transactions by financial institutions more difficult.

f.	Other ways of using the Internet to facilitate money laundering

12.	 During last year's typologies meeting, the experts were not able to put forward any concrete examples of money laundering through the Internet; however, they were able to describe numerous instances in which various types of fraud had be committed by this means. For the FATF-XII meeting, some jurisdictions were able to present cases in which laundering is believed to have taken place using virtually the same methods found in some of the previously examined fraud cases. In both types of cases, it appears that the perpetrators take advantage of the near anonymity that can sometimes be achieved through Internet communication on the Internet, as well as the difficulty in following the path of communication links from one Internet server to another.
See FATF-XI Report on Money Laundering Typologies, 1999-2000, for further discussion of this issue.

13. One method of money laundering through the Internet would be to establish a company offering services payable through the Internet. The launderer then “uses” those services and charges for them using credit or debit cards tied to accounts under his control (located perhaps in an offshore area) which contain criminal proceeds. The launderer’s company then invoices the credit card company which, in turn, forwards the payment for the service rendered. The launderer’s company may then justify these income payments for a service rendered (See Figure 1). In this example, the launderer actually controls only the invoiced accounts and the company offering services through the Internet. The credit card company, the Internet service provider, the Internet invoicing service, and even the bank from which the illegal proceeds begin this process would likely have no reason to believe there was anything suspicious about the activity, since they each only see one part of it. Indeed, this method is virtually the same as used in many fraud cases with the difference being that, in the latter, the bank accounts billed belong to innocent third parties rather than the perpetrator of the scheme (See Figure 2).

14. The problem for the investigator in dealing with such schemes is being able to follow the links between the various parts of the scheme. The launderer can easily use fictitious identities in setting up his presence on the web. If he takes advantage of the easy access to Internet services in other geographical locations so as to ensure additional distance between him and his activities, he can be sure that the lack of uniformity in maintaining on-line communication records by service providers will also work to ensure his anonymity. The fact that the various components of the scheme only see part of the picture means that it will be very difficult to determine if illegal activity is taking place without first obtaining a picture of the whole operation. In short, the criminal using the Internet takes advantage of certain inherent aspects of the system to ensure that the whole picture is not visible by the investigator. To understand this better, it is perhaps worthwhile to provide some explanation of how Internet communication is organised.

Internet Fraud : Dial-up Connection Figure 2
Internet Service Provider
- Fake user ID
- Phone number

- Fake user ID
- Phone number

Billing records:
- IP number/time - Creditcard n°
USD 5,000 payment cheque

Instruction to debit credit card holders

50 account owners

i.	Internet gambling
16.	 Given this scenario, it seems that Internet gambling might be an ideal web-based “service” to serve as a cover for a money laundering scheme through the net. There is evidence in some FATF jurisdictions that criminals are using the Internet gambling industry to commit crime and to launder the proceeds of crime. Despite attempts to deal with the potential problems of Internet gambling by regulating it, requiring licenses in order to operate, or banning such services outright, a number of concerns remain in addition to the inability to track the Internet links mentioned above. for example, transactions are primarily performed through credit cards, and the offshore placement of many Internet gambling sites makes locating and prosecuting the relevant parties more difficult if not impossible. Furthermore, gambling transactions, the records of which might be needed as evidence, are conducted at the gambling site and are software-based; this may add to the difficulty of collecting and presenting such evidence.”

3)	Critical Infrastructure Protection
None of the reports contained information of an intended protection of the infrastructure. Problems addressed and dealt with were those arising from the appropriate use of the infrastructure and not its destruction or disablement.

4)	Corruption 
a)	Private 
In this context corruption is used to gain access to institutions or individuals in order to start a money laundering scheme.

FATF report 2002:
 “Given the size of the securities sector in some financial centres, it is reasoned by certain of the FATF experts that such markets could be a destination for large-scale criminal laundering. As mentioned above, to gain entry to the market, the launderer would require the assistance of a willing securities professional. With the financial resources available to organised crime groups, there is the inherent risk of corruption being used to gain entry to the sector. This means that illegal funds could enter the financial system through, for example, a co-opted professional service provider. As in other financial sectors, a further potential danger may be that some securities practitioners fail to comply with their customer du diligence obligations under the assumption that all customer due diligence obligations have already been performed by the financial institutions, professional service providers or other parties that send the funds to be invested.”

b)	Public Corruption as a source of money to be laundered and as a sign for an economic society that attracts money launderers.
The following excerpts show that corruption can be  a source of money that needs laundering but, and this seems to be more important, that prevailing corruption is a sign for a society that attracts money launderers and provides the means for successful money laundering schemes. 
FATF report 1998
“In South-East Asia the countries that seem to warrant particular attention are Indonesia and Malaysia. Given the absence of appropriate legislation and the regime of strict bank secrecy in Indonesia, money laundering is only part of the financial crime that prevails there essentially in the shape of large-scale fraud and corruption. 
Corruption remains the chief impediment to Mexico’s anti-laundering efforts. “

FATF report 1999
“These organisations are able to operate in Mexico by taking advantage of loopholes in existing legislation. Corruption continues to hamper the country’s anti-money laundering efforts. 	Africa south of the Sahara is also considered by many of the FATF experts to be vulnerable to money laundering, although, again, information on the region is limited. A factor which contribute to this vulnerability is the increasingly widespread activity of indigenous and, to certain extent, non-indigenous organised crime groups. These groups can operate throughout the region due to lack of strong anti-money laundering laws, combined with the endemic corruption, lack of training, and low pay of government authorities. Narcotics trafficking appears still to be the primary single source of criminal proceeds among the majority of FATF members. The various types of fraud (fiscal, EU funds, value added tax, insurance, bankruptcy, etc.) are the next major source of illegal funds, if not, in some jurisdictions, the primary source. Organised crime activity generates a considerable amount of illegal proceeds that are laundered in or through FATF member countries. Some members have noted with concern the increasing trend for these crime groups to operate in loose alliances (Russian and Latin American groups, for example). Written submissions from some of the members also mentioned an increase in the number of cases in which laundering was related to official corruption or the funding of international terrorism. “
FATF report 2002:
“Examples of senior government officials involved in corruption and other types of proceeds generating crime are no longer rare occurrences. In the past few years several high visibility corruption cases involving “politically exposed persons” or PEPs and the laundering of vast amounts of criminal proceeds through various FATF jurisdictions have been detected and investigated. Some of these laundering schemes may have been facilitated by private banking operations. While the negative publicity arising from these cases has undoubtedly increased awareness of and compliance with anti-money laundering requirements within the private banking sectors of some countries, it is unclear whether an adequate level of compliance has been reached universally.
Basic concepts
Private banking is the term used for “preferential” banking service provided to high net worth individuals. Within the institution, this service usually entails a higher degree of discretion and confidentiality for the client in comparison with the ordinary retail customer. Financial institutions often separate private banking from other retail banking operations as part of their customer segmentation strategy, that is, specific financial services are marketed across a customer base according to the value of the service offered. Private bank accounts can be opened in the name of an individual, a commercial business, a trust, an intermediary or an investment company. These services are administered by a relationship manager and his support team who sometimes are on call 24 hours a day and 7 days a week in order to build a strong rapport and intricate knowledge of the client’s financial affairs. The services offered by private bankers are often self-administered and frequently go beyond the call of duty of a normal retail banker.
support team who sometimes are on call 24 hours a day and 7 days a week in order to build a strong rapport and intricate knowledge of the client’s financial affairs. The services offered by private bankers are often self-administered and frequently go beyond the call of duty of a normal retail banker. FATF members who provided information on this topic were in agreement that private banking potentially has two main areas of vulnerability that could be exploited by corrupt PEPs or their associates. The first is when the private banker simply fails to apply appropriate and thorough due diligence to a customer and his activities. A criminal or PEP will generally seek out private banking services, as they offer the ideal opportunity for them, their family members, and close associates to carry out sophisticated and/or complex financial transactions that will further protect their illicit assets. Since a private bank is often involved in helping the client to invest or protect his or her assets, a private bank that fails to apply due diligence could find itself unwittingly assisting a corrupt politician to set up nominees and shell companies, ensuring therefore that the beneficial ownership remains hidden. The use of a professional intermediary to open an account on a client’s behalf, as related by one expert, can also enable a corrupt public official to open and operate an account virtually anonymously.
FATF report 2003-4:
PEPs are individuals who are or have been in the past entrusted prominent public functions in a particular country. New revelations of suspected PEPs’ involvement in financial crime – especially as related to corruption – occur frequently in the press. PEPs, when involved in criminal activity, often conceal their illicit assets through networks of shell companies and off-shore banks located outside the PEPs country of origin. PEPs were noted as frequently using middlemen or family members to move or hold assets on their behalf. The techniques used by PEPs to hide assets are similar to those of money launderers. Financial institutions may thus be able to detect potential illegal activity of PEPs by applying enhanced due diligence methods similar to those used for countering money laundering.
PEPs that come from countries or regions where corruption is endemic, organised and systemic seem to present the greatest potential risk; however, it should be noted that corrupt or dishonest PEPs can be found in almost any country. 

The common techniques of money laundering:

1. Smurfing:If the criminal only needs to move a few million dollars a year, the simplest way to launder cash without detection is "smurfing "— having people deposit random amounts of less than $10,000 into variously named accounts at many different banks. They will also buy bank drafts from various financial institutions to circumvent thresholds for transaction reporting. Then a middleman can ship the compact negotiables for deposit elsewhere. Due diligence rarely catches this activity. Laundering of accounts held by relatives or friends is also popular. 

2. Shipping Money Abroad. Sometimes they have to resort to shipping the money abroad in bulk cash then arrange to get it back. Someone might smuggle cash to Mexico, deposit it in a United States dollar account, draw out a draft, mail or carry it back into the U.S., deposit or cash it in a bank, with no requirement for the bank to report the transaction. Sometimes less bulky items are purchased domestically such as diamonds, gold or even precious stamps and other collectibles. The criterion is that they be of high value in relation to bulk, making them physically easy to smuggle as well as relatively easy to reconvert into cash at the point of destination. Commonly, the proceeds will be wire transferred to accounts back in the U.S. 

3. Placement Through Banks Banks and other financial institutions may unwittingly be used as intermediaries for the transfer or deposit of money derived from criminal activity. 

Suspicious activity may include; use of Letters of Credit and other methods to move money between countries where such trade is inconsistent with the customer's usual business; customers who make regular payments or receive wire transactions from countries which are tax havens; frequent requests or use of travelers cheques, foreign currency drafts or other negotiable instruments; reluctance to provide normal information or providing minimal or fictitious information that is difficult or expensive for the financial institution to verify when applying to open an account; using accounts with several financial institutions then consolidating them prior to onward transmission of the funds; greater or unusual use of safe deposit facilities; companies' representatives avoiding contact with the branch; and requests to borrow against assets held by the financial institution or a third party, where the origin of the assets is unknown or the assets are inconsistent with the customer's standing. 

4. Use of "Pass Through" or "Payable Through" Accounts for Placement
Financial institutions must take care in opening accounts for foreign deposit-taking institutions because a foreign bank may open a checking account to enable their clients, which the domestic bank may not have sufficient knowledge of, to conduct financial transactions in Canada. 

5. Placement Using Electronic Wire Transfers 
Criminals are making extensive use of the electronic payment and message systems for wire transfers. Modern financial systems permit criminals to transfer instantly millions of dollars though personal computers and satellite dishes. The rapid movement of funds between accounts in different jurisdictions increases the complexity of investigating and tracing the source of funds especially when non-customers and non-correspondent banks transfer to equally unknown third parties. 

6. Placement Using Insurance Products 
A particular area where the life insurance industry is vulnerable is the single premium product so they must now keep the client application form for every purchase of an immediate or deferred annuity and any insurance policy for which the client will pay $10,000 or more. 

7. Placement Using Investment Related Transactions 
Every person engaged in the "business of dealing in securities" must keep appropriate client data and records. Unusual activity includes requests by customers for investment management services (either foreign currency or securities) where the source of the funds is inconsistent with the customer's apparent standing, large or unusual settlements of securities in cash form and buying and selling a security with no discernible purpose. 

8. Placement Through Collusion of Financial Institution Employees and Agents 
Suspicious indications include changes in employee characteristics such as lavish life styles or performance, remarkable or unexpected increase in business volume of selling products for cash; consistently high levels of single premium insurance business far in excess of any average company expectation. 

9. Placement Using Non-Bank Financial Services 
There is a growing trend of money launderers moving away from the banking sector to the non-bank financial institution sector where the use of currency exchange houses and wire transfer companies to dispose of criminal proceeds remain among the most often cited threats. The above 9 techniques of money laundering were obtained from an article posted on the website below; http://www.crimespersuasion.com/Criminals/placement.htm 

10. “Hawala”
An excellent example of non-bank financial services is known as "Hawala". It consists of transferring money (usually across borders and in order to avoid taxes or the need to bribe officials) without physical or electronic transfer of funds. Money changers ("Hawaladar") receive cash in one country, no questions asked. Correspondent hawaladars in another country dispense an identical amount (minus minimal fees and commissions) to a recipient or, less often, to a bank account. E-mail, or letter ("Hundi") carrying couriers are used to convey the necessary information (the amount of money, the date it has to be paid on) between Hawaladars. The sender provides the recipient with code words (or numbers, for instance the serial numbers of currency notes), a digital encrypted message, or agreed signals (like handshakes), to be used to retrieve the money. Big Hawaladars use a chain of middlemen in cities around the globe. The above is an excerpt from an online book; Sam Vaknin, Ph.D. “Crime and Corruption” Edited by Lidija Rangelovska A Narcissus Publications Imprint, Skopje 2003 First published by United Press International – UPI, it can be viewed below;http://www.suite101.com/files/topics/6514/files/corruption.rtf

Module 3B: Techniques, Typologies and Trends in Money Laundering

I.  Cyber-Crime

This type of criminal activity is the inevitable effect of technological advances made over the past 30 years.  For example, the advent of the automobile opened the way for criminals to target the automobile itself (e.g., auto theft) or use it to facilitate traditional crimes (e.g., the bank robbery getaway vehicle). In addition, law enforcement had to learn to seize vehicles to search them for evidence of some offense unrelated to the vehicle itself (e.g., the box of documents in the trunk).  A computer may be the target of the offense, such as when a criminal's goal is to steal information from, or cause damage to, a computer, computer system, or computer network. Second, the computer may be a tool of the offense. This occurs when an individual uses a computer to facilitate some traditional offense such as fraud (e.g., a bank teller who once stole money from a cash drawer may now use a computer program to skim money directly from depositors' accounts). Last, computers are sometimes incidental to the offense, but significant to law enforcement because they contain evidence of a crime. Narcotics dealers, for example, may use a personal computer to store records pertaining to drug trafficking instead of relying on old-fashioned ledgers.

The Council of Europe Convention of Cybercrime of November 2001 was the first international treaty on crimes committed via the Internet and other computer networks, dealing particularly with infringements of copyright, computer-related fraud, child pornography and violations of network security. It also contained a series of powers and procedures such as the search of computer networks and interception.

In essence, cybercrime is basically a term that refers to all criminal activities done using the medium of computers, the internet, cyber space and the worldwide web.

II.  Electronic Money Laundering
Financial systems are emerging which allow economic value to be represented digitally by electronic patterns. This 'electronic money', or e-money, can be exchanged through the use of 'smart cards' or over the Internet.  Unlike stored value cards, e-money can pass immediately between the two transacting on-line parties, without the need for an intermediary and works just like paper money, without the risk, inconvenience and cost associated with handling, administering and safeguarding traditional currency.  The electronic money can also be transferred and stored between computers, without an actual tangible “smart card,” such as transferring money between computers via PayPal or a similar sogtware system.
	Additionally, the growth in the use of computers, both personally and in business, is making it easier for people and businesses of all skill levels to transfer money between each other without actually have to use real paper money, or intermediaries.  In particular, internet banking “allows customers to perform all transactions on the internet, with the exception of making cash deposits or withdrawals.”  The use of other means to access the internet, including cell phones and hand-held portable devices, “financial transactions will become more numerous and less dependent on the physical location of the parties, or the intercession of traditional payment methods.”  Money can literally be beamed around the world and never take a tangible form, go through traditional financial systems, or encounter traditional regulatory schemes.

III.  Critical Infrastructure Protection

In October 1996, the National Information Infrastructure Protection Act of 1996 was enacted as part of Public Law 104-294. It amended the Computer Fraud and Abuse Act, which is codified at 18 U.S.C. § 1030.  Then on May 22, 1998, President Clinton ordered the strengthening of the nation's defenses against emerging unconventional threats to the United States to include those involving terrorist acts, weapons of mass destruction, assaults on our critical infrastructures, and cyber-based attacks. The Critical Infrastructure Protection Directive (Presidential Decision Directive (PDD) -63) called for a national-level effort to assure the security of the increasingly vulnerable and interconnected infrastructures of the United States.  Following September 11, 2001, the primary responsibility for infrastructure protection programs fell within the jurisdiction of the Department of Homeland Security, as part of the National Homeland Security Act of 2002.

Additionally, in 2002 the U.S. enacted the Critical Infrastructure Information Act, creating a framework that enabled members of the private sector to voluntarily submit sensitive information regarding the nation’s critical infrastructure to the DHS.   This program is known as the Protected Critical Infrastructure Information Program (PCII).  According to the DHS, “critical infrastructure” includes “the assets and systems that, if disrupted, would threaten our national security, public health and safety, economy, and way of life. Although these industries, services and systems may be found in both the public and private sectors, the Department of Homeland Security estimates that more than 85 percent falls within the private sector.”

As has already been discussed, the banking sector is a critical part of the nation’s infrastructure.  The development of electronic banking, e-money, etc. has made money laundering that much easier and accessible to individuals with access to a computer and a telephone line.  Additionally, terrorism and money laundering are inextricably interconnected, and the same internet used to launder money for terrorist groups is also the same internet used to attack the electronic infrastructure of the U.S.; tracking this money is of primary importance.

IV.  Corruption - Private and Public

	In order to prevent corruption in the private and correspondent banking industries, as well as the securities industry, the USA PATRIOT Act required U.S. financial institutions to exercise due diligence when opening and administering accounts for foreign political figures, and deemed corrupt acts by foreign officials as allowable basis for U.S. money laundering prosecutions.  Certain guidelines have been proposed when examining the effectiveness of the PATRIOT Act, and improvement in the following areas are necessary:  enforcement of anti-money laundering technique, regulations and guidelines implementing due diligence requirements of the Act, issue annual anti-money laundering assessments, strengthen post-employment restrictions, authorize intra-bank disclosures, and increase transparency.

	Examples of public corruption include investigative agencies and personnel who are bribed or extorted to look the other way.  Typically, public officials will use their positions for private benefit.  Corruption deters investment and growth, decrease pubic expenditures that lend themselves to corruption (public health projects, etc.), reduce the productivity of public expenditure, reducing tax revenues, and reducing foreign investment.

Cybercrime
The dictionary definition of “crime” may be defined as “[a]n act that the law makes punishable; the breach of a legal duty treated as the subject matter of a criminal proceeding.”  There are a number of practical problems with this definition.  For example, whether an act is intentional, harmful to society or considered dangerous, and specifically defined in the criminal law as prohibited and punishable must be understood for each jurisdiction.  
Similarly, the dictionary definition of cybercrime is “[a] crime involving the use of a computer…” It seems apparent that the dictionary definition is overbroad.  The concept of cybercrime does not encompass bludgeoning with a workstation or strangling with an Ethernet cable.  Instead, the emphasis should be on the use and misuse of computer, data, and/or network resources.
Other aspects of criminal law that are relevant to cyber-crime and money laundering include: 
•	various cultural concepts of crime,
•	usage of legal terms change over time, 
•	few acts are universally criminal (malum in se), 
•	criminal laws may protect property rights, 
•	expansion of criminal law to economic areas, 
•	principles of interpretation may not be expressed in the criminal code, 
•	a trend interpret the scope of criminal law expansively, 
•	novel technologies lead to novel abuses, which lead to novel restrictions , 
•	proactive/reactive legislation of abuses.
The widely varying jurisdictional treatment of cybercrime and the ease of cross-boarder acts make it a good area for the international harmonization.  One such effort is the Council of Europe Convention on Cybercrime.
The Convention describes nine categories of cyber crimes:
•	illegal access,
•	illegal interception,
•	data interference,
•	system interference,
•	misuse of devices,
•	computer-related forgery,
•	computer-related fraud,
•	offences related to child pornography;
•	offences related to infringements of copyright and related rights.
The United States was one of the original signatories of the Convention, but the U.S. Senate has not ratified it yet.  The U.S. Department of Justice position is that 
Although we believe that the obligations and powers that the Convention requires the U.S. to undertake are already provided for under United States law, the Convention makes progress in this area by (1) requiring signatory countries to establish certain substantive offenses in the area of computer crime, (2) requiring Parties to adopt domestic procedural laws to investigate computer crimes, and (3) providing a solid basis for international law enforcement cooperation in combating crime committed through computer systems.
The treaty will come into force once five countries have ratified the agreement, and three of them must be members of the Council of Europe.  The only three countries that have ratified the agreement are Albania, Croatia and Estonia.   This is interesting since these countries are not usually considered leaders in technology or related crimes.
Electronic Money Laundering
A subset of cybercrime is electronic money laundering.  Any financial activity traditionally conducted in person may now be conducted online.  Since the object of the FATF is to weed out money laundering and terrorist financing, FATF typology reports are good resources to follow the development of electronic money laundering.
  The FATF first identified electronic payment systems as an emerging threat in 1996.  The document described early smart cards and electronic wallets as examples of the technology.  The experts pointed out that they had no evidence that the technology had been misused.
In the 1997 FATF report described in detail the various electronic payment systems available.  The main problem identified was customer identification.  In addition, an appendix to the report contrasts the traditional banking system with the new electronic payments systems.  The conclusion was that it was premature to recommend prescriptive solutions to the abuse of electronic payment systems because these systems were still in their infancy.
The 1998 FATF revealed that electronic money laundering had been detected in some member countries.  The report identified three vulnerabilities of electronic purses: limitation of the amount of a single transaction, distribution of cards by issuers connected to a bank account, and restriction of card operations to a single national territory.  This report also discussed Internet banks that were operating illegally, and one that explicitly advertised anonymous accounts.  The existence of Internet casinos was discussed and the possibility of anonymous gambling.  Finally, the report discussed the possibility of money laundering through online stock trading accounts.
[Note to professor: I am already well over the page limit.  I will finish this topic but would prefer to leave it to another classmate.]
Critical Infrastructure Protection
Critical infrastructure protection has to do with the protection of the financial system.  The U.S. Department of Treasury has an Office of Critical Infrastructure Protection and Compliance Policy (“Office”).  The Office seems most interested in using the Patriot Act to stop phishing attacks, identity theft, and credit reporting.  At first blush, these topics seem to overlap the ambit Federal Trade Commission but the application of the Patriot Act distinguishes the two administrative agencies.
Phishing attacks involve fraudulently inducing a consumer through email to reveal personal information by impersonating a trusted Internet website.  The magnitude of the problem is not large compared to the Internet; with only about 600 and 1125 attacks occurred in March and April 2004.  On the other hand, the size of the Internet makes the potential for harm very high.
Stopping identity theft and helping people fix their credit reports after identity theft sounds great on paper.  The Fair and Accurate Credit Transactions Act of 2003, however, has a provision instructing the Secretary of the Treasury to conduct a study of the possibility of using biometrics to reduce the incidence of identity theft.  Reading between the lines, this is just another attempt at a biometric national identity card.  On the other hand, the act allows consumers to “freeze” their credit report from outsiders by requiring a PIN number be given for access.  Maybe the act is not all bad.
Corruption - Private and Public
Corruption is sometimes divided into three categories: public corruption, private corruption and petty corruption.  Public corruption has to do with government officials and employees, private corruption has to do with business, and petty corruption has to do with everyone else.  Of course, each of these categories can stand alone or interact with the others.
Petty corruption is facilitating payments at a very low level and does not carry criminal sanctions.  Thus, petty corruption is essentially a loophole to money laundering laws.
Private corruption has to do with business.  The most obvious example is bribery and it is not uncommon for small and medium sized businesses to make bribes in foreign countries for protection and other advantages.
Public corruption has to do with government officials.  Public corruption statistics are available from the IRS for the years 1999-2001.
 	 FY 2001	 FY 2000	  FY 1999	
Investigations	95	108	111	
Prosecution Recommendations	69	50	97	
Indictments/Informations	70	56	76	
Convictions	52	66	68	
Incarceration Rate*	75.0%	79.7%	79.2%	
Average Months to Serve (with Prison)	21	33	26	
Average Months to Serve (All Sentenced)	16	26	21	
Direct Investigative Time (DIT)	2.8%	2.9%	3.3%	
*Includes confinement to federal prison, a halfway house, home detention or some combination thereof.	
While the conviction rates are very high, the total number of cases prosecuted is very low.  Judging from the examples listed on the IRS web page (e.g., postal employees, city councilmen, etc.) the targets of such investigations seem to be of a very low level.  Considering the high level corporate corruption that has been revealed in recent years, it seems unlikely that high-ranking government officials are completely clean, only not discovered or prosecuted. 

CHAPTER 4: COMPARISONS OF AML REGIMES OF KEY NATIONS AND
OFFSHORE FINANCIAL CENTERS

A. The INCSR Report of 2003 lists the following criteria for the evaluation of Anti-Money Laundering Regimes of All Nations and Offshore Financial Centers (74-75, INCSR Report 2003):

All Nations –

1.	Has the nation criminalized money laundering for all serious crimes?
2.	Has the nation criminalized beyond drugs? Or has the nation limited the offense to narrow predicates?
3.	Are there requirements of recording and reporting large transactions?
4.	Are there requirements of maintaining records over a specific period of time, e.g., five years or ten years?
5.	Is there a requirement to report suspicious transactions? Are there uniform guidelines for identifying suspicious transactions?
6.	Is there a financial intelligence unit (FIU)? A FIU is a central reporting unit for receiving, analyzing and disseminating to the competent authorities information on large value, suspicious or unusual financial transactions that might identify possible money laundering activity.
7.	Is there a system for identifying and forfeiting assets?
8.	Are there arrangements for asset sharing?
9.	Does the nation cooperate with international law enforcement?
10.	Does the nation regulate the international transportation of currency? Is there effective monitoring of cross-border currency movements?
11.	Is the nation a party to Mutual Legal Assistance Treaties (MLATs)?
12.	Are there well-established non-bank financial systems, especially where regulation, supervision and monitoring are absent or lax?
13.	Are non-bank financial institutions covered by anti-money laundering legislation?
14.	Does the nation offer disclosure protection “safe harbor”?
15.	Is the nation a party to the 1988 United Nations Convention on drugs and money laundering?
16.	Has the nation criminalized the financing of terrorism?
17.	Is there an international terrorism financing connection?
18.	Do rigid bank secrecy rules obstruct law enforcement investigations or prohibit or inhibit large value and/or suspicious or unusual transaction reporting by both banks and non-bank financial institutions?
19.	Does the government and/or private institutions have “know your customer” requirements to open accounts or conduct financial transactions, including the permitted use of anonymous, nominee, numbered or trustee accounts?
20.	Is there a requirement to disclose the beneficial owner of an account or the true beneficiary of a transaction?
21.	Are bearer monetary instruments allowed?
22.	Are there patterns of evasion of exchange controls by legitimate businesses?
23.	Is there ease of incorporation, in particular where ownership can be held through nominees or bearer shares, or where the off-the-shelf corporations can be acquired?
24.	Is there a lack of or weak bank regulatory controls, or failure to adopt or adhere to Basel Committee’s “Core Principles for Effective Banking Supervision,” especially in jurisdictions where the monetary or bank supervisory authority is understaffed, under-skilled or uncommitted?
25.	Is there an offshore financial center or tax haven banking system, especially where such banks and accounts can be readily established with minimal background investigations?
26.	Is there extensive foreign banking operations, especially where there is significant wire transfer activity or multiple branches of foreign banks, or limited audit authority over foreign-owned banks or institutions?
27.	Are charitable organizations or alternate remittance systems, because of their unregulated and unsupervised nature, are used as avenues for money laundering or terrorist financing?
28.	Is there limited narcotics, money laundering and financial crime enforcement and a lack of trained investigators or regulators?
29.	Is there a free trade zone area where there is little government presence or other supervisory authority?
30.	Is there a pattern of corruption or a laissez-faire attitude toward the business and banking communities.
31.	Is there well-established access to international bullion trading centers?
32.	Is there significant trade in or export of gold, diamonds and other gems?
33.	Is there a large parallel or black market economy?
34.	Is there limited or no ability to share financial information with foreign law enforcement authorities?

B. Victoria Figge, the former head of the Financial Intelligence Unit of Panama, has proposed the following criminal and civil criteria for evaluation of national AML regimes:

1. Criminal Aspects: a. Underlying crimes. Are the following predicate crimes?: 1. common crimes; 2.membership in a criminal organization; 3.fraud 4.corruption 5. tax evasion 6.terrorism 7.drug trafficking. In other words, one must determine which of these categories of crime are predicate crimes under the money laundering statues of the respective nation.
b. Criminal Sanctions: Consider the prison terms in years and any fines for crimes. 
c. Which nations allow for seizure? For forfeiture? And by whom? For example, court, judge, authority, public notary or prosecutor??
d. Which of the nations have Financial Intelligence Units (FIUs)?  
e. Obligated Subjects under the Law: Banks?, Attorneys?, Accountants?, Brokers?, Exporters?, Real Estate Brokers?, Travel Agencies?, Investment Advisors?

2. Civil Aspects: a. What is the Know Your Customer policy of each nation? What is required of the client: a copy of the ID or profile of the client or both? Is identification of beneficiaries or directors or both required? Are references required? Is a compliance officer required? Are compliance and training required? Are CTRs required? Are SARs required?
b. Are there administrative sanctions such as fines or cancellation of licenses for money laundering required?
c. Is banking secrecy an obstacle to the money laundering law?

C. Particular Criteria for Offshore Financial Centers (OFCs): 

1.	Does the OFC have offshore banks?
2.	Does the OFC have trust and management companies?
3.	Does the OFC offer IBCs/exempt and/or restricted companies?
4.	Does the OFC offer bearer shares?
5.	Does the OFC offer asset protection trusts?
6.	Does the OFC offer insurance and re-insurance?
7.	Does the OFC sell economic citizenship?
8.	Does the OFC offer internet gaming?
9.	Has the OFC criminalized drug money laundering and beyond drugs?
10.	Has the OFC been listed in the FATF Non-cooperative Exercise?
11.	Is the OFC a member of international organizations such as the Asia/Pacific Group, Caribbean Financial Action Task Force, Council of Europe Select Committee on Money Laundering, Eastern and Southern Africa Anti-Money Laundering Group, The Egmont Group; Financial Action Task Force, Offshore Group of Insurance Supervisors (OGIS), Observer to the OGIS, Offshore Group of Banking Supervisors, OAS/Inter-American Drug Abuse Control Commission, International Organization of Security Commissioners.

INTRODUCTION
Here is my breakdown of the various criteria used to evaluate a nation’s anti-money laundering efforts.  I started originally just intending to list the various criteria gleaned from other posts on the BlackBoard and through our reading, but I ended up adding my own personal biases to the breakdown.  I guess you can say it’s how I would approach anti-money laundering regimes if I were King of the World.
The breakdown was divided into two primary sections, Internal Efforts by a Nation to combat money laundering, and External Efforts, or the way on nation would deal with another on this issue.  Obviously, some of the Internal recommendations would overlap with the External; e.g., criminalizing money laundering would allow a nation to prosecute a money launderer, and seek seizure/forfeiture of assets located outside the nation.
I.	INTERNAL EFFORTS
There are measures that nations take internally to combat money laundering.  These do not require interaction with supra-governmental agencies or rely on the participation or coordination with other nations.  Special attention must be given to ensure minimal government intrusion into to financial and business sectors, except when absolutely necessary.  These measures can be broken down into the following sub-categories:
A.	Legislative/Executive
1.	Criminalize money laundering for all serious crimes or limiting the offense to narrow predicates.
2.	Enact measures to seize and confiscate the proceeds of all serious crime, but most importantly those with the flavor of money laundering.
3.	Ensuring an adequate domestic system for the control and supervision of financial institutions (bank and non-bank).  This can be accomplished through national over-site boards, agencies, departments, etc., or through private sector associations, as long as all financial institutions are required to register/participate/license in order to operate.
a.	This also includes regulation, supervision, and monitoring non-bank financial systems, and they should be required to participate in whatever over-site method is developed for banks.
4.	Enact domestic legislation to implement treaties on money laundering.  Any executing legislation and/or treaty should have a sunset provision requiring periodic review by the national legislature, so that changes can be made, or agreements revoked.
5.	Require domestic corporations to provide beneficial owner information to the State/jurisdiction in which it is incorporating.  Each State would maintain a database with corporate, fictitious name, etc. information that is readily available to the public and searchable by other States and the Federal government.
6.	Provision of narcotics, money laundering and financial crime enforcement and trained investigators or regulators (i.e., a well trained FIU).
7.	Removal of parallel or black market items from the local economy.  Alternative forms of trade, such as the barter system, should not be discouraged.  Prohibited items or contraband, however, should be controlled.
8.	Intense monitoring of political influence by money launderers through campaign contributions, donations, real estate purchases, etc. to prevent corruption.
9.	Enact procedures to detect counterfeit currency and other monetary instruments.  This should be a domestic entity or agency outside the auspices of any supra-governmental agency to prevent loss of sovereignty or outside influence in a nation’s monetary market/supply.
B.	Judicial
1.	Actual enforcement of money laundering crimes, with emphasis on adequate punishment for the crime.
2.	Seizure/forfeiture of property and assets pending the final outcome of criminal/civil matters.  If necessary, the eventual return of property to legitimate owner, or sale on the courthouse steps, with proceeds to fund judicial administration and law enforcement.  Due process should be vigorously maintained.
C.	Private Sector
1.	Requiring financial institutions to identify all clients, including any beneficial owners of property, and to keep appropriate records.  The actual methods should be reserved to the financial institution, with minimum standards outlined through legislation.  The intent here is not to legislate every aspect of business, but merely establish a set of guidelines that will allow the private sector financial institutions to police themselves by implementing a comprehensive range of internal control measures.
a.	Through the self-policing method, financial institutions should be required to report suspicious or large transactions to the competent national authorities (i.e., the IRS).
b.	Restriction of bank secrecy rules to allow necessary law enforcement investigation, with the protection of due process.  This should be a domestic allowance; i.e., financial institutions should not be required to directly disclose information to foreign nations or supra-national organizations.  If there is law enforcement issue, financial institutions should only be required to disclose information to the appropriate domestic law enforcement agency.  Further disclosure of information can then be safeguarded by due process and absolute necessity.
2.	Implementation of “know your client” requirements, and suspicious or unusual transaction reporting requirements.  These requirements, however, should not cast a “chilling effect” on a customer’s right to handle money as he sees fit.  A reporting requirement for money transfers/deposits should not be so low as to require virtually every transaction be documented and reported to a government agency.  Additionally, “know your client” requirements should be so intrusive as to require disclosure of non-vital information; e.g., name, address, social security number.
a.	Although anonymous, nominee, numbered or trustee accounts should be permitted, they should also meet the bare minimum “know your client” requirements.  To avoid abuse by money launderers, but to protect the right to conduct business anonymously within the financial system, information requests for these types of accounts should only be permitted through domestic law enforcement agencies, and only through subpoena.  This will allow judicial review of requests for anonymous information while protecting due process (subpoenas can be quashed).  In civil cases, the process should also require the additional step of in camera inspections by a judge of any information obtained through subpoena to prevent unnecessary disclosure of personal information.
3.	An effective requirement to maintain financial records over a specific period of time.  Although the legislature should set a minimum period, the private sector should have the final determination on the length of time to maintain records, due to costs, overhead, and logistics involved in such a process.  As record keeping becomes paperless, the private sector should encourage longer periods of time, although purging records should continue to occur after the expiration of the time limit.  This would help protect the privacy of the clients and prevent a centralized database of information from being developed.
4.	Develop sufficiently comprehensive laws dealing with charities, both domestic and international.  These organizations present a special case where particular attention must be paid, especially in light of their putatively humanitarian purposes.  These organizations must be monitored while at the same time the government should not cast a chilling effect on the use of charities for legitimate purposes.
5.	Implementation of guidelines for accountants, lawyers, commodities dealers (precious metals, etc.), real estate agents, etc.  It is assumed that each nation will have private sector regulatory bodies, as well as governmental agencies overseeing these non-financial groups.  Again, guidelines should be proposed, and rules of professional conduct implemented, that take into consideration both the right of the client to professional and confidential service, while preventing the commission of a crime.  In cases where there is a doubt as to which concern should prevail, the rights of the client should always trump those of the state.
II.	EXTERNAL EFFORTS
A.	Treaties
1.	Establishment of international treaties or agreements.  These should be kept to the bare minimum necessary to participate in international efforts against money laundering, without a sacrifice of national sovereignty or local control over all issues, cases, etc.  A basis for these treaties, agreements, etc. are the FATF 40 Recommendations, the Aruba 19 Recommendations (CFATF), the OAS Model Regulations on Money Laundering, the Summit of the Americas December 1995 Buenos Aires Communiqué Plan of Action, the European Directive on Money Laundering, and the Basle Principles.  These should be considered suggestions only, subject to modification to fit a nation’s best interests.
2.	Effective monitoring of cross-border currency movements through agreements with other nations.  This would require the cooperation of all nations involved with the agreement.  This can most easily be accomplished through reporting requirements for large cash transactions, with the understanding that no nation is required, but may do so voluntarily, to report transactions of lesser amounts (such as a seizure of foreign currency by law enforcement in an amount less than the minimum for reporting purposes).
B.	Administrative Practices 
1.	Requirement of foreign corporations to register with a database, to include beneficial owner information, before a corporation can be licensed to do business in a particular jurisdiction.  In a federal system of government, like the U.S., the database can be maintained by each State (i.e., through the Secretary of State), but be coordinated for ease of search by each other State or the Federal government.
2.	Provision of adequate audit authority over foreign-owned banks or institutions.
3.	Limited ability to share financial information with foreign law enforcement authorities, so long as the due process safeguards established under the Internal section are not violated.  Some safeguards would include domesticating foreign warrants, execution of warrants by local law enforcement agencies, judicial involvement to protect due process rights, etc.
a.	Use of information standards such as those recommended by FATF and SWIFT for electronic transfers, allowing certain key information to be easily assimilated by other nations when necessary.
4.  Monitoring of money laundering patterns, trends, typologies, and management pervasive in the international community in order to detect trends nationally.
5.  Recognition of property confiscation order issued by a foreign authority, providing that the property would be subject to a confiscation order under national law, local judicial review, and guarantee of due process.
CONCLUSION
As you can tell, I incorporated many of the major criteria into a list that attempted to take into consideration a nation’s sovereignty, the protection of individual rights, while at the same time attempting to discourage money laundering.  Notice I did not say “stop” money laundering; as long as there are financial institutions, there will be money laundering.  A nation that makes it as difficult as possible for laundering, without compromising its identity, traditions, culture, and “way of doing things,” is well on its way to doing its part against money laundering.  Just as money laundering is an abuse of the financial systems of the world, oppressive and/or repressive anti-money laundering practices can become abused by nations, political parties, agencies, national and international organizations, etc. seeking to control the individual by controlling individual finance.
Sources:
U.S. Dept. State, Money Laundering and Financial Crimes, 2000, http://www.freedom.orlingrabbe.com/money_laundering/ml_intro2000.html and http://www.state.gov/g/inl/rls/nrcrpt/2000/959.htm

U.S Dept. State, The Financial Action Task Force on Money Laundering, May 2001, http://usinfo.state.gov/journals/ites/0501/ijee/fatffacts.htm

U.S. Dept. State, INCSR, Money Laundering and Financial Crimes, March 1998, http://www.freedom.orlingrabbe.com/money_laundering/money97.html

Yahoo! Finance, Summary of FATF Report and Conclusions for Saudi Arabia, http://biz.yahoo.com/prnews/040614/phm042_1.html

OECD/FATF, The 40 Recommendations (2003), http://www1.oecd.org/fatf/40Recs_en.htm#Scope

CRITERIA FOR THE EVALUATION OF AML REGIMES OF NATIONS
                                  Submitted By:  R. LEWAYNE JOHNSON, J.D. 

Contents:

(1) Introduction; (2) Implementation of FATF Instruments; (3) Applicability of Filing of SAR/Reporting Suspicious Activity; (4) Criminalizing Money Laundering activities; (5) Financial Intelligence Unit Establishment Measures; (6) Ratification and Implementation of UN Instruments; (7) Conclusion  

Introduction

In an effort to stay abreast of the ever changing faces of the methods and techniques associated with money laundering, the Financial Action Task Force (FATF – an intergovernmental body which sets standards, and develops and promotes policies to combat money laundering and terrorist financing), has established recommendations that countries should put in place both within their criminal justice system and their regulatory system to detect and combat money laundering.  Moreover, these polices/measures extend to financial institutes, businesses, professions and international cooperation to form a comprehensive barrier in the fight against money laundering activities and combating the funding of terrorist activities.

In 1996, the FATF recommendations were revised from the initial 1990 version to include identifying evolving money laundering typologies.  More than 130 countries have adopted the 1996 FATF recommendations – which include 40 recommendations for combating money laundering and terrorist financing.  Additionally, the FATF has provided 8 Special Recommendations on terrorist financing.  Endorsed by more than 130 countries and territories, these recommendations serve as the international standards for combating money laundering and the combating of financing of terrorism.1

Implementation of FATF Instruments  

Nations are currently viewed through the scope of all the FATF recommendations.  These recommendations, nonetheless, set minimum standards for countries to use as a base to model detailed procedures/systems based on the countries constitutional frameworks and particular circumstances applicable to banks, non-bank financial institutions, or other businesses or entities subjected to anti-money laundering obligations.

These instruments include the following measures:

•	Scope of the Criminal Offence of Money Laundering:  Countries should used the UN 1988 Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances and the UN 2000 Convention against Transnational Organized Crime as a threshold for criminalizing money laundering.
•	Provisional measures and confiscation:  Countries should ensure that their criteria for establishing intent and knowledge in proving the offense of money laundering comports with the standards outlined in the 1988 and 2000 Conventions.  Additionally, countries should ensure that criminal liability or civil/administrative liability attaches to all legal persons.

•	Customer due diligence and record keeping and Reporting of suspicious transactions and compliance:  Countries should ensure that secrecy laws imposed by financial institutions do not inhibit the implementation of FATF recommendations.  Additionally, countries should ensure that due diligence is taken using FATF recommended CDD measures as guidance.

•	Other measures to deter money laundering and terrorist financing:  In relations to politically exposed persons, countries should ensure that appropriate risk management systems are in place to ascertain whether the individual is a politically exposed person.  Involve senior management in the conducting and monitoring of business relations with the person.  Countries should ensure that measures are in place that allow financial institutions dealing with cross-border correspondent banking to gather sufficient information about a respondent institution, assess the respondent institution’s anti-money laundering and terrorist financing controls, document the responsibilities of each institution and as it applies to payable-through accounts, coordinate with the respondent bank on due diligence.

•	Additional recommendations full under the following subjects:

o	Measures to be taken by financial institutions and non-financial businesses and professions to prevent money laundering and terrorist financing

•	Measures to be taken with respect to countries that do not or insufficiently comply with the FATF recommendations
•	Regulatory and supervision

o	Institutional and other measures necessary in systems for combating money laundering and terrorist financing.     

•	Competent authorities, their powers and resources
•	Transparency of legal powers and arrangements

o	International Co-operation

•	Mutual legal assistance and extradition
•	Other forms of co-operation 

Applicability of Filing of SAR 

Pursuant to FATF Recommendation 16, lawyers, notaries, other independent legal professions, accountants, dealers in precious metals/stones and trust and company service providers are required to comply with Recommendations 13 to 15 and 21.  Recommendation 13 specifically mandates reporting suspicious financial criminal activities to the financial intelligence unit (FIU).  Further, Recommendation 14 protects lawyers, notaries, other independent legal professions, accountants, financial institutions, etc., from criminal or civil liability upon reporting suspicious financial criminal activities to the FIU.   

The exception, however to this provision/mandate is that where, information relevant to the aforementioned requirements as applicable to attorneys, notaries, other independent legal professionals, is subject to professional secrecy or legal professional privileges, these professionals are not required to report their suspicions.

Criminalizing Money Laundering Activities

Recommendation 1 of the FATF Recommendations provides in relevant terms that “…countries should criminalize money laundering on the basis of United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, 1988 and the United Nations Convention against Transnational Organized Crime, 2000.”2  

Further recommended by this section of the FATF Recommendations is that countries apply a threshold approach to the crime of money laundering, with the threshold linked to either a category of serious offenses or to the punishment of imprisonment applicable to the predicate offense.  Moreover, predicate offenses, according to FATF Recommendations 1, “…should extend to conduct that occurred in another country, which constitutes an offense in that country and which would have constituted a predicated offense had it occurred domestically.”3 

Financial Intelligence Unit Establishment Requirements

Where Recommendation 13 of the FATF Recommendations implies the mandate of the establishment of a financial intelligence unit (FIU), Recommendations 26-32 go further to specify the requirements of a FIU by countries and specify the perimeters/functions of the FIU.  Countries complying with the FATF recommendations should establish a FIU to serve as a national center for receiving, analysis and dissemination of STR and certain other information regarding money laundering and terrorist financing.

On the other hand, countries that do not or insufficiently comply with the FATF Recommendations will be subject to the sacaintions and/ stipulations outlined at Recommendation 21 and 22.   

Ratification and Implementation of UN Instruments

The resolution issues contained in both the UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (1988) and the UN Convention against Transnational Organized Crime (2000) are mandatory when the UNSC acts under Chapter VII of the UN Charter.  This activity makes the resolution issues mandatory for all UN members.  Therefore by being a UN member, and noting that the UNSC was acting under Chapter VII of the UN Charter in issuing the 1988 UN Convention, the resolution issues are mandatory on UN members. 

Summary

The FATF is chartered with promoting anti-money laundering initiatives in all continents and regions of the world and on the same accord, building a worldwide anti-money laundering network.  One of the strategies employed by the FATF in accomplishing the goal of its charter is to work closely with other international organizations to develop a common methodology for “…assessing the measures taken by jurisdictions to combat money laundering and to counter terrorist financing.”4  

One of the most important tasks of the FATF since its 2001 adoption of the Eight Special Recommendations on terrorist financing was the completion of the Forty Recommendations for combating money laundering.  The FATF continues to make significant progress to fight money laundering and terrorist financing.

Analysis of Criteria and Progress of North American and Latin American AML Regimes
Submitted By:  R. LEWAYNE JOHNSON, J.D. 

This paper summarizes progress by the Latin American AML Regimes and North America in implementing their action plans to intensify work on issues of anti-money laundering and combating the financing of terrorism (AML/CFT).  

Nations are currently viewed through the scope of all the FATF recommendations.  These recommendations, nonetheless, set minimum standards for countries to use as a base to model detailed procedures/systems based on the countries constitutional frameworks and particular circumstances applicable to banks, non-bank financial institutions, or other businesses or entities subjected to anti-money laundering obligations.

These instruments include the following measures:

•	Scope of the Criminal Offence of Money Laundering:  Countries should used the UN 1988 Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances and the UN 2000 Convention against Transnational Organized Crime as a threshold for criminalizing money laundering.

•	Provisional measures and confiscation:  Countries should ensure that their criteria for establishing intent and knowledge in proving the offense of money laundering comports with the standards outlined in the 1988 and 2000 Conventions.  Additionally, countries should ensure that criminal liability or civil/administrative liability attaches to all legal persons.

•	Customer due diligence and record keeping and Reporting of suspicious transactions and compliance:  Countries should ensure that secrecy laws imposed by financial institutions do not inhibit the implementation of FATF recommendations.  Additionally, countries should ensure that due diligence is taken using FATF recommended CDD measures as guidance.

Other measures to deter money laundering and terrorist financing:

In relations to politically exposed persons, countries should ensure that:

•	Appropriate risk management systems are in place to ascertain whether the individual is a politically exposed person.

•	Involve senior management in the conducting and monitoring of business relations with the person.

•	Countries should ensure that measures are in place that allow financial institutions dealing with cross-border correspondent banking to gather sufficient information about a respondent institution, assess the respondent institution’s anti-money laundering and terrorist financing controls, document the responsibilities of each institution and as it applies to payable-through accounts, coordinate with the respondent bank on due diligence.

Additional recommendations full under the following subjects:

•	Measures to be taken by financial institutions and non-financial businesses and professions to prevent money laundering and terrorist financing

•	Measures to be taken with respect to countries that do not or insufficiently comply with the FATF recommendations, regulatory and supervision

Institutional and other measures necessary in systems for combating money laundering and terrorist financing.     

•	Competent authorities, their powers and resources

•	Transparency of legal powers and arrangements

•	International Co-operation

•	Mutual legal assistance and extradition

•	Other forms of co-operation 
 
In assisting Latin AML Regimes, the Department of State’s Bureau for International Narcotics and Law Enforcement Affairs (INL) and the Department’s Office of the Coordinator for Counter-Terrorism (SCT) are together implementing a multi-million dollar training and technical assistance program to provide law enforcement, prosecutorial and Central Bank training.  One prime focus of the training program is a multi-agency approach to develop or enhance financial crime and anti-money laundering regimes capable of combating not only money laundering activities but also terrorist financing in selected jurisdictions.  Additionally, the State Department, the Department of Justice, Treasury Department component agencies, the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation, and various non-government organizations are continuously offering law enforcement, regulatory and criminal justice programs both to Latin America and worldwide. 

In 2003, INL/SCT-funded programs were delivered in Latin American countries in addition to other countries in an effort of combating international financial crimes, money laundering and terrorist financing.  U.S federal law enforcement agencies assisted in this effort by providing basic and advanced training courses in all aspects of financial criminal activity.  Additionally, INL made funds available for intermittent posting of financial advisors at selected overseas locations.  Working directly with host governments, these advisors assisted in the creation, implementation, and enforcement of anti-money laundering and financial crime legislation.  INL also provided several federal agencies funding to conduct multi-agency financial crime training assessments and develop specialized training in specific jurisdictions worldwide to combat money laundering.1 

In an effort to bring the Latin American AML regime alone the continuum in combating international financial crime, money and terrorist financing, INL, along with the European Union and the Government of the United Kingdom, continues to fund the Caribbean Anti-Money Laundering Programme (CALP).  INL contributed $600,000 to the CALP in 2003.  

CALP has adopted the objectives of reducing the laundering of the proceeds of all serious crime by facilitating the prevention, investigation, and prosecution of money laundering.  Further, CALP is in the process of developing a sustainable institutional capacity in the Caribbean region to address the issues related to anti-money laundering efforts at a local, regional and international level. 

As in previous years, INL training programs continue to focus on an interagency approach and on bringing together, where possible, foreign law enforcement, judicial and Central Bank authorities in assessments and training programs.  This allows for an extensive dialogue and exchange of information.  This approach has been used successfully in Asia, Central and South America, Russia, the New Independent States (NIS) of the former Soviet Union, and Central Europe.  INL also provides funding for many of the regional training and technical assistance programs offered by the various law enforcement agencies, including assistance to the International Law Enforcement Academies (ILEAs). 

Conclusion

The North American AML Regime has made considerable progress in assisting the Latin American AML and other worldwide regimes in implementing all aspects of the action plan to combat international financial crime, money and terrorist financing.  The policy development and organization work is well advanced.  The immediate next step would be to ensure a successful implementation of the FATF Plenary strategies, with FATF endorsement of the comprehensive AML/CFT methodology, and other conditions outlined by the Fund and Bank Boards for the preparation of AML/CFT ROSCs, as well as reports on the outcome to the Boards.  

A 12-month pilot program of assessments using the comprehensive methodology, and to step up the implementation of technical assistance would also be a step that Latin Americans regimes would need to position them to implement.  It is well recognized that strengthening AML/CFT regimes worldwide will involve capacity building, strengthening financial sectors and supervisory reform, and will be a medium/long-term effort.2 

040804AML Module5 Assignment
09. August 2004

1)	Definition of an Offshore Financial Center:

a)	Short Definition:
An OFC is a jurisdiction where an intentional effort has been made to attract foreign business by deliberate government policies such as the enactment of tax and other fiscal incentives, "business friendly" regulatory/supervisory regimes and secrecy enforced by law. It is the OFC's legal framework that makes it unique. Common to most developing and mature OFCs is a legal framework that to varying degrees facilitates the maintenance of secrecy, the minimization or mitigation of tax and 
supervisory burdens, and freedom from common regulatory constraints, such as exchange controls and disclosure requirements. When viewed as a financial services concept, an OFC is any jurisdiction that enables banks, trust companies, company incorporators, other financial intermediaries and financial advisors resident in that 
jurisdiction to provide products and services to non-residents in their home countries. In many cases the same services are not available to their own residents. These jurisdictions are often sovereign states but not necessarily so. They may be a free zone within a city, such as Dublin, Ireland. They may also be political subdivisions within a sovereign state, such as Madeira or Hong Kong. The relationship between offshore and onshore jurisdictions is complex, but for the most part offshore financial centers tailor their products and services to residents of other jurisdictions. Through a practice known as nicheing, OFCs regularly modify their legislation, developing new financial vehicles and services to attract business from their target markets.

b)	Detailed Definition:
Although there is little consensus regarding the exact definition of an offshore financial center (OFC), certain characteristics distinguish traditional onshore financial centers from those termed "offshore". Offshore financial centers are, in the vast majority of cases, segregated from the traditional banking structure of the jurisdiction. At least 90 percent of all jurisdictions offering offshore financial services restrict access to the offshore sector to non-residents, thereby creating a highly confidential and parallel financial system within their own borders. Many jurisdictions with OFCs conduct financial transactions only in currencies other than the local currency. OFCs also differ from onshore jurisdictions in their regulatory regimes and legal frameworks. Many OFCs lack the stringent regulatory and supervisory regimes found in developed onshore jurisdictions. In the majority of OFCs, banks are not required to adhere to a wide range of regulations normally imposed on onshore banks. In most OFCs, non-bank financial industries, such as the insurance and securities industries, are subject to even less, if any, regulation than is the banking industry. 
OFCs maintain that their carefully crafted laws and regulations provide beneficial business and financial planning options for their clients. These include, but are not limited to: sophisticated trade financing; estate planning for high net worth individuals; tax mitigation for individuals and corporations; avoidance of exchange controls; liability containment for ships and airplanes; sophisticated insurance management options; investment opportunities that transcend home country marketing regulations; preservation of assets; investment of overnight funds; and freedom from certain home country regulatory requirements. 
Freedom from certain home country regulatory requirements provides opportunities to those with criminal intent. In many OFCs, a bank can be formed, registered and its ownership placed in the hands of nominee directors via the Internet. However formed, there are few, if any, disclosure requirements, bank transactions are free of exchange and interest rate restrictions, minimal or no capital reserve requirements are required and transactions are mostly tax-free. Some OFCs permit the licensing and registration of "shell banks"揚enerally understood as banks that exist on paper only and do not have a physical presence in any jurisdiction. Of the more than 4000 offshore banks thought to exist, the number of shell banks remains unknown. 
A principal attraction of the OFCs is often the existence of legal frameworks designed to obscure the identity of the beneficial owner, to promote regulatory and supervisory arbitrage, and to provide mitigation or evasion of home-country tax regimes. Some of these OFCs offer the ability to form and manage confidentiality of a variety of international business companies (IBCs) and exempt companies, trusts, investment funds and insurance companies, many with nominee directors, nominee officeholders and nominee shareholders.1 When combined with the use of bearer shares (shares that do not name the owner) and "mini-trusts" (the latter are instruments used to further insulate the beneficial owner while bridging the ownership and management of the corporate entity), IBCs can present impenetrable barriers to law enforcement.
"IBC" is the term used to describe a variety of offshore corporate entities, which are almost always restricted to transacting business outside the jurisdiction in which they are formed. IBCs are characterized by rapid formation, at low cost, with broad powers, low to no taxation, minimal or non-existent reporting requirements and secrecy. Many OFCs permit IBCs to issue bearer shares. The Enron Corporation, for example, reportedly registered IBCs in the Cayman Islands and the Turks and Caicos OFCs.
This lack of transparency and the ability to engage in regulatory arbitrage, coupled with a concomitant reluctance or refusal of many OFCs to cooperate with regulators and law enforcement officials from other jurisdictions, attract those with both legitimate and illegitimate purposes. Drug traffickers, terrorists, money launderers, tax evaders and other criminals have found the OFCs a particularly inviting venue in which to conduct and conceal their activities. With the advent of the Internet and other technological advances, funds can be transferred around the globe instantaneously, providing further opportunities to engage in the placement and layering of illicitly gained funds. There is also a growing concern that terrorists and other criminals are increasingly enlisting the services of unethical lawyers, accountants and other professionals to help them discover and manipulate new money laundering and terrorist financing opportunities afforded by the new technologies. The attraction for small states in the offshore financial services market is a dependable source of income that in some instances exceeds 50 percent of a jurisdiction’s GDP.  
While there are many well-regulated OFCs, a principal attraction is often the existence of legal frameworks designed to obscure the identity of the beneficial owner, to promote regulatory and supervisory arbitrage, and to provide mitigation or evasion of home-country tax regimes. Some of these OFCs offer the ability to form and manage confidentiality of a variety of international business companies (IBCs) and exempt companies, trusts, investment funds and insurance companies, many with nominee directors, nominee officeholders and nominee shareholders. When combined with the use of bearer shares and "mini-trusts" (the latter are instruments used to further insulate the beneficial owner while bridging the ownership and management of the corporate entity), IBCs can present impenetrable barriers to law enforcement. The term "offshore financial center" (OFC) is generally thought to describe an entire jurisdiction. However, there are important OFCs located with the borders of jurisdictions. "OFC" in this report is used to describe both cases. OFCs maintain that their carefully crafted laws and regulations provide beneficial business and financial planning options for their clients. These include, but are not limited to: sophisticated trade financing; estate planning for high net worth individuals; tax mitigation for individuals and corporations; avoidance of exchange controls; liability containment for ships and airplanes; sophisticated insurance management options; investment opportunities that transcend home country marketing regulations; preservation of assets; investment of overnight funds; and freedom from certain home country regulatory requirements.

2)	List of Offshore Financial Centers:

a)	Africa
 				Seychelles
b)	Asia and the Pacific
				Cook Islands
				Macao SAR	
				Malaysia (Labuan)
				Marshall Islands
				Nauru
				Niue	
				Palau
				Samoa
				Vanuatu
c)	Middle East
				Bahrain
d)	Europe
				Andorra
 				Cyprus
				Gibraltar
				Guernsey
				Isle of Man
				Jersey
				Liechtenstein
				Monaco
e)	Western Hemisphere
				Anguilla
				Antigua and Barbuda
				Aruba
				Belize
				Bermuda
				British Virgin Islands
				Cayman Islands
 				Dominica
				Grenada
				Montserrat
				Netherlands Antilles
				Panama
 				St. Kitts and Nevis
 				St. Lucia
 				St. Vincent and the Grenadines
 				The Bahamas
 				Turks and Caicos Islands

3)	Compliance with AML Laws and OECD Regulations

a)	Compliance with AML Laws:
The Financial Action Task Force (FATF) holds an annual exercise to examine the methods and trends – the typologies – of money laundering and, since 2001, of terrorist financing. The primary objective of this work is to obtain material that will help the FATF policy makers develop and refine anti-money laundering and counter-terrorist financing (AML/CFT) standards.
An enlistment in the NCCT List, published by the FATF (see 4)a)), therefore proves a country’s lack of or unwillingness to enforce AML Laws and is there proof of a countries non-compliance with AML Laws.

Offshore financial centers enlisted in the NCCT are:
		Cook Islands and 
Nauru.

b)	Broader approach:
In July 2000, the Executive Board of the IMF initiated an offshore financial center (OFC) program to help members identify gaps and reduce potential vulnerabilities in their financial systems, and improve the coverage of statistics on activities of OFCs in financial markets. The assessment component of the program evaluates financial regulation and supervision in jurisdictions with significant financial activity and few previous assessments of standards. , IMF staff undertake detailed assessments of the extent to which OFCs meet the standards advocated by the international standard-setters, and of any further action required to meet these standards. These standards include the Basel Principles on Banking and OECD standards for Corporate Governance.

Results:
i)	Aruba (June 2002):
-	It’s Banking system is largely compliant with 19 of the Basel Core Principles (BCP). In respect to 4 BCPs (esp. credit policies, loan evaluation, loan-loss  provisioning and on- and off-site supervision) further governmental efforts were considered to be necessary..
-	In respect to the insurance sector a new law has been passed but it’s effects could not be evaluated at the time of the assessment. Nevertheless according to this law Aruba will be observant of 12 of 17 IAIS Core Principles.
-	Considering AML regulations Aruba claims to be compliant with 25 of the 28 most important FATF recommendations.
-	Offshore corporate entities are virtually unsupervised and highly non-transparent with regard to ownership, corporate governance and financial condition.
-	 There is currently no supervision of the companies that help set up and manage the offshore corporate entites (due to the fact that these do not directly provide financial services).
-	In general respect: Aruba has made very substantial progress.

ii)	Andora (Feb. 2002):
-	Financial sector supervision is generally sound. 
-	A supervising authority is installed and Andorra is on it’s way to address those principoles and recommendations (with regard to AML) not fully compliant.
-	The insurance sector has not been fully assessed due to it’s minor importance (1 % of the financial system assets). A second technical assistance report will be drafted.

iii)	Anguilla:
-	Anguilla is in process of creating a supervising authority in the financial sector.
-	In the areas of AML/CFT, there has been progress in the legislative and regulatory framework but more intensified efforts are required to implement the legislation. Nevertheless Anguella has a relatively strong legal framework for countering money laundering and the financing of terrorism.
-	Offshore banks are mostly operated by domestic banks. 
-	Anguilla still has to put in place the necessary mechanisms for compliance with many of the Basel Core Principles (esp. with regard to the absence of prudential risk management requirements or guidelines)
iv)	British Virgin Islands (Apr. 2004):
-	The BVI has most of the essential elements for a suitable framework for financial supervision. Primary legislation provides the FSC with adequate independence and authority to license and supervise covered financial services, which include banking, insurance, securities (mutual funds, their management and invetors), and trust and company service providers, whether onshore or offshore, and implementation ahs largely been good.
-	There is a weakness with respect to onsite supervision of banking, insurance, and securities sectors due to the fact that there currently is no no regular and comprehensive examination and compliance program in operation.
-	Most banks are subsidiaries or branches of high-quality banking institutions subject to effective consolidated supervision by the home country supervisor. Prudential standards such as guidance and parameters for assuming and managing risk in accordance with BIS have not been issued.
-	The insurance sector is considered to be well supervised sector due to the fact that most companies due have strong ties to high-quality enterprises (see above). Guidelines with regard to corporate governance and internal controls are missing.
-	The legal framework for AML/CFT measures in the BVI is generally compliant with international standards. The implementation fo the full range of AML/CFT supervisory measures has not yet been fully achieved.
-	In general cross-border information exchange and cooperation has been excellent in all areas.

v)	Cyprus (July 2001):
-	There was some scarcity of resources available, and this meant that the amount of onsite supervision has been somewhat less than desirable.
-	Authorities are encouraged (EU accession) to introduce a large volume of legislative changes.
-	Nevertheless high-risk institutions from some countries have been licensed.

vi)	  Gibraltar (Oct. 2001)
-	The results of the assessment indicated that supervision is generally effective and thorough and that Gibraltar ranks as a well-developed supervisor. It meets most of the international standards and “good practices” and is making considerable progress with respect to those principles with which it si not yet fully compliant or observant.
-	Gibraltar is compliant with 18 of the Basel Core Principles and largely compliant with the other seven.
-	With regard to the regulation and supervision of investment and securities activities Gibraltar is fully compliant with 19 IOSCO principles, largely compliant with three and eight are not applicable.
-	In the area of company and trust regulation and the supervision of company and trust service providers, Gibraltar is in the forefront of the development of good practices. 

vii)	Guernsey (Noc. 2003):
-	The financial, regulatory, and supervisory system of the Bailiwick of Guernsey complies well with the assessed international standards.
-	The financial regulatory and supervisory system has been upgraded to meet international standards in banking, insurance, securities, anti-money laundering and combating the financing of terrorism, and best practices for company and trust service providers.
-	Legal, regulatory, and supervisory arrangements with regard to the supervising authority, and AML/CFT practices should be enforced.

viii)	Isle of Man (Oct. 2002)
-	The financial, regulatory, and supervisory system of the Isle of Man complies well with the assessed international standards.
-	The jurisdiction has been assessed to have a high level of compliance with the four key standards.
-	There are currently minor shortcomings in the independence and accountability of the supervising authority, the robustness of supervisory tools, the legal framework for AML/CFT. 

ix)	Jersey (Sep. 2002, Feb. 2003):
-	The financial, regulatory, and supervisory system of the Jersey complies well with the assessed international standards.
-	Shortcomings were noted in following areas:
•	Customer identification
•	Functions and regime of the supervising authority

x)	Liechtenstein (Nov. 2002)
-	Liechtenstein does comply with international standards for anti-money laundering and combating the financing of terrorism (AML/CFT); particularly, the standard issued by the FATF.
-	The expertise and the amount of the staff concerned with supervisory functions is considered to be insufficient.
-	Financing of terrorism is not fully covered under existing legislation.

xi)	Macao SAR (Aug. 2002):
-	There is a high level of compliance with the Basel Core Principles for Effective Banking Supervision. Macao SAR is compliant with 16 if the principles, largely compliant with eight others and materially non-compliant one-that is money laundering.
-	Supervision is generally effective and thorough. Most of the international standards with respect to banking and insurance are met.
-	The insurance sector is also supervised to a good standard. Maca SAR is observant of eight of the Core Principles promulgated by the IAIS, largely observant of six others, and materially non-observant of one – that is on-site supervision.

xii)	Monaco (Aug. 2003):
-	The Principality of Monaco has in place a comprehensive legal framework, supervisory structure, and practices that support a well regulated financial environment.
-	The authorities have over the past two years adopted a strongly proactive approach to supervision, especially in the AML/CFT area. Overall the supervisory structure is relatively complex, current arrangements are generally effective but may require strengthening to respond to new challenges.

xiii)	Montserrat (Nov. 2003)
-	Montserrat is materially non-compliant or non-compliant with most of the Basel Core Principles, particularly those relating to prudential requirements and supervision. Nevertheless the legal framework relating to autonomy ansd supervisory powers was found to be relatively sound particularly with regards to licensing and information sharing.
-	Primary money laundering legislation is comprehensive but significant gaps can still be found (esp. implement counter-terrorism financing provisions).

xiv)	Palau (April 2002);
-	Palau’s Government demonstrated a clear political commitment to AML. As a result of which only 12 of 30 plus financial institutions known to be active in Palau applied for a banking license under the new (AML influenced) provisions.
-	Palau has a largely satisfactory legal and institutional framework for preventing and detecting money laundering in the banking sector, while implementation capabilities need strengthening.
-	Palau’s overall degree of compliance with the Basel Core Principles was found to be modest, particularly the supervising authority’s independence needs strengthening. 
xv)	Panama (April 2001):
-	Panama was assessed to be compliant or largely compliant with 23 of the 25 Basel Core Principles. The remaining two were considered materially non-compliant with efforts underway to achieve compliance (offsite monitoring and investment activities).
-	With regard to the AML criteria Panama is considered to be fully compliant with the Core Principles (Basel) and well staffed (note: this assessment was held shortly after panama’s removal from the NCCT list)

xvi)	Samoa (Aug – Sep. 2002):
-	Offshore banks can still be licensed without the requirement of mainting a physical presence. Onsite supervision of domestic banks is insufficient. 
-	AML/CFT legal framework has been created but is not yet in line with the international standards for anti-money laundering and combating the financing of terrorism.
-	Company service providers operate under a relatively rigorous licensing system with supervision being generally effective.  
-	With regard to the insurance sector it is noted that the licensing of general insurance companies, which sell insurance products in other countries, potentially gives rise to concern involving unlicensed solicitation in other countries or causing problems with its customers.

xvii)	Vanuatu (Aug. 2003)
-	The domestic banking sector is supervised to a reasonably competent level, the entire offshore sector and the nonblank financial institutions within the domestic market are subject to a low standard of supervision. 
-	Legal framework is insufficient and there is a lack of resources. Nevertheless the staff in general is dedicated.
-	Vanuatu has made important progress in combating money laundering and the financing of terrorism, but still has some way to go in making the system robust.

4)	Blacklists:
“The group observed that one way to facilitate the implementation of recommendation 21 would be to establish an internationally agreed ‘black list’ of countries which do not or insufficiently apply the recommendations. But the group felt, and law enforcement authorities confirmed, that the FATF should not attempt to produce, for the time being, a public common minimal list.”
So far the statement of the FATF in it’s 1991 report.

There is still no such thing as an official black list but the List on Non-Cooperative Countries (NCCT).

The NCCT list published by FATF:
The FATF is engaged in a major initiative to identify non-cooperative countries and territories (NCCTs) in the fight against money laundering. Specifically, this has meant the development of a process to seek out critical weaknesses in anti-money laundering systems which serve as obstacles to international co-operation in this area. The goal of this process is to reduce the vulnerability of the financial system to money laundering by ensuring that all financial centres adopt and implement measures for the prevention, detection and punishment of money laundering according to internationally recognised standards.
On 14 February 2000, the FATF published an initial report on NCCTs. The report sets out twenty-five criteria, which help to identify relevant detrimental rules and practices and which are consistent with the FATF Forty Recommendations. It describes a process whereby jurisdictions having such rules and practices can be identified and encourages these jurisdictions to implement international standards in
On 14 February 2000, the FATF published an initial report on NCCTs. (Non Cooperative Countries).
The report sets out twenty-five criteria, which help to identify relevant detrimental rules and practices and which are consistent with the FATF Forty Recommendations. It describes a process whereby jurisdictions having such rules and practices can be identified and encourages these jurisdictions to implement international standards in this area. 
The next step in the NCCT initiative was the publication in June 2000 of the first Review identifying specific NCCTs. (The first “Blacklist”). The report named 15 jurisdictions (Bahamas, Cayman Islands, Cook Islands, Dominica, Israel, Lebanon, Liechtenstein, Marshall Islands, Nauru, Niue, Panama, Philippines, Russia, St. Kitts and Nevis, and St. Vincent and the Grenadines) as having critical deficiencies in their anti-money laundering systems or a demonstrated unwillingness to co-operate in anti-money laundering efforts. 

Current List of Non-Cooperative Countries and Territories 
The following list of non-cooperative countries was last changed on 2 July 2004: 

1.	Cook Islands
2.	Indonesia 
3.	Myanmar 
4.	Nauru 
5.	Nigeria 
6.	Philippines 

5)	What is the real meaning of such a Blacklist-are there any legal or economical consequences for those countries?

a)	Legal consequences:
The FATF can be described as a Transgovernmental Regulatory Organization (TRO). It has no juridical means to enforce its recommendations, either by it’s own force or as part of an international organization.
The NCCT list can therefore be seen as a means of a “Name and Shame”-policy in order to enforce the FATF recommendations with respect to non-members. 

b)Economical consequences:
The amount of economical consequences resulting from a NCCT-listing can be evaluated by focusing on FATF’s Members and affiliates:

FATF MEMBERS 
The following list shows the countries, territories, and organisations that make up the membership of the FATF.  For more on the status of each jurisdiction regarding compliance with anti-money laundering measures, relevant legislation, and other related information, select the appropriate hyperlink.
1.	Argentina 
2.	Australia 
3.	Austria 
4.	Belgium 
5.	Brazil 
6.	Canada 
7.	Denmark 
8.	European Commission 
9.	Finland 
10.	France 
11.	Germany 
12.	Greece 
13.	Gulf Co-operation Council 
14.	Hong Kong, China 
15.	Iceland 
16.	Ireland 
17.	Italy 
18.	Japan 
19.	Luxembourg 
20.	Mexico 
21.	Kingdom of the Netherlands 
22.	New Zealand 
23.	Norway 
24.	Portugal 
25.	Russian Federation 
26.	Singapore 
27.	South Africa 
28.	Spain 
29.	Sweden 
30.	Switzerland 
31.	Turkey 
32.	United Kingdom 
33.	United States 
 	OBSERVER  BODIES AND ORGANISATIONS 
The following international bodies and organisations have observer status with the FATF.   The regional FATF-style bodies have similar form and functions to those of the FATF, and some FATF members are also members of these bodies.  The international organisations listed are those which have, among other functions, a specific anti-money laundering mission or function.  To access additional information on any of these bodies or organisations, select the appropriate hyperlink.
FATF-Style Regional Bodies 
•	Asia / Pacific Group on Money Laundering (APG) 
•	Caribbean Financial Action Task Force (CFATF) 
•	Council of Europe Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures (MONEYVAL) (formerly PC-R-EV) 
•	Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) 
Financial Action Task Force on Money Laundering in South America (GAFISUD)
Other International Organisations 
[The languages listed after each of the links indicate the languages in which the sites are available.] 
•	African Development Bank [English/French] 
•	Asia Development Bank [English] 
•	The Commonwealth Secretariat [English] 
•	Egmont Group of Financial Intelligence Units [English] 
•	European Bank for Reconstruction and Development (EBRD) [English/French/German/Russian] 
•	European Central Bank (ECB) [English (full site)//Danish/Dutch/Finnish/French/
German/Greek/Irish/Italian/Portuguese/Spanish/Swedish (partially)] 
•	Europol [English (full site)//Danish/Dutch/Finnish/French/German/Greek/Irish/Italian/
Portuguese/Spanish/Swedish (partially)] 
•	Inter-American Development Bank (IDB) [English/French/Japanese/Portuguese/Spanish] 
•	Intergovernmental Action Group against Money-Laundering in Africa (GIABA) 
•	International Association of Insurance Supervisors (IAIS) [English] 
•	International Monetary Fund (IMF) [English/German/Spanish] 
•	International Organisation of Securities Commissions (IOSCO) [English] 
•	Interpol [English] 
•	Organization of American States / Inter-American Committee Against Terrorism (OAS/CICTE) [English/Spanish] 
•	Organization of American States / Inter-American Drug Abuse Control Commission (OAS/CICAD) [English/Spanish] 
•	Organisation for Economic Co-operation and Development (OECD) [English/French] 
•	Offshore Group of Banking Supervisors (OGBS) 
•	United Nations Office on Drugs and Crime (UNODC) [English] 
•	World Bank [English/French/Japanese/Portuguese/Russian/Spanish] 
World Customs Organisation (WCO) [English/French]	

Countries listed as NCCT will suffer from serious economical an political pressure exerted by these countries and organizations. For an example:

The USA PATRIOT Act provision that prohibits transactions (directly or indirectly) between U.S. financial institutions and foreign shell banks played a key role in Nauru’s decision to cancel the licenses of shell banks in its jurisdiction and, undoubtedly, was a major factor contributing to the decrease noted globally in the number of offshore banks. 
While the USA PATRIOT Act has had a dramatic impact in reducing the number of shell banks globally, and more OFCs appear to be strengthening their regulatory capacity, the lack of transparency that characterizes the offshore sector makes OFCs attractive places for those who want to hide the movement of their funds. At a time when criminal and terrorist organizations threaten political and economic stability, concerted efforts to effectively supervise and regulate OFCs are essential.

And a NCCT listing will be a handy excuse for any pariah treatment due to the fact that the FATF is an internationally (rather) recognized independent authority. Any economical saction with regard to the NCCT listing will therefore be widely respected as a means of ensuring a secure financial global market.

I.  Definition of Offshore Financial Centers 
Offshore financial centers (OFCs) are typically segregated from the traditional banking structure of the jurisdiction. At least 90 percent of all jurisdictions offering offshore financial services restrict access to the offshore sector to non-residents, thereby creating a highly confidential and parallel financial system within their own borders. Many jurisdictions with OFCs conduct financial transactions only in currencies other than the local currency. OFCs also differ from onshore jurisdictions in their regulatory regimes and legal frameworks. Many OFCs lack the stringent regulatory and supervisory regimes found in developed onshore jurisdictions. In the majority of OFCs, banks are not required to adhere to a wide range of regulations normally imposed on onshore banks. In most OFCs, non-bank financial industries, such as the insurance and securities industries, are subject to even less, if any, regulation than is the banking industry. 
OFCs provide business and financial planning options, including: sophisticated trade financing; estate planning for high net worth individuals; tax mitigation for individuals and corporations; avoidance of exchange controls; liability containment for ships and airplanes; sophisticated insurance management options; investment opportunities that transcend home country marketing regulations; preservation of assets; investment of overnight funds; and freedom from certain home country regulatory requirements. 
One of the reasons OFCs are so attractive are the existence of legal frameworks designed to obscure the identity of the beneficial owner, to promote regulatory and supervisory arbitrage, and to provide mitigation or evasion of home-country tax regimes.   Additionally, OFCs are usually reluctant to cooperate with regulators and law enforcement officials from other jurisdictions.
II.  Identifying OFCs
The Financial Action Task Force comprised a list of 25 criteria “for defining non-cooperative countries or territories.”  These 25 criteria are broken down into four categories, as listed below:
A.  Loopholes in Financial Regulations
1.  Inadequate regulation or supervision of financial institutions.
2.  Inadequate rules for the licensing or creation of financial institutions, including assessing the backgrounds of their managers or beneficial owners.
3.  Absence of measures to guard against the holding of management functions and control or acquisition of a significant investment in a financial institution by criminals or their confederates.
4.  Existence of anonymous accounts.
5.  Lack of effective laws, regulations, or agreements between supervisory authorities and financial institutions or self-regulatory agreements among financial institutions, and no “know your client” rules.
6.  Lack of record keeping laws or regulations for a sufficient time (5 years).
7.  Legal or regulatory obstacles to access by regulatory or judicial authorities to records of transactions, ownership, etc.
8.  One-way secrecy laws that can be used against, but not lifted by, administrative authorities investigating money laundering.
9.  One-way secrecy laws that can be used against, but not lifted by, judicial authorities in criminal investigations involving money laundering.
10.  Absence of “suspicious transactions” reporting requirements.
11.  Lack of monitoring any “suspicious transaction” reporting requirements in place.
B.  Obstacles Raised by Other Regulatory Requirements
12.  Inadequate commercial law requirements for registration of business and legal entities (name, address, directors, articles of incorporation, etc.).
13.  Obstacles to identification by financial institutions of the beneficial owner, director/officer of a company or beneficiaries of a legal or business entity.
14.  Existence of regulatory systems that allow financial institutions to carry on financial business where the beneficial owner is unknown, or represented by an intermediary (attorney) who refuses to divulge the information, and reporting to authorities is not required.
C.  Obstacles to International Cooperation
15.  Laws or regulations prohibiting international exchange of information between administrative anti-money laundering authorities.
16.  Prohibiting relevant administrative authorities to conduct investigations or inquiries on behalf of their foreign counterparts.
17.  Unwillingness to respond constructively to requests for information (long delays, etc.).
18.  Restrictive practices in international cooperation against money laundering between supervisory authorities based upon grounds that such transactions may relate to tax matters.
19.  Failure to criminalize laundering proceeds from serious crimes.
20.  Laws prohibiting, or restrictive conditions, on the judicial exchange of information.
21.  Unwillingness to respond constructively to mutual legal assistance requests.
22.  Refusal to provide judicial cooperation in cases involving offenses recognized as such by the requesting jurisdiction, especially on grounds that the information may relate to tax matters.
D.  Inadequate Resources for Preventing and Detecting Money Laundering Activities
23.  Failure to provide administrative and judicial authorities with the necessary financial, human, or technical resources to exercise their functions or to perform their investigative duties.
24.  Inadequate or corrupt professional staff in either governmental, judicial, or supervisory authorities or among those responsible for anti-money laundering compliance in the financial services industries.
25.  Lack of a centralized unit (Financial Intelligence Unit) or similar organization for the collection, analysis, and dissemination of suspicious transactions information to competent authorities.
III.  The OECD’s Criteria
The OECD has also weighed in regarding harmful tax practices in various jurisdictions, all of which are indicative of an Offshore Financial Center.  There are four criteria outlined in 1998 to identify preferential tax regimes.  These are:
A.  Low or No Taxes
B.  Ring-Fencing from the Domestic Economy (separate rules for international finance)
C.  Lack of Tax Regime Transparency
D.  No effective Exchange or Information
IV.  Conclusion
Many of these criteria are based upon the 40 Recommendations, Basle Recommendations, and other international criteria for detection of anti-money laundering regimes in other countries.  However, particular attention was paid to offshore financial centers due to their preferential tax regimes that attract some of the more unsavory characters in the financial community.  In a nutshell, an offshore financial center will go easy on foreign investment by levying little or no taxes, with ease of incorporation and financial transactions.  “Offshore” does not necessarily mean “island,” although a disproportionate number of Caribbean island nations have been labeled OFC’s.
Sources:
U.S. State Dept., INCSR 2001. http://www.state.gov/g/inl/rls/nrcrpt/2001/rpt/8487.htm
OECD, “The OECD’s Project on Harmful Tax Practices:  The 2004 Progress Report, Feb. 4, 2004.  http://www.oecd.org/dataoecd/60/33/30901115.pdf
FATF,  “Fourth Annual Review of Non-Cooperative Countries or Territories,” June 20, 2003.  http://www1.oecd.org/fatf/pdf/NCCT2003_en.pdf.
Module 7A:  Comparative Analysis of USA AML Regime and UK/Commonwealth AML
Written by:  R. LEWAYNE JOHNSON, J.D.
Contents:  [Introduction]; [FATF Recommendations]; [FATF Impact on Access to Financial Services]; [U.S. Approach to Anti-Money Laundering Controls]; [U.K. Approach to Anti-Money Laundering Controls]; [Conclusion]
Introduction

This report consists of three sections.  Following this introduction the first section consists of an overview of the essential criteria and the elements of the FATF Recommendations.  The second section contains a comparative analysis of the United States (U.S.) and United Kingdom (U.K.) progress in accomplishing the FATF Recommendations.  Finally, there is a conclusion to the analysis and an assessment of FATF’s requirements for future guidance.
FATF Recommendations

Nations are currently viewed through the scope of all the FATF recommendations.  These recommendations, nonetheless, set minimum standards for countries to use as a base to model detailed procedures/systems based on the countries constitutional frameworks and particular circumstances applicable to banks, non-bank financial institutions, or other businesses or entities subjected to anti-money laundering obligations.

These instruments include the following measures:

•	Scope of the Criminal Offence of Money Laundering:  Countries should used the UN 1988 Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances and the UN 2000 Convention against Transnational Organized Crime as a threshold for criminalizing money laundering.

•	Provisional measures and confiscation:  Countries should ensure that their criteria for establishing intent and knowledge in proving the offense of money laundering comports with the standards outlined in the 1988 and 2000 Conventions.  Additionally, countries should ensure that criminal liability or civil/administrative liability attaches to all legal persons.

•	Customer due diligence and record keeping and Reporting of suspicious transactions and compliance:  Countries should ensure that secrecy laws imposed by financial institutions do not inhibit the implementation of FATF recommendations.  Additionally, countries should ensure that due diligence is taken using FATF recommended CDD measures as guidance.

•	Other measures to deter money laundering and terrorist financing:  In relations to politically exposed persons, countries should ensure that appropriate risk management systems are in place to ascertain whether the individual is a politically exposed person.  Involve senior management in the conducting and monitoring of business relations with the person.  Countries should ensure that measures are in place that allow financial institutions dealing with cross-border correspondent banking to gather sufficient information about a respondent institution, assess the respondent institution’s anti-money laundering and terrorist financing controls, document the responsibilities of each institution and as it applies to payable-through accounts, coordinate with the respondent bank on due diligence.

•	Additional recommendations full under the following subjects:

o	Measures to be taken by financial institutions and non-financial businesses and professions to prevent money laundering and terrorist financing

•	Measures to be taken with respect to countries that do not or insufficiently comply with the FATF recommendations
•	Regulatory and supervision

o	Institutional and other measures necessary in systems for combating money laundering and terrorist financing.     

•	Competent authorities, their powers and resources
•	
•	Transparency of legal powers and arrangements

o	International Co-operation

•	Mutual legal assistance and extradition
•	Other forms of co-operation1 

FATF Impact on Access to Financial Services

The implementation of the FATF AML standards throughout the world has placed the international financial sector under great pressure.  The methodology used in both the U.S. and the U.K. campaigns to implement Anti-Money Laundering measures and to Combat Terrorist Financing (AML/CTF).  The methodology is used to guide the countries’ compliance with the AML/CTF standards as contained in the FATF Forty Recommendations 2003 and the FATF Eight Special Recommendations on Terrorist Financing 2001.  The methodology compliments the structure of the FATF Recommendations.  Financial institutions in both the U.S. and U.K. undertook extensive projects to prepare for implementation.  Following are the methodologies took by these countries and their financial institutes to implement anti-money laundering measures and to combat terroist financing. 

U.S. Approach to Anti-Money Laundering Controls

The United States remains particularly concerned about terrorist financing activity in a core set of approximately two-dozen countries around the world.  Accordingly, the bulk of U.S. anti-money laundering technical assistance is focused on making these countries less vulnerable to the terrorist financing threat and on making terrorists and their assets more vulnerable to counter attacks. 

The U.S. State Department is funding most of this inter-agency effort and is coordinating and leading the entire undertaking of technical assistance.  So far, the Department has led comprehensive vulnerability and needs assessments of, and produced training and technical assistance implementation plans for, 17 of these priority countries.  The remaining assessments are planned for 2004, security and political conditions permitting. Assistance, pegged to the implementation plans, is being provided to all of the assessed countries.  The program takes a systemic and comprehensive approach, with assistance—targeted at five core objectives—delivered in both sequential and parallel stages: 

•	Countries must first have adequate anti-money laundering/antiterrorist financing laws.  They must comply with FATF’s anti-money laundering and antiterrorist financing recommendations including the criminalization of money laundering and terrorist financing and the establishment of effective measures to block and freeze assets. 

•	With appropriate laws in place, training and technical assistance can be focused to simultaneously develop the three core entities responsible for implementing laws. Training is provided for criminal investigators in customs and other law enforcement services to assist them in detecting and tracking money laundering and terrorist financing and in developing the evidence to support indictments and prosecutions against criminals and terrorists; for regulators that supervise the financial sector so that they can ensure that all relevant banking and non-banking financial institutions know and follow “know your customer,” suspicious transaction reporting, and other record keeping and good practices procedures; and for the prosecutors and judges who will be key to the criminal prosecution of cases against criminals, terrorists and their supporters. 

•	Typically, the capstone to this effort is the development of Financial Intelligence Units (FIUs), which are often tasked with developing the regulations that banking and non-banking financial organizations must follow and where suspicious transaction reports and other intelligence is collected, analyzed and disseminated both to help develop cases domestically and sharing internationally through FIUs in other countries as part of transnational investigations.

The U.S. Government, however, is not the sole provider of such assistance.  The United States supports a number of regional training programs around the world in which officials from neighboring countries are brought together for specialized anti-money laundering and antiterrorist financing training.  The global network of International Law Enforcement Academies (ILEAs), funded and managed by the State Department’s Bureau of International Narcotics and Law Enforcement Affairs (INL), has enhanced its anti-money laundering curricula, including the incorporation of new segments on terrorist financing.  The State Department’s Anti-terrorist Assistance (ATA) Program similarly includes terrorist financing segments in the curricula it delivers at various antiterrorism training centers around the world such as the Malaysian-run Southeast Asia Regional Center for Counter-terrorism.  These and other broad-based training initiatives allowed the U.S. to provide some form of anti-money laundering or antiterrorist financing assistance to nearly 100 countries in 2003. 

International efforts to identify, block, and freeze terrorist assets persevered in 2003; however, the task is growing more challenging as the most vulnerable targets have been successfully attacked and as terrorists employ countermeasures to further protect their funds.  The U.S. Treasury reports that at the end of 2003, some $140 million worth of terrorist assets worldwide have remained blocked since the crackdown began shortly after September 11, 2001.  This represents approximately a 12 percent increase from the $125 million total at the end of 2002. 

A number of factors help explain the slower pace in 2003.  Most notably, assets were less concealed and thus more vulnerable to detection and blocking when measures were suddenly implemented in the immediate aftermath of 9/11; in short, the low hanging fruit has been picked.  Meanwhile, to avoid the successful targeting of the formal financial sector, terrorist organizations appear to be placing more emphasis on traditional, ethnic-based alternative remittance systems, including trade-based money laundering, and on nongovernmental organizations such a charities.  Identifying and tracking funds through these alternative networks—a tough enough assignment even for countries with sophisticated anti-money laundering regimes—is a staggering challenge for many of the key terrorist financing countries who are only now beginning to develop competent anti-money laundering institutions.  The FATF has sought to help overcome this challenge by issuing various interpretative notes and best practices guidelines on its Special Recommendations dealing with charities and the blocking and freezing of assets.  Indeed, at its 2003 annual typologies meeting, which addressed such issues as money laundering trends and enforcement and regulation best practices, FATF focused on the charities problem, particularly the challenge of tracking and monitoring funds raised by charities when they are distributed in areas that have no formal banking, accounting, or record keeping infrastructure and depend on cash economies. 

Finally, important substantive strides were made with regard to burden sharing in 2003. The proliferation of terrorist attacks around the world brought the threat home to more and more countries and underscored the fact that no one country has the sole obligation or wherewithal to meet the entire challenge.  Sharing the burden of anti-money laundering and antiterrorist financing training and technical assistance is especially important because it is so labor intensive.  U.S. experts are particularly stretched because of their frequent need to undertake, nearly simultaneously, assessment, training, and investigative missions.  Efforts to identify priorities and coordinate assistance by the major donor countries took an important step forward at the June 2003 G-8 Summit in Evian.  There the heads of state agreed to establish the Counter-terrorism Action Group (CTAG) for these priority-setting and coordination purposes. CTAG consists of the G-8 members (U.S., UK, France, Germany, Italy, Canada, Japan, and Russia), the European Union, and representatives of the UN Counter-terrorism Center, as well as other representatives, invited on a case-by-case basis, who have demonstrated a willingness and ability to provide counter terrorism assistance.  CTAG—recognizing the importance of the issue and the potential for burden sharing—focused its first mission on terrorist financing. It has partnered with FATF, providing that organization with a list of countries CTAG members are interested in providing assistance to so that FATF can assess their antiterrorist financing technical assistance needs.  FATF will deliver these assessments to the CTAG in early 2004 enabling the donors for the first time to follow through with coordinated, cost-saving and gap-closing counter terrorism technical assistance programs. 

As we look beyond the accomplishments of 2003 and into the future, we see that much still remains to be done to combat money laundering and terrorist financing.  There remain significant challenges in the adoption and implementation of anti-money laundering and antiterrorist financing standards worldwide.  However, two new FATF-style regional bodies may be established in 2004, bringing more rigorous anti-money laundering disciplines to two regions especially critical in the war against terrorism: the Middle East and Central Asia.  The U.S. will significantly enhance its anti-money laundering programs in East Africa as part of the President’s counter terrorism initiative for this region.  Operationally, the biggest challenge will be countering moves by criminals and terrorists to conduct their transactions through alternative, often underground, remittance systems.  This will press intelligence collection and criminal investigation skills to their limits as they struggle to be effective in very closed, often hostile foreign environments.  One of the means being considered to attack this challenge is the creation of an international network of Trade Transparency Units (TTUs). Patterned after the international network of Financial Intelligence Units (84 worldwide) that, among other missions, collect, analyze and disseminate information on suspicious transactions, the TTUs would similarly focus on detecting anomalies in trade data—such as deliberate over and under-invoicing—that can be a powerful predictor of trade-based money laundering.  By focusing on commodities that often serve as stores-of-value, such as gold and precious gems, and are used to settle accounts without involving the formal financial sector, the TTUs would get to the heart of much of the alternative remittance challenge and help expose the criminals, terrorists, and their associates and assets to punitive and deterrent enforcement action. 

These initiatives will be essential to achieving further progress against money laundering and terrorist financing.  Progress will continue to require strong, imaginative and well-resourced leadership from the United States.  But we need not go it alone.  The gains the United States made in 2003 through its diplomatic and technical assistance efforts show an increasing willingness of the international community to cooperate in this fight—to comply with the measures needed to block, deter, and expose money laundering and terrorist financing, and to provide the assistance needed to turn the political will to comply into the operational ability to enforce the laws and regulations that lead to the confiscation of crime and terrorist-related assets and the prosecution and conviction of money launderers and terrorist financers.

U.K. Approach to Anti-Money Laundering Controls 

Similar to the U.S. economy being a target for money laundering and terrorist financing, the United Kingdom (UK) in playing a leading role in European and world finance remains attractive to money launderers because of the size, sophistication, and reputation of its financial markets.  Although drugs are still a major source of illegal proceeds for money laundering, the proceeds of other offenses, such as financial fraud and the smuggling of people and goods, have become increasingly important both in the U.S. and U.K.  The past few years have witnessed the movement of cash placement away from High Street banks and mainstream financial institutions.  Criminals continue to use bureaux de change, cash smuggling into and out of the U.K., gatekeepers (including solicitors and accountants), and the purchase of high-value assets as disguises for illegally obtained money.
 
In an effort to prevent the use of the financial system of the U.K. from being exploited by money laundering and terrorist financing the U.K. has implemented the provisions of the European Union’s two Directives on the prevention of the use of the financial system for the purpose of money laundering and the Financial Action Task Force (FATF) Forty Recommendations on Money Laundering.  

Further, the U.K. has since 1986 criminalized narcotics-related money laundering. The laundering of proceeds from other serious crimes is criminalized by subsequent legislation.  Similar to the U.S. requirements banks and other non-financial institutions to submit Suspicious Activities Reports (SAR), banks and non-bank financial institutions in the U.K. must report suspicious transactions. 

In November 2001, money-laundering regulations were extended to money service bureaus (e.g., bureaux de change, money transmission companies).  As of January 1, 2004, more sectors are subject to formal suspicious transaction reporting (STR) requirements, including attorneys, solicitors, accountants, real estate agents, and dealers in high-value goods such as cars and jewelry.  Sectors of the betting and gaming industry that are not currently regulated are being encouraged to establish their own codes of practice, including a requirement to disclose suspicious transactions. 

The U.K. legislation on July 24, 2002, enacted the Proceeds of Crime Act 2002.  The act went into force on January 1, 2003.  The final regulations will take effect on March 1, 2004.  The specific of this act is that it creates, for the regulated sector, a new imprisonable offense of failing to disclose suspicious transactions.  This offense is in respect to all crimes, not just narcotics- or terrorism-related crimes.  This was not the case previously prior to the enactment of the act.  Along with the Act came an expansion of investigative powers relative to large movements of cash in the U.K.  In light of this, Her Majesty’s (HM) Customs has increased its national priorities to include investigating the movement of cash through money exchange houses, and identifying unlicensed money remitters.  A total of $28.5 million in cash seizures was made under the new act in 2003. 

The U.K.’s banking sector provides accounts to residents and nonresidents, who can open accounts through private banking activities and various intermediaries that often advertise on the Internet and also offer various offshore services.  Private banking constitutes a significant portion of the British banking industry.  Both resident and nonresident accounts are subject to the same reporting and record keeping requirements.  Individuals typically open nonresident accounts for a tax advantage or for investment purposes. 

Bank supervision falls under the Financial Services Authority (FSA).  The FSA’s primary responsibilities are in areas relating to the safety and soundness of the institutions in its jurisdiction.  The FSA also plays an important part in the fight against money laundering through its continued involvement in the authorization of banks, and investigations of money laundering activities involving banks.  The FSA administers a civil-fines regime and has prosecutorial powers.  The FSA has the power to make regulatory rules with respect to money laundering, and to enforce those rules with a range of disciplinary measures (including fines) if the institutions fail to comply. 

In December 2003, the FSA fined Abbey National, the U.K.’s sixth largest bank, 2.3 million British pounds (approximately $4.2 million), for “extremely serious failings” in its anti-money laundering procedures during the period 2001-2003.  According to the FSA, Abbey National was cited for failure to report suspicious banking transactions in a timely manner, as well as failure to carry out proper identity checks on new customers. 
STRs are filed with the Financial Intelligence Division (FID), formerly the Economic Crime Bureau, of the National Criminal Intelligence Service (NCIS). The NCIS serves as the UK’s financial intelligence unit (FIU).  The FID analyzes reports, develops intelligence, and passes information to police forces and HM Customs and Excise for investigation.  In 2001, the FID received approximately 32,000 STRs, and 65,000 STRs in 2002. The FID estimates it will receive roughly 100,000 STRs in 2003. 

Another initiative passes by the U.K. legislative body aimed at fighting money laundering and terrorism financing is that to The Terrorism (United Nations Measures) Order 2001.  This Order makes it an offense for any individual, without a license from the Treasury, to make any funds for financial or related services available, directly or indirectly, to, or for the benefit of, a person who commits, attempts to commit, facilitates, or participates in the commission of acts of terrorism.  Further, the Order makes it an offense for a bank or building society to fail to disclose to the Treasury a suspicion that a customer or entity, with whom the institution has had dealings since October 10, 2001, is attempting to participate in acts of terrorism.  The Anti-Terrorism, Crime, and Security Act 2001 provides for the freezing of assets. 

As a direct result of the events of September 11, 2001, the FID established a separate Terrorist Finance Team (TFT) to maximize the effect of reports from the regulated sector. The TFT chairs a law enforcement group to provide outreach to the financial industry concerning requirements and typologies.  The operational unit that responds to the work and intelligence development of the TFT has seen a threefold increase in staffing levels directly due to the workload.  The Metropolitan Police responded to the growing emphasis on terrorist financing by expanding the focus and strength of its specialist financial unit dedicated to this area of investigations.  This unit is now called the National Terrorist Financing Investigative Unit (NTFIU). 

The activity in the U.K.’s fight against money laundering and terrorism financing has netted results.  In 2003, the U.K. issued 21 terrorist asset freeze orders on 72 individuals and 16 organizations.  Two of the orders implemented the European Union’s September 2003 decision to freeze all funds, other financial assets, and economic resources of Hamas.  On November 19, 2002, Chancellor Gordon Brown ordered financial institutions in the U.K. to freeze funds belonging to the Benevolence International Foundation (BIF). BIF’s Chief Executive, Enaam Arnaout, a Syrian-born U.S. citizen, was indicted in the United States for running a racketeering enterprise, conspiracy to launder money, money laundering, wire and mail fraud, and providing material support to organizations, including Usama Bin Ladin’s terror network. 

Conclusion

Both the U.S. and the U.K. campaign to implement anti-money laundering measures and to combat terrorist financing has provided positive movements toward compliance with the AML/CFT Standards as contained in the FATF.  Both countries have comprehensive approaches to combating money laundering and combating terrorist financing.  Additionally, both countries cooperate with foreign law enforcement agencies investigating narcotics-related financial crimes.  

Both the U.S. and the U.K. are members of the FATF.  The NCIS is an active member of the Egmont Group and has information sharing arrangements in place with the FIUs of the United States, Belgium, France, and Australia.  The Mutual Legal Assistance Treaty (MLAT) between the U.K. and the U.S. has been in force since 1996.  The U.S. and U.K. recently negotiated an asset sharing agreement that is awaiting signature by the appropriate parties.   The UK also has an MLAT with the Bahamas.  Additionally, there is an MOU between the U.S. Customs Service and HM Customs and Excise. 

The U.S. and the U.K. should continue the strong enforcement of their comprehensive anti-money laundering/counter terrorist financing program and their active participation in international organizations to combat the domestic and global threat of money laundering and the support and financing of terrorists and their organizations.

Module 6A Assignment
Samuel Frankel
AML II Summer 2004
9/9/04

Anti-Money Laundering Requirements in General

	The FATF has issued a revised list of the 40 Recommendations in 2003, addressing the measures all countries should take to combat money laundering.  The recommendations include criminalizing money laundering and certain predicate crimes to money laundering, provide methods of confiscating or forfeiture of property and proceeds, practicing due diligence and record keeping by financial and non-financial institutions, reporting suspicious transactions and enforcing compliance with anti-money laundering laws, implementation of appropriate sanctions for failing to comply, prohibit shell banks, cross-border transport of currency, establish procedures for dealing with countries that do not comply with anti-money laundering protocols, regulate financial and non-financial businesses to ensure compliance, require certain designated non-financial businesses to comply with anti-money laundering rules (casinos, lawyers, accountants, etc.), provide for the establishment of a financial investigative unit, cooperation within a country’s law enforcement branches and judicial branches, as well as international cooperation and enforcement, avoid bank secrecy or abuse of trusts an other financial tools, and provide for mutual cross-border assistance, enforcement, confiscation, and forfeiture.  Eight additional recommendations were written dealing with terrorist financing as well, and mainly address non-profit organizations and money wiring of funds, in addition to criminalizing terrorist acts.

	FATF conducts yearly reviews, and certain members provide the FATF with self-assessments on a regular basis.  The stated goal, however unrealistic, is to have all member countries implement each of the 40 Recommendations to the fullest extent possible.

U.S.A. AML Scheme

	The United States is a member of FATF, and regularly submits mutual evaluations to the organization.  According to the Second Round of Mutual Evaluation, as outlined in the VIII FATF Annual Report (1996-1997), the United States began strengthening its anti-money laundering regime by implementing the following:

$		introducing new suspicious activity reporting (SAR) system and more comprehensive civil safe harbour provisions;
$		the modification of the currency transaction reporting system so as to reduce regulatory burdens on the U.S. banking industry by the expansion of exemptions, and the use of a simplified currency transaction reporting (CTR) forms;
$		extending the list of money laundering predicate offences to cover terrorism, health care and immigration offences;
$		improved co-operation between government and financial industry representatives in meeting anti-money laundering objectives through the establishment of various co-ordinatory groups;
$		the implementation of Project Gateway which provides on-line financial intelligence to state and local government authorities;
$		new funds transfer record keeping rules; and
$		the efforts to encourage the states to enact laws and co-ordinate law enforcement and regulatory activity against money laundering.

	According to the X FATF Annual Report (1998-1999), the United States proposed certain “know Your Customer” laws, that were subsequently withdrawn from consideration.  However, the climate changed as a result of the attacks of September 11, 2001, and new legislation dealing with, among other things, money laundering and terrorist financing, was passed in the form of the USA PATRIOT Act (referred to as the “Act”).  Some of the pertinent sections of the Act are sections 314(a) and 314(b), which refer to the exchange of information between the government and financial institutions, and between financial institutions themselves.  Section 314(a) requires the Secretary of the Treasury to adopt regulations to encourage authorities and law enforcement authorities to share with financial institutions information regarding individuals, entities, and organizations  engaged in or reasonably suspected, based on credible evidence, of engaging in terrorist acts or money laundering activities.

	The contact agency is the Financial Crimes Enforcement Network (“FinCEN”), the United States’ FIU.  The FinCEN enacted regulations allowing law enforcement agencies to provide information, through FinCEN, to various points of contact in the financial industry in order to locate accounts and transactions of persons that may be involved in terrorism or money laundering.  This process is not a substitute for subpoenas or other legal avenues of obtaining information.  It merely allows a process for authorities to conduct a quick nationwide canvass of activities of certain individuals within the past 12 months of the request.  Financial institutions have two weeks to respond if any matches were found.

	In order for one of these 314(a) Information Requests to be sent, FinCEN requires evidence that a certain case is significant through documentation showing the size or impact of the case, the seriousness of the underlying criminal activity, the importance of the case to other agencies, and proof of exhaustion of other traditional means of investigation.

	Section 314(b) allows financial institutions to share information with each other regarding individuals, institutions, organizations, or countries for a period of one year after notifying FinCEN.  The financial institution must have established adequate procedures to safeguard the security and confidentiality of any information.  Information received by financial institutions pursuant to section 314(b) can not be used for any purpose other than identifying and reporting on activities that may involve terrorist or money laundering activities.

	The Act contains many other provisions regarding the fight against money laundering, such as section 352, which requires all financial institutions to implement comprehensive anti-money laundering policies and procedures programs.  In addition to the USA PATRIOT Act, financial institutions must comply with the Bank Secrecy Act of 1982 (the "BSA") and cooperate with the Office of Foreign Asset Control.  The USA PATRIOT Act augments BSA by requiring financial institutions to establish anti-money laundering programs and by providing enhanced civil liability immunity for financial institutions that file suspicious activity reports.  Through FinCEN, certain non-financial entities must comply with the provisions of the Act, including broker dealers, futures commission merchants, and casinos, as well as travel agencies, vehicle sales, and dealers in precious metals and stones.

U.K. AML Scheme

	Like the United States, the United Kingdom is a member of FATF, and regularly submits mutual evaluations to the organization.  According to the Second Round of Mutual Evaluation, as outlined in the VIII FATF Annual Report (1996-1997), the United Kingdom began strengthening its anti-money laundering regime by implementing the Money Laundering Regulations of 1993.  These regulations lay down requirements as to customer identification, record-keeping, supervision and the reporting of suspicious transactions for a wide range of businesses. Active measures have also been taken with respect to international co-operation and many new bilateral confiscation agreements have been entered into. These measures have been complemented by administrative steps such as improving the guidance notes for financial institutions and the procedures relating to the reporting and investigation of suspicious transaction reports, improving feedback to financial institutions, and increasing the awareness of money laundering for non-financial businesses.

	Most recently, the United Kingdom implements the Proceeds of Crime Act of 2002 (the “Act”), prior to which there were five different pieces of primary and secondary legislation dealing with money laundering.  The Act consolidated this legislation by creating a set of general offenses relating to dealings with proceeds of all crimes.  Particularly important was the creation of a new offense of failure to report suspicions of money laundering of any proceeds of crime, rather than just suspicions in relation to the proceeds of terrorism or drugs offenses, as under the prior legislation.

	The Act created three new principal money laundering offenses - “concealing, arranging, and acquiring and using” criminal property. The definition of criminal property in the Act means that all three new principal money laundering offenses will apply to the laundering of a criminal’s own proceeds of crime, as well as those of someone else.  An explanation of “concealing, arranging, and acquiring and using” is as follows:  A person commits an offense if they conceal, disguise, convert or transfer criminal property or remove criminal property from England and Wales or from Scotland or from Northern Ireland.  If a person enters into or becomes concerned in an arrangement which they knew, or suspected, would facilitate another to acquire, retain, use or control criminal property and that the person concerned also knew or suspected that the property constituted or represented benefit from criminal conduct, he is guilty of an offense.  Lastly, a person commits an offence where a person knows or suspects that the property which is acquired, used or possessed constitutes or represents a benefit from crime.

	One of the things the Act does, as opposed to the United States’ laws regarding money laundering, is require lawyers to report suspicious activities.  The Act repeals and replaces certain sections of the Drug Trafficking Act 1994, and creates in its place an obligation on those in the “regulated sector” to report suspicions of any money laundering to the authorities.  This section widens the scope of the offense so that the obligation will now be to report the laundering of the proceeds of any criminal conduct, not just drugs. Additionally, there are reporting requirements under the Terrorism Act of 2000 and the Anti-terrorism, Crime and Security Act of 2001, relating to the reporting of suspicious activities regarding terrorist funds.

	Additionally, the United Kingdom implemented new Money Laundering Regulations of 2003, covering matters such as know your customer, record keeping and training, and Customs & Excise licensing regimes for bureaux de change check cashiers, and money transmitters.  These new regulations pertain to estate agents, casinos, dealers in high value goods, and certain professional services (legal, accounting, etc.).

Conclusions

	Both the United States and the United Kingdom have strengthen their anti-money laundering regimes since 2001, although neither nation is (nor should) in total compliance with each and every recommendation issued by FATF.  The United Kingdom has been more willing to expand the anti-money regulations to businesses that traditionally have the protections of privilege, such as the legal field.  However, both systems have greatly increased the predicate crimes, and international cooperation, concerning money laundering.

Resources:
FATF, http://www1.oecd.org/fatf/Ctry-orgpages/ctry-uk_en.htm and
FinCEN, http://www.fincen.gov/314afactsheet083120042.pdf and http://www.fincen.gov/fi_infoappb.html.
Irwin Mitchell, Money Laundering and the Proceeds of Crime Act 2002, The Legal 500, September 2002, available at http://www.icclaw.com/devs/uk/cc/ukcc_002.htm.
Money Laundering: The UK’s New Regime and Other Recent International Developments, Norton Rose, March 2003, available at:
http://www.nortonrose.com/publications/1412-Money%20laundering%20briefing.pdf.

Module 6A Assignment
Samuel Frankel
AML II Summer 2004
9/9/04

Anti-Money Laundering Requirements in General

	The FATF has issued a revised list of the 40 Recommendations in 2003, addressing the measures all countries should take to combat money laundering.  The recommendations include criminalizing money laundering and certain predicate crimes to money laundering, provide methods of confiscating or forfeiture of property and proceeds, practicing due diligence and record keeping by financial and non-financial institutions, reporting suspicious transactions and enforcing compliance with anti-money laundering laws, implementation of appropriate sanctions for failing to comply, prohibit shell banks, cross-border transport of currency, establish procedures for dealing with countries that do not comply with anti-money laundering protocols, regulate financial and non-financial businesses to ensure compliance, require certain designated non-financial businesses to comply with anti-money laundering rules (casinos, lawyers, accountants, etc.), provide for the establishment of a financial investigative unit, cooperation within a country’s law enforcement branches and judicial branches, as well as international cooperation and enforcement, avoid bank secrecy or abuse of trusts an other financial tools, and provide for mutual cross-border assistance, enforcement, confiscation, and forfeiture.  Eight additional recommendations were written dealing with terrorist financing as well, and mainly address non-profit organizations and money wiring of funds, in addition to criminalizing terrorist acts.

	FATF conducts yearly reviews, and certain members provide the FATF with self-assessments on a regular basis.  The stated goal, however unrealistic, is to have all member countries implement each of the 40 Recommendations to the fullest extent possible.

U.S.A. AML Scheme

	The United States is a member of FATF, and regularly submits mutual evaluations to the organization.  According to the Second Round of Mutual Evaluation, as outlined in the VIII FATF Annual Report (1996-1997), the United States began strengthening its anti-money laundering regime by implementing the following:

$		introducing new suspicious activity reporting (SAR) system and more comprehensive civil safe harbour provisions;
$		the modification of the currency transaction reporting system so as to reduce regulatory burdens on the U.S. banking industry by the expansion of exemptions, and the use of a simplified currency transaction reporting (CTR) forms;
$		extending the list of money laundering predicate offences to cover terrorism, health care and immigration offences;
$		improved co-operation between government and financial industry representatives in meeting anti-money laundering objectives through the establishment of various co-ordinatory groups;
$		the implementation of Project Gateway which provides on-line financial intelligence to state and local government authorities;
$		new funds transfer record keeping rules; and
$		the efforts to encourage the states to enact laws and co-ordinate law enforcement and regulatory activity against money laundering.

	According to the X FATF Annual Report (1998-1999), the United States proposed certain “know Your Customer” laws, that were subsequently withdrawn from consideration.  However, the climate changed as a result of the attacks of September 11, 2001, and new legislation dealing with, among other things, money laundering and terrorist financing, was passed in the form of the USA PATRIOT Act (referred to as the “Act”).  Some of the pertinent sections of the Act are sections 314(a) and 314(b), which refer to the exchange of information between the government and financial institutions, and between financial institutions themselves.  Section 314(a) requires the Secretary of the Treasury to adopt regulations to encourage authorities and law enforcement authorities to share with financial institutions information regarding individuals, entities, and organizations  engaged in or reasonably suspected, based on credible evidence, of engaging in terrorist acts or money laundering activities.

	The contact agency is the Financial Crimes Enforcement Network (“FinCEN”), the United States’ FIU.  The FinCEN enacted regulations allowing law enforcement agencies to provide information, through FinCEN, to various points of contact in the financial industry in order to locate accounts and transactions of persons that may be involved in terrorism or money laundering.  This process is not a substitute for subpoenas or other legal avenues of obtaining information.  It merely allows a process for authorities to conduct a quick nationwide canvass of activities of certain individuals within the past 12 months of the request.  Financial institutions have two weeks to respond if any matches were found.

	In order for one of these 314(a) Information Requests to be sent, FinCEN requires evidence that a certain case is significant through documentation showing the size or impact of the case, the seriousness of the underlying criminal activity, the importance of the case to other agencies, and proof of exhaustion of other traditional means of investigation.

	Section 314(b) allows financial institutions to share information with each other regarding individuals, institutions, organizations, or countries for a period of one year after notifying FinCEN.  The financial institution must have established adequate procedures to safeguard the security and confidentiality of any information.  Information received by financial institutions pursuant to section 314(b) can not be used for any purpose other than identifying and reporting on activities that may involve terrorist or money laundering activities.

	The Act contains many other provisions regarding the fight against money laundering, such as section 352, which requires all financial institutions to implement comprehensive anti-money laundering policies and procedures programs.  In addition to the USA PATRIOT Act, financial institutions must comply with the Bank Secrecy Act of 1982 (the "BSA") and cooperate with the Office of Foreign Asset Control.  The USA PATRIOT Act augments BSA by requiring financial institutions to establish anti-money laundering programs and by providing enhanced civil liability immunity for financial institutions that file suspicious activity reports.  Through FinCEN, certain non-financial entities must comply with the provisions of the Act, including broker dealers, futures commission merchants, and casinos, as well as travel agencies, vehicle sales, and dealers in precious metals and stones.

U.K. AML Scheme

	Like the United States, the United Kingdom is a member of FATF, and regularly submits mutual evaluations to the organization.  According to the Second Round of Mutual Evaluation, as outlined in the VIII FATF Annual Report (1996-1997), the United Kingdom began strengthening its anti-money laundering regime by implementing the Money Laundering Regulations of 1993.  These regulations lay down requirements as to customer identification, record-keeping, supervision and the reporting of suspicious transactions for a wide range of businesses. Active measures have also been taken with respect to international co-operation and many new bilateral confiscation agreements have been entered into. These measures have been complemented by administrative steps such as improving the guidance notes for financial institutions and the procedures relating to the reporting and investigation of suspicious transaction reports, improving feedback to financial institutions, and increasing the awareness of money laundering for non-financial businesses.

	Most recently, the United Kingdom implements the Proceeds of Crime Act of 2002 (the “Act”), prior to which there were five different pieces of primary and secondary legislation dealing with money laundering.  The Act consolidated this legislation by creating a set of general offenses relating to dealings with proceeds of all crimes.  Particularly important was the creation of a new offense of failure to report suspicions of money laundering of any proceeds of crime, rather than just suspicions in relation to the proceeds of terrorism or drugs offenses, as under the prior legislation.

	The Act created three new principal money laundering offenses - “concealing, arranging, and acquiring and using” criminal property. The definition of criminal property in the Act means that all three new principal money laundering offenses will apply to the laundering of a criminal’s own proceeds of crime, as well as those of someone else.  An explanation of “concealing, arranging, and acquiring and using” is as follows:  A person commits an offense if they conceal, disguise, convert or transfer criminal property or remove criminal property from England and Wales or from Scotland or from Northern Ireland.  If a person enters into or becomes concerned in an arrangement which they knew, or suspected, would facilitate another to acquire, retain, use or control criminal property and that the person concerned also knew or suspected that the property constituted or represented benefit from criminal conduct, he is guilty of an offense.  Lastly, a person commits an offence where a person knows or suspects that the property which is acquired, used or possessed constitutes or represents a benefit from crime.

	One of the things the Act does, as opposed to the United States’ laws regarding money laundering, is require lawyers to report suspicious activities.  The Act repeals and replaces certain sections of the Drug Trafficking Act 1994, and creates in its place an obligation on those in the “regulated sector” to report suspicions of any money laundering to the authorities.  This section widens the scope of the offense so that the obligation will now be to report the laundering of the proceeds of any criminal conduct, not just drugs. Additionally, there are reporting requirements under the Terrorism Act of 2000 and the Anti-terrorism, Crime and Security Act of 2001, relating to the reporting of suspicious activities regarding terrorist funds.

	Additionally, the United Kingdom implemented new Money Laundering Regulations of 2003, covering matters such as know your customer, record keeping and training, and Customs & Excise licensing regimes for bureaux de change check cashiers, and money transmitters.  These new regulations pertain to estate agents, casinos, dealers in high value goods, and certain professional services (legal, accounting, etc.).

Conclusions

	Both the United States and the United Kingdom have strengthen their anti-money laundering regimes since 2001, although neither nation is (nor should) in total compliance with each and every recommendation issued by FATF.  The United Kingdom has been more willing to expand the anti-money regulations to businesses that traditionally have the protections of privilege, such as the legal field.  However, both systems have greatly increased the predicate crimes, and international cooperation, concerning money laundering.

Resources:
FATF, http://www1.oecd.org/fatf/Ctry-orgpages/ctry-uk_en.htm and
FinCEN, http://www.fincen.gov/314afactsheet083120042.pdf and http://www.fincen.gov/fi_infoappb.html.
Irwin Mitchell, Money Laundering and the Proceeds of Crime Act 2002, The Legal 500, September 2002, available at http://www.icclaw.com/devs/uk/cc/ukcc_002.htm.
Money Laundering: The UK’s New Regime and Other Recent International Developments, Norton Rose, March 2003, available at:
http://www.nortonrose.com/publications/1412-Money%20laundering%20briefing.pdf.
FRANKEL 6A

I. Anguilla

	Criminal Aspects: The UK government is ultimately responsible for the external relations of Anguilla, as a Overseas Territory (colony) and therefore for ensuring financial stability, good governance in relation to financial affairs, anti-money laundering legislation and other measures. The courts are a Magistrate’s Court and the Eastern Caribbean Supreme Court.
	Underlying (predicate) Crimes: The Proceeds of Criminal Conduct Act of 2000 extends the predicate offenses of money laundering to all indictable offenses.
	Common Crimes:

	1. It is an offence for any person to provide assistance to a criminal to obtain, conceal, retain or be able to invest funds, if that person knows or suspects or, in some cases, should have known or suspected that those funds are the proceeds of criminal conduct;
	2. It is an offence for any person to disclose information to anyone that is likely to prejudice an investigation into money laundering;
	3. It is an offense for any person who acquires knowledge or a suspicion of money laundering in the course of their trade, profession, business or employment not to report the knowledge or suspicion as soon as it is reasonably practical after the information comes to his attention.

Seizure and Forfeiture: The PCCA allows for the forfeiture of criminally-derived funds.
	FIU: Creation of the Financial Services Commission in November 2003. This is an autonomous regulatory board empowered to approve appointment of compliance officers of licensees, conduct compliance inspections, monitor activity within the financial sector, and undertake enforcement actions against persons involved in unlawful activity. It will also monitor compliance with the Anti-Money Laundering Regulations of 2000, and guidance notes, and recommend new laws of legislative amendments.
	Additionally, the MLRAA established the Money Laundering Reporting Authority as the FIU, which receives suspicious transactions reports and is empowered to disclose information to an Anguillan or foreign law enforcement agency. The Criminal Justice Act of 2000 enables Anguilla to directly cooperate with other jurisdictions through mutual legal assistance.
	Obligated Subjects under the Law: The DTOA and PCCA apply to all individuals and businesses, which are subject to the jurisdiction of the court in Anguilla and not just to financial services businesses. The legislation protects those who report suspicions of money laundering from claims in respect of any alleged breach of client confidentiality or in respect of any restrictions upon disclosure imposed by statute or contract.
	Civil Aspects: The Money Laundering Reporting Authority Act of 2000, amending the Drug Trafficking Offences Ordinance of 1988, requires persons involved in the provision of financial services to report any suspicious transactions derived from drugs or criminal conduct.
	“Know Your Customer” policy: The MLRAA establishes requirements for customer identification, record keeping, reporting, and training procedures. The PCCA provides for suspicious activities reporting and a safe harbor for this reporting.
	There are no residency requirements for company formation in Anguilla, with no local presence required for directors, shareholders, meetings, etc. Bearer and redeemable shares are issued. Disclosure of beneficial owners is not required except for bearer shares.
	Banking Secrecy: Banking confidentiality does exist in Anguilla.

II. Argentina

	Criminal Aspects: Although Argentina’s official financial sectors remain weak due to instability, transactions conducted through non-bank sectors and professions remain viable mechanisms to launder money. As such, the Government of Argentina (GOA) in 2003 made efforts to implement the regulations of anti-money laundering law 25.246 of May 200.
	Underlying (predicate) Crimes: Law 25.246 expands the predicate offenses for money laundering to include all crimes listed in the Penal Code.
	Seizure and Forfeiture: The Narcotics Law of 1989 authorizes the seizure of assets and profits, and provides that these or the proceeds of sales will be used in the fight against illegal narcotics trafficking.
	Pending legislation will criminalize terrorist financing and provides for penalties for violating international conventions, including the UN International Convention for the Suppression of the Financing of Terrorism.
	FIU: Law 25.246 created the Unidad de Informacion Financiera (UIF), under the Ministry of Justice and Human Rights.
	Civil Aspects: Law 25.246 sets a stricter regulatory framework for the financial sectors. Under this law, requirements for customer identification, record keeping, and reporting of suspicious transactions by all financial entities and businesses are supervised by the Central Bank, the Securities Exchange Commission (Comision Nacional de Valores or CNV), and the Superintendence of Insurance (Superintendancia de Seguros de la Nacion or SSN).
	The law forbids the institutions to notify their clients when filing suspicious financial transactions reports, and provides a safe harbor from liability for reporting such transactions.
	Resolutions 6, 7, 8, 9, 11, 15, and 17 issued by the UIF in 2003 outline procedures for the reporting of suspicious or unusual transactions by: the Central Bank, CNV, SSN, the tax authority, banks, currency exchange houses, casinos, securities dealers, registrars of real estate, dealers in art, antiques and precious metals, insurance companies, issuers of travelers checks, credit card companies, postal money transmitters, notaries, and CPAs.
	Reporting of suspicious or unusual transactions exceeding 50,000 pesos, and obligated entities required to keep reports of suspicious or unusual transactions for a period of 5 years, and provide documents within 48 hours of a request from the UIF.
	Banking Secrecy: Customer identification and identification of beneficial owners are required.

III. Jamaica
	Criminal Aspects: Due to banking scandals in the mid to late 1990s, Jamaica’s banking system has been under strict scrutiny. Since Jamaica is a large producer of marijuana, and a major transit country for South American cocaine, unlawful gains are laundered by purchase of tangible assets, such as luxury cars and real estate, as well as large shipments of cash to South American countries. Additionally, criminals in Jamaica launder money through investment in front companies or through high-cash businesses such as restaurants, nightclubs, fast food outlets, taxi companies or car sales and repair companies, with high cash turnovers. Also, they often use money service businesses, cambios, and remittance services and of course, banks, if they can get around the suspicious activity reports.
	The law underlying Jamaica’s anti-money laundering system is the Money Laundering Act (MLA) approved by Parliament in 1996, and implemented in 1998.
	In 2003 the Jamaican government introduced a new Customs arrival form that incorporates a requirement to declare currency or monetary instruments over $10,000.00 or equivalent, in order to combat the movement of large amounts of cash through Jamaica.
	Underlying (predicate) Crimes: The MLA criminalizes narcotics-related money laundering. In 2000 the MLA was amended to add fraud, firearms trafficking, and corruption as predicate offenses for money laundering. Acts of terrorism have not been added as a predicate offense, and the government has no authority at this time under the MLA to identify, freeze, and seize terror finance-related assets.
	Under the Money Laundering Act, the offence of money laundering is committed when a person engages in a transaction that involves property that is derived from the commission of a specified offence; or acquires, possesses, uses, conceals, disguises, disposes of or brings into Jamaica, any such property; or converts or transfers that property or removes that property from Jamaica and the person knows at the time he engages in the transaction … that the property is derived or realized directly, or indirectly from the commission of a specified offence.
	Seizure and Forfeiture: Jamaica has no civil forfeiture laws, and under the 1994 Drug Offenses (Forfeiture of Proceeds) Act, a criminal narcotics-trafficking conviction is required as a pre-requisite to forfeiture. In other words, most illicit funds must be returned to the criminal. A court may order, under MLA, that suspected terrorist assets be frozen, but a court order is necessary.
	FIU: Financial Investigations Division of the Ministry of Finance (as of 2003). It comprises of four police officers with arrest powers.
	Obligated Subjects under the Law: Under the MLA, exchange bureaus and cambios have a report threshold of $8,000.00. In 2002, the law was amended and imposed a reporting requirement on money transfer and remittance agencies for transactions over $50,000.00
	Institutions, which are authorized to take deposits within the Jamaican financial sector, are commercial banks, licensed financial institutions (merchant banks), building societies and credit unions. All of the above entities, except for credit unions, are supervised by the Bank of Jamaica.
	Civil Aspects: The MLA introduces record keeping and reporting requirements for financial institutions on all currency transactions over $10,000.00 (raised to $50,000.00 in 1998 due to complaints from financial sector institutions). Additionally, suspicious transactions of any amount are required to be reported to the Director of Public Prosecutions.
	Bank of Jamaica requires all banks and financial institutions to abide by the “Guidance Notes for Financial Institutions in Detecting Terrorist Financing” issued by the FATF in 2002.
	Jamaica and the U.S. have a Mutual Legal Assistance Treaty in force since 1995, and Jamaica is party to the 1988 UN Drug Convention. There is no statutory provision in place to facilitate the sharing of assets confiscated as a result of cooperative efforts of mutual assistance. A bill to remedy this situation has been passed by both Houses of Parliament and is awaiting the assent of the Governor General.
	Administrative Sanctions: In carrying out its supervisory function the Bank of Jamaica does not differentiate between the anti-money laundering aspect of a financial institution’s operations and the normal areas that would be of concern to supervisors. Testing for anti-money laundering compliance is done in conjunction with other prudential assessment procedures. This includes mandatory annual on-site examinations and on-going off-site review of prudential returns submitted on a weekly, monthly, quarterly and annual basis. Failure to adhere to the provisions of the Money Laundering Act may be indicative of unsafe banking practices. Such a finding can lead to regulatory action being taken under the relevant institution’s governing statute in addition to penalties provided by the Money Laundering Act.
	Banking Secrecy: Jamaica is not an OFC with strict bank secrecy laws. Under the MLA, a financial institution is required to establish and implement programs, policies, procedures and controls as may be necessary for preventing and detecting money laundering, including the establishment of procedures to ensure high standards of integrity of employees, the development of a system to evaluate the personal employment and financial history of employees, and training of employees on a continuing basis with respect to their responsibilities under the Act.

IV. U.S.A.

	Criminal Aspects: In 1970 the United States began its fight with money laundering with the enactment of the Bank Secrecy Act, which established reporting standards and requirements aimed at creating a paper trail for transactions involving large amounts of currency. Banks were required to file a currency transaction report for transactions greater than $10,000.00
	In 1986 Congress enacted the Money Laundering Control Act, which criminalized money laundering itself. Beginning in 1987, Congress required all FDIC depository institutions and credit unions to establish anti-money laundering policies with enactment of 31 U.S.C. 5313.
	The Suspicious Activity Reporting System (SARS) was adopted as a nationwide method for filing suspicious activity reports with the Treasury Department and for distribution of these reports to certain sectors of the law enforcement community.
	In 2001, the United States enacted the USA PATRIOT Act, which strengthen the MLCA of 1986. The PATRIOT Act authorizes the Secretary of the Treasury to require domestic financial institutions and domestic financial agencies to take any of five new “special measures” if, after consultation with the Secretary of State and the Attorney General, the Secretary of the Treasury finds that such action is warranted to deter a “primary money laundering concern” imposed by sources outside the United States.
	Underlying (predicate) Crimes: Due to the PATRIOT Act, the list of underlying crimes includes drug trafficking, bank fraud, and certain crimes of violence such as murder, robbery, extortion, and the use of explosives. It also includes bribery of a public official, or the misappropriation, theft, or embezzlement of public funds by or for the benefit of a public official, smuggling or export control violations involving an item listed on the U.S. Munitions List, or an item controlled under regulations under the Export Administration Regulations, and an offense for which the United States would be obligated by a multilateral treaty, either to extradite the alleged offender or to submit the case for prosecution, if the offender were found within the territory of the United States.
	Thus, individuals or groups caught using the proceeds of any of the above activities in a U.S. financial transaction will be guilty of money laundering provided there is the requisite intent (or if more than $10,000 is exchanged).
	Seizure and Forfeiture: The PATRIOT Act gives the U.S. jurisdiction over foreign persons who convert property to their own use after such property has been ordered to be forfeited as a result of a violation of U.S. money laundering laws. It also allows U.S. courts to issue restraining orders to preserve property in the U.S. and appoint a receiver to collect and take possession of assets in satisfaction of criminal or civil money laundering or forfeiture judgments.
	The U.S. can also seize funds and bring a forfeiture action on accounts deposited in a foreign bank that has a correspondent account in the United States when there is reasonable cause to believe the funds are derived from criminal activity.
	FIU: In 1990, the Department of the Treasury created the Financial Crimes Enforcement Network (FinCEN) to provide an analytical intelligence network focused on financial crimes. FinCEN maintains a database of currency transaction reports and suspicious activity reports and makes them available to local, state, federal and foreign law enforcement officials. The USA PATRIOT Act directed FinCEN to assist law enforcement authorities in combating underground banking networks used by terrorists involved in illegal activities.
	Civil Aspects: The five new special measures in the PATRIOT Act require domestic financial institutions and financial agencies to (1) perform additional record-keeping and reporting relative to transactions identified as posing a “primary money laundering concern,” including tracking the name and address of parties to such transactions and identifying the legal capacity in which a party acts; (2) identify the beneficial owner(s) of an account opened or maintained in the United States by a foreign person; (3) maintain records of customers who make use of “payable-through” accounts connected to any foreign jurisdictions, financial institutions, or classes of transactions that are of “primary money laundering concern”; (4) identify customers who use inter-bank “correspondent accounts” opened by a foreign bank at a U.S. bank; and (5) prohibit the opening or maintenance of correspondent and payable-through accounts involving a “primary money laundering concern.” Additionally, financial institutions must enact anti-money laundering programs that develop internal policies, procedures, and controls, designate a compliance officer, implement an ongoing employee training program, and create an independent audit function to test programs.
	Failure to comply with the above “special measures” can result in stiff penalties totaling not more than two times the amount of the transaction, but not more than $1,000,000.
	Banking Secrecy: The PATRIOT Act requires financial institutions to verify customers’ identities, maintain records relating to identify verification, and consult lists of known or suspected terrorists. Banks are still required to file a currency transaction report for transactions greater than $10,000.00, which has not changed since the Bank Secrecy Act.

Information taken substantially from the following resources:

INCSR, U.S. Department of State, March 1, 2004, available at http://www.state.gov/g/inl/rls/nrcrpt/2003/vol2/html.

John D.K. Lawrence, Combating Money Laundering: Developments in Anguilla, Anguilla Financial Services Department, available at http://www.anguillafsc.com/feature_money.htm.

Lloyd Williams, Laundering Drug Money, The Jamaican Gleaner, April 20, 2004, available at http://www.jamaica-gleaner.com/gleaner/20040420/news/news3.html.

CFATF, 1998-1999 Annual Report, available at http://www.cfatf.org/eng/annrep/98-99.html#mute13.

George A. Lyden, The International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001: Congress Wears a Blindfold While Giving Money Laundering Legislation a Facelift, 8 Fordham J. Corp. & Fin. L. 201 (2003).

Rebecca Gregory, The Lawyer’s Role: Will Uncle Sam Want You in the Fight Against Money Laundering and Terrorism?, 72 UMKC L. Rev. 23 (2003).

COMPARATIVE ANALYSIS OF THE CRITERIA AND PROGRESS IN THE AML REGIMES OF PERU, VENEZUELA AND ECUADOR WITH THE UNITED STATES

Peru

	The primary money laundering issue relating to Peru involves the narcotics trade. Key excerpts from the 2003 International Narcotics Control Strategy Report provide the following outline of current conditions there:

“Peru is not a major regional financial center nor an offshore money laundering haven. Narcotics-related and other money laundering does occur, but existing laws do not provide reliable or adequate mechanisms to estimate its scale in Peru.”

“Peru has no formal agreement with the United States on a general mechanism for exchanging records in connection with narcotics investigations and proceedings, and the United States has not requested negotiations with Peru on such an agreement. In 1992, Peru and the United States concluded an agreement for exchange of information on cash transactions (“Kerry Amendment”). The Superintendency of Banking and Insurance has published regulations to implement this agreement; the US has made no formal requests for information thereunder, and it is not know how well those regulations are implemented in practice. National police authorities responsible for narcotics investigation maintain good liaison relationships for informal exchange of information with DEA on narcotics investigations, including money laundering cases. Peru has a formal agreement with the United Kingdom for mutual assistance in narcotics enforcement, including asset sharing, and has provided information under that agreement. It has general agreements for counternarcotics cooperation with other countries, with some of whom it also exchanges drug investigative information. No specific information is available on the extent of such exchanges, nor how many countries may be involved.”

“Legislation adopted in 1992 made money laundering a criminal offense. Narcotics-related money laundering is an aggravated offense calling for additional penalty.”

“Corruption. As a matter of policy, the GOP does not encourage or facilitate the illicit production or distribution of narcotic or psychotropic drugs or other controlled substance, or the laundering of the proceeds from illegal drug transactions.”

	Peru created a Financial Intelligence Unit in 2002 and established reporting requirements for banks and other financial institutions. It has regulatory controls and laws authorizing the seizure of assets, although they appear to be rarely enforced.

Venezuela

	The 2002 International Narcotic Control Strategy Country Report stated that the “Government of Venezuela does not as a matter of policy or practice encourage or facilitate drug trafficking or money laundering, nor are its senior officials proven to engage in, encourage, or facilitate such activities. The GOV recognizes corruption as a problem of major magnitude and has focused considerable attention on combating it, especially in the law enforcement and judicial sectors.”
	The 2003 International Narcotics Control Strategy Report contains a number of observations relevant to money laundering in Venezuela:

“Venezuela is not a regional financial center, nor does it have an offshore financial sector. The relatively small but modern banking sector, which consists of 52 banks, primarily serves the domestic market. Venezuela’s proximity to drug producing countries, weaknesses in its anti-money laundering system, and corruption, continue to make Venezuela particularly vulnerable to money laundering. The main source of money laundering in Venezuela stems from proceeds generated by Colombia’s cocaine and heroin trafficking organizations. Reportedly, some money is laundered through the real estate market in its Margarita Island free trade zone.”

“Although the GOV, as a matter of government policy, does not encourage or facilitate illicit drug production or trafficking, nor the laundering of proceeds from the same, there have been accusations that the current administration has turned a blind eye to such activities. Venezuela’s sometimes practice of assigning temporary stand-in judges to narcotics trafficking cases at key points of the trial has resulted in the release of numerous narcotics traffickers under suspicious, if not farcical, circumstances.”

“Petty corruption, such as the taking of small bribes to facilitate exportation processing, is widespread and tolerated with ambivalence. This in turn creates an atmosphere of ambiguity where larger scale corruption may also be accepted.”

“Venezuela placed 100th out of 133 countries in Transparency International’s 2003 report, falling from its position of 83 in 2002. Venezuela now ranks among the six most corrupt countries in Latin America.”

	While the country has asset seizure, the 2003 report points out that Venezuela has failed to pass the laws needed to streamline asset forfeiture processes there.
	It also notes that:

“The GOV has introduced three antiterrorism bills, but much of their content is highly politicized (e.g., defining various forms of non-violent political protest to be forms of terrorism). These bills do not fulfill the requirements of either the UN International Convention for the Suppression of the Financing of Terrorism (1999) nor the UN International Convention Against Transnational Organized Crime (AKA the Palermo Convention – 2000).”

	In 1998, the government created a central Venezuelan Financial Intelligence Unit (FIU).

Ecuador

	The 2003 INCS report contains several findings relating to money laundering activities in Ecuador and the nation’s anti-AML efforts.

“Ecuador, a major drug transit country, lacks an effective anti-money laundering regime. Ecuador’s dollarized economy increases the attractiveness of Ecuador as a money laundering site. Proximity to Colombia and Peru, increases Ecuador’s vulnerability to drug money laundering. Laundering may also occur in the real estate market and through sales of businesses or commercial contraband.”

“The Narcotics and Psychotropic Substance Act of 1990 (Law 108) provides for the following money laundering crimes, but only in connections with illicit drug trafficking: illegal enrichment (Article 76), conversion or transfer of assets (Article 76, 77), and prosecution of front men (figureheads) (Article 78). Law 108 currently is being revised. However, there is broad agreement that Law 108 is an inappropriate vehicle for money laundering provisions that extend beyond drug offenses. In November 2003, an interagency group completed a draft of a stand-alone law criminalizing the laundering of proceeds of any crime. The draft law was submitted to the President for transmittal to the Congress early in 2004.”

“Regulations issued pursuant to Law 108, the 1994 Financial System Law, and a 1996 Banking Superintendency Resolution require financial institutions to report to the National Drug Council (CONSEP) any transaction in cash or stocks over $5,000, as well as suspicious financial transactions. Mutual societies are required to report transactions of $5,000 and above. Financial cooperatives must report transactions of $22,000 and higher. Electronic reporting of this information was implemented in 1999. Banks operating in Ecuador are required to maintain financial transaction records for six years. There are no due diligence or banker negligence laws that hold individual bankers responsible if their institutions launder money. However, a bank’s board of directors can be held legally responsible if drug money laundering occurs in their institution.”

“Corruption. Ecuadorian government policy opposes the illicit production or distribution of drugs or other controlled substances, as well as the laundering of drug money. The 1990 drug law (Law 108) provides for prosecution of any government official, including a judge, who deliberately impedes the prosecution of anyone charged under that law. Some elements of other official corruption are criminalized in Ecuadorian laws but there is no comprehensive anticorruption law to address the problem per se.”

“Agreements and Treaties. Ecuador and the United States signed a customs mutual assistance agreement in 2002. Ecuador signed and ratified the United Nations Convention against Transnational Organized Crimes and its protocols dealing with migrant smuggling and trafficking in persons.”

“Asset Seizure. By law, seized assets cannot be forfeited until the owner is convicted of a drug offense. Problems arise in relation to the safeguarding of assets pending forfeiture. Real estate, vehicles and other personal property are often used by government agencies or officials….”

Ecuador lacks a Financial Intelligence Unit (FIU), but has proposed to create one during 2004.

United States

	The International Monetary Fund site provides the following report on the anti-money laundering practices of the United States:

1. At the July 27, 2001, Executive Board Meeting to discuss the 2001 Article IV consultation with the United States,1 Executive Directors raised questions about anti-money laundering practices in the United States. Directors requested that the staff conduct follow-up discussions with the U.S. authorities on (i) the reasons why the United States was not in full compliance with the Financial Action Task Force on Money Laundering (FATF) Forty Recommendations; (ii) what efforts were underway to reach full compliance; and (iii) what additional steps were being considered to enhance anti-money laundering practices.

2. The Annual Report 2000-2001 of the Financial Action Task Force on Money Laundering finds that the United States is in full compliance with 17 out of the 28 FATF Recommendations requiring specific country actions with respect to key legal, financial, and international cooperation measures.2 The United States is not fully in compliance with Recommendations 8, 10-12, 14-15, 19-20, 26, and 29 because necessary anti-money laundering measures have not been extended to insurance companies. The United States also is not fully in compliance with Recommendations 14-15, 28-29, because not all obligations have been imposed on bureaux de change and money transmitters, in particular with respect to reporting of suspicious activities.

3. The U.S. authorities indicated that they attach great importance to the implementation of a comprehensive anti-money laundering system in the United States. The United States has developed an annual National Money Laundering Strategy since 1999 and has taken significant steps forward to strengthen anti-money laundering procedures, including passage of comprehensive anti-money laundering legislation, adoption of enhanced regulatory measures, stronger domestic law enforcement efforts, increased collaboration between federal, state and local governments, and enhanced international cooperation and efforts. As part of the international effort to foster the adoption of standards and codes as well as to promote effective anti-money laundering strategies, in June 2001 the United States published its 2000 self-assessment against the FATF Forty Recommendations (see www.treas.gov/standards).

4. Regarding the specific issues involving insurance, neither U.S. assessments nor the FATF exercises have revealed substantial money laundering through this sector within or outside of the United States. Nevertheless, U.S. authorities recognize that a potential vulnerability exists, and consequently, the insurance industry is subject to important anti-money laundering provisions under U.S. criminal money laundering laws. The authorities explained that under U.S. law, insurance companies are treated as financial institutions for purposes of certain laws. Therefore, they are required to report to the Internal Revenue Service receipts of cash or certain monetary instruments totaling $10,000 or more from clients, and the identify of the persons conducting those transactions and the persons on whose behalf those transactions are conducted must be obtained, verified, recorded, and reported. In addition, a number of insurance companies voluntarily file reports on suspicious activities. These practices are considered to be working well, and without indications of money laundering abuses within the industry, the authorities see little basis for imposing additional federal regulations on what is largely a state-regulated industry in the United States. The authorities would continue to closely monitor the effectiveness of anti-money laundering practices. They indicated that there is a growing awareness within the insurance industry of the importance of due diligence in opening and handling accounts, and the need for close attention to money laundering prevention measures.

5. In the case of bureaux de change and monetary transmitters, key aspects of U.S. anti-money laundering laws apply to these institutions, as well as other nonblank financial institutions (NBFIs). For this reason, the U.S. authorities said that deficiencies in full compliance with FATF recommendations do not have significant macroeconomic implications, including in terms of reputation risk or financial stability. All NBFIs in the United States are required to obtain information about the true identity of a person on whose behalf an account is opened or when a transaction is conducted if it involves the receipt of currency or certain other monetary instruments over $10,000, the transfer of funds over $3,000, or the cross-border movement of currency or certain negotiable instruments over $10,000. In addition, many NBFIs obtain information on whose behalf a transaction is conducted in order to protect themselves against potential liability under existing criminal money laundering provisions and suspicious activity reporting rules.

6. While many NBFI transactions are relatively small in value, the U.S. authorities recognize the need to detect and deter money laundering and to combat the financing of terrorism. Therefore, the U.S. authorities have recently taken steps to strengthen regulations requiring that NBFIs report suspicious transactions. The U.S. Department of the Treasury’s Financial Crimes Enforcement Network issued a rule in March 2000 (to become effective in early 2002) requiring money transmitters and money order and traveler’s check businesses to report suspicious transactions. Currency exchangers are not generally required to report suspicious transactions under this new rule, but must do so to the extent that they redeem or sell money orders or traveler’s checks for currency or other monetary instruments, or offer money transmission services.

7. The U.S. authorities also reported that further anti-money laundering rules for various nonblank financial institutions are under consideration. In The National Money Laundering Strategy for 2001, the U.S. Treasury announced a proposed rule requiring securities brokers/dealers to file suspicious activity reports.3

8. Since the September 11 attacks, the United States has stepped up its focus on anti-money laundering issues, and particularly terrorist financing issues. The United States enacted an anti-terrorist and anti-money laundering bill in October that provides for broad  new investigative and information-sharing powers with respect to terrorist financing. It expands the scope of U.S. counter-money laundering regulations, such as requiring broker/dealers in the securities industry to file suspicious activity reports. The law also gives new powers to take action against money laundering havens. In addition, the Financial Action Task Force decided in late October to expand its focus to include terrorist financing issues and adopted an action plan to implement eight new special recommendations directly related to terrorist financing. The United States looks forward to participating in the FATF self-assessment exercise on the new special recommendations, which is to be completed by the end of December 2001.

9. As discussed in the paper for IMP Board discussion on November 12, IMF staff propose that the IMF extend its standard surveillance activities in the money laundering area. In this context, staff propose to conduct a more extensive evaluation of the U.S. efforts in these areas in the course of the 2002 U.S. Article IV review, based on the anti-money laundering questionnaire described in Annex VI.

	The United States is a primary consumer of illicit drugs produced by or shipped through Peru, Venezuela and Ecuador. It has in place Financial Information Exchange Agreements (FIEAs) with each of those nations to facilitate the exchange of currency transaction information between the U.S. Treasury Department and other finance ministries.

CRIMINAL ENTREPRENEURS IN AFRICA*

OVERVIEW

	18 U.S.C.S. § 1961 provides that “enterprise” includes any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity.
	Further, 18 U.S.C.S. § 1962 makes it unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity or collection of unlawful debt.
	In the furtherance of this concept, the U.S. Supreme Court ruling in U.S. v. Turkette, 452 U.S. 576 (1981), where an individual and several others were indicted, among other things, on the charge that they conspired to conduct and participate in the affairs of an enterprise engaged in interstate commerce through a pattern of racketeering activities. The indictment described in interstate commerce through a pattern of racketeering activities. The indictment described the enterprise as “a group of individuals associated in effect for the purpose of illegally trafficking in narcotics and other dangerous drugs, committing arsons, utilizing the United States mails to defraud insurance companies, bribing and attempting to bribe local police officers, and corruptly influencing and attempting to corruptly influence the outcome of state court proceedings.” This description of the group being ruled upon by the Supreme Court paralleled the statutory definition put forward by 18 U.S.C.S. § 1961.
	The Defendant was convicted under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C.S. §§ 1961-1968, for conspiracy to conduct and participate in the affairs of an enterprise, engaged in interstate commerce, through a pattern of racketeering activities. The enterprise conducted illegal activities. Where the appellate court reversed the judgment and held that the term “enterprise” as used in RICO applied to legitimate enterprises, not illegitimate enterprises, the Supreme Court reversed the appellate court’s judgment. The Court ruled that the language and structure of RICO did not limit its application to legitimate enterprises. Further, the Turkette Court ruled that the legislative history indicated that Congress intended the term “enterprise” to include legitimate as well as illegitimate enterprises.

Committee on International Relations Views of Crime Enterprises in Africa

	Using the statutory and case law definition provided only as a backdrop while realizing that U.S. statutes and court decisions are not controlling in Africa, we proceed.
	International crime in today’s society commands an estimated $1 trillion in business revenue. While the Mafia, cocaine cartels, and other criminal organizations may be better known, crime organizations are becoming big business in Africa. African criminal organizations including the Nigerian drug cartels – which are among the most sophisticated in the world – are wreaking havoc throughout the world. South African police estimate that their country is home to more than 190 criminal organizations, many of which are sophisticated and international in scope.
	Swaziland is becoming a haven for drug traffickers and for gunrunners.
	As the integration of African nations into the world economy become more prevalent and nations move closer together in what is truly a world market, the fact that many African nations have simultaneously developed significant international crime organizations that participate in drug trafficking, diamond smuggling, money laundering, counterfeiting, document fraud, and the infamous 419 scam, cannot go unattended. Africa has emerged as a major intermediate transit point for drugs destined for markets in Europe and North America. Tanzania and Mozambique serve as transit points for heroin coming from the Far East. Angola and Namibia are transit points for cocaine coming from the Americas to the European market. The Nigerian crime syndicates have emerged as the primary organizers of these trans-shipments. Evidence even exists of alliances between the Colombian cartels and the Nigerian crime syndicates.
	Moreover, South Africa is struggling with the growth of international crime syndicates thriving on South Africa’s geographic location. More than 190 crime syndicates currently operate in South Africa.
	Factors such as poverty, government disorganization, low-paid and unpaid civil servants, lax banking laws, non-existent customs services, and insufficient and often corrupt law enforcement establishments have made Africa an ideal location for the operation of international crime and drug syndicates.
	The most significant identified international African crime group having an impact on international commerce, or the activities of which affect, interests or foreign commerce as outlines in 18 U.S.C.S. § 1962, thus affecting the United States and other countries are the West African Nigerian criminal groups commonly referred to as Nigerian criminal enterprises. The Nigerian criminal enterprises scheme is to exploit financial institutions, insurance companies, government entitlement programs, and individual citizens of the international community. Law enforcement officials in the United Kingdom, Canada, Germany, Australia, South Africa, Russia and other countries have experienced high crime rates attributable to the Nigerian criminal enterprises.
	Such criminal endeavors as drug trafficking, especially heroin and cocaine, financial crimes, money laundering, counterfeiting, and altered documents seem to be this enterprise’s mode of operation. The Nigerian criminal enterprises are seldom if ever engaged in drug trafficking to the exclusion of other types of crimes. The Nigerian criminal enterprise’s typical structure is to operate in a small inter-related cell. They have international contacts of Nigerian criminal enterprises operating in other foreign countries.
	Involvement in white-collar crime involved, i.e., utilizing false documents to gain identities and then to take these new identities to open bank accounts, to incorporate businesses, to start getting government entitlement programs, particularly in the healthcare fraud are also methods that have been associated with this enterprise.
	Listed below are additional information/sites on this enterprise:

Site				Description

Nigeria – The 419		Extensive information on Nigerian advance fee fraud
Coalition Web Site		schemes; includes links to media clippings, U.S.
government reports, congressional testimony, and law
enforcement contacts.

Nigerian Crime		Jonathan Winer, Deputy Assistant Secretary for
International Narcotics and Law Enforcement Affairs.
Statement before the Subcommittee in Africa of the House
International Relations Committee, Washington, DC,
September 11, 1996. Outlines the Nigerian crime “threat”
and U.S. enforcement strategies.

Combating International	Hearing Before the Subcommittee on Africa of the
Crime in Africa		Committee On International Relations House of
Representatives. Examines organized crime in West Africa
and its impact on the United States.

Nigerian Schemes,		Overview of Nigerian-based organized fraud schemes,
Scams, Frauds			including examples of letters and proposals for advance fee
fraud.

Useful information		Web site includes Samples of Nigerian Advance Fee Fraud
On advance fee fraud		letters

	Additional information on Africa and the international community’s efforts to curve criminal corruption in Africa includes the following sites:

	1. Boosting Africa’s Agricultural Trade, www.scolar.vac.edu/vsccat/*united%. (June 2003).
	2. Regional Traffick, Towards Understanding of West Africa Criminal, http://www.iss.co.za/pubs/ASR/10no4/Shaw.html.
	3. Nathanson Centre for the Study of Organized Crime and Corruption, http://www.yorku.ca/nathanson/lonks/links.htm.

Summary

	In summary, Criminal Enterprises in Africa have continued to establish an effective foothold in the international economy. This development has increased drastically since the 1980s. The expansions of these enterprises have been mainly due to the globalization of the world’s economies and the great advances in communications technology. Moreover, the ease of international travel, expanded world trade, and financial transactions that cross national borders have enabled African Criminal Enterprises to expand their roles from more traditional local and regional criminal groups to that of targeting international victims and developing criminal networks within countries and regions of the world with greater prosperity. Additionally, the political, social and economic conditions in African countries such as Nigeria, Ghana, and Liberia have contributed significantly to some criminal ethnic groups from these countries developing criminal enterprises worldwide, and within the United States.
	There is no argument that the construction and the activities of these groups fall squarely under the definitions provided by both 18 U.S.C.S. § 1961 and 18 U.S.C.S. § 1962. As such, individuals indicted and prosecuted in the U.S. courts for violation of RICO will find Turkette controlling.

CHAPTER 5: INTERNATIONAL AND REGIONAL AML CONFIGURATIONS: THE GROWTH OF THE AML/CTFE REGIME

I. Learning Objectives

1. To learn about anti-money laundering organizations such as the Financial Action Task Force and its regional organizations.

2. To understand the importance of alliances between these AML international organizations and foreign nations. 

3. To understand the international AML standards such as the FATF’s Recommendations in the context of the international AML regime.

4. To understand the history, purpose and strategies of the international organizations in the struggle against financial crimes.

5. To understand the relationships between the emerging international AML regime and the regime against terrorist financing.

II. International and Regional Organizations

Asian Development Bank (ADB), http://www.adb.org

Contact: ADB, Headquarters, 6 ADB Avenue, Mandaiuyong City, 1550 Metro Manila, Philippines/P.O. Box 789, 0980 Manila, Philippines; Telephone: + 632 632 4444; Fax: + 632 636 2444; E-mail: information@adb.org 

Asia-Pacific Economic Cooperation, http://www.apec.org 

Asia-Pacific Economic Cooperation, or APEC, is a forum for facilitating economic growth, cooperation, trade and investment in the Asia-Pacific region. APEC is the only inter-governmental grouping in the world operating on the basis of non-binding commitments, open dialogue and equal respect for the views of all participants. Unlike the WTO or other multilateral trade bodies, APEC has no treaty obligations required of its participants. Decisions made within APEC are reached by consensus and commitments are undertaken on a voluntary basis. 

APEC has twenty-one members – referred to as “Member Economies” – which account for more than a third of the world’s population, approximately 60% of the world GDP and about 47% of world trade. APEC’s 21 Member Economies are Australia, Brunei Darussalam, Canada, Chile, People’s Republic of China, Hong Kong, China, Indonesia, Japan, Republic of Korea, Malaysia, Mexico, New Zealand, Papua New Guinea; Peru; The Republic of the Philippines, The Russian Federation, Singapore, Chinese Taipei, Thailand, United States of America and Viet Nam. 

Contact: APEC Secretariat, 35 Heng Mui Keng Terrace, Singapore, 119616; Telephone: (65) 6775 6012: Fax: (65) 6775 6013; E-mail: info@apec.org. 

Asia/Pacific Group on Money Laundering, http://www.apgml.org

Contact:

Association of Southeast Asian Nations (ASEAN), http://www.aseansec.org

Contact: The ASEAN Secretariat, 70A, Jalan, Sisingamangaraja, Jakarta 12110, Indonesia; Telephone: (6221) 7262991, 7243372; Fax: (6221) 7398234, 7243504; E-mail: public@aseansec.org. 

Bank for International Settlements (BIS), http://www.bis.org

The Bank for International Settlements (BIS) is an international organization which ….

Contact: BIS, Centralbahnplatz 2, Basel Switzerland; Postal Address: CH-4002 Basel; Telephone: (+41d 61) 280 8080; Fax: (+41 61)280 8100; E-mail: email@bis.org. 

Basle Committee on Banking Supervision, http://www.bis.org/bcbs/  

The Basle Committee, established by the central bank Governors of the Group of Ten countries at the end of 1974 …

Contact: BIS, Centralbahnplatz 2, Basel Switzerland; Postal Address: CH-4002 Basel; Telephone: (+41d 61) 280 8080; Fax: (+41 61)280 8100; E-mail: email@bis.org. 

Caribbean Financial Action Task Force (CFATF), http://www.cfatf.org   

The Caribbean Action Task Force (CFATF) is an organization of thirty states of the Caribbean Basin, which have agreed to implement common counter-measures to address the problem of money laundering and the financing of terrorism. It was established as a result of meetings convened  in Aruba in May 1990 and Jamaica in November 1992. In Aruba representatives of Western Hemisphere countries, in particular from the Caribbean and Central America, convened to develop a common approach to the phenomenon of the laundering of the proceeds of crime. Nineteen recommendations constituting this common approach were formulated. These recommendations, which have specific relevance to the region, are complementary to the additional forty recommendations of the Financial Action Task Force established by the Group of Seven at the 1989 Paris Summit. The Jamaica Ministerial Meeting was held in Kingston in November 1992. Ministers issued the Kingston Declaration in which they endorsed and affirmed their governments’ commitment to implement the FATF and Aruba recommendations, the OAS Model Regulations and the 1988 U.N. Convention. They also mandated the establishment of the Secretariat to co-ordinate the implementation of the measures in the CFATF member countries. 

The main objective of the Caribbean Financial Action Task Force is to achieve effective implementation of and compliance with its recommendations to prevent and control money laundering and to combat the financing of terrorism. The Secretariat has been established as a mechanism to monitor progress to ensure full implementation of the Kingston Ministerial Declaration.

Currently, CFATF members are Antigua and Barbuda, Anguilla, Aruba, The Bahamas, Barbados, Bermuda, The British Virgin Islands, The Cayman Islands, Costa Rica, Dominica, Dominican Republic, El Salvador, Grenada, Guatemala, Guyana, Republic of Haiti, Honduras, Jamaica, The Netherlands Antilles, Nicaragua, Panama, St. Kitts and Nevis, St. Lucia, St. Vincent & Grenadines, Suriname, The Turks and Caicos Islands, Trinidad & Tobago and Venezuela.  

Representatives of the governments of Canada, the Kingdom of the Netherlands, France, the United Kingdom and the United States of America (the “Cooperating and Supporting Nations) meeting together in San Jose, Costa Rica, October 9-10, 1996, considered the work of the CFATF since 1990, the benefits of effective implementation to prevent and control money laundering; and the need for expertise and training, and cooperation among nations to assure such implementation in the Caribbean region.

The Cooperating and Supporting Nations are members of the FATF Task Force on Money Laundering and are committed to the 1988 UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances and the implementation of the 40 FATF Recommendations concerning anti-money laundering measures.

At Council of Ministers Meeting in October 1999 and October 2000, both Spain and Mexico, respectively, joined the CFATF Group of Cooperating and Supporting Nations. 

The CFATF Secretariat monitors members’ implementation of the Kingston Ministerial Declaration through the following activities:

Self-Assessment of the implementation of the recommendations.

An on-going program of mutual evaluation of the members.

Co-ordination of, and participation in, training and technical assistance programs.

Bi-annual plenary meetings for technical representatives.

Annual Ministerial meetings.

CFATF has been conducting a number of Typology Exercises on money laundering. These exercises have explored money laundering activity in domestic financial institutions, the casino and gaming industry, through international financial transactions conducted in domestic and offshore institutions and the emerging cyberspace technologies. The CFATF in October 2000 conducted Part 1 of a Typology Exercise into the possibilities of money laundering in free trade zones. Part II was undertaken during March 2001. The Exercise led to the formulation of Money Laundering Prevention Guidelines for CFATF member governments, Free Trade Zone Authorities and Merchants and a Model Free Zone Compliance Program and a Model Code of Conduct.
In April 2002, the CFATF and GAFISUD, the Financial Action Task Force of South America organized in Tobago, Trinidad & Tobago, a Joint Hemispheric Typology Exercise on Terrorism and Terrorist Financing.

The CFATF works with the OAS/CICAD, CARICOM, the Caribbean Customs Law Enforcement Council (CCLEC), the Caribbean Development Bank (CDB), APG   Secretariat, the Commonwealth Secretariat, E.C./E.U., E.C.D.C.O., ECCB, FATF Secretariat, GAFISUD, GPML, IADB, Interpol, OGBS, Jersey, the United National International Drug Control Program (UNDCP) and the World Customs Organization (WCO).

The CFATF Secretariat is hosted by the government of Trinidad & Tobago. The CFATF    Chairman is The Honorable Justin L. Smith, Attorney General and Minister of Justice and Legal Affairs, Antigua and Barbuda. Calvin E. J. Wilson, the CFATF Executive Director, is a national of Trinidad and Tobago, and a member of the bar of England and Wales and Trinidad and Tobago. He was a former Senior Crown  Prosecutor of the  United Kingdom for eight years and is a member of Lincoln’s Inn.

Commonwealth Secretariat, http://www.thecommonwealth.org 

The Commonwealth is a unique family of fifty-three developed and developing nations around the world. It is a voluntary association of independent states which encompass many religions, races, languages and cultures.

The Commonwealth Secretariat is the principal organization of the Commonwealth implementing the decisions taken by the fifty-three member governments. It was established by Heads of Government in 1965 and is located at Marlborough House in London.

Contact: The Commonwealth Secretariat, Marlborough House, Pall Mall, London, SW1Y 5HX; Telephone: +44 (0)20 77476500; Fax: +44 (0)20 7930 0827; E-mail: info@commonwealth.int.  

Council for Europe (COE), http://www.coe.org 

The Council of Europe is the continent’s oldest political organization, founded in 1949. It groups together 45 countries, including 21 countries from Central and Eastern Europe. It has granted observer status to five more countries (the Holy See, the United States, Canada, Japan and Mexico). It is distinct from the 25-nation European Union, but no country has ever joined the Union without first belonging to the Council of Europe. The Council of Europe is headquartered in Strasbourg in north-eastern France.

The main component parts of the Council of Europe are as follows:

The Committee of Ministers, composed of the forty-five Foreign Ministers or their Strasbourg-based deputies (ambassadors/permanent representatives), which is the organization’s decision-making body.

The Parliamentary Assembly, grouping 626 members (313 representatives and 313 substitutes) from the forty-five national parliaments and Special Guest Delegations from the two candidate states. 

The Congress of Local and Regional Authorities, composed of a Chamber of Local Authorities and a Chamber of Regions. 

The 1,800-strong Secretariat.

The Council of Europe has produced 196 legally binding European treaties or conventions many of which are open to non-member states on topics ranging from human rights to the fight against organized crime and from the prevention of torture to data protection or cultural co-operation.

Contact: Council of Europe, Avenue de l’Europe, 67075 Strasbourg Cedex, France; Telephone: +33 (0)3 88 41 20 00; Fax: +33 (0)3 88 41 27 45; E-mail: infopoint@coe.int  

Eastern and Southern African Money Laundering Group (ESAAMLG), http://www.esaamlg.org 

Finance and Law Ministers from nine countries in the Eastern and Southern Africa Region, on behalf of their Governments, agreed on August 27, 1999 at Arusha, Tanzania to establish the Eastern and Southern Africa Anti-Money Laundering Group. 

The aim of this group, which is governed by Ministers representing each of the member countries, is to combat the laundering of the proceeds of serious crime. Like other regional group already in existence, the ESAAMLG will, both at Ministerial and Senior Officer level, bring together representatives from the legal, financial and law enforcement fields to ensure the development of comprehensive national and regional anti-money laundering strategy.

The aims of ESAAMLG are as follows:

to work towards the highest international standards in the fight against the laundering of the proceeds of those crimes referred to in relevant multilateral agreements and initiatives which deal with combating serious crime and to implement the 40 Recommendations of the Financial Action Task Force on money laundering.

to improve co-operation with other relevant international organizations concerned with combating money laundering.

to study emerging regional trends in money laundering and to share member states’ experiences in order to address those trends.

to institute an evaluation process, including mutual evaluation, to access the measure in place in each member state and their effectiveness, and to identify the gap between the existing measure and the endorsed standards.  

The ESAAMLG comprises the Ministerial Council (the Council), the Task Force of Senior officials and the Secretariat. The Ministerial Council is the key decision-making body within ESAAMLG and consists of at least one ministerial representative from each member country. The Council meets at least once a year. The Council elects a President and Vice-President from among its members. 

Contact: Executive Secretary, ESAAMLG EX-KAMATA Building, Msimbazi, Nyerere junction, Box 9923, Dar es Salaam – Tanzania, United Republic of: Telephone: 255 22 2180560-4; Fax: 255 22 2180553; E-mail: charleslengalenga@esaamlg.tz.  

The Egmont Group, http://www.egmontgroup.org 

The Egmont Group (Financial Intelligence Units of the World) has the following members: Albania, Andorra, Anguilla, Antigua and Barbuda, Argentina, Aruba, Australia, Austria, Bahamas, Bahrain, Barbados, Belgium, Belize, Bermuda, Bolivia, Brazil, British Virgin Islands, Bulgaria, Canada, Cayman Islands, Chile, Colombia, Cook Islands, Costa Rica, Croatia, Cyprus, Czech Republic, Denmark, Dominica, Dominican Republic, Egypt, El Salvador, Estonia, Finland, 

Contact: E-Mail: egmont.administrator@ncis.x.gsi.gov.uk. 

European Bank for Reconstruction, Development, http://www.ebrd.org 

Contact: EBRD, One Exchange Square, London EC2A 2JN, United Kingdom. Telephone: +44 20 7338 6000; Fax: +44 20 7338 6100. 

European Central Bank, http://www.ecb.int 

The ECB is the central bank for Europe’s single currency, the euro. The ECB’s main task is to maintain its purchasing power and thus price stability in the euro area. The euro area comprises the European Union countries that have introduced the euro since 1999.

Contact: European Central Bank, Postfach 16 03 19, D-60066 Frankfurt am Main, Germany; Telephone: +49 69 13 44 0; +49 69 13 44 60 00; E-mail: info@ecb.int. 

European Commission, http://www.europa.eu/int/comm/index_en.htm

Contact:

European Union (EU), http://www.eurunion.org 

The European Union (EU) is a family of democratic European countries, committed to working together for peace and prosperity. The member states have set up common institutions to which they delegate some of their sovereignty so that decisions on specific matters of joint interest can be made democratically at European level. There are five EU institutions: European Parliament (elected by the peoples of the member states), Council of the European Union (representing the governments of the member states); European Commission (driving force and executive body); Court of Justice (ensuring compliance with the law) and the Court of Auditors (controlling sound and lawful management of the EU budget). 

Contact: E-mail: public.info@consilium.eu.int 

Europol, http://www.europol.eu.int 

The member states of the European Union created EUROPOL to increase safety within European space. EUROPOL is an office of criminal police force intergovernmental which facilitates the exchange of information between national police forces as regards narcotics, terrorism, international criminality and pedophilie. It treats fields where the safety of Europeans is threatened: traffic of drugs or radioactive materials, dies of clandestine, milked immigration of human beings, traffics of vehicles, bleaching of the capital, terrorism and serious international crime (Mafia). EUROPOL began its mission in July 1999.  

Contact: EUROPOL, Raamweg 47, P.O. Box 90850, NI-2509 LW Che Hague; Telephone: 00.31.70.302.50.00; Fax: 00.31.70.345.58.96; E-mail: info@europol.eu.int. 

Financial Action Task Force (FATF), http://www.oecd.org/fatf/

Since its creation, the Financial Action Task Force has spearheaded the effort to adopt and implement measures designed to counter the use of the financial system by criminals. It established a series of FATF Recommendations in 1990 that set out the basic framework for anti-money laundering efforts and are intended to be of universal application. Since then, the FATF has revised the Forty Recommendations twice – first in 1996 and then more recently in 2003 – to ensure that they remain up to date and relevant to the evolving threat of money laundering. Indeed, the FATF Recommendations are now the principal standard in this field.

Following the terrorist attacks in the United States on September 11, 2001, the FATF expanded its mission beyond money laundering in order to focus its energy and expertise on a world-wide effort to combat terrorist financing. The FATF issued new international standards to combat terrorist financing – the Eight Special Recommendations – and it calls on all countries to adopt and implement these measures. The objective of these measures is to deny terrorists and their supporters access to the international financial system. 

To reduce the vulnerability of the international financial system to misuse by criminals, the FATF is also involved in examining and identifying the serious and systemic weaknesses in the anti-money laundering programs of certain jurisdictions (non-cooperative countries and territories or NCCTs).

The FATF attempts to identify emerging methods and trends used for laundering money. Terrorists finance their operations through criminal activity, or they may also use funding from legal sources. In either case, terrorist groups utilize financial networks in the same way that other criminal groups do. That is, they move funds and hide connections between the source of their funding and the perpetrators, organizers, and sponsors of their activity.

Contact:

Financial Stability Forum, http://www.fsforum.org 

The Financial Stability Forum (FSF) was convened in April 1999 to promote international financial stability through information exchange and international co-operation in financial supervision and surveillance. The Forum brings together on a regular basis national authorities responsible for financial stability in significant international financial centers, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSF seeks to co-ordinate the efforts of these various bodies in order to promote international financial stability, improve the functioning of markets and reduce systemic risk.

Contact: Secretariat to the Financial Stability Forum, Bank for International Settlements, Centralbahnplatz 2, CH-4002 Basel. Switzerland; Telephone: +41 61 280 8298; Fax: +41 61 280 9100; E-mail: fsforum@bis.org. 

Grupo de Accion Financiera de Sudam Trica Contra el Lavado de Activos (GAFISUD), http://www.gafisud.org 

GAFISUD is a regional inter-governmental organization which brings together the countries of South America in order to combat money laundering and terrorism financing by means of the continuous improvement of national policies and the strengthening of different methods of co-operation between the member states.

It was formally established on December 8, 2000 in Cartagena de Indias, Columbia, by the signatures of the founding Memorandum of Understanding by representatives of the governments of nine countries: Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Paraguay, Peru and Uruguay.

The group has legal personality and diplomatic status in the Republic of Argentina, where the office of its Secretariat is located. GAFISUD has also received an offer from Uruguay, which has placed its Training Center on money laundering issues, located in Montevideo, at the disposal of the Group.

The following participate as observers: World Bank, Egmont, Germany, Inter-Development Bank, Spain, United States of America, IMF, France, Mexico, Portugal and United Nations. The following fellow organizations also attend the sessions: Financial Action Task Force on Money Laundering (FATF); Financial Action Task Force of the Caribbean (CFATF) and the Organization of American States, through the Inter-American Commission against Drug Abuse (CICAD).

GAFISUD has been created on the model of the Financial Action Task Force (FATF) and has adopted the Forty Recommendations issued by FATF as the most widely recognized international standards countering money laundering and the Special Recommendations against terrorism financing. At the same time, the Group expects to develop its own recommendations for the improvement of national policies against both offences.

GAFISUD has added to its aims the fight against the financing of terrorism, which has been included in its mission as stated in the Memorandum of Understanding, and has developed a plan of action against terrorist financing. Incorporated into the plan are the commitments made through the United Nations, the Special Recommendations issued by FATF on this matter and a number of lines of activity developed from a regional perspective. 

Our action encompasses the creation of the offence of laundering not only of the underlying offence of drug trafficking but also to other serious activities; the development of a crime prevention system that includes obligations for the financial system to identify the client and to report suspicious transactions; the incorporation in the legal system of measures to effectively support the investigation and prosecution of these offenses; the development of the most advanced co-operation mechanisms between states and the investigation and prosecution of criminal acts. 

Contact: Apartado Postal, Interno N 21, Sucursal 1485, Buenos Aires, Argentina, Telephone: (+54 11) 4816-3131)  contacto@gafisud.org

International Monetary Fund (IMF), http://www.imf.org 

The IMF is an organization of 184 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty. Since the IMF was established its purposes have remained unchanged but its operations – which involve surveillance, financial assistance and technical assistance – have developed to meet the changing needs of its member countries in an evolving world economy.

Contact:  International Monetary Fund, 700 19th Street, N.W., Washington, DC 20431; Telephone: (202) 623-7000; Fax: (202) 623-4661; E-mail: publicaffairs@imf.org 

The IMF and the Fight against Money Laundering and the Financing of Terrorism 

Inter-American Development Bank (The IDB Group), http://www.iadb.org

The IDB Group is the main source of multilateral financing for economic, social and institutional development in Latin America and the Caribbean. It also plays a leading role in regional integration. Headquartered in Washington, D.C., the IBD Group includes three institutions:

The Inter-American Development Bank supports economic and social development and regional integration in Latin America and the Caribbean. It does mainly through lending to public institutions, but it also funds some private projects typically in infrastructure and capital markets development.
The Inter-American Investment Corporation (IIC) is a multilateral financial organization that promotes economic development in Latin America and the Caribbean by financing small and medium-scale private companies.
The Multilateral Investment Fund (MIF) is an autonomous fund that supports private sector development, mainly in the micro-enterprise sector. 

Contact: Inter-American Development Bank, 1300 New York Avenue, NW, Washington, D.C. 20577; Tel: 202-623-1000; Fax: 202-623-3096. E-mail: pic@iadb.org.

International Money Laundering Information Network (IMoLIN), http://www.imolin.org

IMoLIN is an Internet-based network assisting governments, organizations, and individuals in the fight against money laundering. IMoLIN has been developed with the co-operation of the world’s leading anti-money laundering organizations. It has a   database on legislation and regulations throughout the world (AMLID), an electronic library, and a calendar of events in the anti-money laundering field. Certain aspects of IMoLIN are secured and not available for public use.  

In 1996, the leading international organizations involved in the fight against money laundering endorsed the idea of producing a common Internet web through which information could be shared for the benefit of all national and international anti-money laundering agencies. IMoLIN was the outcome of this agreement. This multi-faceted website serves the global anti-money laundering community by providing information about national money laundering laws, regulations and contacts for inter-country assistance. Policy practitioners, lawyers and law enforcement officers all regularly use IMoLIN as a key reference point in their daily work. The information on IMoLIN is freely available to all Internet users, with the exception of AMLID, which is a secured database.

The key features of the IMoLIN system are:

The Anti-Money Laundering International Database (AMLID) which is a compendium of analyses and anti-laundering laws and regulations including two general classes of money laundering control measures (domestic laws and international cooperation) as well as information about national contacts and authorities. AMLID is a secure, multi-database and is an important reference tool for law enforcement involved in cross-jurisdictional work;

The Reference section that contains details of the UN’s latest research abstracts of the best new research from governments and international organizations and a bibliography;
A click-on map that takes users to regional lists of national legislation together with links to the websites of related regional and financial intelligence units (FIUs). Eventually, this section will contain the full text of all national anti-money laundering legislation through the world;

International Standards: model laws for common law and civil law systems, standards, conventions and legal instruments;

A calendar of events that lists current training events and conferences at the national, regional and international level.

The Caribbean Financial Action Task Force and the World Customs Organization have become contributing members next to the Commonwealth Secretariat, Interpol, OAS-CICAD, Financial Action Task Force, Asia/Pacific Group on Money Laundering and the United Nations.

Contact: Global Programme Against Money Laundering, United Nations Office on Drugs and Crime, Vienna International Centre, P.O. Box 500, A-1400 Vienna, Austria: Telephone: + (43) (1) 26060-4222; Fax: + (43) (1) 26060-6878.

Interpol, http://www.interpol.com 

Interpol is the world’s pre-eminent police organization in support of all organizations, authorities and services whose mission is preventing, detecting, and suppressing crime. Interpol provides both a global perspective and a regional focus, exchanges information that is timely, accurate, relevant and complete, facilitates international co-operation, co-ordinates joint operational activities of its member countries and makes available know-how, expertise and good practice. 

Contact: INTERPOL, General Secretariat, 200, quai Charles de Gaulle, 69006 Lyon, France; Fax: (33) 4 72 44 71 63. 

International Organization of Securities Commission (IOSCO), http://www.iosco.org 

The purposes of the member agencies of the IOSCO are as follows: to cooperate together to promote high standards of regulation in order to maintain just, efficient and sound markets; to exchange information on their respective experiences in order to promote the development of domestic markets; to unite their efforts to establish standards and an effective surveillance of international securities transactions; to provide mutual assistance to promote the integrity of the markets by a rigorous applications of the standards and by effective enforcement 
 
Contact: IOSCO, General Secretariat, C/Oquendo 12, 28006 Madrid, Spain; Telephone: (34) 91 41755 49; Fax: (34) 91 555 93 68; E-mail: mail@oicv.iosco.org.

LACEA, http://www.lacea.org 

The Latin American and Caribbean Economic Association (LACEA) was founded in July 1992 in order to encourage greater professional interaction and foster increased dialogue among researchers and practitioners who focus their work on the economies of Latin America and the Caribbean. LACEA has five hundred active members. 

Contact: Nancy Hsieh, UCLA Anderson School of Management, 110 Westwood Plaza, Suite C502, Los Angles, CA. 90095-1481; Tel: 310-206-8518; Fax: 310-825-4011; E-mail: nancy.hsieh@anderson.ucla.edu. 

MONEYVAL Committee, http://www.coe.int/T/E/Legal_affairs/Legal_co-operation/Combating_economic_crime/Money_laundering/  

The Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures (PC-R-EV) uses a mutual evaluation and peer pressure system to review the laws and practices employed by those Council of Europe member states which are not members of the Financial Action Task Force (FATF). Its aim is to harmonize legal, financial and punitive measures in these member states, relying on the relevant international standards for this purpose. 

It gives every state highly detailed recommendations on ways of optimizing its anti-laundering measures. Its work is based in particular on the forty recommendations of the FATF and the Convention on laundering, search, seizure and confiscation of the proceeds from crime (ETS No. 141).

Contact: Council of Europe, Avenue de l’Europe, 67075 Strasbourg Cedex; Telephone: +33 (0)3 88 41 20 00; Fax: +33 (0)3 88 41 27 45; E-mail: infopoint@coe.int  

Offshore Group of Banking Supervisors, http://www1.oecd.org/fatf

The members are Aruba, Bahamas, Bahrain, Barbados, Bermuda, Cayman Islands, Cyprus, Gibraltar, Hong Kong, Isle of Man, Jersey, Labuan, Macau, Mauritius, Netherland Antilles, Panama, Singapore and Vanuatu. 

Contact: Chairman, Offshore Group of Banking Supervisors, Jersey Financial Services Commission, P.O. Box 267, Nelson House, David Place, St. Helier, Jersey JE4 8TP 

Organization of American States (OAS), http://www.oas.org and http://www.cicad.oas.org 

The core mission of Inter-American Drug Abuse Control Commission (CICAD), an agency of the OAS, is to harness the collective energy of its member states to reduce the production, trafficking and use and abuse of drugs in the Americas. In 1992, CICAD formulated model regulations on money laundering offenses connected to illicit drug trafficking. In 1996, the  OAS member countries adopted the Inter-American Convention against Corruption, the first treaty of its kind in the world. 

The members of the OAS are Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, United States, Uruguay, Venezuela, Barbados, Trinidad and Tobago, Jamaica, Grenada, Suriname, Dominica, Saint Lucia, Antigua and Barbuda, Saint Vincent and the Grenadines, The Bahamas, Saint Kitts and Nevis, Canada, Belize and Guyana.

Contact: Mr. James F. Mack, Executive Secretary, Inter-American Drug Abuse Control Commission, Organization of American States, 1889 F St. NW, Washington, D.C. 20002.

Pacific Islands Forum Secretariat (PIFS), http://www.forumsec.org 

The sixteen members of the Pacific Island Forum are: Australia, 

Contact: Director, Political, International and Legal Affairs Division, Pacific Islands Forum Secretariat, Private Bag, Suva, Fiji; Telephone: (679) 3312 600; Fax: (679) 3305 554. 

Transparency International, http://www.transparency.org. 

Transparency International, the only international non-governmental organization devoted to combating corruption, brings civil society, business and governments together in a global coalition. TI, through its International Secretariat and more than eighty-five independent national chapters around the world, works at both the national and international level.  

Contact: Transparency International, Otto-Suhr Allee 97-99, 10585 Berlin, Germany, Telephone: +49-30-3438 2061/19, Fax: +49-30-3470 3912, E-mail: press@transparency.org 

United Nations (UN), http://www.un.org  

The 1999 International Convention for the Suppression of the Financing of Terrorism (Dec. 9, 1999, 39 I.L.M. 270 (2000) (entered into force Apr. 10, 2002)

The 2000 Palermo Convention Against Transnational Organized Crime, Dec.12, 2000, U.N. Doc. A/55/383 (entered into force Sept. 29, 2003)

Model Legislation on Laundering, Confiscation and International Cooperation in Relation to the Proceeds of Crime (1999)

Model Money-Laundering, Proceeds of Crime and Terrorist Financing Bill (2003)

Contact: UN Headquarters, First Avenue at 46th Street, New York, NY 10017. 

United Nations Office on Drugs and Crime, http://www.unodc.org. 

Contact: United Nations Office on Drugs and Crime, Vienna International Centre, P.O. Box 500, A-1400 Vienna, Austria; Telephone: +43 1 26060 0; Fax: +43 1 26060 5866; E-mail: unodc@unodc.org. 

Wolfsberg AML Principles, http://www.wolfsberg-principles.com 

Contact: info@wolfsberg-principles.com 

World Bank, http://www.worldbank.org and http://www1.worldbank.org/finance/html/amlcft/index.htm 

Contact: The World Bank, 1818 H Street, N.W., Washington, D.C. 20433; Telephone: 202-473-1000; Fax: 202-477-6391. E-mail: amlcft@worldbank.org 

World Customs Organization (WCO)

Contact:

III. Discussion Questions

1. Identify the history, purpose and strategies of each of the AML international organizations.

2. Identify the alliances between the international organizations and foreign nations. 

3. Discuss how the international AML regime relates to the growing international regime against terrorist financing. 

4. Compare and contrast the international legal and regulatory AML standards of the international and regional international organizations.

CHAPTER 6: TERRORIST FINANCING: LAW, POLICY AND STRATEGIES

I.	Learning Objectives

1. To understand the variety and range of world terrorist organizations and their cooperative and support institutions.

2. To understand how world terrorist organizations function, how they raise money and how they use money laundering to finance their activities.

3. To understand the money laundering methods used by terrorists and their supporters.

4. To compare and contrast traditional money laundering by organized crime with the money laundering used in terrorist financing.

5. To understand judicial decisions under the USA Patriot Act and other national legislation.

6. To understand and evaluate the effectiveness of the standards, laws, conventions, regulations, polices and strategies against the financing of terrorism.

II.	Research Resources

FATF 8 Special Recommendations on Terrorist Financing

1999 UN Convention for the Suppression of the Financing of Terrorism

UN Resolution 1373

Wolfsberg Statement on the suppression of the financing of terrorism

ECOFIN meeting on October 16 2001

Council of the EU Decision on combating terrorism

[annalise – put here the material marked  SAMAIA which you will find in an email that I sent you]

I.	THE UNITED STATES POSITION*

1.Executive Summary

“ … a key element of terrorist networks that was largely undisturbed prior to 9/11 is the global financial infrastructure that facilitates the rise of groups such as al-Qaida and funds attacks against the United States and our global partners. The work to track and shut down the financial network of terror is one of the most critical efforts facing us today, and we have achieved important successes in the mission to bankrupt the financial underpinnings of terrorism. Raising and moving money is now harder, costlier, and riskier for al-Qaida and like-minded terrorist groups. We have frozen and seized terrorist assets, exposed and dismantled known channels of funding, deterred donors, arrested key facilitators, and built higher hurdles in the international financial system to prevent abuse by terrorist.”

Terrorist groups like al-Qaida and Hamas have an arsenal of tools at their disposal to raise and move money. In additional to using methods such as front companies, attorneys and accountants, they have taken advantage of charities, deep-pocket donors, and crime of all types to raise money. Moreover, they have relied on banks, informal remittance networks known as hawalas, wire remitters, currency exchangers, and couriers to move money or value across national borders.

This report focuses on several actions employed by the U.S. and the international communities to detect, dismantle, and deter terrorist financing networks. Specific focus will be on the U.S. efforts to provide terrorist finance training to foreign allies, the U.S. outlined approach for the international community to develop processes for providing resources to build anti-money laundering and counter terrorist finance (AML/CTF) and finally, a brief look at how the U.S. and the international community have forged systemic interests internationally through the work of the FATF, the FATF-style regional bodies, the International Monetary Fund (IMF) and World Bank, and other multilateral organizations to detect, dismantle and deter terrorist financing.

2. Introduction

	Globalization has rapidly encouraged the cross-border movement of people, products, and capital. Alone with this expansion terrorist financing has expanded. This second expansion, unwelcome by many countries, must be addressed on a worldwide scale. The U.S. government and the U.K. have been among the leaders to seek early on to promote international cooperation on the counterterrorism capacity-building front as a component of the global war on terrorism. Strategies used by the international community to combat the expansion of terrorist financing has required systemic approaches to enhance the transparency and accountability of the international financial system. In the U.S. these interests are being advanced by the implementation of the USA PATRIOT Act. Resulting from this act the Treasury Department has issued regulations that strengthen existing customer identification, recordkeeping, reporting, and information-sharing obligations in various financial sectors. Additionally, these obligations have been expanded to new financial sectors such as money service businesses, which are vulnerable to abuse. The U.S. is promoting the above-mentioned systemic interests internationally through the work of the FATF, the FATF-style regional bodies, the International Monetary Fund (IMF) and World Bank, and other multilateral organizations.

3. U.S. Backed Terrorist Finance Training and Assistance to Foreign Allies

	Countries such as Africa, Asia, Europe, Latin America, and the Middle East on a bilateral and multilateral basis  have been provided counterterrorism finance assistance by the U.S. This coordinated effort with the U.S. Counterterrorism Committee and U.N. Office of Drug Control Policy has filled both requests and offers of technical assistance. The United States has supported key initiatives by the FATF to strengthen anti-money laundering and counterterrorist finance regimes. Additionally, the U.S. through the G8 Counterterrorism Action Group, the Organization of American States, Asia Pacific Economic Cooperation (APEC), and Organization for Security and Cooperation in Europe has worked to raise awareness of possible abuses by terrorist financiers.

	On the international financial front, the U.S. is coordinating and cooperating with the international financial institutions, including the IMF, World Bank, and Asian Development Bank, on counterterrorist finance projects that contribute to the economic development and integrity of international markets. One prevalent example of this effort was with the Bangkok Leader. An October 2003, meeting with APEC and the Bangkok Leader launched a counterterrorism capacity-building initiative to secure the safe movement of people, goods, and money. The regional Trade and Financial Security Initiative was established under the auspices of the Asian Development Bank to provide capacity building in the areas of anti-money laundering and counterterrorist financing and aviation, port, and maritime security.

	Further assistance by the U.S. government is aid to foreign allies to assist in their building capacity to prevent terrorists from using the international financial system to further their plots. The Interagency Terrorist Finance Working Group identifies those countries most needing such U.S. training and technical assistance. To fight terrorism successfully each country must develop the necessary legal framework, banking regulation, financial intelligence unit, law enforcement and judicial process.

	Several groups have been spearheaded by the State Department as a result of the September 11 attacks.

	Terrorist Finance Working Group (TFWG): coordinates, develops, and provides training and technical assistance to our foreign partners deemed most vulnerable to terrorist financing. The TFWG, co-chaired by the State Department’s Office of the Coordinator for Counterterrorism (S/CT) and the Bureau for International Narcotics and Law Enforcement Affairs (INL), includes various U.S. government agencies from the departments of State, Treasury, Justice, and Homeland Security and meets biweekly to receive intelligence briefings, schedule assessment trips, review country reports, and discuss the development and implementation of technical assistance and training programs. This interagency group leveraged the U.S. government’s existing expertise in its efforts to combat money laundering and organized crime and was aimed at addressing terrorist financing.

	Treasury Department Financial Crimes Enforcement Network: provides training and technical assistance to foreign FIUs. Included in this assistance are provisions of equipment, information technology assessments, and specialized analytical software and analyst training for fledgling FIUs. The United States is an active member of the Egmont Group of FIUs and regularly sponsors aspiring members.

Legal Framework to Criminalize Terrorist Financing. To comply with the U.S. Security Council Resolution 1373 and the FATF eight Special Recommendations on Terrorist Financing, each state is required to criminalize terrorist financing and money launderings. Legislation should establish effective measures to clock and seize assets of terrorist financiers and their supporters. Each country should provide its law enforcement agents and judicial branch with ample authority to pursue and prosecute terrorist financing cases. Every country should ratify the U.S. instruments related to terrorism at the earliest opportunity. Robust counterterrorist financing and anti-money laundering legislation provides a country with the requisite legal foundation to combat money laundering and terrorist financing.

	The United States may provide technical assistance on drafting legislation that criminalizes terrorism and terrorist financing to countries that request such assistance through the Department of Justice and U.S. Agency for International Development. In certain cases, the United States can arrange for resident legal advisors to provide assistance to judicial officials in their own country.

	Financial Regulatory Supervision to Protect Integrity of the Banking System. Protecting the financial sector from terrorist financing and criminal abuse is a key element in our CT Finance Training and Technical Assistance strategy. Under international standards, each country must determine which regulatory agency will be responsible for banks’ and non-bank financial institutions’ compliance with measures to combat terrorist financing. Governments should develop strict regulatory and anti-money laundering compliance measures and create a formal system for financial institutions to report suspicious activities to the regulatory agencies. Each country should establish penalties such as monetary fines to ensure the effectiveness of the compliance regime. The central bank, investment regulators, and other supervisory agencies need to educate the private sector as to possible abuse by terrorists.

	The United States may provide assistance to strengthen the financial regulatory regimes of countries that request such assistance through our regulators including the Federal Reserve, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency. Training includes courses for bank examiners on reporting suspicious activity reports and detecting terrorist financing and money laundering schemes.

	Financial Intelligence Unit as the Link Between the Private and Public Sectors. Each country should establish a financial intelligence unit (FIU) to collect, analyze, and disseminate financial intelligence and pass legislation to authorize such data collection. The FIU should develop an efficient system for financial institutions and government regulatory agencies to report suspicious activities related to terrorist financing and money laundering to the FIU. The FIU should be responsible for analyzing these suspicious activities reports and refer cases to law-enforcement agencies for investigation. The FIU should establish appropriate channels to share financial intelligence with its foreign counterparts to assist with financial crime investigations.

	The United States, through the Treasury Department Financial Crimes Enforcement Network, provides training and technical assistance to foreign FIUs. Such assistance includes provision of equipment, information technology assessments, and specialized analytical software and analyst training for fledgling FIUs. The United States is an active member of the Egmont Group of FIUs and regularly sponsors aspiring members.

	Law Enforcement Investigations to Track Down Terrorist Financiers. Law enforcement agencies must be granted adequate legal authority to pursue financial crimes including terrorist financing cases. Such authority may include the power to conduct undercover operations and electronic surveillance to investigation financial crimes. Governments should establish specialized units and interagency task forces to pursue terrorist financing cases. Law enforcement agencies should coordinate investigations and prosecutions of terrorist financing cases with the judiciary branch.

	The United States provides assistance programs in the form of financial investigative training to foreign law-enforcement agents who request such assistance. U.S. agencies – including the FBI, State Department’s Diplomatic Security Anti-Terrorism Assistance Programs, Internal Revenue Service Criminal Investigations Division, and Bureau of Immigration and Customs Enforcement – conduct training courses for their foreign counterparts to develop the skills necessary to investigate financial crimes including terrorist financing.

	Judicial/Prosecutorial Process to Bring Terrorist Financiers to Justice. Each government must determine which judicial unit will be responsible for prosecuting terrorist financing cases. Due to the complex technical nature of terrorist financing cases, a well-trained team of prosecutors familiar with financial crimes should be assembled to pursue these investigations. Judges and magistrates need to familiarize themselves with terrorist financing cases because they may not have tried such cases in the past.

	The United States may provide technical assistance through the Department of Justice to foreign allies’ judicial authorities using case studies to demonstrate how new counterterrorism finance legislation can be applied and cases prosecuted successfully.

	In response to the 9/11 attacks, the U.S. government launched a global war on terrorism on five fronts: military, intelligence, law enforcement, financial, and diplomatic. The U.S. has conducted law enforcement and intelligence operations that bring terrorist financiers to justice. In addition, the U.S. has began to employ public designations measures to name, shame, and block the assets of terrorist groups and their supporters. Further, the U.S. has developed capacity-building programs to reinforce the institutions of foreign allies to proactively combat terrorist financing.

4. Coalition Planning to Counter Terrorist Financing

	The TFWG has development the following process to prioritize the use of financial and human resources to build comprehensive anti-money laundering and counterterrorist finance (AML/CTF) regimes through U.S. foreign assistance:

1.	Identify and prioritize countries needing the most assistance to deal with terrorist financing with input from the intelligence and law enforcement communities.

	2. Evaluate priority countries’ CTF regimes with a Financial Systems Assessment Team (FSAT) comprising legal, financial and law enforcement experts. The FSAT team usually spends one week in country to meet with host government authorities from the ministries of justice, interior, and finance; law-enforcement authorities; the central bank, and the private sector to see how they address money laundering and terrorist financing crimes.

	3. Prepare a formal assessment report on vulnerabilities to terrorist financing and make recommendations for training and technical assistance to address these weaknesses. The team delivers its report in about a month. The formal report is shared with the host government to gauge its receptivity to and coordinate U.S. offers of assistance.

	4. Develop a training implementation plan based on these recommendations. Assistance programs from U.S. government experts may include legal drafting assistance to ensure that the host nation’s legal regime meets international standards, financial regulatory training, financial intelligence unit development, investigative training to “follow the money,” and judicial and prosecutorial training.

	5. Provide training and technical assistance to priority countries on establishing the legal framework to criminalize AML/CTF and then train law-enforcement agents and prosecutors to apply the law. This assistance can be provided in the country, in the region, or in the United States.

	6. Encourage burden sharing in capacity building with our allies, international financial institutions (International Monetary Fund or IMP, World Bank, regional development banks), and through international organizations such as the U.N. Counterterrorism Committee, Financial Action Task Force (FATF), on money laundering, and G-8.

	The September 11 attacks prompted the U.S. and its allies to quickly recognize the urgent need to detect, dismantle, and deter terrorist financing networks around the world. To this end, each country has embarked upon the development of its’ legal, financial regulatory, financial intelligence, law-enforcement, and prosecutorial capabilities and institutions to effectively combat terrorist financing and money laundering. Counterterrorism financial legislation can be applied and cases prosecuted successfully.

5. Conclusion

	In order to curtail funds reaching terrorists, countries must address the threat of terrorism. This action must be conducted on various fronts, e.g., financing domestically and internationally to deny terrorist networks financing and safe haven. The international community must prescribe to capacity building. This technique will allow a country to reinforce its legal, financial regulatory, financial intelligence, law enforcement, and judicial capabilities to combat terrorist financing. By leveraging its resources to assist countries with meeting the challenges posed by terrorist financing, the international community can better safeguard financial systems against abuse by terrorist financiers around the world.

II. THE UNITED NATIONS POSITION

1. Terrorist Financing

Terrorist financing is a part of the so-called “war on terror” aimed at preventing terrorists and supporters of terrorism access to the financial system.  Conventional wisdom is that denial of access to the financial system that further attacks hinders further terrorist attacks.  However, a recent United Nations report questions that reasoning.

The report was compiled by the United Nation’s Analytical Support and Sanctions Monitoring Team for the Security Council, pursuant to the authority of 8 of Security Council resolution 1526 (2004).  The essential elements of the report are that the current sanction regime has either run its course or nearly so, Al Qaida has decentralized and is able to finance its activities on very little money, and advocates greater international cooperation.  In particular, the report discusses the various international efforts against terrorism and terrorist financing and the methodologies used to finance terrorism.

The report states there are currently 32 organizations working to develop standards and policies against terrorist financing.  The report states that “the most comprehensive regulatory regimes” are those in compliance with the Financial Action Task Force’s (FATF’s) 40 recommendations on anti-money laundering and the eight special recommendations regarding terrorist financing.  The only criticism of the FATF is that it does not attract universal international support and “and cannot by itself achieve a properly supervised global regime for the financial sector.” Reading between the lines, the report seems to imply that the United Nations is in a better position to “fill in the gaps” of recognized standards.

The report describes that 90 (of the 192) nations participating in the United Nations have established Financial Intelligence Units (FIUs).  The FIUs collect and analyze Suspicious Transaction Reports submitted by financial businesses in search of prohibited transactions. In essence, the FIUs provide a link between regulatory agencies and financial businesses to gather information for law enforcement and to provide training for financial businesses as to what may be unlawful activity.  The report warns that while the focus of the international community is to counter terrorist financing by tracking individual transactions, this will only force Al Qaida, and by implication similar groups, to use alternative means less susceptible to tracking.  Thus, merely tracking financial transactions is already obsolete.

One of the most interesting aspects of the paper was it described the level of financing to carry out Al Qaida’s terrorist activities.  By far the most expensive operation was the attacks on new York and Washington, D.C.  The exact figure was not stated, but it was in excess of $100 thousand.  The Madrid train bombings cost about $50 thousand. The attack on the U.S.S. Cole cost about $30 thousand.  The point is that these terror operations cost so little to carry out it is probably not possible to track individual financial transactions to identify them before hand.
  
The report emphasizes three ways terrorists move funds: alternative remittance systems, cash couriers, and charities and non-profit organizations.  Licensing and regulating non-banking financial businesses have addressed alternative remittance systems, such as hawala.  However, the report expresses concern that over regulation will just lead to other systems that are less susceptible to regulation.  Cash couriers are used to physically carry cash outside of the banking system.  The United Nations has urged all states to establish reporting requirements.  Similarly, charitable organizations are used to raise and transfer money around the world.  This has led to better monitoring and accounting of the accounts of such organizations.  Of course, all of this leads to questions about how such restrictions are compatible with free societies.

For example, alternative remittance systems are manifestations of the right of parties to enter contracts.  In the United States, the states are prohibited from impairing the obligation of contracts and the authority of the federal government is typically limited to regulation of interstate and foreign commerce.  So swapping contractual liabilities are now a threat to government.  As for transporting cash, it is analytically no different than transporting any other kind of moveable property.  In fact, the public was sold “paper money” for the relative ease of transport over precious metals.  Now people are not supposed to even carry “too much” cash around because it is indicative of a threat to the government.  Similarly, strict regulation of charities makes less money available to address the needs the charities were formed to meet.  In other words, charities are a threat to government.  Yet, these are all basic rights of human beings everywhere. If the basic rights of the vast majority of people must be expended to preserve the current system, one must wonder whether it is the current governmental system that has become obsolete.
To the extent that modern government directs its efforts at self-preservation at the expense of the rights of the people, government is no different than religious organizations that use fear of hell fire and damnation to control people.  Carrying the comparison further, the various policy organizations (particularly the FATF) are akin to television evangelists attempting to exercise the devil of terrorism.  It is a lot of show for something as fleeting as the weather.  The UN report makes this point quite clear.

Despite the fact that the UN and many world governments have taken to listing people and organizations considered related to terrorism, the effort has had little impact on terrorist financing.  “There appear to be several reasons for this, the most important being that the Security Council has, inevitably, reacted to events, while Al-Qaida has shown great flexibility and adaptability in staying ahead of them. The structure of Al-Qaida has evolved from its original form as an office offering support to fighters in Afghanistan, through its role as an initiator and sponsor of terrorism from an established base, to its current manifestation as a loose network of affiliated underground groups with certain goals in common. It will always be difficult to design, let alone enforce, sanctions against diverse groups of individuals who are not in one location, who can adopt different identities, and who need no special equipment to launch their attacks.”  The mere fact that people may do things that destabilize governments are considered threats.  This is a long way from the government Thomas Jefferson described where, “A little revolution is a good thing.”

The Monitoring team sees its future in studying “how Al-Qaida is now raising, holding and moving money in order to identify ways in which the financial measures might be made more effective. It will seek to identify ways in which investigating bodies can pass to the relevant regulatory authorities new information on Al-Qaida associated terrorist financing as early as possible.  The Monitoring Team will also continue its engagement with other international organizations dealing with terrorist financing with a view to making recommendations to the 1267 Committee for possible further measures.”  In other words, the Monitoring team offers the same old solution: more bureaucracy.  History will probably show that the terrorist element has always been present but the government is only reeling under its own weight.

III. PATTERNS OF GLOBAL TERRORISM  -- 2003

Released by the Office of the Coordinator for Counterterrorism
April 29, 2004

Introduction

By Ambassador Cofer Black
Coordinator for Counterterrorism 

"We’ve come to this moment through patience and resolve and focused action. And that is our strategy moving forward. The war on terror is a different kind of war, waged capture by capture, cell by cell, and victory by victory. Our security is assured by our perseverance and by our sure belief in the success of liberty.  And the United States of America will not relent until this war is won." 

President George W. Bush
on 14 December 2003
following the capture of Saddam Hussein 

In 2003, terrorists struck at targets around the world, even as Iraq became a central front in the global war against terrorism and the focus of so many deadly attacks against civilians. Al-Qaida and other terrorist groups made clear once again their relentless pursuit of evil in defiance of any law -- human or divine. The year saw heinous crimes against the international community, humanitarian organizations, and people dedicated to helping mankind: 

*	A bomb in a cement truck exploded at the United Nations headquarters in Baghdad in August, killing special UN representative Sergio Vieira de Mello and 22 other persons. 

*	The Baghdad International Committee for the Red Cross was bombed in October. 

*	The Catholic Relief Services headquarters in Nassiryah was destroyed in a bombing on 12 November. 

*	An explosion occurred near Save the Children USA’s offices in Kabul in  November; the agency has been providing education, health, and economic assistance to children and families in Afghanistan for more than 20 years.

Churches, synagogues, and mosques were all targeted by terrorists in 2003. Among the items captured from al-Qaida terrorists last year were copies of the Koran containing bombs. Clearly, these actions show the terrorists to be enemies of all people, regardless of faith.
The world must remain united against the terrorist threat. The United States, for its part, remains committed to implementing the National Strategy for Combating Terrorism. We will: 

*	Defeat terrorist organizations of global reach by attacking their sanctuaries; leadership; command, control, and communications; material support; and finances. 

*	Deny further sponsorship, support, and sanctuary for terrorists. 

*	Diminish the underlying conditions that terrorists seek to exploit. 

*	Defend the United States, our citizens, and our interests at home and abroad. 

*	Use all the tools at our disposal: diplomatic, law enforcement, intelligence, financial, and military.

Diplomacy 

Through diplomacy, the Department of State promotes international counterterrorism (CT) cooperation that serves our own interests as well as those of our partners. We enhance the capabilities of our allies to fight the terrorist threat and facilitate the disruption of terrorist networks and the apprehension of terrorist suspects.
 
During the year, nations around the world continued to increase their counterterrorism efforts and to cooperate both bilaterally and regionally to deter attacks. The OAS, the European Union, the OSCE, ASEAN, APEC, and other organizations took concrete steps to combat terrorism more effectively and to cooperate with each other in the fight. Since September 11, NATO has made great strides in transforming its military capabilities to make the Alliance more expeditionary and deployable against terrorist threats. NATO currently makes a major contribution to the global war on terrorism by leading the International Security Assistance Force (ISAF) in Afghanistan. Additional Alliance counterterrorism contributions include a maritime terrorism monitoring presence in the Mediterranean Sea, a Chemical-Biological-Radiological-Nuclear defense unit, and a terrorism threat intelligence unit to enhance sharing of intelligence.
 
At the 2003 G-8 Summit in Evian, France, leaders established a Counterterrorism Action Group of donor countries to expand and coordinate training and assistance for countries with the will -- but not the capabilities -- to combat terror, focusing on critical areas such as terrorist financing, customs and immigration controls, illegal arms trafficking, and police and law enforcement. During the fourth regular session of the Inter-American Committee Against Terrorism (CICTE), member states agreed to a comprehensive work plan not only to strengthen border and financial controls but also to address threats to seaport and aviation security as well as cybersecurity. In June, President Bush announced a $100 million Eastern Africa Counterterrorism Initiative to expand and accelerate CT efforts with Kenya, Ethiopia, Djibouti, Uganda, Tanzania, and other countries. 

Law Enforcement 

The greatly increased law enforcement cooperation among nations that followed the 9/11 attacks continued to expand throughout 2003.
 
Al-Qaida is no longer the organization it once was, largely due to such cooperation. Most of the group’s senior leadership is dead or in custody, its membership on the run, and its capabilities sharply degraded. More than 3,400 al-Qaida suspects have been arrested or detained worldwide.  In the United States, international terrorist suspects repeatedly faced the rule of law: 

*	In February, the Department of Justice (DOJ) announced the indictment of the alleged North American leader of the Palestine Islamic Jihad, Sami Al-Arian, and seven co-conspirators. The indictment charges them with operating a racketeering enterprise that has supported numerous violent terrorist activities since 1984. Al-Arian and three others were placed under arrest. 

*	In March, DOJ announced the indictment and arrest of three members of the Army for the Liberation of Rwanda for the brutal murder in 1999 of two American tourists in Uganda. 

*	In May, a naturalized American citizen, Iyman Faris, pled guilty to surveilling a New York City bridge for al-Qaida, and in October he was sentenced to 20 years for providing material support to that group and conspiring to give them information about possible US targets for attack. 

*	Also in May, the Justice Department unsealed a 50-count indictment against two Yemeni nationals for the bombing in October 2000 of the USS Cole that killed 17 American sailors and wounded more than 40. 

*	In November, two Yemeni suspects were extradited from Germany to the United States on federal charges of conspiring to provide material support to al-Qaida and HAMAS. 

*	Throughout the year, numerous members of terrorist cells that were disrupted in Detroit, Portland, Buffalo, and Seattle pled guilty to or were convicted of charges of conspiracy to provide material support to terrorists, including al-Qaida and the Taliban.

Intelligence 

With enhanced intelligence sharing among nations, terrorists are being tracked down, and plots are being thwarted.
 
In March, al-Qaida operational leader and mastermind of the 9/11 terrorist attacks, Khalid Sheikh Mohammed, was captured in Pakistan and turned over to US authorities.
 
In August, his associate -- Riduan bin Isomuddin, or Hambali -- was arrested in Thailand and also turned over to US authorities. Hambali is believed to have been largely responsible for the terrorist attacks in Bali that killed more than 200 people. 
Information gained from captured enemy combatants and imprisoned terrorist suspects continues to be exploited effectively around the world.
 
In January 2003, President Bush announced the creation of the Terrorist Threat Integration Center, which began operations last May. The center analyzes threat-related information collected domestically and abroad to form a comprehensive threat picture and to ensure information sharing among US agencies.
 
In September, Attorney General John Ashcroft, Secretary of Homeland Security Tom Ridge, Secretary of State Colin Powell, FBI Director Robert Mueller, and Director of Central Intelligence George Tenet announced the creation of the Terrorist Screening Center to consolidate terrorist watch lists and provide 24/7 operational support for the thousands of federal screeners across the country and around the world. 

Financial 

The world community is waging an unprecedented campaign to disrupt the flow of money to terrorist networks and cripple their ability to operate on a global scale. The United States is working closely with other governments and international institutions to block terrorist assets overseas, take preventive measures to keep assets out of terrorist hands, and offer training and assistance to governments that seek to improve their institutional ability to carry out anti-money laundering strategies.
 
Virtually every country in the world has expressed support for the war on terrorist financing: 173 nations have issued orders to freeze terrorist assets, more than 100 countries have introduced new legislation to fight terrorist financing, and 84 countries have established financial intelligence units to share information.
 
The 31-member Financial Action Task Force (FATF), the world’s standard setter for fighting money laundering, has adopted recommendations for countries that seek to protect their financial systems from terrorist financiers. More than 90 non-FATF countries and jurisdictions have already submitted self-assessment reports to FATF on their compliance with these recommendations.
 
Some 350 terrorist entities and individuals have been designated under Executive Order 13224, signed by President Bush on 23 September 2001, which freezes the assets of terrorists and their supporters and authorizes the government to identify, designate, and freeze the US-based assets of those who offer financial support to terrorist groups.
 
The Department of State’s Counterterrorism Finance Unit and the interagency Terrorist Financing Working Group coordinate the delivery of technical assistance and training to governments around the world that seek to improve their ability to investigate, identify, and interdict the flow of money to terrorist groups.
 
The United States has blocked some $36 million in assets of the Taliban, al-Qaida, and other terrorist entities and supporters; approximately $26 million of this has been turned over to the Government of Afghanistan. Other nations have blocked more than $100 million in terrorist assets. 

Military 

In Iraq and Afghanistan, military force is being brought to bear against terrorists with real success. 
The capture of Saddam Hussein in December 2003 was a major defeat for the thugs and terrorists who supported him. Through Operation Iraqi Freedom, the United States and its Coalition partners defeated the Saddam regime, effectively neutralizing a state sponsor of terrorism and removing a government that had used weapons of mass destruction against its own people. Iraq could no longer be used as a sanctuary by the network run by Abu Musab al-Zarqawi, whose relationships with senior al-Qaida leaders helped establish a poison-and-explosives training camp in northeastern Iraq.
 
During Operation Enduring Freedom, the United States has built a worldwide Coalition that dismantled the oppressive Taliban regime in Afghanistan and denied al-Qaida a safehaven. The Coalition remains engaged there.
 
(Most of the attacks that have occurred during Operation Iraqi Freedom and Operation Enduring Freedom do not meet the longstanding US definition of international terrorism because they were directed at combatants, that is, American and Coalition forces on duty. Attacks against civilians and against military personnel, who at the time of the incident were unarmed and/or not on duty, are judged as terrorist attacks.) 

Conclusion 

We have made significant progress in the two and one-half years since the global war on terrorism began. But the ultimate success of this global counterterrorism campaign will hinge, in large part, on two factors: sustained international political will and effective capacity building.
 
First, we must sustain and enhance the political will of states to fight terrorism. The key to maintaining a coalition is underscoring to its members every day that the fight is not over and that sustained effort is clearly in their long-term interests. We have made tremendous progress on that score.
 
I would cite Saudi Arabia as an excellent example of a nation increasingly focusing its political will to fight terrorism. Saudi Arabia has launched an aggressive, comprehensive, and unprecedented campaign to hunt down terrorists, uncover their plots, and cut off their sources of funding. The horrific bombings in Riyadh in May and November served to strengthen Saudi resolve, hasten existing counterterrorism efforts, and open new avenues of cooperation.  I have made numerous trips to the Kingdom during the past year and met with the highest levels of the Saudi Government, and I have been greatly impressed with the strides they have made and their seriousness of purpose.
 
Second, we need to enhance the capacity of all states to fight terrorism. The United States cannot by itself investigate every lead, arrest every suspect, gather and analyze all the intelligence, effectively sanction every sponsor of terrorism, prevent the proliferation of weapons of mass destruction, or find and fight every terrorist cell. 

I would cite Malaysia as a nation that is helping others increase their counterterrorism capacities while also increasing its own. Malaysia opened the Southeast Asia Regional Center for Counterterrorism in August. Participants from 15 nations from South and Southeast Asia received US-provided training at the center in ways to cut off sources of terrorist financing. Malaysia is a key partner in the war on terrorism, and its role in creating a regional center for building counterterrorism capacity and sharing information about terrorism in Asia is most welcome. 
The United States shares that goal of assisting governments to become full and self-sustaining partners in the global fight against terrorism. 
This fight will be of uncertain duration, but additional deadly attacks are certain.  
As Secretary Powell reminded us on the second anniversary of the September 11 attacks: “Led by the United States, nations all around the globe have come together in an historic effort to wipe terrorism from the face of the Earth. Faithful friends and former foes alike have united against terror, and we are bringing every tool of statecraft to bear against it -- military, intelligence, law enforcement, financial, and most certainly diplomatic."

Note

Adverse mention in this report of individual members of any political, social, ethnic, religious, or national group is not meant to imply that all members of that group are terrorists. Indeed, terrorists represent a small minority of dedicated, often fanatical, individuals in most such groups. It is those small groups -- and their actions -- that are the subject of this report.
 
Furthermore, terrorist acts are part of a larger phenomenon of politically inspired violence, and at times the line between the two can become difficult to draw. To relate terrorist events to the larger context, and to give a feel for the conflicts that spawn violence, this report will discuss terrorist acts as well as other violent incidents that are not necessarily international terrorism. 

Legislative Requirements 

This report is submitted in compliance with Title 22 of the United States Code, Section 2656f(a), which requires the Department of State to provide Congress a full and complete annual report on terrorism for those countries and groups meeting the criteria of Section (a)(1) and (2) of the Act. As required by legislation, the report includes detailed assessments of foreign countries where significant terrorist acts occurred and countries about which Congress was notified during the preceding five years pursuant to Section 6(j) of the Export Administration Act of 1979 (the so-called terrorist-list countries that have repeatedly provided state support for international terrorism). In addition, the report includes all relevant information about the previous year’s activities of individuals, terrorist organizations, or umbrella groups known to be responsible for the kidnapping or death of any US citizen during the preceding five years and groups known to be financed by state sponsors of terrorism.
 
In 1996, Congress amended the reporting requirements contained in the above-referenced law. The amended law requires the Department of State to report on the extent to which other countries cooperate with the United States in apprehending, convicting, and punishing terrorists responsible for attacking US citizens or interests. The law also requires that this report describe the extent to which foreign governments are cooperating, or have cooperated during the previous five years, in preventing future acts of terrorism. As permitted in the amended legislation, the Department is submitting such information to Congress in a classified annex to this unclassified report. 

Definitions

No one definition of terrorism has gained universal acceptance. For the purposes of this report, however, we have chosen the definition of terrorism contained in Title 22 of the United States Code, Section 2656f(d). That statute contains the following definitions: 

The term terrorism means premeditated, politically motivated violence perpetrated against noncombatant targets by subnational groups or clandestine agents, usually intended to influence an audience. 

The term international terrorism means terrorism involving citizens or the territory of more than one country. 

The term terrorist group means any group practicing, or that has significant subgroups that practice, international terrorism. 

The US Government has employed this definition of terrorism for statistical and analytical purposes since 1983. 

Domestic terrorism is probably a more widespread phenomenon than international terrorism. Because international terrorism has a direct impact on US interests, it is the primary focus of this report. However, the report also describes, but does not provide statistics on, significant developments in domestic terrorism. 

II.	Discussion Questions

1.	Discuss the specific statutory definition of a terrorist activity.
2.	Discuss by region and terrorist group the financing methods and methods of money laundering.
3.	Discuss the role of non-profit organizations, such as charities, in the financing of terrorism.
4.	Discuss the USA Patriot Act’s provisions on the financing of terrorism.
5.	Discuss the international standards on the financing of terrorism.
6.	Discuss the legislations and regulations enacted by the United Kingdom and other nations on the financing of terrorism. 
7.	How effective is the international regime against money laundering and the financing of terrorism? Which methods and controls been most effective?
8.	Discuss the Eight Special Recommendations of the FATF.

CHAPTER 7: THE UNITED STATES LAW OF MONEY LAUNDERING AND FORFEITURE

I. Learning Objectives

1. To learn the three primary cycles to the money laundering process, the three categories of offenses under Section 1956 and two categories of offenses under Section 1957, the basic outline of the USA Patriot Act 

2. To learn the definition of terms under the Money Laundering Control Act of 1986 and Sections 1956 and 1957.

3. To learn the offenses that are prosecutable under Sections 1956 and 1957 and the burden of proof required.

4. To learn the similarities and differences of Sections 1956 and 1957.

5. To learn about the meanings and concepts of specified unlawful activities (predicate offenses) and proceeds of crime.

6. To learn the different treatment of proceeds of crime under Sections 1956 and 1957, and the requirements of various judicial circuits of the federal courts.

7. To learn how the proceeds of crime relate to Sections 1956 and 1957 and how the case law, under various circuits, differs.

8. To learn how extraterritorial jurisdiction is obtained by the U.S. government and the U.S. district courts with respect to international money laundering matters.

9. To learn the criminal fines and civil penalties for money laundering transactions.

10. To learn when criminal forfeitures and civil asset forfeitures apply.

11. To learn how the USA Patriot Act allows the U.S. government to obtain funds at interbank accounts established by foreign banks.

12. To learn about the John Doe Summonses cases and how this can lead the Internal Revenue Service to finding crimes of money laundering.

II. Money Laundering Control Act of 1986. The Money Laundering Control Act of 1986 is codified under the United States Code at 18 U.S.C. §§ 1956 and 1957 (hereinafter referred to as Section 1956 and Section 1957).

A. Money Laundering Defined. Money laundering may be defined as “The process by which one conceals the existence, illegal source, or illegal application of income, and then disguises that income to make it appear legitimate.” 

B. Introduction to Money Laundering. To understand the concept of money laundering, the primary cycles to the money laundering process must be understood:

1. Pre-Washing Phase. This phase involves the introductions of the proceeds of crimes into the financial system;

2. The Washing Phase. The second phase involves hiding the proceeds of crimes through a variety of financial transactions, usually designed to eliminate the ability to trace the proceeds; and

3. The Recycling Phase. The third phase involves the “washed” funds that provide benefit to the criminal without further taint.

C. Introduction to Section 1956 and Section 1957.  Prior to Sections 1956 and 1957, it was difficult for the U.S. Government to successfully control the movement of illegal income through financial institutions.  Sections 1956 and 1957 add the goal of focusing on the act of converting funds derived from illegal activities into spendable assets.  The following is a brief history:

The CID’s [Criminal Investigation Division’s] Anti-Money Laundering Program is the compliance effort to address criminal violations of the Bank Secrecy Act (BSA), the Money Laundering Control Act of 1986, and IRC § 6050I (Form 8300 filing requirements). In 1970, Congress enacted legislation to enable law enforcement officials to detect and prosecute narcotics trafficking and other criminal activities that generate illegal proceeds and the laundering of those proceeds. The BSA authorizes the Treasury Department to require the filing of reports and the maintenance of records concerning various types of transactions “where they have a high degree of usefulness in enforcement of criminal, tax, or regulatory proceedings.”  

The Treasury Department has enacted regulations that impose four major reporting requirements. The currency transaction report (CTR) requires designated financial institutions to report cash transactions exceeding $10,000.  The Report of International Transportation of Currency or Monetary Instruments (CMIR) requires that all persons report the import or export of currency and certain other monetary instruments in excess of $10,000 into or out of the United States.  The Report of Foreign Bank and Financial Accounts (FBAR) requires that each person subject to U.S. jurisdiction file an annual report of her interest in designated foreign accounts that exceed $10,000.  

In 1984, Congress enacted IRC § 6050I, which requires any person who is engaged in a trade or business and who, in the course of such trade or business, receives more than $10,000 to report the transaction on Form 8300.  Structuring transactions to evade the reporting requirements of the BSA or IRC § 6050I are felonies, which can also result in civil penalties and forfeiture.  The Money Laundering Control Act of 1986 created the offense of money laundering (18 USC § 1956) and the offense of knowingly engaging in monetary transactions in property derived from specified criminal activity (18 USC § 1957); both offenses carry severe criminal penalties and can result in forfeiture.  

The CID has devoted approximately 35 percent of its investigative resources to its Anti-Money Laundering Program. Between fiscal years 1987 and 1992, the CID increased its initiated money-laundering and currency-reporting investigations from 507 to 2525 and increased its prosecution recommendations from 258 to 1745, and convictions for such offenses increased from 148 to 927.

D. Three Categories of Offenses Under Section 1956.  Section 1956 consists of three categories: (i) domestic money laundering; (ii) international money laundering; and (iii) government sting operations, involving property represented by a law enforcement officer to be the proceeds of illegal activity. Section 1956 criminalizes, among other things, commercial transactions where goods or services are provided in exchange for “dirty money” with certain knowledge or intent. Section 1956 also prohibits transporting or transmitting “dirty” monetary instruments, including U.S. currency, into or out of the U.S. with certain knowledge or intent. 

E. Two Categories of Offenses Under Section 1957. Section 1957 consists of two categories of offenses where: (i) the offense takes place in the U.S. or in the special maritime and territorial jurisdiction of the U.S.; or (ii) the offense takes place outside the U.S. and the person perpetrating the offense is a U.S. person. Section 1957 prohibits engaging in “monetary transactions” with “dirty money.”

F. Basic Outline of the Act. Before looking at the details of the Money Laundering Control Act of 1986, it is important to understand the basic outline or format of the two statutes.  

1. Section 1956.  Section 1956(a)(1) deals with financial transactions involving the proceeds of some specified unlawful activity.  Section 1956(a)(2) deals with cross border transfers of monetary instruments or funds from a place in the U.S. to or through a place outside the U.S.  Section 1956(a)(3) deals with: (i) promoting or carrying on specified unlawful activities; (ii) concealment; or (iii) avoiding a transaction reporting requirement under state or federal law.

2. Section 1957.  Section 1957(a) deals with a monetary transaction that involves engaging in a monetary transaction in criminally derived property of a value greater than $10,000 that is derived from funds from some specified unlawful activity. 

G. Definition of Terms—Section 1956. 

1. Transaction. The term “transaction” means: 

[A] purchase, sale, loan, pledge, gift, transfer, delivery, or other disposition, and with respect to a financial institution includes a deposit, withdrawal, transfer between accounts, exchange of currency, loan, extension of credit, purchase or sale of any stock, bond, certificate of deposit, or other monetary instrument, use of a safe deposit box, or any other payment, transfer, or delivery by, through, or to a financial institution, by whatever means effected.

2. Financial Institution. The term “financial institution” means:

“Financial institution” is defined by reference to 31 USC § 5312(a)(2), and an individual, as well as a bank, can be considered a financial institution. The USA Patriot Act amended the definition of “financial institution” to specifically include any financial institution as defined in 31 USC § 5312(a)(2) or the regulations promulgated thereunder, and any foreign bank as defined in Section 1 of the International Banking Act of 1978, 12 USC § 3101. Financial institutions include securities brokers or dealers, operators of credit card systems, insurance companies, travel agencies, car dealers, and individuals involved in real estate closings. The Secretary of the Treasury may designate any business “whose cash transactions have a high degree of usefulness in criminal, tax or regulatory matters …” as a financial institution. According to the Money Laundering Prosecution Manual (MLPM), amendments to the money-laundering statute clarified that the definition of “financial institution” includes both the categories provided by regulation or as defined under 31 USC § 5312(a)(2). 

3. Financial Transaction.  The term “financial transaction” means a transaction which in any way or degree affects interstate or foreign commerce involving the movement of funds by wire or other means or involving one or more monetary instruments or involving the transfer of title to any real property, vehicle, vessel, or aircraft or a transaction involving the use of a financial institution which is engaged in, or the activities of which affect, interstate or foreign commerce in any way or degree.

4. Monetary Instruments. The term “monetary instruments” means (i) coin or currency of the U.S. or of any other country, travelers’ checks, personal checks, bank checks, and money orders; or (ii) investment securities or negotiable instruments, in bearer form or otherwise in such form that title thereto passes upon delivery.

5. Conducts. The term “conducts” means:

initiating, concluding, or participating in initiating, or concluding a transaction. Concerning bank deposits, one court has defined “conducts” as occurring when a deposit is made, not when the deposited check is processed. The term “specified unlawful activity” is defined broadly to include all Racketeer Influenced and Corrupt Organizations Act (RICO) predicate offenses, except Title 31 offenses. The term “state” includes any state, “the District of Columbia and any commonwealth, territory, or possession of the United States.” Vagueness challenges to the definitional framework have been rejected.

6. Proceeds. “Proceeds” is not a defined term under § 1956.

The earliest decision to consider a challenge was by a district court in United States v. Ortiz, where the district court rejected a due process challenge to the term. The court cited The Random House Dictionary definition as “[s]omething that results or accrues; the total amount derived from a sale or other transaction …; [or] the profits or returns from a sale, investment, etc.,” and Black’s Law Dictionary definition of “proceeds” as “[i]ssues; income; yield; receipts; produce; money or articles or other thing of value arising or obtained by the sale of property; the sum, amount or value of property sold or converted into money or into other property.” The court concluded that the term “proceeds” had a commonly accepted meaning and provided sufficient notice of the prohibited conduct. 

The term was considered by another district court in United States v. Werber, where the defendants used counterfeit cashier’s checks to purchase automobiles they later sold. Citing Phelps v. Harris, which stated that “proceeds” is a “word of great generality,” and the dictionary definition of the term, the court found that the automobiles represented proceeds of the specified unlawful activity (i.e., the purchase of automobiles with counterfeit checks). 

Subsequently, a number of circuit courts have rejected vagueness challenges. For example, in United States v. Haun, the Sixth Circuit rejected a vagueness challenge, relying on the definition of “proceeds” in Webster’s Third New International Dictionary: “what is produced by or derived from something (as a sale, investment, levy, business) by way of total revenue.” The court found that the term had a commonly accepted meaning. In United States v. Jackson, the defendant argued that the term “proceeds” was vague because it failed to specify what portion of the funds must include illegal proceeds. The Seventh Circuit rejected this contention, noting that since the commingling of legal and illegal funds violated the statute, the term was specific enough. In United States v. Monaco, the defendant objected to the application of “proceeds” to conduct occurring before the statute was enacted. The Second Circuit held that conduct occurring before the enactment of the statute nevertheless created “proceeds” of an offense when financial transactions subsequently occurred after the enactment date, and the conviction was affirmed. 

Beyond vagueness challenges, what constitutes “proceeds” has resulted in significant appellate litigation with varying pronouncements. Proceeds need not consist of currency or monetary instruments, and proceeds may be derived from a specified unlawful activity committed by someone other than the defendant. The Ninth Circuit, in United States v. Estacio, rejected the contention that proceeds must consist of money or tangible assets, finding that proceeds were created as a result of a fraudulently obtained line of credit that resulted in artificially inflated bank balances. In United States v. Akintobi, this same circuit held that proceeds of a credit card scheme included personal bank checks stolen from the mails, which were used to pay down balances due on the credit card accounts and resulted in an increase in the available credit. In United States v. Christo, however, the Eleventh Circuit, in a check-kiting scheme charged under 18 USC § 1957, distinguished Estacio and held that the evidence was insufficient to show that the defendant had engaged in a transaction separate from the underlying criminal offense sufficient to create proceeds. 

In a significant ruling, the Seventh Circuit has limited the concept of proceeds in a case involving a video poker business. In United States v. Scialabba, the defendants were convicted of money laundering predicated upon the distribution of the gross receipts from video poker machines. The distributed funds were used to pay the outlet owners, winning customers, and business expenses. The Seventh Circuit rejected the contention that the proceeds included the gross receipts obtained, stating that the government’s theory was the equivalent of saying that every drug dealer commits money laundering by using receipts from the sale to purchase more stock in trade, that a robber commits money laundering by using part of the loot to rent a get-a-way car, and that an embezzler commits money laundering by spending part of the embezzled money for food and rent to stay alive. The Seventh Circuit held that proceeds in this case consisted of business profits, and the convictions of the defendants were reversed. While the court attempted to distinguish United States v. Conley, the Seventh Circuit’s decision conflicts with the Third Circuit’s view of the concept of proceeds. 

One issue that arises from a broad definition of “proceeds” is the possible use of tax crimes to establish that a defendant knew the funds involved were the proceeds of some form of unlawful activity. Under the dictionary definitions, there arguably are no “proceeds” of tax offenses, since the unreported income in a tax offense frequently comes from the operation of a taxpayer’s business, or some other legitimate activity. The Senate Report to the Money Laundering Control Act of 1986 noted that tax-evasion offenses did not have clearly identifiable proceeds. Although it could be argued that the taxes due on the income omitted from a tax return conceptually could be considered “proceeds,” it is, nonetheless, difficult to employ tax violations to charge a money-laundering crime. 

A second issue relating to the term “proceeds” is whether it includes funds received from the original illegal activity, the subsequent disposition of assets originally acquired from the illegal source, or both. Stated another way, the term fails to specify whether direct or derivative proceeds of specified unlawful activities constitutes proceeds. For example, assume a bookmaker receives funds in payment of a bet from a customer—have proceeds been created? Arguably, there are no proceeds until the underlying offense is completed. If the bookmaker then uses the funds to buy a home, these could be considered proceeds. If the bookmaker later sells the home and buys another, however, it is not clear whether and to what extent the “proceeds” are tainted forever. 

Title 18 USC § 1956 does not directly address the issue of derivative proceeds. In contrast, 18 USC § 1957(a) specifically targets funds “derived from specified unlawful activity.” Similarly, one asset-forfeiture statute applicable to 18 USC § 1956 violations provides for forfeiture of “property traceable to such property.” Commentators have suggested that the differing terms contained in 18 USC §§ 1956, 1957, and 981 indicate that, absent unusual circumstances, 18 USC § 1956 should apply to what are determined to be direct proceeds but not to derivative proceeds of illegal activities. 

Several circuits, nonetheless, have held that derivative proceeds can be charged as a money-laundering offense. In United States v. Mankarious, the Seventh Circuit held that when a check is deposited in a bank account, and a second check is written on the account, the second check constitutes proceeds even if the first check had not cleared. The Fourth Circuit held that where property is purchased in part with proceeds of fraudulent loans and with proceeds of legitimate assets, and the property is then sold, the net returned to the defendant continues to be proceeds of a specified unlawful activity up to the amount of the false loan amount. 

Yet another issue exists with respect to the timing of the offense and the creation of proceeds. The Justice Department has recognized that a timing issue exists with respect to the relationship between the underlying offense and the money-laundering violation. The MLPM notes: 

Merger: The statute seems to contemplate a temporal progression of transactions—i.e., that the funds already have attained the status of unlawful proceeds when the money laundering financial transaction is commenced. The same transaction, in other words, cannot at once constitute the money laundering offense and the underlying specified unlawful activity that generated the funds being laundered. Thus it is critical to determine when funds become the “proceeds” of the underlying crime. In many cases this will be simple to do: The money involved in a drug transaction becomes “proceeds” when the transaction is consummated; any subsequent transaction could be the subject of a money laundering offense. But the issue is likely to be very complicated in cases involving complex, ongoing crimes like fraud where there may be no bright line between the transactions constituting fraud and subsequent transactions constituting money laundering. 

The merger concept was first discussed in an 18 USC § 1957 case. In United States v. Johnson, the defendant convinced investors to fund a fraudulent peso-transfer scheme. The Tenth Circuit found that transfers to the defendant’s account from investors did not involve “proceeds,” since the transaction occurred before the criminal activity was completed. The court held, however, that transfers out of the account once the funds were deposited did involve “proceeds” and sustained the 18 USC § 1957 convictions on these counts. 

The same concept was employed in another 18 USC § 1957 case, United States v. Piervinanzi, where the defendant fraudulently caused the transfer of funds from a domestic bank to a bank in London. The scheme was detected almost immediately, and the transfer was reversed. The court, citing Johnson, held that while the defendant and his colleagues succeeded in transferring the funds, the funds never came into their possession or control. The court held that there were no proceeds for purposes of 18 USC § 1957, and the conviction was reversed. While some convictions have been reversed, in most cases the government is careful to charge the “second” transaction so as not to run afoul of the merger concept. 

The government has sought to broaden the concept of proceeds in mail and wire fraud cases by charging what appears to be the “first” funds transaction. In these circumstances, a number of circuit courts have held that funds become proceeds when derived from an already-completed offense, or a completed phase of an ongoing mail or wire fraud scheme. While the cases are fact intensive, several are instructive. In United States v. Kennedy, involving a Ponzi scheme selling precious metals and coins to unsuspecting investors, the defendant contended that the deposit of checks from the investors did not constitute proceeds because he had not yet obtained control of the funds. The Tenth Circuit held that the central inquiry was whether the underlying crime had been completed when the transaction occurred and, distinguishing its earlier decision in Johnson, found that the defendant had engaged in earlier mailings that established a completed mail fraud offense. Since the scheme was operational, the deposited checks were found to be proceeds of the offense. Separately, as to certain counts, the defendant contended that because mailings to specific victims occurred after the financial transactions charged, there was insufficient evidence to establish a transaction after the commission of the predicate offense. Relying on its earlier opinion in Massey, the court held that other mailings established the mail fraud offense, and the financial transaction that followed the establishment of the scheme fulfilled all elements of the offense. 

In United States v. Pretty, the Tenth Circuit followed Kennedy in a money-laundering case involving a kickback to a state official, which was charged as a violation of 18 USC § 666. The court held that since the statute criminalized an attempt to influence a public official, the payment of the kickback by way of the purchase of a home from the state official, and by way of a loan to the official and her spouse to purchase a second home, established the elements of the offense. The court further stated that the “follow in time” language in Johnson was not an absolute rule, because any transaction concealing the nature or source of the income was sufficient to establish an offense. The court noted that while payment of a kickback is not money laundering, “filtering” the kickback through real estate transactions created a separate money-laundering offense. 

In United States v. Prince, the Sixth Circuit followed this line of authority in a case involving a scheme to buy properties at favorable prices out of bankruptcy, which was charged as money laundering. Funds were transferred in three different ways: (1) investors wire-transferred money into bank accounts of third parties and the third parties wrote checks to one defendant who transferred funds to the second; (2) investors wire-transferred money by Western Union to third parties and the money was then transferred to the first defendant who transferred it to the second; and (3) investors wire-transferred money directly to one defendant who then transferred it to the second, the principal of the scheme. One defendant claimed that proceeds were not created until he had physical possession of the funds and, once he did, he did not thereafter conduct a financial transaction. The court rejected that contention, holding that once the funds were transferred by the victims, even though the funds were not yet in the defendant’s possession, the defendants had sufficient control of the funds such that proceeds were created. 

Similarly, the concept of proceeds has been broadly interpreted where the specified unlawful activity is bank fraud. For example, in United States v. Allen, involving a complex interlocking loan scheme, kickbacks were paid to a banker from consulting fees and loan proceeds were diverted. The Fifth Circuit held that in the context of the misapplication of bank funds, the bank fraud offense was complete and proceeds were created when the funds were no longer under the bank’s control. 

In a less expansive decision, the Ninth Circuit, in United States v. Estacio, found proceeds sufficient to sustain money-laundering convictions based on a check-kiting scheme. The court held that the scheme had been ongoing for months and that the transactions charged as money laundering were proceeds of earlier check-kiting transactions. 

Not all circuit courts are in agreement on this issue. In United States v. Christo, an 18 USC § 1957 case involving a check-kiting scheme, the Eleventh Circuit held that the evidence was insufficient to establish a money laundering offense. The court stated that the mere writing of a check with insufficient funds did not create proceeds where the funds paid by the bank were not used again by the defendant. While the court failed to mention Allen and distinguished Estacio, these decisions are inconsistent. In a later decision, the Eleventh Circuit held that checks used to withdraw funds received in an insurance claim settlement were proceeds of a bank fraud offense where the bank had a mortgage on the subject property. The court distinguished Christo as a case where the bank fraud and money laundering were predicated on the same, as opposed to separate, transactions. 

The Seventh Circuit in the late 1990s attempted to harmonize a number of the earlier cases. In United States v. Mankarious, the defendants were convicted of money laundering based on a complex mail and wire fraud scheme. Citing Kennedy, Christo, and other cases, the court outlined the following principles for money-laundering cases involving mail fraud, bank fraud, and wire fraud predicate offenses: (1) in a mail fraud case, proceeds may be created long before a mailing that furthers the fraudulent scheme; (2) in contrast, bank fraud creates proceeds only after execution of the scheme; and (3) wire fraud creates proceeds only after a predicate wire transfer involving funds employed in the scheme. 

Thereafter, in United States v. Bolden, the Fourth Circuit cited Mankarious in a Medicare fraud scheme. The court held that prospective payments made in advance by Medicare constituted proceeds even though the payments occurred prior to the financial transaction that constituted the money-laundering offense. 

Even further complicating this area, the Third Circuit, in United States v. Morelli, refused to follow Mankarious in a daisy-chain excise tax case. The court stated that proceeds may not be created before mailings occur when the predicate money-laundering offense consists of a mail fraud violation, and that the mail and wire fraud statutes should be interpreted in an identical fashion. In this case, oil was sold to a series of companies, including a “burn company” that collected the excise taxes, and then to a street company that eventually sold the fuel. The government only proved wire transfers of funds from the “street company” to the burn company, and the defendant claimed that no proceeds existed until the funds passed through the burn company. The court rejected the contention, holding that the funds were the proceeds of the fraud and were proceeds of the wire fraud. While noting that there would be no proceeds from the first series of transactions upstream, the court held that since multiple series of transactions were proven, transfers after the initial series furthered the wire fraud scheme using proceeds of the offense. 

The USAM notes the difficulty in determining when proceeds occur. It provides, as an example, that if a victim in a fraud scheme sends her husband to deliver funds to the defendant, the funds do not become proceeds until the defendant receives them. If the defendant sends his assistant to retrieve the funds, then they become proceeds upon receipt by the assistant. If a middleman collects payments on behalf of the defendant but had no knowledge of their criminally driven nature and no interest in the funds, then the funds will probably be proceeds to the defendant when collected. The USAM recommends that neither 18 USC § 1956 nor 18 USC § 1957 be charged where the same financial transaction represents both the money-laundering offense and part of the specified unlawful activity generating the proceeds being laundered. While the case law suggests that the prudent prosecutor will bring a charge as to the “second” transaction, cases permitting the “first” to be charged expand the concept of proceeds in connection with these types of specified unlawful activities by merging the underlying predicate offense with the money-laundering charge.

H. Definition of Terms—Section 1957.

1. Monetary Transaction. The term “monetary transaction” means the deposit, withdrawal, transfer, or exchange in or affecting interstate or foreign commerce, of funds or a monetary instrument, by, through, or to a financial institution.  The definition of a monetary transaction is less expansive than the definition of financial transaction.

2. Criminally Derived Property. The term “criminally derived property” includes any property constituting, or derived from, proceeds obtained from a criminal offense.

3. Proceeds Obtained From a Criminal Offense. The authors’ discussions of proceeds obtained from a criminal offense are as follows:

The scope of what is a proceed has emerged as a crucial issue in 18 USC § 1957 cases. In United States v. Johnson, for example, a defendant convinced investors to fund a peso scheme in which he bought discounted pesos and sold them at market price. The 18 USC § 1957 violations were based on the wire transfer of customers” funds to his account. The Tenth Circuit found that the transfers to the defendant’s account did not involve proceeds of an unlawful activity, since the monetary transactions occurred prior to the completion of the underlying criminal event. The funds could not be considered proceeds until credited to the defendant’s account, and the convictions were reversed on the 18 USC § 1957 counts. The court, however, sustained convictions on the 18 USC § 1957 counts that charged the transfer of funds from the credited account to certain investors, since, at this point in time, the funds were proceeds of the unlawful activity (i.e., the wire fraud scheme). 

A number of circuit courts have discussed the concept of proceeds post-Johnson. 

First Circuit. In United States v. Richard, one defendant was convicted of soliciting funds to invest in an ongoing lawsuit involving a bankrupt party. The defendant argued that the bankruptcy fraud was not complete until the funds were deposited into a separately created bank account. The court rejected this contention, stating that proceeds were created even prior to the deposit into a nominee bank account, since acceptance of the checks constituted a completed phase of an ongoing bankruptcy fraud. 

Second Circuit. In United States v. Piervinanzi, a conviction was reversed of one defendant under 18 USC § 1957 based on the fraudulent transfer of $24 million from a domestic bank to a foreign bank. Although the transfer was completed, the parties discovered that the transfer was not authorized and the transaction was reversed. The court held that the transfer of funds from the domestic bank to the foreign bank did not involve proceeds, since the funds never came into the possession or control of the participants to the scheme. 

Third Circuit. In United States v. Cefaratti, the defendant, on behalf of a vocational school that was near termination from a loan program, manipulated repayment student rates by falsely showing that the loans had been deferred and made payments on behalf of students who were in arrears. The court held that fraudulently obtained proceeds may emanate either from an already completed offense or a completed phase of an ongoing offense. Finding that the checks had to be endorsed by the borrower and the representative of the company before they could be deposited, the court held that they became proceeds when the student borrowers endorsed them. 

Fifth Circuit. In United States v. Leahy, the defendant participated in a scheme whereby his company provided false invoices to the Veterans Administration to obtain progress payments. The payments were then diverted. The 18 USC § 1957 count related to a transfer from a bank-created escrow account to the company’s primary business account. Holding that the company had sufficient control over the escrow accounts such that the wire fraud was complete when the money was deposited, the court affirmed the conviction. 

In United States v. Dupre, defendants were engaged in bank fraud, and the 18 USC § 1957 counts related to the transfer of portions of loan proceeds and a loan discount from a title company account to the Cayman Islands and then to domestic accounts. Holding that proceeds were created once the funds were under the defendants” control, and that once in the hands of the title company they were under the defendants” control, the court affirmed the convictions. 

Sixth Circuit. In United States v. Griffith, the defendant purchased merchandise for credit, sold the merchandise without paying for it, and deposited the proceeds of the sales in secret bank accounts. The 18 USC § 1957 counts related to the sale of the merchandise. The court held that the merchandise, which was criminally derived property, was within the defendant’s control prior to his engaging in the financial transactions that resulted in the sales. Finding that proceeds were created, the court affirmed the conviction. 

Seventh Circuit. In United States v. Seward, the defendant engaged in a scheme to misappropriate his deceased friend’s assets, and the 18 USC § 1957 counts involved the transfer of funds out of an account opened by the defendant after his friend’s death. The particular transactions involved a transfer from a CD into a joint account opened shortly after the friend’s death and two checks written on the account. Holding that the act of fraud was complete once the defendant had control of the proceeds and the funds were placed into the joint account, the court affirmed the conviction. 

Ninth Circuit. In United States v. Savage, the defendant solicited $5,000 amounts from investors by informing them that the funds would be used to obtain foreign loans with a promised $10 million return. The defendant used others to gather the funds, deposit them, wire transfer the money to other accounts, and pay his personal expenses. The court held that the term “criminally derived property” for purposes of 18 USC § 1957 was the same as the term “proceeds” in 18 USC § 1956. Holding that the funds were in the defendant’s possession, even though transferred by third parties, the court affirmed the convictions. 

Tenth Circuit. In United States v. Lovett, the defendant, who defrauded his almost-blind grandmother of her life savings, was charged with the interstate transportation of fraudulently obtained funds and 18 USC §§ 1956 and 1957 violations. The 18 USC § 1957 counts related to the deposit of a loan obtained through a CD, which had been purchased using the fraudulently obtained funds as collateral. Holding that the deposits of the loan proceeds, and not the directly deposited “tainted” funds, were proceeds, the court affirmed the conviction. 

In United States v. Massey, the defendant was involved in an advance fee loan scheme. The 18 USC § 1957 count was based on the wire transfer to a coconspirator of funds obtained from the victims of the scheme. The defendants claimed that the funds did not derive from the offense, since none of the victim-clients were sent any correspondence through the mails prior to the wire transfer. After a lengthy analysis of the mail fraud statute, the court concluded that “lulling letters” sent to victims, other than those whose money was used in the transfer, to explain why funding of the loans had not occurred, furthered the overall scheme by avoiding detection. Holding that these letters were sufficient to establish the mail fraud predicate for the money-laundering offense, the court held that the transfer of funds out of the account involved proceeds of mail fraud. 

Eleventh Circuit. In United States v. Nolan, the defendants converted government contract proceeds. The 18 USC § 1957 count related to a duplicate payment of funds, which were transferred from a corporate account to a shell corporation account owned and controlled by the defendant. Holding that the evidence was sufficient to show that once the money went into the corporate account, the defendant had control over it and proceeds were created, the court affirmed the conviction. 

District of Columbia Circuit. In United States v. Wynn, the defendant sold clothing to narcotics traffickers. The 18 USC § 1957 count related to a payment for clothing. Holding that the defendant knew the funds were criminally derived based on years of dealing with the traffickers, including cash purchases of over $500,000 in merchandise, the court affirmed the conviction. 

There is an unresolved issue as to whether the tracing of funds is required, especially for commingled funds, under 18 USC § 1957. In United States v. Johnson, for example, the Tenth Circuit sustained a conviction in a peso fraud scheme as to transfers out of the defendant’s account where over 98 percent of the funds in the account were tied to the fraud. In United States v. Moore, the Fourth Circuit went further in a case involving the sale of condominium units the defendant had purchased in part with the proceeds of loans that were obtained based on false tax return information. When the condominiums were sold, a settlement check of approximately $37,000 was received, and the deposit of the check was the transaction charged as the money-laundering offense. The Fourth Circuit upheld the conviction, even though the government did not trace the loan proceeds to the settlement check, stating that the statute permits a presumption that the funds acquired, up to the originally derived and illegal loan amounts, were proceeds. The Eighth Circuit has also held that tracing is not required in an 18 USC § 1957 case. 

The Ninth Circuit took a contrary position in United States v. Rutgard, where the defendant, an ophthalmologic surgeon, was charged with Medicare and related insurance fraud and with violating 18 USC § 1957 in connection with wire transfers of $5.629 million and $1.935 million from a family trust account to a bank offshore. The government claimed that the entire surgical practice was fraudulent, but the court reversed, finding that the fraudulent proceeds were a little over $46,000. The court stated that the elements of an 18 USC § 1957 offense were different from those under 18 USC § 1956, and held that commingling will prevent a conviction under 18 USC § 1957 if deposits are kept under the $10,000 threshold. The court refused to sustain a presumption that the transfers to the offshore bank included the $46,000 of fraudulently obtained proceeds and reversed the conviction on this count. 

The Ninth Circuit reviewed an 18 USC § 1957 conviction arising out of a telemarketing scheme in United States v. Hanley, where tracing did not occur. The court reaffirmed its earlier decision in Rutguard, but noted that if the government could show that the defendant’s entire business was fraudulent, then the financial transactions would necessarily involve tainted funds. Holding that the only purpose of the telemarketing scheme was to sell exorbitantly overpriced products to unwitting customers and that the only funds involved in the accounts came from such sales, the court sustained an 18 USC § 1957 conviction. 

In United States v. Loe, the Fifth Circuit created its own tracing rule. The defendants were involved in a scheme to defraud the Army Corps of Engineers of leasehold payments and insurance carriers of insurance proceeds. The money-laundering counts were based on transfers from an insurance carrier to an account controlled by the defendants. Relying on its earlier decision in United States v. Davis, the Fifth Circuit reaffirmed that if the aggregate amount withdrawn from an account containing commingled funds exceeds the clean funds, individual withdrawals would be deemed to be tainted funds. The court, however, also held that Davis implied the converse, that where the account contained clean funds sufficient to cover the withdrawal (which they did in this case), the government could not prove beyond a reasonable doubt that the withdrawal contained dirty funds. The money-laundering convictions were reversed.

I. Financial Transaction Representing Proceeds of Unlawful Activity.  It is a crime for a person to know that property involved in a financial transaction represents proceeds of some unlawful activity and to conduct or to attempt to conduct that financial transaction, or an international transportation or transmission of funds, that involves the proceeds of specified unlawful activity either with (i) the intent to promote specified unlawful activity; (ii) the knowledge that a transaction is designed in whole or in part to conceal or disguise the source of ownership of the proceeds; or (iii) the knowledge that the transmission is designed in whole or in part to avoid a state or federal transaction reporting requirement.

A person who knows that property involved in a financial transaction represents proceeds of some unlawful activity and who conducts or attempts to conduct a financial transaction that involves the proceeds of specified unlawful activity with the intent to commit tax evasion under I.R.C. § 7206 or tax fraud under I.R.C. § 7201 violates Section 1956.  However, few cases under Section 1956 involve the allegation of tax fraud or evasion.  Most cases under Section 1956 involve attempts to conceal or transfer assets derived from specified unlawful activities.  

J. Financial Transactions Constituting Domestic Money Laundering. A domestic money laundering offense involves the concealment of assets derived from an unlawful activity if a person conducts or attempts to conceal a “financial transaction” and: (i) he knows that the property represents the proceeds of some form of illegal activity; (ii) the proceeds are in fact derived from specified unlawful activity; (iii) he knows that the transaction is designed, in whole or in part, to conceal or disguise the nature, the location, the source, the ownership or control of the funds or to avoid a transaction reporting requirement under state or federal law.

K. Financial Transactions Constituting Interstate or Foreign Money Laundering. A financial transaction is a transaction that in any way or degree affects interstate commerce or foreign commerce: (i) involving the movement of funds by wire or other means (such as by mail); (ii) involving one or more monetary instruments; (iii) involving the transfer of title to any real estate, vehicle, vessel or aircraft; or (iv) involving the use of a financial institution that is engaged in, or the activities of which affect, interstate or foreign commerce in any way.  Financial transactions thus include, among many other transactions, loans, pledges, gifts, transfers of funds, deposits in a bank account, placement of funds in a safe deposit box, purchases of securities and the transfer of title to real estate.  

L. Specified Unlawful Activities.  Specified unlawful activities (predicate offenses) include numerous offenses such as various types of concealment of assets from courts, smuggling of goods into the U.S., narcotics trafficking, bank fraud, fraud upon a foreign bank, trafficking in counterfeit goods and services, and racketeering activities under the Racketeer Influenced and Corrupt Organizations (R.I.C.O.) Act.  The transportation of monetary instruments or transfer of funds between the U.S. and a foreign jurisdiction are included under Section 1956 under the same circumstances described in the preceding paragraph.  Activities under R.I.C.O. that are included as specified unlawful activities under Sections 1956 and 1957 include, among other activities, the following: fraud and related activity in connection with identification documents, mail fraud, wire fraud, financial institution fraud, procurement of citizenship or nationalization unlawfully, obstruction of justice, obstruction of criminal investigations, obstruction of state or local law enforcement, forgery, false use or misuse of passports, visas, permits and other documents, fraudulent sale of securities, and specific reference is made to Section 1956 (relating to the laundering of monetary instruments) and Section 1957 (relating to engaging in monetary transactions in property derived from specified unlawful activities).  As a result of the specific reference under R.I.C.O., the unlawful specified activities (predicate offenses) are broad.  

Presently, the money laundering laws do not include tax fraud as a specified unlawful activity (predicate offense) for international money laundering purposes.  One noted practitioner and author writes:

 However, the concept of “fraud, or any scheme or attempt to defraud, by or against a foreign bank” is included in 18 U.S.C. § 1956[(c)](7)(B)(iii) and it would clearly seem to include tax evasion, and would make banks agents for the U.S. Government in identifying and reporting money laundering from such crimes.  Indeed the U.S. has prosecuted persons for money laundering whose predicate offenses have been evading Canadian excise taxes on cigarettes and liquor, prosecutable for use of the wires in violation of 18 U.S.C. § 1956(a)(2)(A).  The British have been somewhat more specific in criminalizing foreign fiscal offenses although the effect is the same as the U.S.: until now no reported criminal prosecutions for money laundering relating to foreign fiscal offenses.  In fact, the U.S. prosecution on the Bank of New York included money laundering relating to Russian tax crimes. In particular, the indictment charges the defendants with “wire fraud, namely, a scheme to defraud the Russian Government of customs duties and tax revenues and the use of the wires in furtherance thereof, in violation of Title 18, United States Code, Section 1956(a)(2)(A).”

M. Offenses that are Prosecutable; Burden of Proof. Sections 1956 and 1957 make it an offense that is prosecutable to knowingly take the proceeds from specified unlawful activities and engage in any financial or monetary transaction, or international transportation or transmission of funds.  U.S. government must prove beyond a reasonable doubt that: (i) an underlying specified unlawful activity occurred; and (ii) the illicit proceeds derived from the specified unlawful activity were laundered.  However, in a Section 1957 prosecution, proof is not required that the defendant knew that the offense from which the criminally derived property came from was derived from specified unlawful activity.

1. Elements of Proof for Section 1956 Crimes. Under Section 1956, the U.S. government must prove that the person had knowledge and that the property involved was the product of unlawful activity.  Section 1956 requires actual knowledge that concealed proceeds were derived from illegal activity.  However, in a concealment case, there is a split of authority as to whether the U.S. government must prove that the U.S. person knew whether a specific criminal offense was the source of the funds.  The Second, Third and Fourth Circuits follow the standard that the U.S. person must only know that “some form” of unlawful activity was involved in generating the funds.  Under these circuits, the U.S. government is required only to show that the defendant knew that the property was derived from a federal or state felony.

2. Elements of Proof for Section 1957 Crimes. Similarly, Section 1957 requires the U.S. government to prove that the property involved was derived from criminally derived property.  Section 1957 states it is a crime to knowingly engage in or attempt to engage in a monetary transaction in criminally derived property (criminally derived funds), valued over $10,000, that is derived from specified unlawful activity.  Under Section 1957, the U.S. government is required to show that a defendant knew that the property was derived from a “criminal offense” that includes a foreign, state or a federal felony or misdemeanor.  The Seventh Circuit determined that the U.S. person must know the specific unlawful activity that was the source of the funds.  Circumstantial evidence is permitted to prove that a U.S. person had actual knowledge that some form of illegal activity was the source of the concealed funds.  

N. Similarities and Differences in Section 1956 and Section 1957. Under Section 1957, specified unlawful activity has the same meaning as defined under Section 1956.  Under Section 1956, in order to engage in the act of promoting specified unlawful activities a financial transaction is required.  In order to be engaged in cross border transports or transfers, monetary instruments or funds are required.  Section 1957 refers to a monetary transaction instead of a financial transaction or monetary instruments or funds.  A “monetary transaction” means the deposit, withdrawal, transfer, or exchange, in or affecting interstate or foreign commerce, of funds or a monetary instrument … by, through, or to a financial institution …” Contrary to Section 1956, Section 1957 requires that the conduct of money laundering by a foreign person involve a financial institution located in the U.S. Also, contrary to Section 1956, in a Section 1957 prosecution the U.S. government is not required to prove that the defendant knew that the offense from which the criminally derived property came from specified unlawful activity.

O. Sting Provision. Section 1956 includes a sting provision.  A law enforcement officer, or someone at the direction of a law enforcement officer, is permitted to represent to a person that a transaction involving property consists of proceeds that are derived from an unlawful activity or property used to conduct or facilitate illegal activity.  If this person acts on this knowledge and conducts or attempts to conduct a financial transaction believing the represented property to be the proceeds of specified unlawful activity, a crime may occur.  A crime occurs if this person intends to promote the specified unlawful activity to conceal or disguise its source of ownership or to avoid a state or federal transaction-reporting requirement.

P. Federal Sentencing Guidelines. Under the Federal Sentencing Guidelines, fixed sentencing ranges are stated for each federal offense.  Little discretion is granted to federal judges with respect to amount of incarceration time to be imposed unless there is a basis for departure from the guidelines.  One basis for departure is providing substantial assistance in the investigation or prosecution of another person.

1. Sentencing Guidelines for Money Laundering Crimes. Section 1956 and Section 1957 have high guideline ranges.  The guideline for laundering of monetary instruments in a Section 1956 violation specifies a base level of 23, if the offense of plea or conviction is under Section 1956(a)(1)(A), Section 1956(a)(2)(A), or Section 1956(a)(3)(A).  For all other convictions, a level 20 is applicable. For example, if a defendant is convicted under Section 1956(a)(1)(A)(ii), for laundering money with the intent to engage in a million dollar tax evasion, a level 23 is applicable.  If the defendant pleads guilty and accepts responsibility for his actions, then the sentencing range for such an offense is 51-63 months.  Periods of incarceration can be increased according to the amount of money involved and the specific characteristics of the offense, such as knowing that the proceeds were derived from drug trafficking.  

2. Focus by U.S. Government on Money Laundering. In recent years, the U.S. Government has focused on including money laundering charges and indictments involving tax and other fraud violations.

[P]rosecutors have sought to include money laundering charges in indictments charging tax and other fraud violations. The reason is simple: under the Sentencing Guidelines … the guideline ranges for money laundering charges are exponentially greater than for the underlying fraudulent conduct. At the same time, the evidence needed to prove money laundering violations is often just marginally greater than that needed to establish the fraudulent conduct itself.

The Money Laundering Control Act of 1986 defined and criminalized for the first time a category of activity known as “money laundering.”  Unlike earlier efforts, like the Bank Secrecy Act and the Currency and Foreign Transactions Reporting Act, that unsuccessfully attempted to control the movement of illegal income through financial institution reporting requirements, the Money Laundering Control Act was aimed at “the lifeblood of organized crime”: the act of converting funds derived from illegal activities into spendable forms.

3. Improper Application of Money Laundering Guidelines. However, in a case favorable to the criminal defense bar, the Seventh Circuit Court of Appeals affirmed convictions, but remanded for sentencing based on the pronouncement of the U.S. Sentencing Commission that “the money laundering guideline was drafted to cover conduct more egregious than in the facts presented to this court.”  This court stated: “Ultimately, we conclude that the Sentencing Commission itself has indicated that the heartland of U.S.S.G. § 2S1.1 … the money laundering activity, when evaluated against the entire course of conduct, was an “incidental by-product” of the kickback scheme …. To use the money laundering guideline in this routine fraud case would let the “tail wag the dog.”  As the Court said in United States v. Kuku, 129 F.3d 1435, 1440 (11th Cir. 1997), “strict focus on the technicalities of the sentencing process obscures the overarching directive to match the guideline to the offense conduct which formed the basis of the underlying conviction.  We are convinced that this case presents one of those anomalies that Congress intended the courts to deal with fairly.  To fulfill that obligation, we direct the use of the fraud guidelines rather than that for money laundering.”

Q. Extraterritorial Jurisdiction—U.S. Government. A careful reading of Section 1956(f) and Section 1957(d)(2) is required to understand that extraterritorial jurisdiction is not granted to the U.S. government for acts or omissions constituting tax fraud or tax evasion, or even absolute fraud.  Section 1956(f) requires conduct involving a transaction or series of related transactions involving “funds or monetary instruments” of a value exceeding $10,000.  Section 1956(a)(2) deals with funds or monetary instruments and does not include tax fraud or tax evasion.  Section 1957 makes no reference to tax fraud or tax evasion and, therefore, extraterritorial jurisdiction to the U.S. government is not granted for such reasons.  

1. Wire and Mail Fraud. The U.S. government obtains extraterritorial jurisdiction from wire and mail fraud.  A transaction or a series of related transactions must involve funds or monetary instruments of a value exceeding $10,000.  Transfer by wire or mail is a transaction involving funds or monetary instruments.  Thus, the mailing or wiring of funds to a foreign jurisdiction provides extraterritorial jurisdiction to the U.S. government.  Again, the involvement of tax fraud or tax evasion does not grant extraterritorial jurisdiction; it is mail and wire fraud as predicate offenses that provide the extraterritorial jurisdiction.

2. Transactions Involving Funds or Monetary Instruments. Section 1956 and Section 1957 provide extraterritorial jurisdiction to the U.S. government. “There is extraterritorial jurisdiction over the conduct prohibited by this Section if--(1) the conduct is by a United States citizen or, in the case of a non-United States citizen, the conduct occurs in part in the United States; and (2) the transaction or series of related transactions involves funds or monetary instruments of a value exceeding $10,000.” Extraterritorial jurisdiction is also granted to the U.S. government under Section 1957. In contrast to Section 1956, Section 1957 requires that the money laundering conduct involve a financial institution located in the U.S. On the other hand, if the money laundering transaction occurred in the U.S., involving property valued more than $10,000, the U.S. government “is not required to prove the U.S. person knew that the offense from which the criminally derived property was derived was specified unlawful property.” Under Section 1957, the U.S. government must prove that the U.S. person knew that the property involved was derived from a “criminal offense.” Generally, it is easier for the government to rely upon extraterritorial jurisdiction granted under Section 1956, notwithstanding that it must be proved that the person knew that the property involved was the product of specified unlawful activity.

3. Fraud or Scheme by or Against a Foreign Bank. In addition, the concept of fraud or any scheme or attempt to defraud by or against a foreign bank, is included in 18 U.S.C. § 1956(c)(7)(B)(iii) and appears to include tax evasion and thereby cause banks to be treated as agents for the U.S. government in identifying and reporting money laundering from such crimes.

4. Department of Justice Position on Offenses Under Extraterritorial Provisions. The USAM states that “[d]ue to the potential international sensitivities, as well as proof problems … no grand jury investigation may be commenced, indictment returned, or complaint filed without the written approval of [Asset Forfeiture and Money Laundering Section], Criminal Division when jurisdiction to prosecute these offenses exists only because of these extraterritorial provisions.”

R. Extraterritorial Jurisdiction—U.S. District Courts.  Section 1956(b) is amended by the USA Patriot Act to provide U.S. District Courts with jurisdiction over foreign persons in accordance with the provisions thereof. 

1. Long-arm Jurisdiction to a U.S. District Court. Section 1956(b)(2) grants long-arm jurisdiction to U.S. District Courts with respect to adjudicating an action filed or enforcing a penalty ordered under Section 1956, over any foreign person, including any financial institution authorized under the laws of a foreign country, so long as service of process is made under the Federal Rules of Civil Procedure or the laws of the country where the person is found, and the offender commits a crime involving a financial transaction under Section 1956(a).  The financial transaction must occur in whole or in part in the U.S. and the foreign person must convert, to his own use, property in which the U.S. has an ownership interest due to an order of forfeiture entered by a court of the U.S., or the foreign person is a financial institution that maintains a bank account at a financial institution in the U.S. 

2. Power to Issue Pretrial Restraining Order and Appoint a Federal Receiver to Oversee Seized Assets. A U.S. District Court may issue a pretrial restraining order or take other action necessary to ensure that any bank account or other property held by the foreign person in the U.S. is available to satisfy a judgment under § 1956(a).  The court may appoint a Federal Receiver, upon application of a Federal prosecutor or a Federal or State regulator, to oversee the seized assets.  Upon appointment, the Receiver is an officer of the court with all the powers and standing equal to that of a Federal prosecutor or a Federal or State Regulator for the purpose of obtaining information by written request from the Financial Crimes Enforcement Network (“FinCEN”) of the Department of the Treasury or from a foreign country pursuant to a mutual legal assistance treaty, multilateral agreement, or other arrangement for international law enforcement assistance, provided that such requests comply with the policies and procedures of the U.S. Attorney General.

III. Criminal Fines and Imprisonment for Money Laundering Transactions. The criminal fines and imprisonment for intentionally engaging in money laundering transactions are severe and substantial. 

A. Section 1956(a)(1) Intentional Violations. Section 1956(a)(1) provides for criminal fines and imprisonment for anyone who knows “that the property involved in a financial transaction represents the proceeds of some form of unlawful activity, conducts or attempts to conduct such a financial transaction which in fact involves the proceeds of specified unlawful activity … with the intent to promote the carrying on of specified unlawful activity; or … with intent to engage in conduct constituting a violation of section 7201 or 7206 [tax evasion or tax fraud] of the Internal Revenue Code; or … knowing that the transaction is designed … to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of specified unlawful activity; … or to avoid a transaction reporting requirement under State or Federal law ….”

B. Section 1956(a)(2) Intentional Violations. Section 1956(a)(2) mirrors Section 1956(a)(1) and provides for criminal fines and imprisonment for anyone who “transports, transmits, or transfers, or attempts to transport, transmit, or transfer a money instrument or funds …” in a cross-border transaction “with the intent to promote the carrying on of specified unlawful activity; or … knowing that the monetary instrument or funds involved in the transportation, transmission or transfer represent the proceeds of some form of unlawful activity and knowing that such transportation, transmission, or transfer is designed … to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of specified unlawful activity; or …  to avoid a transaction reporting requirement under State or Federal law ….”  The defendant’s knowledge may be established by proof that a law enforcement officer represented the matter specified in 18 U.S.C. § 1956(a)(2)(B) as true and the defendant’s subsequent statements or actions indicate the defendant believed such representation to be true.

C. Section 1956(a)(3) Sting Operations. Section 1956(a)(3) provides for criminal fines and imprisonment for anyone who “with the intent … to promote the carrying on a specified unlawful activity; … to conceal or disguise the nature, location, source, ownership or control of property believed to be the proceeds of specified unlawful activity; or … to avoid a transaction reporting requirement under State or Federal law, conducts or attempts to conduct a financial transaction involving property who represented to be the proceeds of specified unlawful activity, or property used to conduct or facilitate specified unlawful activity ….”  The foregoing “represented” is “any representation made by a law enforcement officer or by another person at the direction of, or with the approval of, a Federal official authorized to investigate or prosecute violations of this section [Section 1956].”

D. Specific Criminal Fines and Imprisonment for Section 1956 Violations.  Each violation of one or both of Sections 1956(a)(1) or (2) is subject to a 20-year prison term and a fine of $500,000, or twice the value of the property involved in the financial transaction or twice the value of the money instrument or funds involving the transportation, transmission or transfer, whichever is greater, or both.

E. Specific Criminal Fines and Imprisonment for Section 1957 Violations. Section 1957 provides a fine under Title 18 of the United States Code, or imprisonment for not more than 10-years or both; or an alternate fine of not more than twice the value of the criminally derived property in the transaction.

IV. Civil Penalties for Money Laundering Transactions. The foregoing criminal fines and imprisonment involve intentionally engaging in transactions involving specified money laundering transactions.  In addition, anyone who conducts or attempts to conduct a transaction covered by Section 1956 or Section 1957 is subject to a civil penalty equal to the value of the property, funds, or monetary instruments involved in the transaction or $10,000, whichever is greater.  Also, Section 1957(b)(2) provides an alternate fine of not more than twice the amount of the criminally derived property involved in a money laundering transaction.  

V. Forfeiture of Assets. Not only may the net proceeds from money laundering transactions be forfeited but also the proceeds of crime may be confiscated.  This is commonly referred to as the facilitation theory.

A. Facilitation Theory. In accordance with the facilitation theory, property that facilitates the laundering of proceeds from crime may also be confiscated in addition to the actual proceeds. The civil forfeiture statute states that all property “involved in a transaction or attempted transaction” under Section 1956 or Section 1957 may be forfeited.

1. Reference to Facilitate in the U.S. Code. Real or personal property, within the jurisdiction of the U.S., that constitutes or is derived from or traceable to proceeds that are obtained directly or indirectly from an offense against a foreign nation or property used to facilitate such events may be forfeited.

2. Burden of Proof. If the U.S. government’s theory of forfeiture is that the property was used to commit or facilitate the commission of a criminal offense or was involved in the commission of a criminal offense, the U.S. government must establish a “substantial connection” between the property and the offense. The legislative history indicates that this provision applies in any action to forfeit bank accounts containing both tainted and untainted funds and where the government seeks to forfeit a business because the funds were laundered in a firm bank account. The legislative history further states that for a business to be forfeitable, a “primary purpose” for the establishment or maintenance of the entire business must be to disguise a money laundering scheme.

3. Excessive Fines. The decision by the Supreme Court involving a currency and monetary instrument report forfeiture under the Eighth Amendment, Excessive Fines clause, indicates that a forfeiture based on a facilitation theory is subject to an Eighth Amendment challenge.

B. Criminal Forfeiture. Criminal forfeiture is also available to the U.S. Government.  The court, in imposing a sentence on a person convicted of an offense in violation of Section 1956 or 1957, among other violations, shall order that person to forfeit to the U.S. any property involved in the offense or any property traceable to such property.

C. Civil Asset Forfeiture Reform Act of 2000. The Civil Asset Forfeiture Reform Act of 2000 (“CAFRA”), effective August 23, 2000, caused major changes with respect to forfeitures.  

1. Civil Forfeiture of Proceeds of Specified Unlawful Activity. CAFRA amends 18 U.S.C. § 981(a)(1)(C) and authorizes the civil forfeiture of the proceeds of any offense defined as “specified unlawful activity” in Section 1956(c)(7). “Proceeds” is defined as gross proceeds where the offense involves “unlawful activity, health care fraud or telemarketing fraud.”  Proceeds is further defined as gross proceeds minus “direct costs,” if the offense involves “lawful goods or lawful services that are sold or provided in an illegal manner.”  

2. Forfeiture of U.S. Property for a Person Arrested in a Foreign Country.  In international cases where any person is arrested or charged in a foreign country in connection with an offense that gives rise to the forfeiture of property in the U.S. under 18 U.S.C. § 981, or under the Controlled Substances Act, the assets of the person arrested may be frozen.  

3. Court May Issue a Subpoena Duces Tecum Case Involving Forfeiture In Rem.  In cases where an action for forfeiture in rem is brought by the U.S. Government under various provisions, including Section 1956, Section 1957 and the Controlled Substances Act, any party may request the court to issue a subpoena duces tecum to a financial institution to produce books, records and other documents at any place designated by the requesting party.  

4. Sanctions in an In Rem Case.  In addition, in a forfeiture in rem case, the court may enter sanctions up to and including dismissal of a civil forfeiture case, or an ancillary proceeding in a criminal case, if the records are in a bank secrecy jurisdiction and the claimant refuses to produce the records, if the claimant has the capacity to waive the claimant’s rights under applicable financial secrecy laws or has the capacity to obtain the records, notwithstanding the secrecy laws.

D. Forfeiture of Funds in U.S. Interbank Accounts.  The U.S. government is now provided with additional civil forfeiture rights under 18 U.S.C. § 981(k) with respect to funds deposited into an account at a foreign bank if that bank has an interbank account in the U.S. with a covered financial institution.  The funds in the foreign bank account shall be deemed to have been deposited into the interbank account in the U.S. and any restraining order, seizure warrant or arrest warrant in rem regarding such funds may be served on the covered financial institution, and funds in the interbank account, for an amount equal to the value of the funds deposited in the account at the foreign bank.  Such funds may be restrained, seized or arrested.
 
1. Interbank Account in a Covered Financial Institution. Funds that are deposited into an account at a foreign bank that has an interbank account in a U.S. covered financial institution, such funds are deemed to have deposited into the interbank account in the U.S.  Such funds are subject to “… any restraining order, seizure warrant, or arrest warrant in rem regarding the funds may be served on the covered financial institution, and funds in the interbank account, or up to the value of the funds deposited into the account at the foreign bank, may be restrained, seized or arrested.”

2. No Requirement for U.S. Government to Trace Funds. In an Action Under 18 U.S.C. § 981(k), the U.S. Government is not required to establish that the funds are directly traceable to funds that were deposited into a foreign bank nor is the U.S. Government required to rely on the application of 18 U.S.C. § 984.

3. Authority to Suspend; Defense Against Forfeiture. The Attorney General, in consultation with the Secretary of the Treasury, may suspend or terminate such a forfeiture if the Attorney General determines that a conflict of law with respect to liabilities arising from the restraint, seizure or arrest of such funds and that such action could be in the interest of justice and harm national interests of the U.S.  The owner of the funds deposited into a foreign account may contest the forfeiture by providing a claim under 18 U.S.C. § 983.

4. Example of Seizing Correspondent Account of Foreign Bank. The U.S. government is provided with new forfeiture and seizure rights with respect to a covered financial institution, and funds in an interbank account, equal to the value of funds deposited in a foreign bank that has an interbank account in the U.S. with a covered financial institution. The U.S. government may now seize the funds in the interbank account of the covered financial institution without having to trace the funds deposited in the covered financial institution to the account in the foreign bank because the funds are deemed to have been deposited into the U.S. interbank account. § 319(b) of the USA Patriot Act provides summons or subpoena of records authority to the Secretary of the Treasury or the Attorney General. The Secretary of the Treasury or the Attorney General is provided with new summons or subpoena of records authority.

a. Testimony at U.S. Senate Banking Committee.  Tax Analysts, in its Worldwide Tax Daily (January 31, 2002), reported the U.S. Department of Justice testimony at the U.S. Senate Banking Committee hearing on money laundering. WTD 2127. Michael Chertoff of the U.S. Department of Justice testified to the following:

[27]	Some of the new provisions in the Act have already been deployed with successful results. For example, the Department of Justice relied on the new civil forfeiture authority provided in the PATRIOT Act to seize six bank accounts in New Jersey and three in Florida related to the 11 September terrorists. On 8 November, 2001, the United States Attorney’s Office for the District of New Jersey obtained nine seizure warrants for bank accounts used by the terrorists based on the newly enacted PATRIOT Act authority codified at 18 U.S.C. 981(a)(1)(G), which provides for the seizure of all assets owned, acquired or used by any individual or organization engaged in domestic or international terrorism. Notice of the proposed forfeiture of these accounts has been made and, not surprisingly, no one has claimed an interest in the accounts.

[28]	In addition, we recently used Section 319 of the PATRIOT Act to good effect. Section 319(a) provided us with a new tool to seize and forfeit criminal assets deposited into a foreign bank account through the foreign bank’s correspondent bank account in the United States. This section provides that assets which are subject to forfeiture in the United States, but which are deposited abroad in a foreign bank may be deemed to be held in the foreign bank’s correspondent account in the United States. Thus, where a criminal deposits funds in a bank account in a foreign country and that bank maintains a correspondent account in the United States, the government may seize and forfeit an equivalent sum of money in the correspondent account, irrespective of whether the money in the correspondent account is traceable to the proceeds deposited in an account held by the foreign bank.

[29]	Although I was recused from the case because of a past representation, I can report that last month we recovered almost US $ 1.7 million in funds using Section 319, which will be used to compensate the victims of a fraud scheme. On 18 January 2001, a grand jury in the Southern District of Illinois indicted James R. Gibson for various offenses, including conspiracy to commit money laundering, mail and wire fraud. Gibson defrauded clients of millions of dollars by fraudulently structuring settlement agreements for numerous tort victims. Gibson and his wife, who was indicted later, fled to Belize, depositing some of the proceeds of their fraud scheme in two Belizean banks.

[30]	Our efforts to recover the proceeds at first were unsuccessful. Although the government of Belize initially agreed to restrain the assets, a Belizean court ordered the freeze lifted, because local law prohibited legal assistance to the United States: the treaty providing for legal assistance between the two countries has not entered into force. The court also prohibited the government from assisting the United States law enforcement agencies further, including providing information regarding Gibson’s money laundering activities. Efforts to break the impasse failed, and all the while the Gibsons systematically looted their accounts in Belize.

[31]	Following the passage of the PATRIOT Act, and interagency consultation, the Criminal Division authorized the use of the Section 319(a) authority. A seizure warrant was served on the correspondent bank, and the remaining funds were recovered. In our judgment, this case presents a compelling example of the need for, and appropriate use of, the new authority under Section 319(a).

[32] 	While this instance involved fraud, the facts of this case demonstrate the utility of this particular tool, particularly in the area of terrorist financing. Section 319(a) is, of course, an important enhancement to the law enforcement’s ability to pursue assets overseas. It is also a very powerful tool and one that can affect our international relationships. Accordingly, the Criminal Division is developing a policy to provide prosecutorial oversight regarding the use of this new provision.

[33]	Similarly, Section 319(b) of the Act provides new summons and subpoena authority with respect to foreign banks that have correspondent accounts in the United States. This section authorizes the Attorney General and the Secretary of the Treasury to issue subpoenas and summonses to foreign banks that maintain correspondent accounts with banks in the United States in order to obtain records related to the U.S. correspondent accounts. We also anticipate delegating authority to use Section 319(b) to a level below the Attorney General, but because of the international sensitivities involved, we anticipate that the use of such authority will remain subject to departmental review and approval and interagency consultation. I am currently reviewing a proposal regarding the best way to implement this important new authority.

b. The Gibson Case. The court refused to order the Belize bank to return these assets to the U.S. because local law prohibited legal assistance to the U.S.: the Mutual Legal Assistance Treaty (MLAT) between the two countries was not in force. The court also prohibited the Belize government from assisting U.S. law enforcement agencies, including providing information regarding Gibson’s money laundering activities.

[i] Facts of the Gibson Case.  Mr. and Mrs. Gibson, who fled the U.S. and moved to Belize, opened an account at Provident Bank & Trust of Belize Limited.  Provident Bank & Trust of Belize Limited filed an action, as a bank or financial institution, due to Governor of the Central Bank of Belize issuing an Affidavit instructing Provident Bank & Trust of Belize Limited to freeze the deposits of Mr. and Mrs. Gibson.  This action by the Governor of the Central Bank of Belize was based on the Belize police advising him that these deposits may involve money laundering proceeds, as determined pursuant to statements made by the F.B.I. in the U.S.  Provident Bank & Trust of Belize Limited asked the court what action it should take as a bank.

[ii] Reasoning of the Gibson Case.  The court held that the Governor of the Central Bank of Belize was not given the power to effect a freeze on bank accounts of customers.  The court further stated that if the Governor received information that money laundering had occurred, he must send that information to the law enforcement authorities.  The court further stated: “To freeze a customer’s account with his bank is a grave and serious action which can only be allowed by express words of a statute … I cannot overemphasize the need for coordination, speed and secrecy and timely action for the provisions of the Act [Belize Money Laundering (Prevention) Act] to be deployed in the fight against the pernicious practice of money laundering but all this must be done in consonance with the law.”  The court further noted that there was no action contemplated or pending against Mr. Gibson in any Court in Belize; and all evidence had been proceeded in the U.S. due to the approach by authorities in the U.S. with the Belize police regarding Mr. Gibson.  The court further stated: “In my view, in the circumstances of this application, the requirements of subsection (6) of section 23 of the Money Laundering (Prevention) Act, are mandatory assistance by this court for the purposes of money laundering offenses shall be provided only to those countries with whom Belize has entered into mutual assistance treaties either on a bilateral or a multilateral basis.”  The court concluded that there was not yet an operative mutual assistance treaty in force between Belize and the U.S., “notwithstanding the evident unilateral ratification by Belize of the Mutual Legal Assistance in Criminal Matters Treaty between the two countries signed on, 19th September 2000 in Belize and ratified Belize on 8th January 2001.  To bring this treaty into force, there has to be its ratification by the United States and the exchange of its instrument of ratification with Belize.”  

[iii] Current Status of MLAT with Belize. The MLAT with Belize, signed on September 18-19, 2000, was ratified on July 15, 2002.

c. Criminal Information Charge Against BDO Seidman, LLP.  The U.S. Attorney for the Southern District of Illinois, as a part of a pretrial diversion agreement, filed a criminal information charging BDO Seidman, LLP, on April 12, 2002, with misprision of a felony, in violation of 18 U.S.C. § 4.

[i] Facts Leading to Criminal Information Charge.  BDO Seidman, LLP, represented SBU, Inc., Flag Finance Corporation, and Family Company of America and “knew that SBU, Inc., was a third-party settlement company owned and operated by James R. Gibson engaged in the business of structuring personal injury plaintiff’s settlements and judgments through the establishment of a revocable trust funded with U.S. Treasury obligations intended to qualify as tax-exempt transactions.”  The criminal information showed the BDO Seidman, LLP, through its former St. Louis office, knew in October 1995 that SBU, Inc., and James R. Gibson failed to purchase promised U.S. Treasury obligations to fund approximately 22 of SBU, Inc.’s clients’ trusts.  Instead, the money was diverted to finance the purchase and operations of a chain of 23 grocery stores, purchased in March 1996.  In addition, the Internal Revenue Service (“IRS”), on July 7, 1997, sent a Notice of Tax Examination to SBU, Inc., for the tax year ending October 31, 1993.  During the tax examination, the IRS requested information relating to tax years 1994 and 1995.  BDO Seidman, LLP, submitted documents on behalf of SBU, Inc., pursuant to this request, on January 8, 1998.  The U.S. Attorney’s office states: “At that time, BDO … knew that James R. Gibson had committed a felony—attempted tax evasion—in connection with the tax year 1995 return.  In the January 8, 1998 submission, BDO … failed to inform the IRS of information that was material to the determination of income for year 1995, i.e., that James R. Gibson had not purchased U.S. Treasury obligations with settlement funds received and that James R. Gibson had, instead, used those funds to purchase and operate the grocery stores which were not qualified assets under the Internal Revenue Code, and BDO … failed to inform the IRS that James R. Gibson had committed attempted tax evasion.”

[ii] Agreement with BDO Seidman, LLP.  BDO Seidman, LLP, must cooperate with the agreement and pay a total of $16 million into fund established as victim restitution for former clients of SBU, Inc.  

[iii] Prosecution.  The office of the U.S. Attorney states that prosecution will be deferred with a view toward dismissal of information after eighteen months.

E. Bank’s Concern About Privacy Versus Concerns About Money Laundering.  A case in London shows the problems that a bank faces with respect to concerns about the privacy of its bank depositors and the concerns about financial crimes related to those deposits, even with the help of a court.

VI. Weapons Against Promoters Who Recommend Transactions Constituting Tax Fraud or Tax Evasion.  Promoters who recommended to and established on behalf of U.S. persons simple or elaborate schemes and structures that include so-called “secret” accounts are subjecting themselves, as well as their clients, to numerous crimes.  The IRS has numerous weapons against advisors giving fraudulent and improper tax advice.  The four most powerful weapons are:

A. Conspiracy–provides that “If two or more persons conspire either to commit any offense against the U.S., or to defraud the U.S., or any agency thereof in any manner or for any purpose, and one or more of such persons do any act to effect the object of the conspiracy, each shall be fined … or imprisoned not more than five years, or both.  If, however, the offense, the commission of which is the object of the conspiracy, is a misdemeanor only, the punishment for such conspiracy shall not exceed the maximum punishment provided for such misdemeanor.”

B. Corrupt Interference–provides that anyone who obstructs or impedes, or who endeavors to obstruct or impede, the due administration of the tax laws shall upon conviction, be fined not more than $5,000, or imprisoned not more than three years, or both, except that if the offense is committed only by threats of force (instead of actual force), the person convicted thereof shall be fined not more than $3,000, or imprisoned not more than one year, or both.

C. Aiding and Abetting–provides for a penalty of $1,000 per return or document, except in the case of the tax liability of a corporation where the penalty is increased to $10,000, is imposed upon anyone (i) who aids or assists in, procures, or advises with respect to, the preparation or presentation of any portion of a return, affidavit, claim or other document; (ii) who knows (or has reason to believe) that such portion will be used in connection with any material matter arising under the tax laws; and (iii) who knows that such portion (if so used) will result in an understatement of the liability for tax of another person.

D. Swapping or Transferring Information to IRS by Other Governmental Agencies–Other governmental agencies are permitted to swap or transfer information to the IRS.  Specifically, the following may be disclosed: returns and return information for use in criminal investigations; return information other than taxpayer return information for use in criminal investigations; return information to apprise appropriate government officials of criminal activities or emergency circumstances; returns and return information for use in judicial or administrative proceedings; information to locate fugitives from justice; and returns may be available in certain circumstances for inspection by the officers and employees of the General Accounting Office.  This swapping and transferring of information is available not only against promoters, but taxpayers, in criminal investigations, audits, and court proceedings.

VII. Weapons Against Promoters Who Participate in or Facilitate Money Laundering Transactions for Clients.  Civil and criminal penalties are provided against anyone who promotes a transaction that constitutes the commission of the crime of money laundering under Section 1956 or 1957.  And, practitioners must be concerned with the general conspiracy statute that may apply with respect to representing a particular client who is engaged in the activity of money laundering.

A. Cooperation Against Professional to Reduce Period of Incarceration.  Because periods of incarceration may be increased according to the amount of money involved and the specific characteristics of the offense, it follows that a U.S. person facing incarceration has substantial incentives to cooperate against his or her professional advisor.  A professional runs a high risk of becoming involved in a Federal investigation if his or her client is protecting assets that are derived from illegal activities.  The fact that the professional is unaware that proceeds are being concealed may not avoid the horrors of a federal investigation.  Thus, it is important for professionals representing persons going “offshore” to determine the source of funds, the background and character of the client and obtain bank references and other professional references of the client, etc.  It is also recommended that the client sign an Affidavit of Solvency that includes an attached description of the money laundering statutes, with an affirmation by the client that none of the funds being transferred “offshore” are illicit proceeds.

B. Increasing Number of Statutes Providing for Forfeiture of Illegally Derived Assets in Money Laundering Matters.  Professionals, especially attorneys, must be aware of the increasing number of statutes providing for forfeiture of illegally derived assets in transactions of money laundering.  And, transactions that may result in forfeiture are not limited to drug cases.  The forfeiture laws impacting professionals include forfeitures in money laundering, corruption, program fraud and bank fraud cases, forfeiture in R.I.C.O. cases and forfeitures in narcotics cases. 

C. Forfeiture of Attorney’s Fees.  The forfeiture of funds used to pay for attorney’s fees that were derived from a narcotics enterprise were upheld by the U.S. Supreme Court, pursuant to the provisions of 21 U.S.C. § 883.  Furthermore, the U.S. Supreme Court upheld a restraining order on potentially forfeitable assets, where legal counsel requested such assets for payment of legal fees.

D. Strong Burden of Proof.  Attorneys who are seeking relief from forfeiture of fees may find a strong burden in court.  A law firm cannot inform clients that it refuses to accept improper funds without performing due diligence on the source of the funds.  In order for an attorney to raise the innocent owner defense in a forfeiture case, the attorney must show that he was not acting with willful blindness that the property was either used to facilitate an unlawful transaction or that the proceeds were derived from an unlawful transaction.

VIII. The “John Doe” Summonses Cases.

A. The “John Doe” Summonses Case in Miami.

1. The Petition and the Supporting Brief.  The U.S. Department of Justice filed a petition in the U.S. District Court, Southern District of Florida (Miami), requesting authorization to serve “John Doe” summonses, pursuant to I.R.C. §§ 7609(f) and (h), on MasterCard International and American Express Travel Related Services Co. to obtain information relating to all U.S. taxpayers holding credit and debit cards issued by banks in The Bahamas, Cayman Islands, Antigua and Barbuda during the years 1998 and 1999. This request calls for information on the banks that issued the cards, credit card applications, account correspondence, security and credit checks on the cardholders, and transactions regarding the purchase of airline tickets, cars and other high-ticket items.

The U.S. Department of Justice filed a brief in support of its request for credit card information and records of American Express Travel Related Services Co. and MasterCard International for the years in question from the three specific jurisdictions.  The following is paragraph 12 of the Department of Justice brief: 

[12] Moreover, the Declaration of Revenue Agent West sets forth specific examples of court cases and pending investigations reflecting that other known taxpayers have used or promoted the use of cards to access funds held in offshore banks as part of schemes to evade the payment of taxes or otherwise fail to comply with the internal revenue laws.  The schemes involve the transfers of funds, not reported as taxable income in federal tax returns, to offshore banks, and their eventual repatriation for tax-free use in the United States through the use of cards for purchases or direct access to cash withdrawals.  See United States v. Brigham Young University, 679 F.2d 1345, 1349-50 (10th Cir. 1982), vacated for consideration of mootness, 459 U.S. 1095 (1983) (prior audit experience with other contributors that had overvalued “in kind” contributions was a reasonable basis for issuing a “John Doe” summons for the identity of all “in kind” contributors to Brigham Young University).

The court, in Case No. 00-3919-CIV-JORDAN (S.D. Fla. 2000), issued an order granting ex parte petition for leave to file “John Doe” summonses.  An ex parte order is one that is granted after considering the request of one party.  The following is the order:

The United States of America has filed a petition for leave to file John Doe summonses pursuant to 26 U.S.C. § 7609(f).  I have considered the petition, the memorandum of law, and the supporting affidavits and exhibits ex parte, as required by 26 U.S.C. § 7609(h)(2).  I find that the United States has established the following.

First, the summonses relate to the investigation of an ascertainable group or class of persons, i.e., American Express and MasterCard signatories whose charge, debit, or credit cards were issued by or through, or paid for from funds drawn on, banks in Antigua and Barbuda, the Bahamas, or the Cayman Islands during 1998 and 1999.  See 26 U.S.C. § 7609(f)(1).

Second, a reasonable basis exists for believing that such individuals may fail or may have failed to comply with provisions of the internal revenue laws. See 26 U.S.C. § 7609(f)(2).

Third, the information to be obtained from the testimony and examination of the records (and the identities of the persons with respect to whose liability the summonses are issued) is not readily available from other sources. See 26 U.S.C. § 7609(f)(3).

Accordingly, the Internal Revenue Service, through an authorized officer or agent, may serve John Doe summonses, in the forms attached to the petition as Exhibits 1 & 2, on American Express Travel Related Services Co. and MasterCard International.

DONE and ORDERED in chambers in Miami, Florida, this 30th day of October, 2000.

The U.S. Department of Justice states that MasterCard has produced over 1.7 million records that involve 230,000 accounts in three tax haven jurisdictions in response to the John Doe summonses case filed in Miami.  The IRS states that by using the MasterCard account total, it is estimated that 1-2 million such unreported accounts exist.

2. The Impetus for the Government to File the Summonses.  It is important to understand the reason that the U.S. government filed the petition requesting authorization to serve “John Doe” summonses on MasterCard International and American Express Travel Related Services.  This case was filed because of the information provided by Mr. Mathewson, regarding his Cayman Islands bank to the Federal Bureau of Investigation (“F.B.I.”).  Mr. Mathewson formed Guardian Bank & Trust (Cayman) Ltd., a bank in the Cayman Islands, and established so-called “secret” accounts for U.S. persons. Mr. Mathewson divulged extremely helpful information to the F.B.I. in order to avoid incarceration. Please note particularly the reports of the Mathewson case by The Wall Street Journal and the Associated Press in the following paragraphs.

On August 3, 1999, The Wall Street Journal reported: “U.S. District Judge Alfred Lechner called Mr. Mathewson’s cooperation “unparalleled,” before waiving federal-sentencing guidelines Monday and ordering him to service five years” probation and to pay a $30,000 fine.  Mr. Mathewson’s guilty pleas in separate indictments in federal courts in Newark, Brooklyn and Miami could have netted him up to 57 months in prison, under sentencing guidelines.”

On August 7, 1999, the Associated Press reported: “Mathewson could have received a five-year prison term, but he got probation by providing what U.S. District Judge Alfred J. Lechner called “unparalleled” cooperation: computerized records that could produce tax evasion charges against 1,500 U.S. citizens.”  “In hushed tones, bankers and officials here disputed Mathewson’s claims that his actions were commonplace -- and suggestions by U.S. officials that by obtaining the secret codes to Guardian’s files, they might have pierced other banks” secrecy.”

The extremely helpful information provided by Mr. Mathewson, including the secret codes to Guardian’s files that may have pierced the secrecy of other banks, spawned the filing of the “John Doe” summonses in Miami.

3. Apparent Purpose for Requesting the Information.  The U.S. Department of Justice on behalf of the IRS wants this information in order to match the data obtained with the returns filed by each individual to determine if they reported interests in foreign accounts on Form TD F 90-22.1 and on Schedule B, Part III, of Form 1040.  Alternatively, or in addition to, the IRS may want this information to determine if tax fraud and/or tax evasion is involved.  Failure to report these transactions potentially constitutes the crimes of tax fraud or tax evasion and civil tax fraud, as well as the crime of money laundering.

4. Typical Facts Regarding Unreported Accounts with Credit and Debit Cards.  The IRS and other federal governmental agencies are aware of specific facts regarding the use of unreported accounts by U.S. persons.  The U.S. government is also aware of the use of unreported accounts in discharging the liabilities of credit and debit cards issued by foreign banks.  

One of the more typical structures is the formation of an international business company (“IBC”) by a foreign person on behalf of a U.S. person.  Upon formation of the IBC, bearer shares are issued to a foreign person as the nominee owner.  Bearer shares are certificates of stock with no name and are deemed, for legal purposes, to be owned by the person in possession of those shares of stock.  However, for tax purposes, the U.S. person is deemed to be the owner of the shares of stock.  A foreign person places those bearer shares in his internal files or in his desk.  The foreign person who formed the IBC, or someone on his behalf, establishes a bank account or investment account in the name of the IBC.  The foreign person opening the bank account in the name of the IBC informs the bank of the U.S. person who is the “beneficial owner” or has a “beneficial interest” in the account.  A U.S. person typically transfers money to this bank or investment account by wiring or mailing funds.  A credit or debit card is issued by this bank or another bank either in the name of the U.S. person or the IBC.  The bank issuing the credit or debit card generally obtains financial information from the U.S. person with the beneficial interest prior to issuing the credit or debit card.  Irrespective of whether the credit or debit card is issued in the name of the U.S. person or the IBC, the credit or debit card is used for the benefit of a U.S. person.  Failure to report these transactions constitutes the crime of money laundering, tax fraud and tax evasion, as well as civil tax fraud.

Another typical fact situation is included at paragraph eleven of the Department of Justice brief that quotes from a professional journal as follows:  

[11] In this regard, a recent law review article published in the Journal of Taxation is instructive.  In Advising a Client with Secret Offshore Accounts–Current Filing and Reporting Problems, 91 J. Tax’n 158 (1999) … Scott D. Michel, a past chair of the Committee on Civil and Criminal Tax Penalties of the ABA Tax Section, describes the following “not atypical [common] hypothetical”: 

In the spring of 1996, Richard Smith had a marvelous vacation on the tropical island of Azure.  While he was there, he attended a free seminar on offshore banking and investing, where he heard about the many benefits of having an Azure bank account, including the island’s strict bank secrecy laws.  Smith opened an account at an Azure bank and deposited funds over the next three years.  The bank invested his money and provided him with a “debit” card to use for “untraceable” cash advances and purchases.  While Smith was careful to report all of his domestic income on his tax returns for 1996 and 1997, he did not disclose the existence of the Azure account or report the income earned in the account.

The article then analyzes how the taxpayer in this hypothetical violated provisions of the Internal Revenue Code, such as failing to comply with the disclosure requirements for foreign financial accounts and willfully failing to report earnings on such accounts.  Of course, implicit in the hypothetical set forth by the writer of the article, is the use of the debit card as an integral component of the tax evasion scheme.

B. John Doe Summonses case in San Francisco. Due to the favorable order granted in the John Doe Summonses case in Miami and the fact that MasterCard International and American Express Travel Related Services Co. are turning over requested records to the IRS, the U.S. government filed another case in San Francisco.

1. Order of the Judge.  U.S. District Judge Phyllis Hamilton of San Francisco, in a ruling late Wednesday, March 27, 2002, agreed that the IRS had demonstrated “there is a reasonable basis for believing” many of these cardholders were not complying with U.S. tax laws. She granted the IRS request for a summons to obtain the Visa records.  The summons seeks information including the names, addresses, social security numbers, and telephone numbers of U.S. taxpayers who, during the years ended 31 December 1999 through 31 December 2001, had signature authority over Visa cards issued by, through, or on behalf of banks or other financial institutions in: Anguilla; Antigua and Barbuda; Aruba; the Bahamas; Belize; Bermuda; the British Virgin Islands; the Cayman Islands; the Cook Islands; Cyprus; Dominica; Gibraltar; Guernsey/Sark/Alderney; Hong Kong; the Isle of Man; Jersey; Latvia; Liechtenstein; Luxembourg; Malta; Nauru; Netherlands Antilles; Panama; Samoa; St. Kitts and Nevis; St. Lucia; St. Vincent and the Grenadines; Switzerland; the Turks and Caicos; and Vanuatu.

2. The Impetus for the Government to File the Case.  The affidavit filed in support of the petition for a summons to be issued against Visa states that MasterCard International complied with the John Doe summonses case filed in Miami by producing electronic database records and the records contained files of over 1.7 million transactional records involving more than 230,000 different accounts.  The affidavit further states that many of the cards appear to be issued to U.S. customers and, based on these records, the IRS has developed hundreds of cases for civil audits or potential criminal investigation.

In addition, on March 25, 2002, a stipulation, involving a stipulated agreement with American Express Travel Related Services Co., requesting a court order was filed in the U.S. District Court for the Southern District of Florida.  After entry of the order, American Express Travel Related Services Co. will provide certain records for 1998 and 1999 on cards for U.S. persons with transactions in the U.S. and with mailing addresses in the islands subject to the John Doe summonses case filed in Miami.

C. Tax Compliance and Reporting Requirements.  Specific tax compliance and tax reporting requirements for the above transactions include the following:

1. Form 1040, Schedule B, Part III.  Form 1040, Schedule B, Part III, Line 11a asks “did you have an interest in or signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account?”  Line 11a of this Schedule must be answered in the affirmative for a foreign grantor trust.  Line 11b of this Schedule then requires entering the name of the foreign country for where the foreign account, established by the trust, is located.  Line 12 of this Schedule asks “Were you the grantor of, or transferor to, a foreign trust … whether or not you have any beneficial interest in it?”  This also must be answered in the affirmative since the U.S. person who establishes the trust is both a grantor and a transferor to the trust.  Line 12 then states, with respect to an affirmative answer that “you may have to file Form 3520, 3520-A, or 926.”  Answering Lines 11 (foreign account) and 12 (foreign grantor trust) of this Schedule in the affirmative clearly shows that the taxpayer is required to file TD F 90-22.1 and Form 3520.

2. TD F 90-22.1–Report of Foreign Bank and Financial Accounts.  This report is filed by each U.S. citizen who has a financial interest in, or signature authority or other authority over, any financial accounts, including bank, securities or other financial accounts, in a foreign country exceeding $10,000 in the aggregate at any time during a calendar year.  A U.S. citizen means a citizen or resident of the U.S., a domestic partnership, a domestic corporation, or a domestic estate or trust.  A “financial interest” includes interest in foreign accounts titled in the names of nominees, agents and trusts if the present beneficial interest of the U.S. citizen in the trust exceeds 50% of the assets or more than 50% of the current income is distributed to a U.S. citizen.  Signature authority includes the ability to control the disposition of money or property in the foreign account by oral or written instructions to the signatory or titleholder on the account.

The TD F 90-22.1 Form states “Civil and criminal penalties, including certain circumstances a fine of not more than $500,000 and imprisonment of not more than five years, are provided for failure to file a report, supply information, and for filing a false or fraudulent report.”  The U.S. Code provides that the person who willfully fails to file this return “shall be fined not more than $250,000, or imprisoned for not more than five years, or both.”  The U.S. Code further provides that the person who willfully fails to file this return “while violating another law of the United States or as part of a pattern of any illegal activity involving more than $100,000 in a 12-month period … shall be fined not more than $500,000, imprisoned for not more than ten years, or both.”  These penalties for failure to file are further provided by the Code of Federal Regulations. 

3. Form 4789–Currency Transaction Report.  This currency transaction report is filed for deposits, withdrawals, exchange of currencies or other payment or transfer of more than $10,000 per year.

4. Form 4790–Report of International Transportation of Currency or Monetary Instruments.  This report is filed for international transportation of currency or monetary instruments.

5. Form 926–Return by a U.S. Transferor of Property to a Foreign Corporation.  This form is due with respect to the transfer, directly or indirectly, of assets to a foreign corporation.  The penalty is 10% of the fair market value of the property at the time of the transfer for failure to file the Form 926.  For U.S. tax purposes, the U.S. person is the real owner of the shares of stock, not the nominee owner.

6. Form 5471–Information Return of U.S. Persons with Respect to Certain Foreign Corporations.  This form is required for a U.S. person who has direct or indirect (real) control over a foreign corporation.  The foreign corporation is generally classified as a controlled foreign corporation for income tax purposes.  A foreign corporation is a controlled foreign corporation for a taxable year if more than 50% of the voting power or value of its stock is owned, directly, indirectly or constructively, on any day of the taxable year by a U.S. shareholder or shareholders.  Each shareholder must report Subpart F income of a controlled foreign corporation yearly, whether or not distributions are made.  Attempts to avoid the thrust of the rules for determining controlled foreign corporation status by appearing to formally transfer voting control to non-U.S. shareholders is not effective if the formality is not a reflection of the facts.  Thus, if the unofficial but real or indirect power to control the corporation remains with a U.S. person, that person is considered the holder of the foreign corporation’s voting control.  For U.S. tax purposes, the U.S. person who controls the foreign corporation is deemed to be the shareholder, not the nominee owner.  A U.S. person in control of a foreign business entity (a foreign corporation or foreign partnership), must provide such information as the Secretary of the Treasury may prescribe (on Form 5471 with respect to a foreign corporation) relating to (i) identifying information, such as the name, place of organization or incorporation, principal place of business and nature of business, (ii) in the case of a corporation, its post-1986 undistributed earnings, (iii) a balance sheet, (iv) related party transactions, i.e., transactions between the entity and the U.S. person, another entity that the U.S. person controls, or any U.S. person owning 10% or more of the entity, and (v) a description of the capitalization of the entity, along with names, addresses and interests owned by any person holding 5% or more of any class of outstanding stock.

D. Government Jurisdiction Over the Credit and Debit Card Records.  The U.S. government has jurisdiction over American Express Travel Related Services Co. and MasterCard International for several reasons.  The payment, in U.S. dollars, of credit or debit card bills issued by foreign banks results in the settling of those dollar payments in the Federal Reserve Bank of New York.  The necessary liquidity to discharge those liabilities resides at the Federal Reserve Bank of New York.  However, if the position is taken that credit and debit card records are outside the U.S. and reside with banks in the three jurisdictions, the question is whether the U.S. government has extraterritorial jurisdiction, if necessary, available under this “John Doe” summonses over these credit and debit card receipts, records and other information.  The answer is in the affirmative.

1. Extraterritorial Jurisdiction Granted to the U.S. Government Under Section 1956 and 1957.  A careful reading of Section 1956(f) and Section 1957(d)(2) is required to understand that extraterritorial jurisdiction is not granted to the U.S. government for acts or omissions constituting tax fraud or tax evasion, or even absolute fraud.  Section 1956(f) requires conduct by a U.S. citizen, or in the case of a non-U.S. citizen the conduct occurs in part in the U.S., involving a transaction or series of related transactions involving “funds or monetary instruments” of a value exceeding $10,000.  Section 1956(a)(2) deals with funds or monetary instruments and does not include tax fraud or tax evasion.  Section 1957 makes no reference to tax fraud or tax evasion and, therefore, extraterritorial jurisdiction is not granted to the U.S. government for such reasons.  

a. Wire and Mail Fraud.  The U.S. government obtains extraterritorial jurisdiction from wire and mail fraud.  Thus, the mailing or wiring of funds to a foreign jurisdiction provides extraterritorial jurisdiction to the U.S. government.  The failure to report the so-called “secret” account constitutes concealment or tax fraud or tax evasion and causes the account to be classified as a specified unlawful activity.  However, as stated, the fact that tax fraud or tax evasion is involved does not grant extraterritorial jurisdiction; it is mail and wire fraud as predicate offenses that provide the extraterritorial jurisdiction.

b. Specific Provisions Granting Exterritorial Jurisdiction.  The U.S. government has specific extraterritorial jurisdiction over the records requested in the “John Doe” summonses case in Miami under Section 1956 and Section 1957.

2. Extraterritorial Jurisdiction Under the USA Patriot Act.

a. Jurisdiction of U.S. District Courts.  Jurisdiction is granted to U.S. District Courts with respect to an action filed or enforcing a penalty ordered under Section 1956, over any foreign person, including any financial institution, so long as the service of process is made under the federal rules of civil procedures or the laws of the country where the person is found and the offender commits a crime a financial transaction under Section 1956(a).

b. Jurisdiction of U.S. Government.  The USA Patriot Act provides jurisdiction over foreign banks that have U.S. correspondent, interbank or payable-through accounts.

3. Jurisdiction under CAFRA.  CAFRA grants jurisdiction involving Section 1956 and Section 1957 cases and a court may issue a subpoena duces tecum to a financial institution to produce books, records and other documents.

4. Resident Jurisdiction Over Credit Card Companies.  The U.S. government has jurisdiction over American Express Travel Related Services Co. and MasterCard International because both companies are located in the U.S.  Also, the settlement of credit and debit card bills in dollars occurs in the U.S. at the Federal Reserve Bank of New York.  Furthermore, as previously stated, the concept of fraud or any scheme or attempt to defraud by or against a foreign bank, is included in 18 U.S.C. § 1956(c)(7)(B)(iii) and appears to include tax evasion and thereby causes banks to be treated as agents of the U.S. government in identifying and reporting money laundering from such crimes.  This is especially true due to the jurisdiction given to the U.S. government and the U.S. District Courts over foreign banks and their customers, as well as the due diligence or enhanced due diligence as required at the U.S. financial institutions having a correspondent banking account for foreign banks.

5. Mutual Legal Assistance Treaties.  The U.S. government has and continues to enter into an MLAT with jurisdictions around the world.  An MLAT provides assistance in criminal matters and seeks to improve the effectiveness of judicial assistance and to regularize and facilitate its procedures.  Each country to the MLAT designates a central authority, generally the Justice Departments for direct communication.  An MLAT includes the power to summon witnesses, compel the production of documents and other real evidence, to issue search warrants, and to serve legal process.  Remedies offered by an MLAT are only available to prosecutors.  An MLAT with a jurisdiction may be used by the U.S. government against a U.S. person who has a debit or credit card issued by a bank in that jurisdiction where unreported accounts are used to discharge the liabilities under the debit or credit card.   The defense generally must proceed with the available methods of obtaining evidence in criminal matters under the laws of the host country that usually involve letters rogatory.

a. MLATs in Force.  MLATs currently in force include: Anguilla, Antigua/Barbuda, Argentina, Australia, Austria, Bahamas, Barbados, Belgium, Brazil, British Virgin Islands, Canada, Cayman Islands, Cyprus, Czech Republic, Dominica, Egypt, Estonia, Greece, Grenada, Hong Kong, Hungary, Israel, Italy, Jamaica, Korea (South), Latvia, Lithuania, Luxembourg, Mexico, Montserrat, Morocco, Netherlands, Panama, Philippines, Poland, Romania, St. Kitts-Nevis, St. Lucia, St. Vincent, Spain, Switzerland, Thailand, Trinidad, Turkey, Turks and Caicos Islands, Ukraine, United Kingdom, Uruguay.

b. Purposes of MLATs.  MLATs are specifically designed to override local laws pertaining to bank secrecy and to ensure the admissibility of the evidence obtained.  MLATs generally contain provisions that, in conjunction with certain statutes, are directed as securing the admissibility of business records, or establishing chain of custody over an evidentiary item, without having to adduce the in-court testimony of a foreign witness.

6. Tax Information Exchange Agreements.  The U.S. has entered into, and continues to enter into, tax information exchange agreements (“TIEA”) with numerous jurisdictions that allow for the exchange of information with respect to tax matters.  

a. Some TIEAs in Force.  On November 27, 2001, the U.S. and the U.K. signed a TIEA with respect to the Cayman Islands.  The Cayman Islands agreement comes into force January 1, 2004, for criminal tax evasion and on January 1, 2006, for all other tax matters.  On January 24, 2002, the U.S. signed a TIEA with The Bahamas.  The Bahamas agreement comes into force January 1, 2004, with respect to matters in connection with criminal tax matters and on January 1, 2006, for information in connection with civil tax matters.  The U.S. also signed TIEAs with the following, among others: Antigua and Barbuda (December 6, 2001), the British Virgin Islands (April 3, 2002), the Netherlands Antilles (April 17, 2002), Guernsey (September 19, 2002), the Isle of Man (October 3, 2002), and Jersey (November 4, 2002).  The U.S. has signed TIEAs with other jurisdictions and continues to sign TIEAs with additional jurisdictions around the world.

b. Scope of TIEAs.  Under most of the TIEAs, as well as tax treaties, to which the U.S. is a party, requests for assistance may be made for any civil or criminal tax investigation or proceeding regarding any tax year not barred by the statute of limitations of the state seeking the information.

c. Designation of a Competent Authority to Administer TIEAs.  TIEAs, as well as tax treaties, specify competent authorities to act on behalf of each treaty partner to make requests, to receive and execute requests, and to administer generally the treaty relationship.  The Assistant Commissioner-International, IRS, is designated to act as the Competent Authority for exchanging information under TIEAs, as well as tax treaties, under the authority of the Secretary of Treasury.

d. Example of a TIEA.  The Cayman Islands tax cooperation agreement with the U.S. and the U.K. is an example of a TIEA.  This TIEA, under Article 1 provides the Scope of the Agreement.  Article 1 states: “The competent authorities of the contracting party shall provide assistance through exchange of information relating to the administration and enforcement of the domestic laws of the contracting parties concerning the taxes and the tax matters covered by this Agreement, including information that may be relevant to the determination, assessment, verification, enforcement or collection of tax claims with respect to persons subject to such taxes, or to the investigation or prosecution of criminal tax evasion in relation to such persons. The territorial scope of this Agreement, in respect of the United Kingdom, is the territory of the Cayman Islands.”  Under Article 3, the taxes covered are federal income taxes.  However, the types of tax covered may be extended by agreement between the parties in the form of an exchange of letters.  Article 5 provides for exchange of information upon a request; Article 6 provides for tax examination (or investigations) abroad; and Article 11 provides for mutual agreement procedure between the parties.  Article 12 provides for entry into force of the agreement and states that it takes effect for criminal tax evasion on January 1, 2004, and for other matters covered by Article 1, it takes effect on January 1, 2006.

7. Letters Rogatory.  The traditional method used by U.S. litigants to enlist the assistance of foreign authorities to obtain evidence abroad, in both civil and criminal cases, is a letter rogatory, also known as a letter of request.  In general, a letter rogatory is a formal request from a court, in which an action is pending, to a foreign court to perform some judicial act.  If the foreign court honors the request, it does so based on comity rather than any sort of strict obligation.  As this definition suggests, a letter rogatory can usually only be used in a proceeding that has commenced, such as in the post-indictment stages of a criminal case or the post-complaint stages of a civil case; however, this is not an iron-clad rule.

E. Issuance of John Doe Summons to Merchants. The IRS is not only obtaining information from American Express Travel Related Services Co. and MasterCard International, but also of merchants in the U.S. in which the debit and credit cards have been used to purchase products.  Also, the IRS is issuing summonses to the credit card companies with respect to specific individuals, specific debit or credit card numbers, with appearance required by credit card companies at a specific address, at a specific time, with specific information requested.

F. Chronology on Credit Cards and John Doe Summonses. In an August 29, 2002, release, the IRS describes the “major steps” it is taking to combat tax-avoidance schemes involving credit cards issued by offshore banks.  The following are excerpts from this release:

1. Identifying Promoters and Participants.  

Lead Development Center

[84] Key to the fight against abusive scams and schemes is better identifying their promoters. To succeed, we must go the source and cut off the supply. To this end, SB/SE established a Lead Development Center (LDC) in April 2002. Its purpose is threefold:

-Centralize the receipt and development of leads on promoters of abusive tax schemes; 

-Authorize and monitor on a national level abusive tax promoter investigations (also called 6700 investigations) assigned to the field; and

-Promote and effect the coordination of parallel investigation with IRS Criminal Investigation. 

[85] Let me explain how the LDC works. The Center receives leads from both internal and external sources, such as practitioners and taxpayers. For example, as I will discuss later in my testimony, the OVCI [Offshore Voluntary Compliance Initiative] is producing leads from taxpayers coming clean. We will make excellent use of them at the LDC. LDC personnel also conduct Internet and other public database searches to develop facts about promoters or the promotion of schemes. 

[86] The lead is then classified, prioritized and eventually assigned to LDC agents for development and potential referral to the field. We also coordinate with the IRS” Office of Chief Counsel, Criminal Investigation, and other departments and functions for input on approval of the lead. If approved, the promoter is then referred to the field for case development. 

[87] Because of the LDC, we now also have a much better handle on the universe of the problem. Since its formation in April 2002, approximately 1,100 leads have been received by the LDC. The current receipt of new leads is averaging approximately 70-80 per month. As of March 1, 2003, we have 267 investigation referrals being worked in the field, with the remaining being evaluated in the LDC for further action. The leads can also be broken down into promoter brackets or “buckets,” with domestic trusts, offshore transactions and frivolous constitutional arguments being the largest.

[88] I also want to point out an interesting pattern that is starting to emerge from our investigations. We are not seeing many new promoters. Rather, it is the same promoters selling a number of new schemes. If one scheme gets too hot, they drop it and move on to sell a different one, and so on and so forth. This is a hallmark of the huckster and confidence man.

[89] Mr. Chairman, critical to our efforts are new expedited procedures developed with the Justice Department to obtain timely injunctions. In the past, many of the scams and schemes continued to operate even when we had identified them as being abusive. In a very real sense, we were fighting with one hand tied behind our back. However, with these new procedures in place, we and our partners at the Justice Department are in a much better position to shut these scams down before they can do any more harm.

[90] As a result of referrals made to the Department of Justice, 22 injunctions were granted. The streamlined procedure for obtaining civil injunctions is markedly faster. Indeed, in the case of Section 861 scams, we have gone from months to weeks after identifying the scheme. 

[91] Let me also note that for this fiscal year, we have scheduled three classes to train approximately 100 additional personnel nationwide in promoter investigations. Our regular classroom training program related to scams and schemes for FY 2003 includes: abusive tax promotions (95 revenue agents), abusive schemes/passthroughs (125 managers), John Doe/Offshore cases (1,400 revenue agents), anti-money laundering (240 revenue agents), advanced collection techniques for schemes (120 revenue officers); foreign trust and other offshore (240 revenue agents), Casino Bank Secrecy Act (96 revenue agents), special enforcement training (75 revenue agents), OVCI training (700 revenue agents), and advanced fraud referral specialist (80 agents) and abusive tax scheme coordinators (50 special agents).

2. Credit Card Summonses.

[92] Since October 2000, the IRS has issued a series of summonses to a variety of financial and commercial businesses to obtain information on U.S. residents who held credit, debit, or other payment cards issued by offshore banks. We are identifying promoters and participants. The following is a chronology of our actions, according to public records:

-On October 30, 2000, a federal judge in Miami issued an order authorizing the IRS to serve John Doe summonses on American Express and MasterCard. These summonses were designed to obtain limited information for 1998 and 1999, revealing U.S. participants in offshore arrangements who hold credit cards issued by banks from Antigua and Barbuda, the Bahamas, and the Cayman Islands. 

-On March 27, 2002, a federal judge in San Francisco issued an order authorizing the IRS to serve a John Doe summons on VISA International seeking records on transactions for 1999-2001 using cards issued by banks in over 30 tax haven countries. 

-On August 21, 2002, a federal judge in Miami issued an order authorizing the IRS to serve a John Doe summons on MasterCard for records on transactions for 1999-2001 using credit cards issued by banks in over 30 tax haven countries. 

-In August and October 2002, federal judges in 18 district courts across the nation gave permission to the IRS to serve John Doe summonses on over 120 businesses to assist in the identification of credit card owners.

[93] The results of the investigations have been promising. The first summons alone yielded data from MasterCard on 237,000 cards issued through 28 banks in three countries. 

[94] Investigators have been using records from these summonses to trace the identities of those whose use of these payment cards may be related to hiding taxable income. We identified thousands of offshore payment cardholders for potential examination and dozens of cases have already been referred to Criminal Investigation for possible action. The investigation itself has entailed combing through data on millions of transactions.

[95] An early estimate suggested that 1-2 million cardholders could be involved. However, after reviewing records in recent months obtained from the “John Doe” effort, we reduced our estimate of the number of abusive cardholders. This re-estimate is based on information we culled on duplicate cards issued to the same individual, inactive or small-dollar accounts, people using the cards because of bad credit, persons traveling abroad, and a wide range of other non-tax reasons for holding the cards. While an exact figure of taxpayers involved remains uncertain, we now believe the use of offshore credit, debit, and charge cards to evade payment of U.S. taxes involves hundreds of thousands of taxpayers.

[96] Once taxpayers are identified from cards, case building begins. The IRS already has developed over a thousand cases for civil audits or potential criminal investigations. The IRS is increasing resources in Fiscal Years 2003-2004 devoted to working these cases.

[97] Access to information is also critical to ensuring the full and fair enforcement of the tax laws. In addition to techniques, such as the use of these John Doe summonses, the United States has a broad network of bilateral treaties and agreements with countries throughout the world that allow the IRS to obtain information relevant to the tax liabilities of U.S. taxpayers. Information requested from other countries under these treaties and agreements is an important means by which the IRS identifies taxpayers who attempt to hide income offshore to avoid their tax obligations.

3. The Offshore Voluntary Compliance Initiative.

[98] In January 2003, we launched an initiative aimed at bringing taxpayers who used “offshore” payment cards or other offshore financial arrangements to hide their income back into compliance with tax law. The Offshore Voluntary Compliance Initiative (OVCI) grows out of the two-year-old “John Doe” summons investigation described above in my testimony. 

[99] Under the OVCI, eligible taxpayers who step forward will not face civil fraud and information return penalties. However, taxpayers will still have to pay back taxes, interest, and certain accuracy or delinquency penalties. The last day a taxpayer can apply is two weeks away -- April 15, 2003.

[100] Eligible taxpayers who come forward will also avoid criminal prosecution based upon application of the revised voluntary disclosure practice. A taxpayer who does not come forward now, however, will be subject to payment of taxes, interest, penalties, and potential criminal prosecution.

[101] The Voluntary Compliance Initiative reflects an attempt to bring taxpayers back into compliance quickly while simultaneously gathering more information about the promoters of these offshore schemes. Mr. Chairman, I fully concur with your statement that “while taxpayers will be getting a fresh start, IRS plans on making it the end of the line for crooked perpetrators.”

[102] As part of the request to participate, the taxpayer must provide full details on those who promoted or solicited the offshore financial arrangement. 

[103] The IRS will use this information to pursue promoters and to obtain information about taxpayers who have avoided tax through the use of offshore payment cards or other offshore financial arrangements and who do not come forward under the OVCI.

[104] We are striking the proper balance with this initiative. It is sound tax administration, and it will help root out tax evasion. Those who misused offshore credit and other payment cards will be able to pay their fair share. Just as importantly, it will help the IRS get the people promoting these deals.

[105] In addition to the names of those who promoted these offshore financial arrangements, taxpayers deemed eligible to participate in the Voluntary Compliance Initiative must provide the details on all aspects of the scheme used to avoid paying the proper tax liability. 

[106] Those who promoted or solicited others to avoid tax by using offshore payment cards and other domestic and offshore abusive schemes are not eligible to participate in the OVCI. Also prohibited is anyone who has illegal source income, such as a drug dealer. Complete details on this initiative and eligibility can be found in Revenue Procedure 2003-11. 

[107] Under the OVCI, eligible taxpayers will have to file or amend their returns and pay interest and certain civil penalties, as well as the tax. The interest and penalties depend on the amount of the unpaid tax liability, the years involved, whether a return was inaccurate or if a return should have been filed and was not. 

[108] For example, a taxpayer who understated his income to avoid $ 100,000 in taxes in 1999 would wind up paying $ 149,319 to the government. This includes the tax liability plus $ 29,319 in interest and an additional accuracy-related penalty of $ 20,000. 

[109] If a taxpayer did not step forward, his or her tax liability generally would include the civil fraud penalty of $ 75,000, and therefore higher interest of $ 42,758. The total amount due would be $ 217,758, without considering probable additional civil penalties for failure to file certain information returns. 

[110] The accuracy-related penalty, cited in the above examples, is equal to 20 percent of the tax underpayment. The civil fraud penalty is up to 75 percent of the unpaid tax liability attributable to fraud. 

[111] To apply for the OVCI, taxpayers must notify the IRS in writing and provide their name taxpayer identification number, current address, daytime phone number, and certain promoter information as specified in the Revenue Procedure. 

[112] As part of the OVCI, the IRS will also be closely monitoring the filing of amended returns. If, in order to circumvent this initiative, taxpayers simply file an amended return without complying with the other required provisions, they run the risk of having the civil fraud penalty and other information return penalties applied. As Senator Baucus rightly observed, “The IRS” message to tax evaders is clear -- either come forward and pay what is owed to the country today, or find the IRS knocking on your door with jail time and high financial penalties tomorrow.” 

[113] People interested in participating in the Offshore Voluntary Compliance Initiative can contact the IRS by calling 215- 516-3537 (not toll-free), or visit our web site.

[114] OVCI results to date are promising and we expect more taxpayers to take advantage of the initiative in its final two weeks. We will provide the Committee with an update after the close of the program.

[115] Anecdotally, there are excellent examples of the results we are receiving. The OVCI unit is also receiving promoter and other fraud related information from taxpayers who have seen the OVCI media coverage, but who are not involved in offshore activities. These promotional materials and leads are being referred to the SB/SE and CI Lead Development Centers.

4. Civil Actions—Offshore Credit Cards.

[124] On March 13, the IRS announced that summons enforcement petitions have been filed by the Justice Department in seven U.S. District Courts against individual taxpayers related to the Offshore Credit Card Project. This marks the first time in the Offshore Project that the IRS has taken this step; previous court efforts centered on credit card companies and businesses. These actions are against individual participants.

[125] According to publicly-filed court documents:

-The IRS took these steps based on information gathered in the Offshore Project -- an on-going effort to identify persons who hide taxable income by transferring funds to offshore jurisdictions and then use payment cards to access these funds in the United States. 

-The summons enforcement petitions were filed against individuals who used a MasterCard payment card issued by the Leadenhall Bank & Trust Company in Nassau, Bahamas. The enforcement petitions were filed after the individuals did not produce for examination the books or records requested in earlier IRS summonses. 

-The IRS and Justice Department filed the petitions in U.S. District Courts in the Eastern District of California, the Middle District of Florida, the Southern District of Florida, the District of Maryland, the District of Nevada, the District of North Dakota, and the Western District of Tennessee.

[126] Treasury Assistant Secretary for Tax Policy Pam Olson stated that “the IRS has focused resources on identifying and weeding out the threats to our tax system posed by tax avoidance activities, such as hiding income offshore. The Treasury Department is supporting the IRS initiatives by putting sunlight on the offshore sector. The Treasury and the IRS will continue to use all of the tools available to ensure that every taxpayer pays what it owes to support this great country.”

5. Tax Avoidance Schemes.

[128] According to a March 20, 2003 DOJ press release, a federal court in Las Vegas issued a temporary restraining order barring Irwin Schiff and two associates, Cynthia Neun and Lawrence N. Cohen, from promoting their tax scams. The order prohibits the trio from holding any seminars to promote or sell Schiff’s fraudulent “zero tax” plan or “any other false, fraudulent, or frivolous tax schemes or arguments.”

[129] The order also prohibits Schiff and his associates from selling or advertising tax-scam books, audiotapes and other tax- related products and services, and from preparing any federal income tax returns for others. Within 10 days, Schiff, Neun, and Cohen must provide a copy of the order to their current customers and former customers with whom they have done business since January 1, 1999. 

[130] According to court papers filed by the Justice Department, Schiff, Neun, and Cohen conduct seminars and sell audiotapes and other products designed to help customers evade federal taxes, primarily by filing income-tax returns falsely listing no income and no tax due. The Justice Department has alleged that customers of Schiff and his associates attempted to evade an estimated $ 56 million in income taxes from 1999 through 2001.

[131] This is the latest in a series of actions brought by the Justice Department in recent years against alleged tax scam promoters across the country. In the past two years, the Department has filed suits asking for injunction orders against 35 promoters and has prevailed in every case decided so far. 

[132] Also, according to a February 28, 2003 DOJ press release, a federal court in Tampa ordered David Bosset of Spring Hill, Fla., to stop promoting a fraudulent tax scheme. The permanent injunction bars Bosset from promoting the frivolous “Section 861” argument. Bosset had falsely claimed that Section 861 of the Internal Revenue Code exempted from federal income taxes persons with U.S.-source income. Bosset also must contact clients and inform them of the injunction.

[133] In the permanent injunction order, the court stated that in promoting the scheme Bosset made “false or fraudulent statements.” The court last March had entered a preliminary injunction against Bosset. Federal courts have enjoined five other “Section 86 1 “ tax scam promoters in other cases.

6. Web Site Actions.

[134] As of March 16, 2003, the following web sites were shut down or had injunctions posted on them: 

-Al Abdo, www.amtaxplan.com, preliminary injunction entered and website shut down 5/25/01. (This was the first site shut down by means of an IRS/DOJ injunction suit.) 

-Joy Foundation & Jack Malone, www.Joyfoundation.com, permanent injunction on 10/21/02 and injunction posted on website within a week thereafter. Government moved for contempt because posting was not sufficiently prominent; thereafter the posting was made more prominent. 

-Michael Richmond & Rex Black, www.mcep.com; www.libertyinstitute.com & www.nationaCEP.com, permanent injunction against Rex Black on 6/14/02. Black served 3 months in prison and incurred substantial fines for civil contempt for failing to post the injunction on the sites. Injunction was finally posted in February. 

-Thurston Bell, www.nite.org, Preliminary injunction entered 1/10/03; injunction posted on website a few days later.

Suit has been filed and is pending against: 

-Chad Prater, www.taxinformer.com, preliminary injunction entered December 19, 2002. Court declined to order posting of injunction order on website, but did order Prater to remove false statements from the site. Prater has not complied with the injunction. DOJ moved for contempt on 3/10/03, and again asked the court to order Prater to post the injunction. A hearing on the contempt motion is scheduled for April 2, 2003. 

-Irwin Schiff, www.paynoincometax.com, www.ischiff.com, suit filed 3/12/03 seeking temporary restraining order (TRO) to remove false statements from websites. TRO granted on March 20, 2003.

[135] Three additional suits have been referred to DOJ in which we requested DOJ to enjoin false statements on websites.

7. Criminal Actions—Shift to Tax Administration.

[136] With the IRS” major compliance initiatives now revolving around promoters and abusive scams and schemes, CI developed a comprehensive compliance strategy that incorporates all IRS operating divisions and their taxpayer bases. To begin the process, CI worked particularly closely with the other divisions to develop a strong fraud referral program.

8. Fraud Referrals from other IRS Operating Divisions.

[137] CI works closely with SB/SE, LMSB and W&I operating divisions to improve the fraud referral process. SB/SE established the position of “fraud referral specialists” to aid employees in identifying matters suitable for referral for criminal investigation. CI’s lead development managers also work closely with SB/SE’s fraud specialists to monitor the process. This has complemented CI’s efforts to re-focus its investigative resources on legal source income cases. The acceptance rate for fraud referrals from other IRS operating divisions was 63% for FY2002 -- a 10% jump from the previous fiscal year.

9. Abusive Trusts.

[143] In FY 2002, CI initiated 108 investigations compared to 79 in FY 2001, recommended 55 prosecutions as compared to 30 in FY 2001, received 44 indictments as compared to 32 the previous year and won 26 convictions compared to 45 in FY 2001. The incarceration rate was 88.2 percent and average months served in prison was 32 months

[144] For the Anderson Ark & Associates abusive scheme, 79 investigations were initiated and 23 prosecutions were recommended. There were also 20 indictments and 10 convictions. Two individuals were sentenced and incarcerated with an average of 18 month to serve in prison. 

10. Voluntary Disclosure.

[151] Outside of the on-going Offshore Voluntary Compliance Initiative, as of February 28, 2003, Criminal Investigation has received a total of 30 voluntary disclosure requests, 16 have been approved, five declined and nine are still pending.

11. Offshore—Abusive Trust Guilty Plea Victory.

[152] In a March 5, 2003 press release, the Department of Justice announced that two former administrators of the Institute of Global Prosperity (IGP) admitted in federal court in Charleston, S.C., that they used a foreign bank account to commit tax evasion. Shoshana B. Szuch, former Director of Operations of IGP, and her husband, Jeffrey S. Szuch, a former IGP conference planner, each entered a guilty plea before U.S. District Judge David C. Horton.

[153] According to the charging document filed in court, the Szuchs were administrators of the Institute of Global Prosperity (IGP), an organization that hosted offshore seminars for promoters of abusive trusts and anti-tax schemes. IGP was also known by other names, including Global Prosperity Marketing Group (GPMG) and Global Prosperity Group (GPG). Members of IGP marketed and sold various IGP products, including an “education course” named “Global 1” priced at $ 1,250; a ticket to a three-day offshore seminar named “Global 2” priced at $ 6,250; and a ticket to a five-day offshore seminar named “Global 3” priced at $ 18,750. The Global 2 and Global 3 seminars brought together portions of the IGP membership to hear, among other things, presentations by individuals and organizations involved in the sale and operation of foreign trusts designed in part to conceal income from the IRS. 

[154] Shoshana Szuch marketed and sold IGP products from the fall of 1996 until the fall of 1997 and was the Director of Operations of IGP from the fall of 1997 through February 2001, according to documents filed in court. Her husband, Jeffrey Szuch, assisted her in selling IGP products and planning offshore conferences hosted by IGP.

[155] On or about Sept. 4, 1997, Shoshana Szuch and Jeffrey Szuch purchased an International Business Corporation (IBC) and related offshore bank account in the name of Oro Blanco, Ltd. This bank account, located in Antigua, was used by the Szuchs to conceal the income paid to Shoshana Szuch by IGP and the income earned from the sale of IGP products. Shoshana and Jeffrey Szuch failed to file a 1997 tax return despite having approximately $ 62,540 in taxable income from IGP-related activities, upon which they owed approximately $ 21,051 in income tax. 

[156] The plea agreement requires the Szuchs to cooperate fully with the government regarding their involvement and the involvement of others with IGP and to cooperate with the IRS in the ascertainment, computation, and payment of their correct federal income tax liability for 1997 through 1999. The maximum statutory penalties for tax evasion are imprisonment for five years, release under court supervision for three years and a fine of $ 250,000. No sentencing date has been set for the Szuchs. 

[157] A member of IGP, Margo E. Jordan, pled guilty to tax evasion regarding her 1997 income taxes in the District of Maine on Feb. 28, 2003.

12. Conclusion.

[158] Mr. Chairman, combating these abusive scams and schemes is our number one compliance priority. More than sapping the government of badly needed revenues, they undermine the confidence of honest taxpayers in the fairness of our time-honored system of voluntary compliance. I am pleased to report the progress we have made over the past year to identify the promoters and participants and to shut some schemes down. Clearly, we have a much better grip on the situation than we did a year ago. But clearly too, we still have much work to do. Yet I am convinced that if we stay the course we are on today, we can succeed.

G. Conflicting Opinions Regarding Success of the Offshore Initiative. Treasury Assistant Secretary for Tax Policy stated that the Offshore Voluntary Compliance Initiative was a success. The Wall Street Journal reports that the IRS admits the Offshore Voluntary Compliance Initiative failed. The IRS was premature in its negative assessment because individuals who came forward under the Offshore Voluntary Compliance Initiative divulged the names of foreign banks, foreign financial institutions, U.S. and foreign service providers, U.S. and foreign lawyers, and other professionals who helped with the structuring of accounts, trusts, international business companies, limited liability companies, offshore life insurance, and etc., where the failure to file required tax returns (including the TD F 90-22.1) and the failure to report income were involved.

H. FinCEN Transfers Enforcement Authority To IRS to Crack Down on Offshore Accounts. On April 10, 2003, FinCEN announced an agreement that FinCEN delegates its enforcement authority for foreign bank and financial account reporting to the IRS.  The agreement marks another step by the IRS to find individuals with undisclosed overseas accounts.  The agreement provides IRS responsibility to oversee the filing of foreign bank and financial account reports (FBARs) under the Bank Secrecy Act.  The form for these filings is the TD F 90-22.1, the Foreign Bank and Financial Account Report (previously discussed).  IRS agents who are focusing on the use of offshore bank payment cards to avoid reporting income will also be recommending assertion of penalties under the statute governing FBARs.

I. Conclusion Regarding John Doe Summonses Cases. Mr. Mathewson of Guardian Bank & Trust (Cayman) Ltd. provided extremely helpful information, as well as the secret code to Guardian’s files to the F.B.I. that may have pierced the secrecy of other banks. The F.B.I. turned this information over to the IRS. The U.S. Department of Justice obtained an ex parte order from the U.S. District Court, Southern District of Florida, granting the serving of “John Doe” summonses on MasterCard International and American Express Travel Related Services Co. After the IRS began obtaining requested information from MasterCard International and American Express Travel Related Services Co., the Department of Justice, with the help of the IRS, filed the John Doe summonses case in San Francisco against the larger credit card company, Visa International involving 30 jurisdictions. In addition, the IRS has substantial information in its files due to targeting certain promoters and their promotions and sales of fraudulent schemes and structures to U.S. persons. The IRS identified these promoters primarily from attending conferences sponsored by promoters, both inside and outside the U.S., as well as reading books written by promoters and searching the Internet. Due to this substantial information in the hands of the IRS, U.S. persons who have used unreported accounts to discharge credit and debit card liabilities are potentially facing serious criminal charges, including tax fraud, tax evasion, money laundering, failure to file the TD F 90-22.1 report, and etc. Such U.S. persons must either attempt to “come clean” with the IRS or face indictments. Lawyers who represent U.S. persons facing money laundering charges or criminal tax fraud and/or tax evasion charges must understand that the issues are complex and serious. It is recommended that knowledgeable practicing tax lawyers experienced in the planning areas of offshore structuring and criminal tax lawyers represent such U.S. persons.

J. Conclusion Regarding the Offshore Voluntary Compliance Initiative. The primary purpose of the Offshore Voluntary Compliance Initiative program was to allow individuals to “come clean” with lessoned penalties, in some cases, in exchange for their divulging the names of foreign banks, foreign financial institutions, U.S. and foreign service providers, U.S. and foreign lawyers, and other professionals who helped with the structuring of accounts, trusts, international business companies, limited liability companies, offshore life insurance, and etc., where the failure to file required tax returns (including the TD F 90-22.1) and the failure to report income were involved. The IRS has compared the names, divulged by these individuals, with the names resulting from the John Doe Summonses cases, names divulged at audits of tax shelter promoters” clients, checking promoters” Web sites, and attending promoters” conferences. With this information, the IRS has determined those parties who have helped U.S. persons enter into structures or open accounts without complying with the law, as well as foreign banks and foreign financial institutions that are holding those accounts on behalf of U.S. persons.

IX.	Discussion Questions

1. What are the three primary cycles to the money laundering process?

2. What are the elements of the money laundering crime under both Section 1956 and Section 1957?

3. What are the differences between a financial transaction under Section 1956 and a monetary transaction under Section 1957? Explain how the U.S. government and the U.S. district courts can obtain extraterritorial jurisdiction with respect to commission of money laundering crimes.

4. What are the criminal fines and civil penalties for money laundering transactions?

5. What are the varying views of the U.S. judicial circuit courts and views of the requirements for finding proceeds of crime?

6. What are the key elements of the Civil Asset Forfeiture Reform Act of 2000?

7. What assets are subject to criminal or civil forfeiture?

8. Must assets be traced back to some wrongdoing with respect to criminal civil forfeiture and how does the "facilitation" theory apply? 

9. Explain the purpose of the U.S. Department of Justice filing a John Doe Summonses case and how can this lead to money laundering, as well as tax fraud or tax evasion.

APPENDIX A

MONEY LAUNDERING CONTROL ACT OF 1986
18 USC Sec. 1956

TITLE 18 - CRIMES AND CRIMINAL PROCEDURE

PART I - CRIMES

CHAPTER 95 - RACKETEERING

Sec. 1956. Laundering of monetary instruments

(a)(1) Whoever, knowing that the property involved in a financial transaction represents the proceeds of some form of unlawful activity, conducts or attempts to conduct such a financial transaction which in fact involves the proceeds of specified unlawful activity -

(A)(i) with the intent to promote the carrying on of specified unlawful activity; or

(ii) with intent to engage in conduct constituting a violation of section 7201 or 7206 of the Internal Revenue Code of 1986; or

(B) knowing that the transaction is designed in whole or in part—

(i) to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of specified unlawful activity; or

(ii) to avoid a transaction reporting requirement under State or Federal law, shall be sentenced to a fine of not more than $500,000 or twice the value of the property involved in the transaction, whichever is greater, or imprisonment for not more than twenty years, or both.

(2) Whoever transports, transmits, or transfers, or attempts to transport, transmit, or transfer a monetary instrument or funds from a place in the United States to or through a place outside the United States or to a place in the United States from or through a place outside the United States—

(A) with the intent to promote the carrying on of specified unlawful activity; or

(B) knowing that the monetary instrument or funds involved in the transportation, transmission, or transfer represent the proceeds of some form of unlawful activity and knowing that such transportation, transmission, or transfer is designed in whole or in part—

(i) to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of specified unlawful activity; or

(ii) to avoid a transaction reporting requirement under State or Federal law, shall be sentenced to a fine of not more than $500,000 or twice the value of the monetary instrument or funds involved in the transportation, transmission, or transfer, whichever is greater, or imprisonment for not more than twenty years, or both.  For the purpose of the offense described in subparagraph (B), the defendant's knowledge may be established by proof that a law enforcement officer represented the matter specified in subparagraph (B) as true, and the defendant's subsequent statements or actions indicate that the defendant believed such representations to be true.

(3) Whoever, with the intent—

(A) to promote the carrying on of specified unlawful activity;

(B) to conceal or disguise the nature, location, source, ownership, or control of property believed to be the proceeds of specified unlawful activity; or

(C) to avoid a transaction reporting requirement under State or Federal law, conducts or attempts to conduct a financial transaction involving property represented to be the proceeds of specified unlawful activity, or property used to conduct or facilitate specified unlawful activity, shall be fined under this title or imprisoned for not more than 20 years, or both.  For purposes of this paragraph and paragraph (2), the term ''represented'' means any representation made by a law enforcement officer or by another person at the direction of, or with the approval of, a Federal official authorized to investigate or prosecute violations of this section.

(b) PENALTIES.—

(1)  IN GENERAL.--; Whoever conducts or attempts to conduct a transaction described in subsection (a)(1) or (a)(3), or section 1957, or a transportation, transmission, or transfer described in subsection (a)(2), is liable to the United States for a civil penalty of not more than the greater of—

(A) the value of the property, funds, or monetary instruments involved in the transaction; or 

(B) $10,000.

(2) JURISDICTION OVER FOREIGN PERSONS.—

For purposes of adjudicating an action filed or enforcing a penalty ordered under this section, the district courts shall have jurisdiction over any foreign person, including any financial institution authorized under the laws of a foreign country, against whom the action is brought, if service of process upon the foreign person is made under the Federal Rules of Civil Procedure or the laws of the country in which the foreign person is found, and— 

(A) the foreign person commits an offense under subsection (a) involving a financial transaction that occurs in whole or in part in the United States; (B) the foreign person converts, to his or her own use, property in which the United States has an ownership interest by virtue of the entry of an order of forfeiture by a court of the United States; or 

(C) the foreign person is a financial institution that maintains a bank account at a financial institution in the United States. 

(3) COURT AUTHORITY OVER ASSETS.—A court described in paragraph (2) may issue a pretrial restraining order or take any other action necessary to ensure that any bank account or other property held by the defendant in the United States is available to satisfy a judgment under this section.

(4) FEDERAL RECEIVER.—

(A) IN GENERAL.—A court described in paragraph (2) may appoint a Federal Receiver, in accordance with subparagraph (B) of this paragraph, to collect, marshal, and take custody, control, and possession of all assets of the defendant, wherever located, to satisfy a civil judgment under this subsection, a forfeiture judgment under section 981 or 982, or a criminal sentence under section 1957 or subsection (a) of this section, including an order of restitution to any victim of a specified unlawful activity.

(B) APPOINTMENT AND AUTHORITY.—A Federal Receiver described in subparagraph 

(A)— 

(i) may be appointed upon application of a Federal prosecutor or a Federal or State regulator, by the court having jurisdiction over the defendant in the case; 

(ii) shall be an officer of the court, and the powers of the Federal Receiver shall include the powers set out in section 754 of title 28, United States Code; and 

(iii) shall have standing equivalent to that of a Federal prosecutor for the purpose of submitting requests to obtain information regarding the assets of the defendant— 

(I) from the Financial Crimes Enforcement Network of the Department of the Treasury; or 

(II) from a foreign country pursuant to a mutual legal assistance treaty, multilateral agreement, or other arrangement for international law enforcement assistance, provided that such requests are in accordance with the policies and procedures of the Attorney General. 

(c) As used in this section—

(1) the term ''knowing that the property involved in a financial transaction represents the proceeds of some form of unlawful activity'' means that the person knew the property involved in the transaction represented proceeds from some form, though not necessarily which form, of activity that constitutes a felony under State, Federal, or foreign law, regardless of whether or not such activity is specified in paragraph (7);

 (2) the term ''conducts'' includes initiating, concluding, or participating in initiating, or concluding a transaction; 

(3) the term ''transaction'' includes a purchase, sale, loan, pledge, gift, transfer, delivery, or other disposition, and with respect to a financial institution includes a deposit, withdrawal, transfer between accounts, exchange of currency, loan, extension of credit, purchase or sale of any stock, bond, certificate of deposit, or other monetary instrument, use of a safe deposit box, or any other payment, transfer, or delivery by, through, or to a financial institution, by whatever means effected;

(4) the term ''financial transaction'' means (A) a transaction which in any way or degree affects interstate or foreign commerce (i) involving the movement of funds by wire or other means or (ii) involving one or more monetary instruments, or (iii) involving the transfer of title to any real property, vehicle, vessel, or aircraft, or (B) a transaction involving the use of a financial institution which is engaged in, or the activities of which affect, interstate or foreign commerce in any way ordegree;

(5) the term ''monetary instruments'' means (i) coin or currency of the United States or of any other country, travelers' checks, personal checks, bank checks, and money orders, or (ii) investment securities or negotiable instruments, in bearer form or otherwise in such form that title thereto passes upon delivery;

(6) the term ‘financial institution’ includes—

(A) any financial institution, as defined in section 5312(a)(2) of title 31, United States Code, or the regulations promulgated thereunder; and 

(B) any foreign bank, as defined in section 1 of the International Banking Act of 1978 (12 U.S.C. 3101).

(7) the term ''specified unlawful activity'' means—

(A) any act or activity constituting an offense listed in section 1961(1) of this title except an act which is indictable under subchapter II of chapter 53 of title 31;

(B) with respect to a financial transaction occurring in whole or in part in the United States, an offense against a foreign nation involving—

(i) the manufacture, importation, sale, or distribution of a controlled substance (as such term is defined for the purposes of the Controlled Substances Act);

(ii) murder, kidnapping, robbery, extortion, or destruction of property by means of explosive or fire, or a crime of violence (as defined in section 16); (FOOTNOTE 1)

(FOOTNOTE 1) So in original.  Probably should be followed by ''or''.

(iii) fraud, or any scheme or attempt to defraud, by or against a foreign bank (as defined in paragraph 7 of section 1(b) of the International Banking Act of 1978);

(iv) bribery of a public official, or the misappropriation, theft, or embezzlement of public funds by or for the benefit of a public official; 

(v) smuggling or export control violations involving— 

(I) an item controlled on the United States Munitions List established under section 38 of the Arms Export Control Act (22 U.S.C. 2778); or 

(II) an item controlled under regulations under the Export Administration Regulations (15 C.F.R. Parts 730–774); or 

(vi) an offense with respect to which the United States would be obligated by a multilateral treaty, either to extradite the alleged offender or to submit the case for prosecution, if the offender were found within the territory of the United States;’

(C) any act or acts constituting a continuing criminal enterprise, as that term is defined in section 408 of the Controlled Substances Act (21 U.S.C. 848);

(D) an offense under section 32 (relating to the destruction of aircraft), section 37 (relating to violence at international airports), section 115 (relating to influencing, impeding, or retaliating against a Federal official by threatening or injuring a family member), section 152 (relating to concealment of assets; false oaths and claims; bribery), section 215 (relating to commissions or gifts for procuring loans), section 351 (relating to congressional or Cabinet officer assassination), any of sections 500 through 503 (relating to certain counterfeiting offenses), section 513 (relating to securities of States and private entities), section 541 (relating to goods falsely classified), section 542 (relating to entry of goods by means of false statements), section 545 (relating to smuggling goods into the United States), section 549 (relating to removing goods from Customs custody), section 641 (relating to public money, property, or records), section 656 (relating to theft, embezzlement, or misapplication by bank officer or employee), section 657 (relating to lending, credit, and insurance institutions), section 658 (relating to property mortgaged or pledged to farm credit agencies), section 666 (relating to theft or bribery concerning programs receiving Federal funds), section 793, 794, or 798 (relating to espionage), section 831 (relating to prohibited transactions involving nuclear materials), section 844(f) or (i) (relating to destruction by explosives or fire of Government property or property affecting interstate or foreign commerce), section 875 (relating to interstate communications), section 922(1) (relating to the unlawful importation of firearms), section 924(n) (relating to firearms trafficking), section 956 (relating to conspiracy to kill, kidnap, maim, or injure certain property in a foreign country), section 1005 (relating to fraudulent bank entries), 1006 (FOOTNOTE 2) (relating to fraudulent Federal credit institution entries), 1007 (FOOTNOTE 2) (relating to Federal Deposit Insurance transactions), 1014 (FOOTNOTE 2) (relating to fraudulent loan or credit applications), section 1030 (relating to computer fraud and abuse), 1032 (FOOTNOTE 2) (relating to concealment of assets from conservator, receiver, or liquidating agent of financial institution), section 1111 (relating to murder), section 1114 (relating to murder of United States law enforcement officials), section 1116 (relating to murder of foreign officials, official guests, or internationally protected persons), section 1201 (relating to kidnaping), section 1203 (relating to hostage taking), section 1361 (relating to willful injury of Government property), section 1363 (relating to destruction of property within the special maritime and territorial jurisdiction), section 1708 (theft from the mail), section 1751 (relating to Presidential assassination), section 2113 or 2114 (relating to bank and postal robbery and theft), section 2280 (relating to violence against maritime navigation), section 2281 (relating to violence against maritime fixed platforms), section 2319 (relating to copyright infringement), section 2320 (relating to trafficking in counterfeit goods and services), (FOOTNOTE 3) section 2332 (relating to terrorist acts abroad against United States nationals), section 2332a (relating to use of weapons of mass destruction), section 2332b (relating to international terrorist acts transcending national boundaries), or section 2339A (relating to providing material support to terrorists) of this title, section 46502 of title 49, United States Code, (FOOTNOTE 3) a felony violation of the Chemical Diversion and Trafficking Act of 1988 (relating to precursor and essential chemicals), section 590 of the Tariff Act of 1930 (19 U.S.C. 1590) (relating to aviation smuggling), section 422 of the Controlled Substances Act (relating to transportation of drug paraphernalia), section 38(c) (relating to criminal violations) of the Arms Export Control Act, section 11 (relating to violations) of the Export Administration Act of 1979, section 206 (relating to penalties) of the International Emergency Economic Powers Act, section 16 (relating to offenses and punishment) of the Trading with the Enemy Act, any felony violation of section 15 of the Food Stamp Act of 1977 (relating to food stamp fraud) involving a quantity of coupons having a value of not less than $5,000, any violation of section 543(a)(1) of the Housing Act of 1949 (relating to equity skimming), any felony violation of the Foreign Agents Registration Act of 1938, or any felony violation of the Foreign Corrupt Practices Act; or (FOOTNOTE 2) So in original.  Probably should be preceded by ''section''. (FOOTNOTE 3) So in original.

ENVIRONMENTAL CRIMES

(E) a felony violation of the Federal Water Pollution Control Act (33 U.S.C. 1251 et seq.), the Ocean Dumping Act (33 U.S.C. 1401 et seq.), the Act to Prevent Pollution from Ships (33 U.S.C. 1901 et seq.), the Safe Drinking Water Act (42 U.S.C. 300f et seq.), or the Resources Conservation and Recovery Act (42 U.S.C. 6901 et seq.).

(F) Any (FOOTNOTE 4) act or activity constituting an offense involving a Federal health care offense. (FOOTNOTE 4) So in original.  Probably should not be capitalized.

(8) the term ''State'' includes a State of the United States, the District of Columbia, and any commonwealth, territory, or possession of the United States.

(d) Nothing in this section shall supersede any provision of Federal, State, or other law imposing criminal penalties or affording civil remedies in addition to those provided for in this section.

(e) Violations of this section may be investigated by such components of the Department of Justice as the Attorney General may direct, and by such components of the Department of the Treasury as the Secretary of the Treasury may direct, as appropriate and, with respect to offenses over which the United States Postal Service has jurisdiction, by the Postal Service. Such authority of the Secretary of the Treasury and the Postal Service shall be exercised in accordance with an agreement which shall be entered into by the Secretary of the Treasury, the Postal Service, and the Attorney General. Violations of this section involving offenses described in paragraph (c)(7)(E) may be investigated by such components of the Department of Justice as the Attorney General may direct, and the National Enforcement Investigations Center of the Environmental Protection Agency.

(f) There is extraterritorial jurisdiction over the conduct prohibited by this section if—

(1) the conduct is by a United States citizen or, in the case of a non-United States citizen, the conduct occurs in part in the United States; and

(2) the transaction or series of related transactions involves funds or monetary instruments of a value exceeding $10,000. 

(g) Notice of Conviction of Financial Institutions. - If any financial institution or any officer, director, or employee of any financial institution has been found guilty of an offense under this section, section 1957 or 1960 of this title, or section 5322 or 5324 of title 31, the Attorney General shall provide written notice of such fact to the appropriate regulatory agency for the financial institution.

(h) Any person who conspires to commit any offense defined in this section or section 1957 shall be subject to the same penalties as those prescribed for the offense the commission of which was the object of the conspiracy.

18 USC Sec. 1957

TITLE 18 - CRIMES AND CRIMINAL PROCEDURE

PART I - CRIMES

CHAPTER 95 - RACKETEERING

Sec. 1957—Engaging in monetary transactions in property derived from specified unlawful activity

(a) Whoever, in any of the circumstances set forth in subsection (d), knowingly engages or attempts to engage in a monetary transaction in criminally derived property of a value greater than $10,000 and is derived from specified unlawful activity, shall be punished as provided in subsection (b). 

(b) 

(1) Except as provided in paragraph (2), the punishment for an offense under this section is a fine under title 18, United States Code, or imprisonment for not more than ten years or both. 

(2) The court may impose an alternate fine to that imposable under paragraph (1) of not more than twice the amount of the criminally derived property involved in the transaction. 

(c) In a prosecution for an offense under this section, the Government is not required to prove the defendant knew that the offense from which the criminally derived property was derived was specified unlawful activity. 

(d) The circumstances referred to in subsection (a) are— 

(1) that the offense under this section takes place in the United States or in the special maritime and territorial jurisdiction of the United States; or 

(2) that the offense under this section takes place outside the United States and such special jurisdiction, but the defendant is a United States person (as defined in section 3077 of this title, but excluding the class described in paragraph (2)(D) of such section). 

(e) Violations of this section may be investigated by such components of the Department of Justice as the Attorney General may direct, and by such components of the Department of the Treasury as the Secretary of the Treasury may direct, as appropriate and, with respect to offenses over which the United States Postal Service has jurisdiction, by the Postal Service. Such authority of the Secretary of the Treasury and the Postal Service shall be exercised in accordance with an agreement which shall be entered into by the Secretary of the Treasury, the Postal Service, and the Attorney General. 

(f) As used in this section— 

(1) the term “monetary transaction” means the deposit, withdrawal, transfer, or exchange, in or affecting interstate or foreign commerce, of funds or a monetary instrument (as defined in section 1956 (c)(5) of this title) by, through, or to a financial institution (as defined in section 1956 of this title), including any transaction that would be a financial transaction under section 1956 (c)(4)(B) of this title, but such term does not include any transaction necessary to preserve a person’s right to representation as guaranteed by the sixth amendment to the Constitution; 

(2) the term “criminally derived property” means any property constituting, or derived from, proceeds obtained from a criminal offense; and 

(3) the term “specified unlawful activity” has the meaning given that term in section 1956 of this title.

APPENDIX B

CIVIL ASSET FORFEITURE REFORM ACT OF 2000
18 USC § 981 (2004)

§ 981.  Civil forfeiture
 
(a)(1) The following property, real or personal, is subject to forfeiture to the United States:
    
(A) Any property, real or personal, involved in a transaction or attempted transaction in violation of section 1956, 1957 or 1960 of this title, or any property traceable to such property.

(B) Any property, real or personal, within the jurisdiction of the United States, constituting, derived from, or traceable to, any proceeds obtained directly or indirectly from an offense against a foreign nation, or any property used to facilitate such an offense, if the offense—

(i) involves the manufacture, importation, sale, or distribution of a controlled substance (as that term is defined for purposes of the Controlled Substances Act), or any other conduct described in section 1956(c)(7)(B);

(ii) would be punishable within the jurisdiction of the foreign nation by death or imprisonment for a term exceeding 1 year; and

(iii) would be punishable under the laws of the United States by imprisonment for a term exceeding 1 year, if the act or activity constituting the offense had occurred within the jurisdiction of the United States.

(C) Any property, real or personal, which constitutes or is derived from proceeds traceable to a violation of section 215, 471, 472, 473, 474, 476, 477, 478, 479, 480, 481, 485, 486, 487, 488, 501, 502, 510, 542, 545, 656, 657, 842, 844, 1005, 1006, 1007, 1014, 1028, 1029, 1030, 1032, or 1344 of this title or any offense constituting "specified unlawful activity" (as defined in section 1956(c)(7) of this title), or a conspiracy to commit such offense.

(D) Any property, real or personal, which represents or is traceable to the gross receipts obtained, directly or indirectly, from a violation of—

(i) section 666(a)(1) (relating to Federal program fraud);

(ii) section 1001 (relating to fraud and false statements);

(iii) section 1031 (relating to major fraud against the United States);

(iv) section 1032 (relating to concealment of assets from conservator or receiver of insured financial institution);

(v) section 1341 (relating to mail fraud); or

(vi) section 1343 (relating to wire fraud), if such violation relates to the sale of assets acquired or held by the Resolution Trust Corporation, the Federal Deposit Insurance Corporation, as conservator or receiver for a financial institution, or any other conservator for a financial institution appointed by the Office of the Comptroller of the Currency or the Office of Thrift Supervision or the National Credit Union Administration, as conservator or liquidating agent for a financial institution.

(E) With respect to an offense listed in subsection (a)(1)(D) committed for the purpose of executing or attempting to execute any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent statements, pretenses, representations or promises, the gross receipts of such an offense shall include all property, real or personal, tangible or intangible, which thereby is obtained, directly or indirectly.

(F) Any property, real or personal, which represents or is traceable to the gross proceeds obtained, directly or indirectly, from a violation of—

(i) section 511 (altering or removing motor vehicle identification numbers);

(ii) section 553 (importing or exporting stolen motor vehicles);

(iii) section 2119 (armed robbery of automobiles);

(iv) section 2312 (transporting stolen motor vehicles in interstate commerce); or

(v) section 2313 (possessing or selling a stolen motor vehicle that has moved in interstate commerce).

(G) All assets, foreign or domestic—

(i) of any individual, entity, or organization engaged in planning or perpetrating any act of domestic or international terrorism (as defined in section 2331) against the United States, citizens or residents of the United States, or their property, and all assets, foreign or domestic, affording any person a source of influence over any such entity or organization;

(ii) acquired or maintained by any person with the intent and for the purpose of supporting, planning, conducting, or concealing an act of domestic or international terrorism (as defined in section 2331) against the United States, citizens or residents of the United States, or their property; or

(iii) derived from, involved in, or used or intended to be used to commit any act of domestic or international terrorism (as defined in section 2331) against the United States, citizens or residents of the United States, or their property.

(H) Any property, real or personal, involved in a violation or attempted violation, or which constitutes or is derived from proceeds traceable to a violation, of section 2339C of this title.

(2) For purposes of paragraph (1), the term "proceeds" is defined as follows:

(A) In cases involving illegal goods, illegal services, unlawful activities, and telemarketing and health care fraud schemes, the term "proceeds" means property of any kind obtained directly or indirectly, as the result of the commission of the offense giving rise to forfeiture, and any property traceable thereto, and is not limited to the net gain or profit realized from the offense.

(B) In cases involving lawful goods or lawful services that are sold or provided in an illegal manner, the term "proceeds" means the amount of money acquired through the illegal transactions resulting in the forfeiture, less the direct costs incurred in providing the goods or services. The claimant shall have the burden of proof with respect to the issue of direct costs. The direct costs shall not include any part of the overhead expenses of the entity providing the goods or services, or any part of the income taxes paid by the entity.

(C) In cases involving fraud in the process of obtaining a loan or extension of credit, the court shall allow the claimant a deduction from the forfeiture to the extent that the loan was repaid, or the debt was satisfied, without any financial loss to the victim.

(b) (1) Except as provided in section 985, any property subject to forfeiture to the United States under subsection (a) may be seized by the Attorney General and, in the case of property involved in a violation investigated by the Secretary of the Treasury or the United States Postal Service, the property may also be seized by the Secretary of the Treasury or the Postal Service, respectively.

(2) Seizures pursuant to this section shall be made pursuant to a warrant obtained in the same manner as provided for a search warrant under the Federal Rules of Criminal Procedure, except that a seizure may be made without a warrant if—

(A) a complaint for forfeiture has been filed in the United States district court and the court issued an arrest warrant in rem pursuant to the Supplemental Rules for Certain Admiralty and Maritime Claims;

(B) there is probable cause to believe that the property is subject to forfeiture and—

(i) the seizure is made pursuant to a lawful arrest or search; or

(ii) another exception to the Fourth Amendment warrant requirement would apply; or

(C) the property was lawfully seized by a State or local law enforcement agency and transferred to a Federal agency.

(3) Notwithstanding the provisions of rule 41(a) of the Federal Rules of Criminal Procedure, a seizure warrant may be issued pursuant to this subsection by a judicial officer in any district in which a forfeiture action against the property may be filed under section 1355(b) of title 28, and may be executed in any district in which the property is found, or transmitted to the central authority of any foreign state for service in accordance with any treaty or other international agreement. Any motion for the return of property seized under this section shall be filed in the district court in which the seizure warrant was issued or in the district court for the district in which the property was seized.

(4)(A) If any person is arrested or charged in a foreign country in connection with an offense that would give rise to the forfeiture of property in the United States under this section or under the Controlled Substances Act, the Attorney General may apply to any Federal judge or magistrate judge in the district in which the property is located for an ex parte order restraining the property subject to forfeiture for not more than 30 days, except that the time may be extended for good cause shown at a hearing conducted in the manner provided in rule 43(e) of the Federal Rules of Civil Procedure.

(B) The application for the restraining order shall set forth the nature and circumstances of the foreign charges and the basis for belief that the person arrested or charged has property in the United States that would be subject to forfeiture, and shall contain a statement that the restraining order is needed to preserve the availability of property for such time as is necessary to receive evidence from the foreign country or elsewhere in support of probable cause for the seizure of the property under this subsection.

(c) Property taken or detained under this section shall not be repleviable, but shall be deemed to be in the custody of the Attorney General or the Secretary of the Treasury, as the case may be, subject only to the orders and decrees of the court or the official having jurisdiction thereof. Whenever property is seized under this subsection, the Attorney General, the Secretary of the Treasury, or the Postal Service, as the case may be, may—

(1) place the property under seal;

(2) remove the property to a place designated by him; or

(3) require that the General Services Administration take custody of the property and remove it, if practicable, to an appropriate location for disposition in accordance with law.

(d) For purposes of this section, the provisions of the customs laws relating to the seizure, summary and judicial forfeiture, condemnation of property for violation of the customs laws, the disposition of such property or the proceeds from the sale of such property under this section, the remission or mitigation of such forfeitures, and the compromise of claims (19 U.S.C. 1602 et seq.), insofar as they are applicable and not inconsistent with the provisions of this section, shall apply to seizures and forfeitures incurred, or alleged to have been incurred, under this section, except that such duties as are imposed upon the customs officer or any other person with respect to the seizure and forfeiture of property under the customs laws shall be performed with respect to seizures and forfeitures of property under this section by such officers, agents, or other persons as may be authorized or designated for that purpose by the Attorney General, the Secretary of the Treasury, or the Postal Service, as the case may be. The Attorney General shall have sole responsibility for disposing of petitions for remission or mitigation with respect to property involved in a judicial forfeiture proceeding.
 
(e) Notwithstanding any other provision of the law, except section 3 of the Anti Drug Abuse Act of 1986 [21 USCS § 801 note], the Attorney General, the Secretary of the Treasury, or the Postal Service, as the case may be, is authorized to retain property forfeited pursuant to this section, or to transfer such property on such terms and conditions as he may determine—

(1) to any other Federal agency;

(2) to any State or local law enforcement agency which participated directly in any of the acts which led to the seizure or forfeiture of the property;

(3) in the case of property referred to in subsection (a)(1)(C), to any Federal financial institution regulatory agency—

(A) to reimburse the agency for payments to claimants or creditors of the institution; and

(B) to reimburse the insurance fund of the agency for losses suffered by the fund as a result of the receivership or liquidation;

(4) in the case of property referred to in subsection (a)(1)(C), upon the order of the appropriate Federal financial institution regulatory agency, to the financial institution as restitution, with the value of the property so transferred to be set off against any amount later recovered by the financial institution as compensatory damages in any State or Federal proceeding;

(5) in the case of property referred to in subsection (a)(1)(C), to any Federal financial institution regulatory agency, to the extent of the agency's contribution of resources to, or expenses involved in, the seizure and forfeiture, and the investigation leading directly to the seizure and forfeiture, of such property;

(6) as restoration to any victim of the offense giving rise to the forfeiture, including, in the case of a money laundering offense, any offense constituting the underlying specified unlawful activity; or

(7) In [in] the case of property referred to in subsection (a)(1)(D), to the Resolution Trust Corporation, the Federal Deposit Insurance Corporation, or any other Federal financial institution regulatory agency (as defined in section 8(e)(7)(D) of the Federal Deposit Insurance Act [12 USCS § 1818(e)(7)(D)]).
 
The Attorney General or the Secretary of the Treasury, as the case may be, shall ensure the equitable transfer pursuant to paragraph (2) of any forfeited property to the appropriate State or local law enforcement agency so as to reflect generally the contribution of any such agency participating directly in any of the acts which led to the seizure or forfeiture of such property. A decision by the Attorney General or the Secretary of the Treasury pursuant to paragraph (2) shall not be subject to review. The United States shall not be liable in any action arising out of the use of any property the custody of which was transferred pursuant to this section to any non-Federal agency. The Attorney General or the Secretary of the Treasury may order the discontinuance of any forfeiture proceedings under this section in favor of the institution of forfeiture proceedings by State or local authorities under an appropriate State or local statute. After the filing of a complaint for forfeiture under this section, the Attorney General may seek dismissal of the complaint in favor of forfeiture proceedings under State or local law. Whenever forfeiture proceedings are discontinued by the United States in favor of State or local proceedings, the United States may transfer custody and possession of the seized property to the appropriate State or local official immediately upon the initiation of the proper actions by such officials. Whenever forfeiture proceedings are discontinued by the United States in favor of State or local proceedings, notice shall be sent to all known interested parties advising them of the discontinuance or dismissal. The United States shall not be liable in any action arising out of the seizure, detention, and transfer of seized property to State or local officials. The United States shall not be liable in any action arising out of a transfer under paragraph (3), (4), or (5) of this subsection.

(f) All right, title, and interest in property described in subsection (a) of this section shall vest in the United States upon commission of the act giving rise to forfeiture under this section.
 
(g) (1) Upon the motion of the United States, the court shall stay the civil forfeiture proceeding if the court determines that civil discovery will adversely affect the ability of the Government to conduct a related criminal investigation or the prosecution of a related criminal case.

(2) Upon the motion of a claimant, the court shall stay the civil forfeiture proceeding with respect to that claimant if the court determines that—

(A) the claimant is the subject of a related criminal investigation or case;

(B) the claimant has standing to assert a claim in the civil forfeiture proceeding; and

(C) continuation of the forfeiture proceeding will burden the right of the claimant against self-incrimination in the related investigation or case.

(3) With respect to the impact of civil discovery described in paragraphs (1) and (2), the court may determine that a stay is unnecessary if a protective order limiting discovery would protect the interest of one party without unfairly limiting the ability of the opposing party to pursue the civil case. In no case, however, shall the court impose a protective order as an alternative to a stay if the effect of such protective order would be to allow one party to pursue discovery while the other party is substantially unable to do so.

(4) In this subsection, the terms "related criminal case" and "related criminal investigation" mean an actual prosecution or investigation in progress at the time at which the request for the stay, or any subsequent motion to lift the stay is made. In determining whether a criminal case or investigation is "related" to a civil forfeiture proceeding, the court shall consider the degree of similarity between the parties, witnesses, facts, and circumstances involved in the two proceedings, without requiring an identity with respect to any one or more factors.

(5) In requesting a stay under paragraph (1), the Government may, in appropriate cases, submit evidence ex parte in order to avoid disclosing any matter that may adversely affect an ongoing criminal investigation or pending criminal trial.

(6) Whenever a civil forfeiture proceeding is stayed pursuant to this subsection, the court shall enter any order necessary to preserve the value of the property or to protect the rights of lienholders or other persons with an interest in the property while the stay is in effect.

(7) A determination by the court that the claimant has standing to request a stay pursuant to paragraph (2) shall apply only to this subsection and shall not preclude the Government from objecting to the standing of the claimant by dispositive motion or at the time of trial.
 
(h) In addition to the venue provided for in section 1395 of title 28 or any other provision of law, in the case of property of a defendant charged with a violation that is the basis for forfeiture of the property under this section, a proceeding for forfeiture under this section may be brought in the judicial district in which the defendant owning such property is found or in the judicial district in which the criminal prosecution is brought.

(i)(1) Whenever property is civilly or criminally forfeited under this chapter [18 USCS §§ 981 et seq.], the Attorney General or the Secretary of the Treasury, as the case may be, may transfer the forfeited personal property or the proceeds of the sale of any forfeited personal or real property to any foreign country which participated directly or indirectly in the seizure or forfeiture of the property, if such a transfer—

(A) has been agreed to by the Secretary of State;

(B) is authorized in an international agreement between the United States and the foreign country; and

(C) is made to a country which, if applicable, has been certified under section 490(a)(1) of the Foreign Assistance Act of 1961 [22 USCS § 2291j(a)(1)].

A decision by the Attorney General or the Secretary of the Treasury pursuant to this paragraph shall not be subject to review. The foreign country shall, in the event of a transfer of property or proceeds of sale of property under this subsection, bear all expenses incurred by the United States in the seizure, maintenance, inventory, storage, forfeiture, and disposition of the property, and all transfer costs. The payment of all such expenses, and the transfer of assets pursuant to this paragraph, shall be upon such terms and conditions as the Attorney General or the Secretary of the Treasury may, in his discretion, set.

(2) The provisions of this section shall not be construed as limiting or superseding any other authority of the United States to provide assistance to a foreign country in obtaining property related to a crime committed in the foreign country, including property which is sought as evidence of a crime committed in the foreign country.

(3) A certified order or judgment of forfeiture by a court of competent jurisdiction of a foreign country concerning property which is the subject of forfeiture under this section and was determined by such court to be the type of property described in subsection (a)(1)(B) of this section, and any certified recordings or transcripts of testimony taken in a foreign judicial proceeding concerning such order or judgment of forfeiture, shall be admissible in evidence in a proceeding brought pursuant to this section. Such certified order or judgment of forfeiture, when admitted into evidence, shall constitute probable cause that the property forfeited by such order or judgment of forfeiture is subject to forfeiture under this section and creates a rebuttable presumption of the forfeitability of such property under this section.

(4) A certified order or judgment of conviction by a court of competent jurisdiction of a foreign country concerning an unlawful drug activity which gives rise to forfeiture under this section and any certified recordings or transcripts of testimony taken in a foreign judicial proceeding concerning such order or judgment of conviction shall be admissible in evidence in a proceeding brought pursuant to this section. Such certified order or judgment of conviction, when admitted into evidence, creates a rebuttable presumption that the unlawful drug activity giving rise to forfeiture under this section has occurred.

(5) The provisions of paragraphs (3) and (4) of this subsection shall not be construed as limiting the admissibility of any evidence otherwise admissible, nor shall they limit the ability of the United States to establish probable cause that property is subject to forfeiture by any evidence otherwise admissible.

(j) For purposes of this section—

(1) the term "Attorney General" means the Attorney General or his delegate; and

(2) the term "Secretary of the Treasury" means the Secretary of the Treasury or his delegate.
 
(k) Interbank Accounts.

 (1) In general.

(A) In general. For the purpose of a forfeiture under this section or under the Controlled Substances Act (21 U.S.C. 801 et seq.), if funds are deposited into an account at a foreign bank, and that foreign bank has an interbank account in the United States with a covered financial institution (as defined in section 5318(j)(1) of title 31), the funds shall be deemed to have been deposited into the interbank account in the United States, and any restraining order, seizure warrant, or arrest warrant in rem regarding the funds may be served on the covered financial institution, and funds in the interbank account, up to the value of the funds deposited into the account at the foreign bank, may be restrained, seized, or arrested.

(B) Authority to suspend. The Attorney General, in consultation with the Secretary of the Treasury, may suspend or terminate a forfeiture under this section if the Attorney General determines that a conflict of law exists between the laws of the jurisdiction in which the foreign bank is located and the laws of the United States with respect to liabilities arising from the restraint, seizure, or arrest of such funds, and that such suspension or termination would be in the interest of justice and would not harm the national interests of the United States.

(2) No requirement for Government to trace funds. If a forfeiture action is brought against funds that are restrained, seized, or arrested under paragraph (1), it shall not be necessary for the Government to establish that the funds are directly traceable to the funds that were deposited into the foreign bank, nor shall it be necessary for the Government to rely on the application of section 984.

(3) Claims brought by owner of the funds. If a forfeiture action is instituted against funds restrained, seized, or arrested under paragraph (1), the owner of the funds deposited into the account at the foreign bank may contest the forfeiture by filing a claim under section 983.

(4) Definitions. For purposes of this subsection, the following definitions shall apply:

(A) Interbank account. The term "interbank account" has the same meaning as in section 984(c)(2)(B).

(B) Owner.

(i) In general. Except as provided in clause (ii), the term "owner"—

(I) means the person who was the owner, as that term is defined in section 983(d)(6), of the funds that were deposited into the foreign bank at the time such funds were deposited; and

(II) does not include either the foreign bank or any financial institution acting as an intermediary in the transfer of the funds into the interbank account.

(ii) Exception. The foreign bank may be considered the "owner" of the funds (and no other person shall qualify as the owner of such funds) only if—

(I) the basis for the forfeiture action is wrongdoing committed by the foreign bank; or

(II) the foreign bank establishes, by a preponderance of the evidence, that prior to the restraint, seizure, or arrest of the funds, the foreign bank had discharged all or part of its obligation to the prior owner of the funds, in which case the foreign bank shall be deemed the owner of the funds to the extent of such discharged obligation.

18 USCS § 982 (2004)

§ 982.  Criminal forfeiture
 
(a)(1) The court, in imposing sentence on a person convicted of an offense in violation of section 1956, 1957, or 1960 of this title, shall order that the person forfeit to the United States any property, real or personal, involved in such offense, or any property traceable to such property.

(2) The court, in imposing sentence on a person convicted of a violation of, or a conspiracy to violate—

(A) section 215, 656, 657, 1005, 1006, 1007, 1014, 1341, 1343, or 1344 of this title, affecting a financial institution, or

(B) section 471, 472, 473, 474, 476, 477, 478, 479, 480, 481, 485, 486, 487, 488, 501, 502, 510, 542, 545, 842, 844, 1028, 1029, or 1030 of this title,    shall order that the person forfeit to the United States any property constituting, or derived from, proceeds the person obtained directly or indirectly, as the result of such violation.

(3) The court, in imposing a sentence on a person convicted of an offense under—

(A) section 666(a)(1) (relating to Federal program fraud);

(B) section 1001 (relating to fraud and false statements);

(C) section 1031 (relating to major fraud against the United States);

(D) section 1032 (relating to concealment of assets from conservator, receiver or liquidating agent of insured financial institution);

(E) section 1341 (relating to mail fraud); or

(F) section 1343 (relating to wire fraud),    involving the sale of assets acquired or held by the Resolution Trust Corporation, the Federal Deposit Insurance Corporation, as conservator or receiver for a financial institution or any other conservator for a financial institution appointed by the Office of the Comptroller of the Currency or the Office of Thrift Supervision, or the National Credit Union Administration, as conservator or liquidating agent for a financial institution, shall order that the person forfeit to the United States any property, real or personal, which represents or is traceable to the gross receipts obtained, directly or indirectly, as a result of such violation.

(4) With respect to an offense listed in subsection (a)(3) committed for the purpose of executing or attempting to execute any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent statements, pretenses, representations, or promises, the gross receipts of such an offense shall include any property, real or personal, tangible or intangible, which is obtained, directly or indirectly, as a result of such offense.

(5) The court, in imposing sentence on a person convicted of a violation or conspiracy to violate—

(A) section 511 (altering or removing motor vehicle identification numbers);

(B) section 553 (importing or exporting stolen motor vehicles);

(C) section 2119 (armed robbery of automobiles);

(D) section 2312 (transporting stolen motor vehicles in interstate commerce); or

(E) section 2313 (possessing or selling a stolen motor vehicle that has moved in interstate commerce); shall order that the person forfeit to the United States any property, real or personal, which represents or is traceable to the gross proceeds obtained, directly or indirectly, as a result of such violation.

(6)(A) The court, in imposing sentence on a person convicted of a violation of, or conspiracy to violate, section 274(a), 274A(a)(1), or 274A(a)(2) of the Immigration and Nationality Act [8 USCS §§ 1324(a), 1324a(a)(1), or 1324a(a)(2)] or section 1425, 1426, 1427, 1541, 1542, 1543, 1544, or 1546 of this title, or a violation of, or conspiracy to violate, section 1028 of this title if committed in connection with passport or visa issuance or use, shall order that the person forfeit to the United States, regardless of any provision of State law—

(i) any conveyance, including any vessel, vehicle, or aircraft used in the commission of the offense of which the person is convicted; and

(ii) any property real or personal—

(I) that constitutes, or is derived from or is traceable to the proceeds obtained directly or indirectly from the commission of the offense of which the person is convicted; or

(II) that is used to facilitate, or is intended to be used to facilitate, the commission of the offense of which the person is convicted.

(B) The court, in imposing sentence on a person described in subparagraph (A), shall order that the person forfeit to the United States all property described in that subparagraph.

(7) The court, in imposing sentence on a person convicted of a Federal health care offense, shall order the person to forfeit property, real or personal, that constitutes or is derived, directly or indirectly, from gross proceeds traceable to the commission of the offense.

(8) The court, in sentencing a defendant convicted of an offense under section 1028, 1029, 1341, 1342, 1343, or 1344, or of a conspiracy to commit such an offense, if the offense involves telemarketing (as that term is defined in section 2325), shall order that the defendant forfeit to the United States any real or personal property—

(A) used or intended to be used to commit, to facilitate, or to promote the commission of such offense; and

(B) constituting, derived from, or traceable to the gross proceeds that the defendant obtained directly or indirectly as a result of the offense.

(b)(1) The forfeiture of property under this section, including any seizure and disposition of the property and any related judicial or administrative proceeding, shall be governed by the provisions of section 413 (other than subsection (d) of that section) of the Comprehensive Drug Abuse Prevention and Control Act of 1970 (21 U.S.C. 853).

(2) The substitution of assets provisions of subsection 413(p) [21 USCS § 853(p)] shall not be used to order a defendant to forfeit assets in place of the actual property laundered where such defendant acted merely as an intermediary who handled but did not retain the property in the course of the money laundering offense unless the defendant, in committing the offense or offenses giving rise to the forfeiture, conducted three or more separate transactions involving a total of $ 100,000 or more in any twelve month period.

18 USC § 983 (2004)

§ 983.  General rules for civil forfeiture proceedings 

(a) Notice; claim; complaint.

(1)(A)(i) Except as provided in clauses (ii) through (v), in any nonjudicial civil forfeiture proceeding under a civil forfeiture statute, with respect to which the Government is required to send written notice to interested parties, such notice shall be sent in a manner to achieve proper notice as soon as practicable, and in no case more than 60 days after the date of the seizure.

(ii) No notice is required if, before the 60-day period expires, the Government files a civil judicial forfeiture action against the property and provides notice of that action as required by law.

(iii) If, before the 60-day period expires, the Government does not file a civil judicial forfeiture action, but does obtain a criminal indictment containing an allegation that the property is subject to forfeiture, the Government shall either—

(I) send notice within the 60 days and continue the nonjudicial civil forfeiture proceeding under this section; or

(II) terminate the nonjudicial civil forfeiture proceeding, and take the steps necessary to preserve its right to maintain custody of the property as provided in the applicable criminal forfeiture statute.

(iv) In a case in which the property is seized by a State or local law enforcement agency and turned over to a Federal law enforcement agency for the purpose of forfeiture under Federal law, notice shall be sent not more than 90 days after the date of seizure by the State or local law enforcement agency.

(v) If the identity or interest of a party is not determined until after the seizure or turnover but is determined before a declaration of forfeiture is entered, notice shall be sent to such interested party not later than 60 days after the determination by the Government of the identity of the party or the party's interest.

(B) A supervisory official in the headquarters office of the seizing agency may extend the period for sending notice under subparagraph (A) for a period not to exceed 30 days (which period may not be further extended except by a court), if the official determines that the conditions in subparagraph (D) are present.

(C) Upon motion by the Government, a court may extend the period for sending notice under subparagraph (A) for a period not to exceed 60 days, which period may be further extended by the court for 60-day periods, as necessary, if the court determines, based on a written certification of a supervisory official in the headquarters office of the seizing agency, that the conditions in subparagraph (D) are present.

(D) The period for sending notice under this paragraph may be extended only if there is reason to believe that notice may have an adverse result, including—

(i) endangering the life or physical safety of an individual;

(ii) flight from prosecution;

(iii) destruction of or tampering with evidence;

(iv) intimidation of potential witnesses; or

(v) otherwise seriously jeopardizing an investigation or unduly delaying a trial.

(E) Each of the Federal seizing agencies conducting nonjudicial forfeitures under this section shall report periodically to the Committees on the Judiciary of the House of Representatives and the Senate the number of occasions when an extension of time is granted under subparagraph (B).

(F) If the Government does not send notice of a seizure of property in accordance with subparagraph (A) to the person from whom the property was seized, and no extension of time is granted, the Government shall return the property to that person without prejudice to the right of the Government to commence a forfeiture proceeding at a later time. The Government shall not be required to return contraband or other property that the person from whom the property was seized may not legally possess.

(2)(A) Any person claiming property seized in a nonjudicial civil forfeiture proceeding under a civil forfeiture statute may file a claim with the appropriate official after the seizure.

(B) A claim under subparagraph (A) may be filed not later than the deadline set forth in a personal notice letter (which deadline may be not earlier than 35 days after the date the letter is mailed), except that if that letter is not received, then a claim may be filed not later than 30 days after the date of final publication of notice of seizure.

(C) A claim shall—

(i) identify the specific property being claimed;

(ii) state the claimant's interest in such property; and

(iii) be made under oath, subject to penalty of perjury.

(D) A claim need not be made in any particular form. Each Federal agency conducting nonjudicial forfeitures under this section shall make claim forms generally available on request, which forms shall be written in easily understandable language.

(E) Any person may make a claim under subparagraph (A) without posting bond with respect to the property which is the subject of the claim.

(3)(A) Not later than 90 days after a claim has been filed, the Government shall file a complaint for forfeiture in the manner set forth in the Supplemental Rules for Certain Admiralty and Maritime Claims or return the property pending the filing of a complaint, except that a court in the district in which the complaint will be filed may extend the period for filing a complaint for good cause shown or upon agreement of the parties.

(B) If the Government does not—

(i) file a complaint for forfeiture or return the property, in accordance with subparagraph (A); or

(ii) before the time for filing a complaint has expired—

(I) obtain a criminal indictment containing an allegation that the property is subject to forfeiture; and

(II) take the steps necessary to preserve its right to maintain custody of the property as provided in the applicable criminal forfeiture statute, the Government shall promptly release the property pursuant to regulations promulgated by the Attorney General, and may not take any further action to effect the civil forfeiture of such property in connection with the underlying offense.

(C) In lieu of, or in addition to, filing a civil forfeiture complaint, the Government may include a forfeiture allegation in a criminal indictment. If criminal forfeiture is the only forfeiture proceeding commenced by the Government, the Government's right to continued possession of the property shall be governed by the applicable criminal forfeiture statute.

(D) No complaint may be dismissed on the ground that the Government did not have adequate evidence at the time the complaint was filed to establish the forfeitability of the property.

(4)(A) In any case in which the Government files in the appropriate United States district court a complaint for forfeiture of property, any person claiming an interest in the seized property may file a claim asserting such person's interest in the property in the manner set forth in the Supplemental Rules for Certain Admiralty and Maritime Claims, except that such claim may be filed not later than 30 days after the date of service of the Government's complaint or, as applicable, not later than 30 days after the date of final publication of notice of the filing of the complaint.

(B) A person asserting an interest in seized property, in accordance with subparagraph (A), shall file an answer to the Government's complaint for forfeiture not later than 20 days after the date of the filing of the claim.
 
(b) Representation.

(1)(A) If a person with standing to contest the forfeiture of property in a judicial civil forfeiture proceeding under a civil forfeiture statute is financially unable to obtain representation by counsel, and the person is represented by counsel appointed under section 3006A of this title in connection with a related criminal case, the court may authorize counsel to represent that person with respect to the claim.

(B) In determining whether to authorize counsel to represent a person under subparagraph (A), the court shall take into account such factors as—

(i) the person's standing to contest the forfeiture; and

(ii) whether the claim appears to be made in good faith.

(2)(A) If a person with standing to contest the forfeiture of property in a judicial civil forfeiture proceeding under a civil forfeiture statute is financially unable to obtain representation by counsel, and the property subject to forfeiture is real property that is being used by the person as a primary residence, the court, at the request of the person, shall insure that the person is represented by an attorney for the Legal Services Corporation with respect to the claim.

(B)(i) At appropriate times during a representation under subparagraph (A), the Legal Services Corporation shall submit a statement of reasonable attorney fees and costs to the court.

(ii) The court shall enter a judgment in favor of the Legal Services Corporation for reasonable attorney fees and costs submitted pursuant to clause (i) and treat such judgment as payable under section 2465 of title 28, United States Code, regardless of the outcome of the case.

(3) The court shall set the compensation for representation under this subsection, which shall be equivalent to that provided for court-appointed representation under section 3006A of this title.
 
(c) Burden of proof. In a suit or action brought under any civil forfeiture statute for the civil forfeiture of any property—

(1) the burden of proof is on the Government to establish, by a preponderance of the evidence, that the property is subject to forfeiture;

(2) the Government may use evidence gathered after the filing of a complaint for forfeiture to establish, by a preponderance of the evidence, that property is subject to forfeiture; and

(3) if the Government's theory of forfeiture is that the property was used to commit or facilitate the commission of a criminal offense, or was involved in the commission of a criminal offense, the Government shall establish that there was a substantial connection between the property and the offense.
 
(d) Innocent owner defense.

(1) An innocent owner's interest in property shall not be forfeited under any civil forfeiture statute. The claimant shall have the burden of proving that the claimant is an innocent owner by a preponderance of the evidence.

(2)(A) With respect to a property interest in existence at the time the illegal conduct giving rise to forfeiture took place, the term "innocent owner" means an owner who—

(i) did not know of the conduct giving rise to forfeiture; or

(ii) upon learning of the conduct giving rise to the forfeiture, did all that reasonably could be expected under the circumstances to terminate such use of the property.

(B)(i) For the purposes of this paragraph, ways in which a person may show that such person did all that reasonably could be expected may include demonstrating that such person, to the extent permitted by law—

(I) gave timely notice to an appropriate law enforcement agency of information that led the person to know the conduct giving rise to a forfeiture would occur or has occurred; and

(II) in a timely fashion revoked or made a good faith attempt to revoke permission for those engaging in such conduct to use the property or took reasonable actions in consultation with a law enforcement agency to discourage or prevent the illegal use of the property.

(ii) A person is not required by this subparagraph to take steps that the person reasonably believes would be likely to subject any person (other than the person whose conduct gave rise to the forfeiture) to physical danger.

  (3)(A) With respect to a property interest acquired after the conduct giving rise to the forfeiture has taken place, the term "innocent owner" means a person who, at the time that person acquired the interest in the property—

(i) was a bona fide purchaser or seller for value (including a purchaser or seller of goods or services for value); and

(ii) did not know and was reasonably without cause to believe that the property was subject to forfeiture.

(B) An otherwise valid claim under subparagraph (A) shall not be denied on the ground that the claimant gave nothing of value in exchange for the property if—

(i) the property is the primary residence of the claimant;

(ii) depriving the claimant of the property would deprive the claimant of the means to maintain reasonable shelter in the community for the claimant and all dependents residing with the claimant;

(iii) the property is not, and is not traceable to, the proceeds of any criminal offense; and

(iv) the claimant acquired his or her interest in the property through marriage, divorce, or legal separation, or the claimant was the spouse or legal dependent of a person whose death resulted in the transfer of the property to the claimant through inheritance or probate, except that the court shall limit the value of any real property interest for which innocent ownership is recognized under this subparagraph to the value necessary to maintain reasonable shelter in the community for such claimant and all dependents residing with the claimant.

(4) Notwithstanding any provision of this subsection, no person may assert an ownership interest under this subsection in contraband or other property that it is illegal to possess.

(5) If the court determines, in accordance with this section, that an innocent owner has a partial interest in property otherwise subject to forfeiture, or a joint tenancy or tenancy by the entirety in such property, the court may enter an appropriate order—

(A) severing the property;

(B) transferring the property to the Government with a provision that the Government compensate the innocent owner to the extent of his or her ownership interest once a final order of forfeiture has been entered and the property has been reduced to liquid assets; or

(C) permitting the innocent owner to retain the property subject to a lien in favor of the Government to the extent of the forfeitable interest in the property.

(6) In this subsection, the term "owner"—

(A) means a person with an ownership interest in the specific property sought to be forfeited, including a leasehold, lien, mortgage, recorded security interest, or valid assignment of an ownership interest; and

(B) does not include—

(i) a person with only a general unsecured interest in, or claim against, the property or estate of another;

(ii) a bailee unless the bailor is identified and the bailee shows a colorable legitimate interest in the property seized; or

(iii) a nominee who exercises no dominion or control over the property.
 
(e) Motion to set aside forfeiture.

(1) Any person entitled to written notice in any nonjudicial civil forfeiture proceeding under a civil forfeiture statute who does not receive such notice may file a motion to set aside a declaration of forfeiture with respect to that person's interest in the property, which motion shall be granted if—

(A) the Government knew, or reasonably should have known, of the moving party's interest and failed to take reasonable steps to provide such party with notice; and

(B) the moving party did not know or have reason to know of the seizure within sufficient time to file a timely claim.

(2)(A) Notwithstanding the expiration of any applicable statute of limitations, if the court grants a motion under paragraph (1), the court shall set aside the declaration of forfeiture as to the interest of the moving party without prejudice to the right of the Government to commence a subsequent forfeiture proceeding as to the interest of the moving party.

(B) Any proceeding described in subparagraph (A) shall be commenced—

(i) if nonjudicial, within 60 days of the entry of the order granting the motion; or

(ii) if judicial, within 6 months of the entry of the order granting the motion.

(3) A motion under paragraph (1) may be filed not later than 5 years after the date of final publication of notice of seizure of the property.

(4) If, at the time a motion made under paragraph (1) is granted, the forfeited property has been disposed of by the Government in accordance with law, the Government may institute proceedings against a substitute sum of money equal to the value of the moving party's interest in the property at the time the property was disposed of.

(5) A motion filed under this subsection shall be the exclusive remedy for seeking to set aside a declaration of forfeiture under a civil forfeiture statute.
 
(f) Release of seized property.

(1) A claimant under subsection (a) is entitled to immediate release of seized property if—

(A) the claimant has a possessory interest in the property;

(B) the claimant has sufficient ties to the community to provide assurance that the property will be available at the time of the trial;

(C) the continued possession by the Government pending the final disposition of forfeiture proceedings will cause substantial hardship to the claimant, such as preventing the functioning of a business, preventing an individual from working, or leaving an individual homeless;

(D) the claimant's likely hardship from the continued possession by the Government of the seized property outweighs the risk that the property will be destroyed, damaged, lost, concealed, or transferred if it is returned to the claimant during the pendency of the proceeding; and

(E) none of the conditions set forth in paragraph (8) applies.

(2) A claimant seeking release of property under this subsection must request possession of the property from the appropriate official, and the request must set forth the basis on which the requirements of paragraph (1) are met.

(3)(A) If not later than 15 days after the date of a request under paragraph (2) the property has not been released, the claimant may file a petition in the district court in which the complaint has been filed or, if no complaint has been filed, in the district court in which the seizure warrant was issued or in the district court for the district in which the property was seized.

(B) The petition described in subparagraph (A) shall set forth—

(i) the basis on which the requirements of paragraph (1) are met; and

(ii) the steps the claimant has taken to secure release of the property from the appropriate official.

(4) If the Government establishes that the claimant's claim is frivolous, the court shall deny the petition. In responding to a petition under this subsection on other grounds, the Government may in appropriate cases submit evidence ex parte in order to avoid disclosing any matter that may adversely affect an ongoing criminal investigation or pending criminal trial.

(5) The court shall render a decision on a petition filed under paragraph (3) not later than 30 days after the date of the filing, unless such 30-day limitation is extended by consent of the parties or by the court for good cause shown.

(6) If—

(A) a petition is filed under paragraph (3); and

(B) the claimant demonstrates that the requirements of paragraph (1) have been met, the district court shall order that the property be returned to the claimant, pending completion of proceedings by the Government to obtain forfeiture of the property.

(7) If the court grants a petition under paragraph (3)—

(A) the court may enter any order necessary to ensure that the value of the property is maintained while the forfeiture action is pending, including—

(i) permitting the inspection, photographing, and inventory of the property;

(ii) fixing a bond in accordance with rule E(5) of the Supplemental Rules for Certain Admiralty and Maritime Claims; and

(iii) requiring the claimant to obtain or maintain insurance on the subject property; and

(B) the Government may place a lien against the property or file a lis pendens to ensure that the property is not transferred to another person.

(8) This subsection shall not apply if the seized property—

(A) is contraband, currency, or other monetary instrument, or electronic funds unless such currency or other monetary instrument or electronic funds constitutes the assets of a legitimate business which has been seized;

(B) is to be used as evidence of a violation of the law;

(C) by reason of design or other characteristic, is particularly suited for use in illegal activities; or

(D) is likely to be used to commit additional criminal acts if returned to the claimant.

(g) Proportionality.

(1) The claimant under subsection (a)(4) may petition the court to determine whether the forfeiture was constitutionally excessive.

(2) In making this determination, the court shall compare the forfeiture to the gravity of the offense giving rise to the forfeiture.

(3) The claimant shall have the burden of establishing that the forfeiture is grossly disproportional by a preponderance of the evidence at a hearing conducted by the court without a jury.

(4) If the court finds that the forfeiture is grossly disproportional to the offense it shall reduce or eliminate the forfeiture as necessary to avoid a violation of the Excessive Fines Clause of the Eighth Amendment of the Constitution.
 
(h) Civil fine.

(1) In any civil forfeiture proceeding under a civil forfeiture statute in which the Government prevails, if the court finds that the claimant's assertion of an interest in the property was frivolous, the court may impose a civil fine on the claimant of an amount equal to 10 percent of the value of the forfeited property, but in no event shall the fine be less than $ 250 or greater than $ 5,000.

(2) Any civil fine imposed under this subsection shall not preclude the court from imposing sanctions under rule 11 of the Federal Rules of Civil Procedure.

(3) In addition to the limitations of section 1915 of title 28, United States Code, in no event shall a prisoner file a claim under a civil forfeiture statute or appeal a judgment in a civil action or proceeding based on a civil forfeiture statute if the prisoner has, on three or more prior occasions, while incarcerated or detained in any facility, brought an action or appeal in a court of the United States that was dismissed on the grounds that it is frivolous or malicious, unless the prisoner shows extraordinary and exceptional circumstances.

(i) Civil forfeiture statute defined. In this section, the term "civil forfeiture statute"—

(1) means any provision of Federal law providing for the forfeiture of property other than as a sentence imposed upon conviction of a criminal offense; and

(2) does not include—

(A) the Tariff Act of 1930 or any other provision of law codified in title 19;

(B) the Internal Revenue Code of 1986 [26 USCS §§ 1 et seq.];

(C) the Federal Food, Drug, and Cosmetic Act (21 U.S.C. 301 et seq.);

(D) the Trading with the Enemy Act (50 U.S.C. App. 1 et seq.) or the International Emergency Economic Powers Act (IEEPA) (50 U.S.C. 1701 et seq.); or

(E) section 1 of title VI of the Act of June 15, 1917 (40 Stat. 233; 22 U.S.C. 401).
 
(j) Restraining orders; protective orders.

(1) Upon application of the United States, the court may enter a restraining order or injunction, require the execution of satisfactory performance bonds, create receiverships, appoint conservators, custodians, appraisers, accountants, or trustees, or take any other action to seize, secure, maintain, or preserve the availability of property subject to civil forfeiture—

(A) upon the filing of a civil forfeiture complaint alleging that the property with respect to which the order is sought is subject to civil forfeiture; or

(B) prior to the filing of such a complaint, if, after notice to persons appearing to have an interest in the property and opportunity for a hearing, the court determines that—

(i) there is a substantial probability that the United States will prevail on the issue of forfeiture and that failure to enter the order will result in the property being destroyed, removed from the jurisdiction of the court, or otherwise made unavailable for forfeiture; and

(ii) the need to preserve the availability of the property through the entry of the requested order outweighs the hardship on any party against whom the order is to be entered.

(2) An order entered pursuant to paragraph (1)(B) shall be effective for not more than 90 days, unless extended by the court for good cause shown, or unless a complaint described in paragraph (1)(A) has been filed.

(3) A temporary restraining order under this subsection may be entered upon application of the United States without notice or opportunity for a hearing when a complaint has not yet been filed with respect to the property, if the United States demonstrates that there is probable cause to believe that the property with respect to which the order is sought is subject to civil forfeiture and that provision of notice will jeopardize the availability of the property for forfeiture. Such a temporary order shall expire not more than 10 days after the date on which it is entered, unless extended for good cause shown or unless the party against whom it is entered consents to an extension for a longer period. A hearing requested concerning an order entered under this paragraph shall be held at the earliest possible time and prior to the expiration of the temporary order.

(4) The court may receive and consider, at a hearing held pursuant to this subsection, evidence and information that would be inadmissible under the Federal Rules of Evidence.

CHAPTER 8: USA PATRIOT ACT

I. Learning Objectives

1. To learn the primary purposes for the passage of Title III of the USA PATRIOT Act (hereinafter “USA Patriot Act”).

2. To learn key definitions, such as correspondent account, interbank account, payable-through account and covered financial institutions.

3. To learn the requirements with respect to required anti-money laundering programs, and specific cases showing the consequences for failure to establish anti-money laundering programs and failure to file suspicious activity reports timely or properly.

4. To learn the requirements for a foreign bank to establish a U.S. correspondent account in the U.S. and the identification and verification of accountholders.

5. To learn the meaning of special measure matters with respect to jurisdictions, banks or a bank.

6. To learn the rules and consequences of the cooperation and information sharing procedures.

7. To learn how the requirements of the Financial Crimes Enforcement Network coincide with the requirements of the Federal Banking Agencies with respect to anti-money laundering programs and the requirement to file suspicious activity reports.

8. To learn about the Gatekeeper Initiative and how it affects financial institutions and the impact upon lawyers in the U.S. if they become subject to this initiative.

9. To learn about the requirements under the USA Patriot Act, the Bank Secrecy Act, Federal Reserve and others with respect to record keeping and the requirements to file suspicious activity reports.

II. Introduction to the USA Patriot Act. The USA PATRIOT ACT (hereafter “USA Patriot Act”) provides the U.S. Government with new and substantial—maybe extreme—powers in the publicized war against terrorism. However, the USA Patriot Act also provides these same powers to the U.S. Government with respect to money laundering concerns.  

A. USA Patriot Act. Title III of the USA Patriot Act is titled “International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001.” § 302(b) of the USA Patriot Act states the purposes of Title III. The purposes stated places money laundering on equal footing with the financing of terrorism.  The purposes of Title III are stated as follows:

(1) to increase the strength of United States measures to prevent, detect, and prosecute international money laundering and the financing of terrorism; 

(2) to ensure that … banking transactions and financial relationships and the conduct of such transactions and relationships, do not contravene the purposes of subchapter II of chapter 53 of title 31, United States Code, section 21 of the Federal Deposit Insurance Act, or chapter 2 of title I of Public Law 91–508 (84 Stat. 1116), or facilitate the evasion of any such provision; and … the purposes of such provisions of law continue to be fulfilled, and such provisions of law are effectively and efficiently administered; 

(3) to strengthen the provisions put into place by the Money Laundering Control Act of 1986 (18 U.S.C. 981 note), especially with respect to crimes by non-United States nationals and foreign financial institutions; (4) to provide a clear national mandate for subjecting to special scrutiny those foreign jurisdictions, financial institutions operating outside of the United States, and classes of international transactions or types of accounts that pose particular, identifiable opportunities for criminal abuse; 

(5) to provide the Secretary of the Treasury (in this title referred to as the “Secretary”) with broad discretion, subject to the safeguards provided by the Administrative Procedure Act under title 5, United States Code, to take measures tailored to the particular money laundering problems presented by specific foreign jurisdictions, financial institutions operating outside of the United States, and classes of international transactions or types of accounts; 

(6) to ensure that the employment of such measures by the Secretary permits appropriate opportunity for comment by affected financial institutions; 

(7) to provide guidance to domestic financial institutions on particular foreign jurisdictions, financial institutions operating outside of the United States, and classes of international transactions that are of primary money laundering concern to the United States Government; 

(8) to ensure that the forfeiture of any assets in connection with the anti-terrorist efforts of the United States permits for adequate challenge consistent with providing due process rights; 

(9) to clarify the terms of the safe harbor from civil liability for filing suspicious activity reports; 

(10) to strengthen the authority of the Secretary to issue and administer geographic targeting orders, and to clarify that violations of such orders or any other requirement imposed under the authority contained in chapter 2 of title I of Public Law 91–508 and subchapters II and III of chapter 53 of title 31, United States Code, may result in criminal and civil penalties; 

(11) to ensure that all appropriate elements of the financial services industry are subject to appropriate requirements to report potential money laundering transactions to proper authorities, and that jurisdictional disputes do not hinder examination of compliance by financial institutions with relevant reporting requirements; 

(12) to strengthen the ability of financial institutions to maintain the integrity of their employee population; and 

(13) to strengthen measures to prevent the use of the United States financial system for personal gain by corrupt foreign officials and to facilitate the repatriation of any stolen assets to the citizens of countries to whom such assets belong.

B. Definitions.

1. Account. The term “account” means “a formal banking or business relationship established to provide regular services, dealings, and other financial transactions; and includes a demand deposit, savings deposit, or other transaction or asset account and a credit account or other extension of credit.”

2. Correspondent Account. The term “correspondent account” means “an account established to receive deposits from or make payments on behalf of a foreign financial institution, or handle other financial transactions related to such institution.”

3. Covered Financial Institution—Foreign Shell Banks. For purposes of the prohibition on U.S. correspondent accounts with foreign shell banks, the term “covered financial institution” means any “financial institution described in subparagraphs (A) through (G)” of 31 U.S.C. § 5312(a)(2): (A) an insured bank; (B) a commercial bank or trust company; (C) a private banker: (D) an agency or branch of a foreign bank in the U.S.; (E) any credit union; (F) a thrift institution; and (G) a broker or dealer registered with the SEC under the Securities Exchange Act of 1934.  

4. Covered Financial Institution—U.S. Correspondent Account. For a correspondent account in the U.S. that requires a foreign bank to identify its owners and the name of the person in the U.S. to accept legal service of process, the term “covered financial institution” has the same meaning as provided in the foregoing sentence, except that such term does not include a broker or dealer registered with the Securities and Exchange Commissioner under the Securities Exchange Act of 1934. The Secretary of the Treasury intends to propose similar record keeping requirements for such brokers and dealers.

5. Financial Agency. The term “financial agency” means a person acting for a person as a financial institution, bailee, depository trustee, or agent, or acting in a similar way related to money, credit, securities, gold, or a transaction in money, credit, securities or gold.

6. Financial Institution. The term “financial institution” includes: 

(A) an insured bank (as defined in § 3(h) of the Federal Deposit Insurance Act (12 U.S.C. § 1813(h)); (B) a commercial bank or trust company; (C) a private banker; (D) an agency or branch of a foreign bank in the United States; (E) any credit union; (F) a thrift institution; (G) a broker or dealer registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934 (15 U.S.C. § 78a et seq.); (H) a broker or dealer in securities or commodities; (I) an investment banker or investment company; (J) a currency exchange: (K) an issuer, redeemer, or cashier of travelers’ checks, checks, money orders, or similar instruments; (L) an operator of a credit card system; (M) an insurance company; (N) a dealer in precious metals, stones, or jewels; (O) a pawnbroker; (P) a loan or finance company; (Q) a travel agency; (R) a licensed sender of money or any other person who engages as a business in the transmission of funds, including any person who engages as a business in an informal money transfer system or any network of people who engage as a business in facilitating the transfer of money domestically or internationally outside of the conventional financial institutions system; (S) a telegraph company; (T) a business engaged in vehicle sales, including automobile, airplane, and boat sales; (U) persons involved in real estate closing and settlements; (V) the United States Postal Service; (W) an agency of the United States Government or of a State or local government carrying out a duty or power of a business described in this paragraph and (X) a casino, gambling casino, or gaming establishment with an annual gaming revenue of more than $1,000,000 which – (i) is licensed as a casino, gambling casino, or gaming establishment under the laws of any State or any political subdivision of any State; or (ii) is an Indian gaming operation conducted under or pursuant to the Indian Gaming Regulatory Act other than an operation which is limited to class I gaming (as defined in § 4(6) of such Act).

In addition, the term “financial institution” includes “futures commission merchant, commodity trading advisor or, commodity pool operator registered, or required to register, under the Commodity Exchange Act.” 

7. Money Laundering; Terrorist Activity.

[S]ection 314 [of the USA PATRIOT Act] authorizes the sharing of information between the federal government and financial institutions, and among financial institutions, for the purpose of identifying possible money laundering or terrorist activities. Although section 314 does not define “money laundering” or “terrorist activity,” each of these terms has well-established definitions. Accordingly, and consistent with the broad intent underlying section 314, section 103.90(a) defines “money laundering” to mean any activity described in section 1956 or 1957 of title 18, United States Code. Similarly, section 103.90(b) defines “terrorist activity” to mean an act of domestic terrorism or international terrorism as defined in section 2331 of title 18, United States Code.

8. Interbank Account. The term “interbank account” is defined as “[a]n account held by one financial institution at another financial institution primarily for the purpose of facilitating customer transactions.”  The term “interbank account” has the same meaning as it has in 18 U.S.C. § 984(c)(2)(B).

9. Payable-Through Account. The term “payable-through account” means an account, including a “transaction account” opened at a depository institution by a foreign financial institution by means of which the foreign financial institution permits its customers to engage, either directly or through a subaccount, in banking activity usually in connection with the business of banking in the U.S.  

10. Transaction Account. Under § 19(b)(1)(C) of the Federal Reserve Act, the term “transaction account” means “a deposit or account on which the depositor or account holder is permitted to make withdrawals by negotiable or transferable instrument, payment orders of withdrawal, telephone transfers, or other similar items for the purpose of making payments or transfers to third parties or others …” under § 19(b)(1)(C) of the Federal Reserve Act.  “Such term includes demand deposits, negotiable order of withdrawal accounts, savings deposits subject to automatic transfers, and share draft accounts.”

C. Office of Foreign Assets Control. The mission of the Office of Foreign Assets Control (“OFAC”) of the U.S. Department of Treasury is as follows:

The [OFAC] of the U.S. Department of the Treasury administers and enforces economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries, terrorists, international narcotics traffickers, and those engaged in activities related to the proliferation of weapons of mass destruction. OFAC acts under Presidential wartime and national emergency powers, as well as authority granted by specific legislation, to impose controls on transactions and freeze foreign assets under US jurisdiction. Many of the sanctions are based on United Nations and other international mandates, are multilateral in scope, and involve close cooperation with allied governments.

1. Information Available to Subscribers. E-mail information is available to subscribers (without cost) from the OFAC web site, including: (i) The OFAC Financial Operations Bulletin; and (ii) What’s New File (recent OFAC actions of interest).  

2. Other Information. The OFAC web site includes a “National Money Laundering Strategy” and the “2002 National Money Laundering Strategy” may be downloaded from a PDF file.  The 2002 National Money Laundering Strategy is a blueprint for how the government will address critical issues surrounding the enforcement of financial crimes. One may also subscribe to U.S. Treasury e-mail lists.

D. The Domestic Security Enhancement Act of 2003—Drafted. 

1. USA Patriot Act Sequel. The Center for Public Integrity Exposed the U.S. Attorney General’s sequel to the USA Patriot Act. The U.S. Department of Justice draft of the Domestic Security Enhancement Act of 2003 is labeled “confidential” but is not classified.  The document can be downloaded at http://www.publicintegrity.org.

2. General Aspects of the U.S. Department of Justice Draft. The U.S. Department of Justice draft is apparently referred to internally as “Patriot Act II” and is more far reaching than the USA Patriot Act. This draft, if passed, radically expands law enforcement and intelligence gathering authorization, reduces or eliminates judicial oversight over surveillance, authorizes secret arrests, creates a DNA database for suspected terrorists based on unchecked executive “suspicion,” creates new death penalties, and seeks to take U.S. citizenship away from an American citizen who provided “material support” to a group the U.S. has designated as a terrorist organization.

III. Anti-Money Laundering Programs. § 352 of the USA Patriot Act  requires the establishment of “anti-money laundering programs.”

A. Financial Institutions Required to Establish Anti-Money Laundering Programs. 31 U.S.C. § 5318(h) is amended to guard against money laundering by requiring financial institutions to establish anti-money laundering programs, including: the development of internal policies, procedures and controls, designation of a compliance officer, ongoing employee training programs, and an independent audit function to test programs.

B. Program Standards. The Secretary of the Treasury will establish minimum standards for programs for financial institutions with respect to the foregoing anti-money laundering programs.

C. Effective Date. The foregoing amendment to 31 U.S.C. § 5318(h) takes effect 180 days after the beginning of the date of the enactment of the USA Patriot Act.

D. Examples of Failure to Implement Required Due Diligence Programs. Banks and other financial institutions are being fined and penalized for failure to implement proper anti-money laundering and due diligence programs and failure to file suspicious activity reports (“SARs”). Below are some of the banks that have failed to comply with various laws.

1. Banco Popular de Puerto Rico. On January 16, 2003, the U.S. Attorney General, Justice Department Criminal Division, U.S. Customs Commissioner, Criminal Investigation Division at the Internal Revenue Service (“IRS”), Financial Crimes Enforcement Network (“FinCEN”), and the Board of Governors of the Federal Reserve System announced that Banco Popular de Puerto Rico must forfeit $21.6 million to the U.S. as part of a Deferred Prosecution Agreement on charges of failing to report suspicious financial activity. From June 1995 to June 2000, several unusual or suspicious transactions were conducted in connection with certain accounts at the bank. The bank did file SARs but they were untimely and, in some cases, inaccurate. Millions of dollars of drug proceeds were laundered through the bank and the bank failed to have a comprehensive anti-money laundering program as required by the Bank Secrecy Act.  

2. Riggs Bank. Riggs Bank entered into a Consent Order with the Office of the Comptroller of the Currency on May 13, 2004, agreeing to pay $25 million in civil penalties for a “willful, systematic” violation of anti-money laundering law. The Consent Order required Riggs Bank’s board to review and produce a written report regarding the staffing skills and levels required to fulfill the bank’s obligations pursuant to the order within 60 days. The Office of the Comptroller of the Currency, in assessing the penalty, found that Riggs Bank failed to implement an effective anti-money laundering program and did not detect or investigate suspicious transactions and had not filed SARs as required under the law. Also, the bank did not collect or maintain sufficient information about its foreign banking customers. The Office of the Comptroller of the Currency found a number of problems with Riggs’ account relationship with foreign governments, including Saudi Arabia and Equatorial Guinea. The Office of the Comptroller of the Currency further found that Riggs failed to properly monitor, and report as suspicious, transactions involving tens of billions of dollars in cash withdrawals, international drafts that were returned to the bank, and numerous sequentially-numbered cashier’s checks.

3. ABN Amro Bank N.V. On July 23, 2004, the Board of Governors of the Federal Reserve System, the State of Illinois Department of Financial and Professional Regulation, and the New York State Banking Department entered into an agreement with this foreign bank and the New York branch. The bank was required to take steps, within 60 days, to submit with respect to its New York bank an acceptable written anti-money laundering program, improve the system of internal controls with respect to clearing operations and to ensure compliance with all record keeping and reporting requirements, including controls to ensure compliance with requirements relating to correspondent accounts with non-U.S. persons. In addition, it provided for thorough assessment of legal and reputational risks associated with correspondent accounts, and retain outside consultant assistance as necessary and appropriate to assess risks and to design and implement controls to manage risks, and to design same to ensure identification verification of accountholders.

4. AmSouth Bank. AmSouth Bank was assessed with a $10 million fine and paid $40 million to the U.S. to avoid criminal prosecution.

a. Civil Penalty. On October 12, 2004, the Board of Governors of the Federal Reserve System, Washington, D.C., and the State of Alabama, Alabama Department of Banking, Montgomery, Alabama, issued a Cease and Desist Order and Order of Assessment of a Civil Money Penalty Issued Upon Consent Pursuant to the Federal Deposit Insurance Act, as amended, against AmSouth Bancorporation and AmSouth Bank (hereinafter jointly referred to as “AmSouth”). AmSouth mutually agreed with the petitioners to enter into the order. The order states that AmSouth: (i) engaged in violations of § 208.63 of Regulation H of the Board of Governors by failing to establish and maintain procedures reasonably designed to assure and monitor compliance with the Bank Secrecy Act; (ii) violated § 208.62 of Regulation H of the Board of Governors by failing to file accurate, and complete, or timely SARs; and (iii) engaged in unsafe and unsound practices by failing to have adequate systems in place to prevent, identify, and report criminal activity conducted through AmSouth, and failing to promptly and fully cooperate with law enforcement authorities in the review and investigation of such activity. The bank will immediately pay a $10 million fine for the foregoing violations of law, regulation and unsafe and unsound practices assessed by the Board of Governors, and by FinCEN for violations of the anti-money laundering program required by the USA Patriot Act and SAR requirements of the Bank Secrecy Act.

b. Deferring Prosecution Agreement. AmSouth agreed to pay an additional $40 million, pursuant to a Deferred Prosecution Agreement, to the U.S. and in order for the Department of Justice to defer criminal charges for 12 months while the bank improves its controls. As a part of this agreement, AmSouth waived indictment and agreed to the filing of one count in the U.S. District Court for the Southern District of Mississippi that charged it with failing to file SARs in a timely, complete and accurate manner in violation of 31 U.S.C. §§ 5318(g)(1) and 5322(b) and 31 C.F.R. § 103.18. 

5. Treasury Imposes Sanctions Against Two Foreign Financial Institutions. On August 24, 2004, the Federal Register included two notices of proposed rulemaking of FinCEN, U.S. Department of Treasury, announcing the imposition of special measures against two foreign financial institutions for their standing as primary money laundering concerns, under the authority of the Bank Secrecy Act. In both cases, FinCEN proposes to prohibit certain financial institutions from opening and maintaining correspondent or payable-through accounts for, or on behalf of, Infobank of Belarus and the First Merchant Bank OSH Ltd. of the Turkish Republic of Northern Cyprus.

IV. Bank Records Related to Anti-Money Laundering Programs. 31 U.S.C. § 5318(k) is added by the USA Patriot Act authorizing access to bank records, by the Secretary of the Treasury or the Attorney General, of a foreign bank that has a U.S. correspondent bank account.

A. Summons or Subpoena of Records. The Secretary of the Treasury or the Attorney General may issue a summons or subpoena to any foreign bank maintaining a U.S. correspondent bank account and request records related to such correspondent account including records maintained outside the U.S. relating to the deposit of funds into the foreign bank.

B. 120-Hour Rule—Responding to a Request by a Covered Financial Institution. An appropriate Federal banking agency may request information related to anti-money laundering compliance by a covered financial institution, or its customer.  No later than 120 hours after such request, the covered financial institution “shall provide information and account documentation for any account opened, maintained, administered or managed in the United States by the covered financial institution.”

C. Identification of Owners and Acceptance of Service by the Foreign Bank. Any covered financial institution that maintains a correspondent account in the U.S. for a foreign bank shall maintain records in the U.S. identifying the owners of the foreign bank and the name and address of a person residing in the U.S. who is authorized to accept service of legal process for records regarding the correspondent account.  The term “owner” is a defined term.

D. Service of Summons or Subpoena. A summons or subpoena may be served on the U.S. person appointed by the foreign bank to accept service of legal process for records regarding the correspondent account.

E. Termination of Correspondent Relationship. A covered financial institution shall terminate any correspondent relationship with a foreign bank no later than 10 business days after receipt of written notice from the Secretary of the Treasury or the Attorney General stating that the foreign bank failed to comply with a summons or subpoena, or failed to initiate proceedings in the U.S. court contesting such summons or subpoena.

F. Failure to Terminate a Relationship. Failure to terminate a correspondent relationship in accordance with the foregoing provision results in a civil penalty of a maximum of $10,000 per day until the correspondent relationship is terminated.

G. Limitation on Liability. The covered financial institution is not liable to any person in a court or arbitration proceeding for terminating a correspondent relationship as required by the Secretary of Treasury or the Attorney General.

H. Grace Period. Financial institutions have 60 days from the date of enactment of the USA Patriot Act to comply with the provisions of 31 U.S.C. § 5318(k).  

V. Identification and Verification of Accountholders. 31 U.S.C. § 5318(l) is added to require identification and verification of accountholders.

A. Minimum Standards for the Identity of Customers. The Secretary of the Treasury shall prescribe regulations providing the minimum standards for financial institutions and their customers regarding the identity of each customer with respect to the opening of an account.

B. Minimum Requirements. The regulations, at a minimum, shall require financial institutions to implement, and customers (after receiving adequate notice) to comply with, reasonable procedures for: “verifying the identity of any person seeking to open an account to the extent reasonable and practicable; … maintaining records of the information used to verify a person’s identity, including name, address and other identifying information; … consulting lists of known or suspected terrorists or terrorist organizations provided to the financial institution by any government agency to determine whether a person seeking to open an account appears on any such list.”

C. Study and Report Required. Within six months after the enactment of the USA Patriot Act, the Secretary of the Treasury, in consultation with other governmental agencies, is required to submit a report to Congress providing recommendations for determining how foreign nationals will provide domestic financial institutions and agencies with appropriate and accurate information.  This information shall be comparable to that required of U.S. nationals relating to the identity, address and other related information in order to enable institutions and agencies to comply with identification and verification of accountholders.  In addition, this report to Congress shall recommend methods for requiring foreign nationals to apply for and obtain, for opening accounts with a domestic financial institution, an identification number that functions similar to a Social Security number or tax identification number.  Furthermore, the report to Congress shall establish a system for domestic financial institutions and agencies to review information maintained by U.S. Government agencies that relate to verifying the identities of foreign nationals who are seeking to open accounts at such institutions and agencies.

D. Effective Date. Final regulations shall take effect before one year from the enactment of Title III of the USA Patriot Act.

E. Politically Exposed Persons. The Financial Action Task Force Revised “Forty Recommendations” focused extensively on customer due diligence and identification. Recommendations Six and Seven provide for enhanced due diligence requirements for “politically exposed persons” (certain prominent public officials) and foreign correspondent banking accounts.

VI. Forfeiture of Funds in U.S. Interbank Accounts. The U.S. Government is now provided with additional civil forfeiture rights under 18 U.S.C. § 981(k) with respect to funds deposited into an account at a foreign bank if that bank has an interbank account in the U.S. with a covered financial institution.

A. Interbank Account in a Covered Financial Institution. The funds in the foreign bank account are deemed to be deposited into the interbank account in a U.S. covered financial institution.  Such funds are subject to “any restraining order, seizure warrant, or arrest warrant in rem regarding the funds may be served on the covered financial institution, and funds in the interbank account, or up to the value of the funds deposited into the account at the foreign bank, may be restrained, seized or arrested.”

B. No Requirement for U.S. Government to Trace Funds. In an action under 18 U.S.C. § 981(k), the U.S. Government is not required to establish that the funds are directly traceable to funds deposited into a foreign bank nor is the U.S. Government required to rely on the application of 18 U.S.C. § 984.

C. Authority to Suspend; Defense Against Forfeiture. The Attorney General, in consultation with the Secretary of the Treasury, may suspend or terminate such a forfeiture if the Attorney General determines that a conflict of law with respect to liabilities arising from the restraint, seizure or arrest of such funds and that such action could be in the interest of justice and harm national interests of the U.S.  The owner of the funds deposited into a foreign account may contest the forfeiture by providing a claim under 18 U.S.C. § 983.

D. Example of Seizing Correspondent Account of Foreign Bank. The U.S. Government is provided with new forfeiture and seizure rights with respect to a covered financial institution and funds in an interbank account equal to the value of funds deposited in a foreign bank that has an interbank account in the U.S. with a covered financial institution. The U.S. Government may now seize the funds in the interbank account of the covered financial institution without having to trace the funds deposited in the covered financial institution to the account in the foreign bank because the funds are deemed to have been deposited into the U.S. interbank account. The Secretary of the Treasury or the Attorney General may issue a summons or subpoena against a U.S. correspondent account that is maintained by any foreign bank and may request records with respect to such correspondent account, including records maintained outside the U.S. relating to the deposit of funds into the foreign bank.

1. Testimony at U.S. Senate Banking Committee. Tax Analysts, in its Worldwide Tax Daily (January 31, 2002), reported the Justice Department testimony at the U.S. Senate Banking Committee hearing on money laundering. WTD 2127. Michael Chertoff of the Justice Department testified to the following:

[27]	Some of the new provisions in the Act have already been deployed with successful results. For example, the Department of Justice relied on the new civil forfeiture authority provided in the PATRIOT Act to seize six bank accounts in New Jersey and three in Florida related to the 11 September terrorists. On 8 November, 2001, the United States Attorney’s Office for the District of New Jersey obtained nine seizure warrants for bank accounts used by the terrorists based on the newly enacted PATRIOT Act authority codified at 18 U.S.C. 981(a)(1)(G), which provides for the seizure of all assets owned, acquired or used by any individual or organization engaged in domestic or international terrorism. Notice of the proposed forfeiture of these accounts has been made and, not surprisingly, no one has claimed an interest in the accounts.

[28]	In addition, we recently used Section 319 of the PATRIOT Act to good effect. Section 319(a) provided us with a new tool to seize and forfeit criminal assets deposited into a foreign bank account through the foreign bank’s correspondent bank account in the United States. This section provides that assets which are subject to forfeiture in the United States, but which are deposited abroad in a foreign bank may be deemed to be held in the foreign bank’s correspondent account in the United States. Thus, where a criminal deposits funds in a bank account in a foreign country and that bank maintains a correspondent account in the United States, the government may seize and forfeit an equivalent sum of money in the correspondent account, irrespective of whether the money in the correspondent account is traceable to the proceeds deposited in an account held by the foreign bank.

[29]	Although I was recused from the case because of a past representation, I can report that last month we recovered almost US $ 1.7 million in funds using Section 319, which will be used to compensate the victims of a fraud scheme. On 18 January 2001, a grand jury in the Southern District of Illinois indicted James R. Gibson for various offenses, including conspiracy to commit money laundering, mail and wire fraud. Gibson defrauded clients of millions of dollars by fraudulently structuring settlement agreements for numerous tort victims. Gibson and his wife, who was indicted later, fled to Belize, depositing some of the proceeds of their fraud scheme in two Belizean banks.

[30]	Our efforts to recover the proceeds at first were unsuccessful. Although the government of Belize initially agreed to restrain the assets, a Belizean court ordered the freeze lifted, because local law prohibited legal assistance to the United States: the treaty providing for legal assistance between the two countries has not entered into force. The court also prohibited the government from assisting the United States law enforcement agencies further, including providing information regarding Gibson’s money laundering activities. Efforts to break the impasse failed, and all the while the Gibsons systematically looted their accounts in Belize.

[31]	Following the passage of the PATRIOT Act, and interagency consultation, the Criminal Division authorized the use of the Section 319(a) authority. A seizure warrant was served on the correspondent bank, and the remaining funds were recovered. In our judgment, this case presents a compelling example of the need for, and appropriate use of, the new authority under Section 319(a).

[32] 	While this instance involved fraud, the facts of this case demonstrate the utility of this particular tool, particularly in the area of terrorist financing. Section 319(a) is, of course, an important enhancement to the law enforcement’s ability to pursue assets overseas. It is also a very powerful tool and one that can affect our international relationships. Accordingly, the Criminal Division is developing a policy to provide prosecutorial oversight regarding the use of this new provision.

[33]	Similarly, Section 319(b) of the Act provides new summons and subpoena authority with respect to foreign banks that have correspondent accounts in the United States. This section authorizes the Attorney General and the Secretary of the Treasury to issue subpoenas and summonses to foreign banks that maintain correspondent accounts with banks in the United States in order to obtain records related to the U.S. correspondent accounts. We also anticipate delegating authority to use Section 319(b) to a level below the Attorney General, but because of the international sensitivities involved, we anticipate that the use of such authority will remain subject to departmental review and approval and interagency consultation. I am currently reviewing a proposal regarding the best way to implement this important new authority.

2. The Gibson Case. The court refused to order the Belize bank to return these assets to the U.S. because local law prohibited legal assistance to the United States: the Mutual Legal Assistance Treaty (MLAT) between the two countries was not in force. The court also prohibited the Belize government from assisting U.S. law enforcement agencies, including providing information regarding Gibson’s money laundering activities.

a. Facts of the Gibson Case. Mr. and Mrs. Gibson, who fled the U.S. and moved to Belize, opened an account at Provident Bank & Trust of Belize Limited.  Provident Bank & Trust of Belize Limited filed an action, as a bank or financial institution, due to Governor of the Central Bank of Belize issuing an Affidavit instructing Provident Bank & Trust of Belize Limited to freeze the deposits of Mr. and Mrs. Gibson.  This action by the Governor of the Central Bank of Belize was based on the Belize police advising him that these deposits may involve money laundering proceeds, as determined pursuant to statements made by the F.B.I. in the U.S.  Provident Bank & Trust of Belize Limited asked the court what action it should take as a bank.

b. Reasoning of the Gibson Case. The court held that the Governor of the Central Bank of Belize was not given the power to effect a freeze on bank accounts of customers.  The court further stated that if the Governor received information that money laundering had occurred, he must send that information to the law enforcement authorities.  The court further stated: “To freeze a customer’s account with his bank is a grave and serious action which can only be allowed by express words of a statute … I cannot overemphasize the need for coordination, speed and secrecy and timely action for the provisions of the Act [Belize Money Laundering (Prevention) Act] to be deployed in the fight against the pernicious practice of money laundering but all this must be done in consonance with the law.”  The court further noted that there was no action contemplated or pending against Mr. Gibson in any Court in Belize; and all evidence had been proceeded in the U.S. due to the approach by authorities in the U.S. with the Belize police regarding Mr. Gibson.  The court further stated: “In my view, in the circumstances of this application, the requirements of subsection (6) of section 23 of the Money Laundering (Prevention) Act, are mandatory assistance by this court for the purposes of money laundering offenses shall be provided only to those countries with whom Belize has entered into mutual assistance treaties either on a bilateral or a multilateral basis.”  The court concluded that there was not yet an operative mutual assistance treaty in force between Belize and the U.S., “notwithstanding the evident unilateral ratification by Belize of the Mutual Legal Assistance in Criminal Matters Treaty between the two countries signed on, 19th September 2000 in Belize and ratified Belize on 8th January 2001.  To bring this treaty into force, there has to be its ratification by the United States and the exchange of its instrument of ratification with Belize.”  

c. Current Status of MLAT with Belize. The MLAT with Belize, signed on September 18-19, 2000, was ratified on July 15, 2002.

3. Criminal Information Charge Against BDO Seidman, LLP. The U.S. Attorney for the Southern District of Illinois, as a part of a pretrial diversion agreement, filed a criminal information charging BDO Seidman, LLP, on April 12, 2002, with misprision of a felony, in violation of 18 U.S.C. § 4.

a. Facts Leading to Criminal Information Charge. BDO Seidman, LLP, represented SBU, Inc., Flag Finance Corporation, and Family Company of America and “knew that SBU, Inc., was a third-party settlement company owned and operated by James R. Gibson engaged in the business of structuring personal injury plaintiff’s settlements and judgments through the establishment of a revocable trust funded with U.S. Treasury obligations intended to qualify as tax-exempt transactions.”  The criminal information showed the BDO Seidman, LLP, through its former St. Louis office, knew in October 1995 that SBU, Inc., and James R. Gibson failed to purchase promised U.S. Treasury obligations to fund approximately 22 of SBU, Inc.’s clients’ trusts.  Instead, the money was diverted to finance the purchase and operations of a chain of 23 grocery stores, purchased in March 1996.  In addition, the IRS, on July 7, 1997, sent a Notice of Tax Examination to SBU, Inc., for the tax year ending October 31, 1993.  During the tax examination, the IRS requested information relating to tax years 1994 and 1995.  BDO Seidman, LLP, submitted documents on behalf of SBU, Inc., pursuant to this request, on January 8, 1998.  The U.S. Attorney’s office states: “At that time, BDO … knew that James R. Gibson had committed a felony—attempted tax evasion—in connection with the tax year 1995 return.  In the January 8, 1998 submission, BDO … failed to inform the IRS of information that was material to the determination of income for year 1995, i.e., that James R. Gibson had not purchased U.S. Treasury obligations with settlement funds received and that James R. Gibson had, instead, used those funds to purchase and operate the grocery stores which were not qualified assets under the Internal Revenue Code, and BDO … failed to inform the IRS that James R. Gibson had committed attempted tax evasion.”

b. Agreement with BDO Seidman, LLP. BDO Seidman, LLP, must cooperate with the agreement and pay a total of $16 million into fund established as victim restitution for former clients of SBU, Inc.  

c. Prosecution. The office of the U.S. Attorney states that prosecution will be deferred with a view toward dismissal of information after eighteen months.

E. Privacy Versus Concerns About Money Laundering. A case in London shows the problems that a bank faces with respect to concerns about the privacy of its bank depositors and the concerns about financial crimes related to those deposits, even with the help of a court.

VII. Special Measures for Jurisdictions, Financial Institutions, or International Transactions of Primary Money Laundering Concern. 31 U.S.C. § 5318A is added to provide for special measures with respect to “primary money laundering concern.”

A. International Counter-Money Laundering Requirements. The Secretary of the Treasury may require domestic financial institutions and domestic financial agencies to take one or more special measures.

B. Definitions.

1. Special Measure Matters. For purposes of 31 U.S.C. § 5318(a), special measures are required for “special measure matters” which means that the Secretary of the Treasury finds “a jurisdiction outside of the United States, 1 or more foreign financial institutions operating outside of the United States, 1 or more classes of transactions within, or involving, a jurisdiction outside the United States, or 1 or more types of accounts is a primary money laundering concern ….”

2. Primary Money Laundering Concern. The Secretary of the Treasury shall consult with the Secretary of State and the Attorney General with respect to finding money laundering concern regarding “special measure matters.”  In finding primary money laundering concern, the Secretary of the Treasury shall consider, in addition to what the Secretary determines to be relevant, additional factors, including: (i) jurisdictional factors; and (ii) institutional factors. Jurisdictional factors for a particular jurisdiction include: (i) governments that organize criminal groups for international terrorist transacted business in that jurisdiction: (ii) extent to which the jurisdiction offers bank secrecy or special regulatory advantages to non-residents or non-domiciliaries of that jurisdiction; (iii) the substance and quality of administration of the bank supervisory and counter-money laundering laws of the jurisdiction; (iv) the volume of financial transactions in relationship to the size of the economy of the jurisdiction; (v) whether the jurisdiction is characterized as an offshore banking or secrecy haven by a credible financial organization or multi-lateral expert groups; vi) whether the U.S. has a mutual legal assistance treaty with the jurisdiction and the experience of U.S. law enforcement officials in obtaining information under such a treaty; and (vii) the extent the jurisdiction has high levels of official or institutional corruption.  Institutional factors include: (i) the extent to which money laundering facilitated or promoted in and through a jurisdiction; (ii) the extent which an institution’s transactions or accounts are used for legitimate business purposes in the jurisdiction; and (iii) the extent to which action is taken by the jurisdiction that the purposes of USA Patriot Act § 311(c) is fulfilled in order to guard against international money laundering or other financial crimes.

3. Special Measures. With respect to “special measure matters,” the Secretary of the Treasury may require any domestic financial institution or domestic financial agency to maintain records, file reports, or both, concerning the aggregate amount of transactions or concerning each transaction with respect to such special measure matters if the Secretary finds such to be a money laundering concern.  The records shall be made as required by the Secretary of the Treasury and shall include the identity and address of the participants in a transaction or relationship, including the identity of the originator of any funds, the legal capacity in which a participant is acting and the identity of the beneficial owner of the funds involved in any transaction.  Records and reports shall be made and retained in the manner determined by the Secretary of Treasury.

C. Information Relating to Beneficial Ownership. The Secretary of Treasury may require any domestic financial institution or domestic financial agency, if the Secretary of Treasury determines to be reasonable and practicable, to obtain and retain information concerning the beneficial ownership of any account opened and maintained in the U.S. by a foreign person (other than a foreign entity whose shares are subject to reporting requirements or listed on a regulated stock exchange) or a representative of such person that involves “special measure matters” to be a primary money laundering concern.

D. Information Relating to Certain Payable-Through Accounts. If the Secretary of Treasury finds “special measure matters,” the Secretary of the Treasury may require any domestic financial institution or domestic financial agency to meet certain conditions before opening or maintaining a payable-through account for a foreign financial institution involving a foreign jurisdiction or foreign institution or payable-through account through which a transaction may be conducted. Such conditions may include identifying each customer (and the representative of each customer) of each financial institution who is permitted to use or whose transactions pass through the payable-through account and obtaining, with respect to such customer, information that is substantially comparable to records obtained from U.S. customers in the ordinary course of business.

E. Information Relating to Certain Correspondent Accounts. If the Secretary of the Treasury finds “special measure matters” to be a primary money laundering concern, the Secretary of the Treasury, in consultation with the Attorney General and the chairman of the board of governors of the Federal Reserve System, may prohibit or impose conditions on the opening or maintaining of a correspondent account or payable-through account by any domestic financial institution or domestic financial agency for or on behalf of a foreign banking institution if such account or any transaction involves such a jurisdiction or institution.
	
VIII. Special Due Diligence for Correspondent Accounts and Private Banking Accounts. 31 U.S.C. § 5318(i) is added to provide special due diligence requirements for correspondent accounts and private banking accounts.

A. Due Diligence for Accounts Involving Foreign Persons. Each financial institution that establishes, maintains, administers or manages a private banking account or a correspondent account in the U.S. for a non-U.S. person shall establish appropriate, specific and, where necessary, enhanced due diligence policies, procedures and controls that are reasonably designed to detect and report money laundering transactions passing through those accounts.

B. Enhanced Due Diligence for Certain Correspondent Accounts.  

1. Enhanced Due Diligence for Correspondent Accounts for Offshore Bank Designated as Non-Cooperative. Enhanced due diligence is required of a correspondent account requested or maintained by or on behalf of a foreign bank operating under an offshore banking license or under a banking license issued by a foreign country that has been designated as non-cooperative with international anti-money laundering principles or procedures by an inter-governmental group or organization of which the U.S. is a member or by the Secretary of the Treasury as warranting special measures due to money laundering concerns.

2. Obtaining Identity of Owners of Certain Foreign Banks and Reporting Suspicious Activities. The enhanced due diligence policies, procedures and controls are required to ensure that a financial institution in the U.S. takes reasonable steps to ascertain, for any such foreign bank whose shares are not publicly traded, the identity of each of the owners of the foreign bank and the nature and extent of the ownership interests of each owner.  The enhanced due diligence policies, procedures and controls are also necessary to conduct enhanced scrutiny of the accounts to guard against money laundering, to report suspicious activities and to ascertain whether such foreign bank provides correspondent accounts to other foreign banks and, if so, the ability of those foreign banks and related due diligence information.

IX. Prohibition on U.S. Correspondent Accounts with Foreign Shell Banks. 31 U.S.C. § 5318(j) is added to prohibit U.S. correspondent bank accounts to be established for foreign shell banks.  

A. Definitions.

1. Affiliate. Affiliate means a foreign bank controlled by or under common control with a depository institution, credit union or foreign bank.

2. Physical Presence. Physical presence is a place of business that is maintained by a foreign bank and is located at a fixed address in which the bank is authorized to conduct business activities at its location and employs one or more individuals on a full-time basis, maintains operating records relating to banking activities; and is subject to inspection by the banking authority that licenses the foreign bank to conduct banking activities.

B. Covered Financial Institution Shall not Establish or Maintain a Correspondent Account for a Foreign Shell Bank. A covered financial institution “shall not establish, maintain, administer, or manage a correspondent account in the United States for, or on behalf of, a foreign bank that does not have physical presence in any country.”  The Secretary of the Treasury indicates that this prohibition applies to “non-bank covered financial institutions,” including broker-dealers.

C. Ensuring that Indirect Service is not Provided to Foreign Shell Banks. A covered financial institution shall take steps necessary to ensure that any U.S. correspondent account is not being used by a foreign bank to indirectly provide banking services to another foreign bank that does not have a physical presence in any country.

D. Exception to the General Rules of Prohibition. A correspondent account may be provided to a foreign bank if the foreign bank is: (i) an affiliate of the depository institution or foreign bank that maintains a physical presence in the U.S. or a foreign country; and (ii) subject to supervision by a banking authority in the country regulating affiliated depository institutions, credit unions, or foreign banks.  The Secretary of the Treasury terms such entities “regulated affiliates” and adds to the definition, entities that are controlled by or are under common control with the depository institution, credit union, or foreign bank.

E. Effective Date. Covered financial institutions have 60 days from the date of enactment of the USA Patriot Act to comply with the provisions of 31 U.S.C. § 5318(j).

X. Cooperative Efforts to Deter Money Laundering. The USA Patriot Act, § 314 provides for cooperation among financial institutions, regulatory parties, and law enforcement authorities.

A. Adoption of Regulations. Provision is made for adoption of regulations within 120 days of enactment of the USA Patriot Act (or by February 25, 2002).  The Secretary of the Treasury shall adopt regulations to encourage further cooperation between these parties, specifically in regard to individuals, entities and organizations engaged in or reasonably suspected to be engaged in terrorist acts or money laundering activities.

1. Cooperation and Information Sharing Procedures. The regulations may include procedures for cooperation and information sharing focusing on matters specifically related to the finances of terrorist groups, the means by which they transfer funds around the world (including within the U.S.), the use of charities, non-profit organizations and non-governmental organizations to make transfers, and the extent to which financial institutions in the U.S. are unwillingly involved in such transactions.  In addition, the regulations may include a clear procedure for cooperation and information sharing focusing on international narcotics traffickers and foreign terrorist organizations; and the means for identifying the accounts and transactions that involve terrorist groups in facilitating exchange of information among law enforcement and regulatory personnel.

2. Contents of Regulations. The regulations may “require that each financial institution designate 1 or more persons to receive information concerning, and to monitor accounts of individuals, entities, and organizations that are identified …” in the regulations and “further establish procedures for the protection of the shared information, consistent with the capacity, size and nature of the institution in which particular procedures apply.”

B. Rule of Construction; Use of Information. The receipt of information hereunder does not relieve or otherwise modify the obligation of a financial institution with respect to any other person or account.  Information obtained “pursuant to this section shall not be used for any purpose other than identifying and reporting on activities that may involve terrorist acts or money laundering activities.”

C. Cooperation Among Financial Institutions. Upon notice of the Secretary of the Treasury, “financial institutions may share information with another regarding individuals, entities, or organizations, and countries suspected of possible terrorists or money laundering activities.” A safe harbor provision applies that states financial institutions “shall not be liable to any person under any law or regulation of the United States, any constitution, law, or regulation of any State or political subdivision thereof, or under any contract or other legally enforceable agreement (including any arbitration agreement), for such disclosure or for any failure to provide notice of such disclosure to the person who is the subject of such disclosure, or any other person identified in the disclosure, except where such transmission, receipt, or sharing violates this section or regulations promulgated pursuant to this section.”

D. Reports on Suspicious Financial Activities. The Secretary of the Treasury “shall … publish a semi-annual report, to be distributed to financial institutions, containing a detailed analysis identifying patterns of suspicious activity and other investigative insights derived from suspicious activity reports and investigations conducted by Federal, State and local law enforcement agencies … and … distribute such report to financial institutions ….”

E. Regulations Improve Information Sharing Among Financial Institutions. Amendments were made to the Code of Federal Regulations to improve information sharing among financial institutions. All financial institutions, unless the financial institution is within a class of financial institutions that FinCEN designated as ineligible to share information under this section, shall be subject to information sharing. 

1. Financial Institution. A financial institution means any financial institution as described in 31 U.S.C. § 5312(a)(2), except one that FinCEN has designated as ineligible to share information under this section.

2. Voluntary Information Sharing Among Financial Institutions. Financial institutions or associations of financial institutions may, with safe harbor protection from liability, “transmit, receive, or otherwise share information with any other financial institution or association of financial institutions regarding individuals, entities, organizations and countries for purposes of identifying and, where appropriate, reporting activities that the financial institution or association suspects may involve possible terrorist activity or money laundering.”

3. Notice Requirement. A financial institution or association of financial institutions that intends to share information shall submit to FinCEN a prescribed notice that shall be effective for one year beginning on the date of the notice.

4. Verification Requirement. Prior to sharing information, a financial institution or association of financial institutions must take reasonable steps to verify that the other financial institution or association of financial institutions with which it intends to share information has submitted to FinCEN the notice required by 31 C.F.R. § 103.110(b)(2).

5. Use and Security of Information. A financial institution or association of financial institutions shall use information only for the purposes of identifying and, where appropriate, reporting on money laundering and terrorist activities; or determining whether to establish or maintain an account, or to engage in a transaction; or assisting the financial institution in complying with any requirement of this part.

6. Protecting Security and Confidentiality of Information. Each financial institution or association of financial institutions that engage in the sharing of information under these provisions shall maintain adequate procedures to protect the security and the confidentiality of such information.

7. Safe Harbor From Liability. A financial institution or association of financial institutions that shares information under these provisions shall be protected from liability for such sharing, or for any failure to provide notice of such sharing, to any individual, entity or organization that is identified. This safe harbor does not apply to a financial institution or association of financial institutions if failure to comply with the notice requirement, verification requirement, or use and security of information requirement occurs.

8. Information Sharing Between Financial Institutions and the Federal Government. If, as a result of sharing information under these provisions, a financial institution knows, suspects or has reason to suspect that an individual, entity or organization is involved in, or may be involved in, terrorist activity or money laundering, and such institution is subject to SAR reporting, the institution shall file a SAR as required by regulations.

F. Information Sharing Between Federal Law Enforcement Agencies and Financial Institutions. Amendments were made to the Code of Federal Regulations to improve information sharing between federal law enforcement agencies and financial institutions.

1. Financial Institution. Financial Institution means any financial institution described in 31 U.S.C. 5312(a)(2).

2. Information Request Based on Credible Evidence Concerning Terrorist Activity or Money Laundering. A federal law enforcement agency investigating terrorist activity or money laundering may request that FinCEN solicit certain information from a financial institution or a group of financial institutions. A written certification, as may be prescribed by FinCEN, is required to be submitted and must set forth the particulars with respect to the party being investigated.

3. Obligation of Financial Institution Receiving Information Request. A financial institution or a group of financial institutions that receives a FinCEN request shall expeditiously search its records to determine whether it maintains an account or is engaged in a transaction with the person or entity that is subject to the request.

4. Maintain Adequate Procedure to Protect Security and Confidentiality. Each financial institution shall maintain adequate procedures to protect the security and confidentiality of requests from FinCEN.

XI. Four-Year Congressional Review; Expedited Consideration.

A. In General. Effective the first day after the fiscal year 2005, Title III of the USA Patriot Act and any amendments thereto shall terminate if Congress enacts a joint resolution that reads as follows: “That provisions of the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001, and the amendments made thereby, shall no longer have the force of law.”

B. Expedited Consideration. Congress shall consider any joint resolution submitted hereunder expeditiously.

XII. FinCEN, Federal Banking Agencies, Bank Secrecy Act and Other Federal Statutes. Pursuant to the delegated authority from the Secretary of the Treasury, FinCEN is the administrator of the Bank Secrecy Act. FinCEN is provided the authority to examine financial institutions for compliance with the Bank Secrecy Act and regulations promulgated under the Bank Secrecy Act, as well as to take enforcement actions for violations of the Bank Secrecy Act and the implementing regulations under 31 U.S.C. §§ 5320-23. The Secretary of the Treasury may impose civil penalties, criminal penalties, and may pay rewards to and for informants to a “domestic financial institution or nonfinancial trade or business, and a partner, director, officer, or employee of a domestic financial institution or nonfinancial trade or business, willfully violating this subchapter or regulation prescribed or order issued under this subchapter (except sections 5314 and 5315 of this title or a regulation prescribed under sections 5314 and 5315), or willfully violating a regulation prescribed under section 21 of the Federal Deposit Insurance Act or section 123 of Public Law 91-508, is liable to the United States government for a civil penalty ….” The Secretary of the Treasury delegated Bank Secrecy Act examination authority, but not enforcement authority, to each of the federal banking agencies, discussed below, with respect to banking organizations supervised by the federal banking agencies. The federal banking agencies have separate authority pursuant to 12 U.S.C. §§ 1786 and 1818 to ensure that banking organizations comply with all laws and regulations, including the Bank Secrecy Act. FinCEN’s regulations state that each agency that performs FinCEN’s delegated examination authority shall make periodic reports to FinCEN.

XIII. Definition of “Suspicious” Activity. A suspicious activity is one that appears to involve the proceeds of criminal activity or is related to terrorist financing, or one that has no apparent economic or visible lawful purpose. FinCEN includes a definition of “suspicious activity” that is almost the same as the definition under the Financial Action Task Force Recommendations.

XIV. Bank’s and Financial Institution’s Requirement to File SARs. Financial Intermediaries are those who handle financial transactions and they include banks, thrift institutions, bank holding companies and non-bank subsidiaries, credit unions, U.S. branches and agencies of foreign banks, and certain other financial institutions are required to file SARs. 

A. Federal Banking Agencies. Five federal financial institution supervisory agencies (collectively, the “federal banking agencies”) and FinCEN require the filing of SARs. The five federal financial institutions and the federal banking agencies include the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, and Office of Thrift Supervision. 

B. The Agencies’ SAR Rules. The federal banking agencies, and certain other financial institutions, are required to file SARs pursuant to regulations issued by the federal banking agencies and FinCEN. The federal banking agencies’ SAR rules are authorized by various federal law, including the Bank Secrecy Act and generally require those financial institutions to file SARs with law enforcement and bank supervisory authorities whenever they know or suspect suspicious or potential criminal activity. 

C. Secretary of the Treasury Authorized to Require Filing of SARs. The Secretary of the Treasury has the power to require banks and other financial institutions to file SARs with the appropriate authorities. In 1992, the U.S. Congress passed the Annunzio-Wylie Anti-Money Laundering Act, providing the Secretary of the Treasury with the power to require banks and other financial institutions to file SARs, as well as mandatory and voluntary disclosure of suspicious activities. 

1. Regulations Requiring a SAR to be Filed. SARs are required to be filed, by sending a completed SAR to FinCEN, in the following circumstances: 

(c) SARs required. A national bank shall file a SAR with the appropriate Federal law enforcement agencies and the Department of the Treasury in accordance with the form’s instructions, by sending a completed SAR to FinCEN in the following circumstances:

(1) Insider abuse involving any amount. Whenever the national bank detects any known or suspected Federal criminal violation, or pattern of criminal violations, committed or attempted against the bank or involving a transaction or transactions conducted through the bank, where the bank believes that it was either an actual or potential victim of a criminal violation, or series of criminal violations, or that the bank was used to facilitate a criminal transaction, and the bank has a substantial basis for identifying one of its directors, officers, employees, agents or other institution-affiliated parties as having committed or aided in the commission of a criminal act, regardless of the amount involved in the violation.

(2) Violations aggregating $ 5,000 or more where a suspect can be identified. Whenever the national bank detects any known or suspected Federal criminal violation, or pattern of criminal violations, committed or attempted against the bank or involving a transaction or transactions conducted through the bank and involving or aggregating $ 5,000 or more in funds or other assets where the bank believes that it was either an actual or potential victim of a criminal violation, or series of criminal violations or that it was used to facilitate a criminal transaction, and the bank has a substantial basis for identifying a possible suspect or group of suspects. If it is determined prior to filing this report that the identified suspect or group of suspects has used an alias, then information regarding the true identity of the suspect or group of suspects, as well as alias identifiers, such as drivers’ license or social security numbers, addresses and telephone numbers, must be reported.

(3) Violations aggregating $ 25,000 or more regardless of potential suspects. Whenever the national bank detects any known or suspected Federal criminal violation, or pattern of criminal violations, committed or attempted against the bank or involving a transaction or transactions conducted through the bank and involving or aggregating $ 25,000 or more in funds or other assets where the bank believes that it was either an actual or potential victim of a criminal violation, or series of criminal violations, or that the bank was used to facilitate a criminal transaction, even though there is no substantial basis for identifying a possible suspect or group of suspects.

(4) Transactions aggregating $ 5,000 or more that involve potential money laundering or violate the Bank Secrecy Act. Any transaction (which for purposes of this paragraph (c)(4) means a deposit, withdrawal, transfer between accounts, exchange of currency, loan, extension of credit, or purchase or sale of any stock, bond, certificate of deposit, or other monetary instrument or investment security, or any other payment, transfer, or delivery by, through, or to a financial institution, by whatever means effected) conducted or attempted by, at or through the national bank and involving or aggregating $ 5,000 or more in funds or other assets, if the bank knows, suspects, or has reason to suspect that:

(i) The transaction involves funds derived from illegal activities or is intended or conducted in order to hide or disguise funds or assets derived from illegal activities (including, without limitation, the ownership, nature, source, location, or control of such funds or assets) as part of a plan to violate or evade any law or regulation or to avoid any transaction reporting requirement under Federal law;

(ii) The transaction is designed to evade any regulations promulgated under the Bank Secrecy Act; or

(iii) The transaction has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage, and the institution knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction.

(d) Time for reporting. A national bank is required to file a SAR no later than 30 calendar days after the date of the initial detection of facts that may constitute a basis for filing a SAR. If no suspect was identified on the date of detection of the incident requiring the filing, a national bank may delay filing a SAR for an additional 30 calendar days to identify a suspect. In no case shall reporting be delayed more than 60 calendar days after the date of initial detection of a reportable transaction. In situations involving violations requiring immediate attention, such as when a reportable violation is ongoing, the financial institution shall immediately notify, by telephone, an appropriate law enforcement authority and the OCC in addition to filing a timely SAR.

2. Financial Institutions Prohibited From Disclosing Existence of SARs. Financial institutions are prohibited from disclosing the existence of SARs or other reports of suspicious transactions to a government agency, in accordance with the following:

(g) Reporting of suspicious transactions. --

(1) In general. -- The Secretary may require any financial institution, and any director, officer, employee, or agent of any financial institution, to report any suspicious transaction relevant to a possible violation of law or regulation.

(2) Notification prohibited. --

(A) In general. -- If a financial institution or any director, officer, employee, or agent of any financial institution, voluntarily or pursuant to this section or any other authority, reports a suspicious transaction to a government agency--

(i) The financial institution, director, officer, employee, or agent may not notify any person involved in the transaction that the transaction has been reported; and

(ii) No officer or employee of the Federal Government or of any State, local, tribal, or territorial government within the United States, who has any knowledge that such report was made may disclose to any person involved in the transaction that the transaction has been reported, other than as necessary to fulfill the official duties of such officer or employee.

3. Safe Harbor From Civil Liability for Filing SARs. The Bank Secrecy Act and the federal banking agencies’ SAR regulations provide protection from civil liability to the financial institutions and their employees for filing a SAR or making disclosures in a SAR.

(3) Liability for disclosures. --
 
(A) In general. -- Any financial institution that makes a voluntary disclosure of any possible violation of law or regulation to a government agency or makes a disclosure pursuant to this subsection or any other authority, and any director, officer, employee, or agent of such institution who makes, or requires another to make any such disclosure, shall not be liable to any person under any law or regulation of the United States, any constitution, law, or regulation of any State or political subdivision of any State, or under any contract or other legally enforceable agreement (including any arbitration agreement), for such disclosure or for any failure to provide notice of such disclosure to the person who is the subject of such disclosure or any other person identified in the disclosure. 

4. Protection From Reporting Possible Criminal Activity. Financial institutions and officers, employees, and agents are granted immunity from suit based on their having filed a SAR that discloses a possible crime.

5. Case Law Interpreting Safe Harbor Protection to Financial Institutions. U.S. courts have disagreed about the scope of protection available with respect to the safe harbor provisions. Some courts limit the safe harbor protection to disclosures made on a good faith belief that a violation occurred. Other courts decline to extend the safe harbor protection to financial institutions that may have misrepresented material facts. A majority of the courts, however, provide unqualified protection under the safe harbor provisions to financial institutions and their employees from civil liability for filing a SAR. Other cases provide qualified protection under the safe harbor provisions to financial institutions and their employees from civil liability for filing a SAR.

D. Memorandum of Understanding, September 2004. A Memorandum of Understanding was entered into by the federal banking agencies and FinCEN that set forth procedures for the exchange of certain information among the federal banking agencies and FinCEN.

XV. Financial Action Task Force. The Financial Action Task Force (“FATF”) is an inter-governmental body consisting of 33 Members (31 countries, including the U.S., and two international organizations) that studies money laundering trends and issues non-binding recommendations expected to be implemented by national government authorities. The Task Force is a “policy-making body” that works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas.

A. The FATF Monitors Members. The FATF monitors members’ progress in implementing necessary measures, reviews money laundering and terrorist financing techniques and counter-measures, and promotes the adoption and implementation of appropriate measures globally. In performing these activities, the FATF collaborates with other international bodies involved in combating money laundering and the financing of terrorism.

B. The FATF Has No Constitution. The FATF does not have a tightly defined constitution or an unlimited life span. The Task Force reviews its mission every five years. The FATF began in 1989, and it has been agreed that its current mandate extends through the end of 2004. It will only continue to exist and to perform its function after this date provided the member governments agree that this is necessary.

C. FATF Working Group. An FATF working group, with U.S government involvement, developed options for future recommendations on the Gatekeeper Initiative. The FATF first published a Consultation Paper and later issued Revised Anti-Money Laundering Recommendations (hereinafter “FATF Recommendations”).

D. FATF Mandate Review for Eight Years. The representatives from the FATF Members reaffirmed their commitment to the FATF and renewed the FATF’s mandate to combat money laundering and terrorist financing for a further eight years.

XVI. The Gatekeeper Initiative. The “Gatekeeper Initiative” is a concept for anti-money laundering initiatives directed specifically at certain professionals, like lawyers, accountants and auditors. It stems from a Communiqué of the G-8 Finance Ministers in Moscow in October 1999 calling upon countries to consider various means to address money laundering through the efforts of professional “gatekeepers” to the international financial/business markets.

A. Consultation Paper. On May 31, 2002, FATF published a Consultation Paper that identifies several areas where possible changes could be made to the FATF anti-money laundering framework. The options identified in the Consultation Paper include (1) imposing enhanced “due diligence” requirements on lawyers regarding clients and source of funds used in transactions, and maintaining records on client activities that could be produced to law enforcement agencies; (2) requiring lawyers to file “suspicious activity reports” (also referred to as “suspicious transaction reports”) regarding certain client activities that may involve money laundering; and (3) prohibiting lawyers form informing clients that such reports have been filed with the government enforcement authorities. The Consultation Paper recognizes the need to protect the attorney-client privilege.

B. American Bar Association Task Force. In February 2002 then American Bar Association (“ABA”) President Bob Hirshon created an ABA Task Force on Gatekeeper Regulation and the Profession to respond to initiatives by the FATF, the U.S. Department of Justice and other organizations that would impact the attorney-client relationship in the context of money laundering enforcement. ABA President Alfred P. Carlton, Jr., has continued strong support for the Task Force in its mission. The Task Force has met on numerous occasions with the U.S. Department of Justice and Treasury Department officials involved in the Gatekeeper Initiative, to discuss the Initiative and the concerns of the profession. The Task Force provided comments to the FATF on its Consultation Paper, and also participated in an FATF public forum that took place in October 2002, where other organizations also voiced their opinions and concerns. The Task Force has also been instrumental in promoting education of bar members on money laundering risks and responsibilities, and the Gatekeeper Initiative. 

1. ABA Response to Consultation Paper. The ABA responded to the consultation paper and stated that to the extent that the FATF Recommendations apply to lawyers, it must be carefully tailored and focused primarily on attorneys who receive a transfer of funds on behalf of clients. The ABA Task Force supported the principal recommendations that require attorneys, when acting as financial intermediaries, to verify the identities of clients, maintain records on domestic and international transactions, and develop training programs that help attorneys identify potential money laundering schemes or other situations in which the domestic or international monetary system may be used for criminal purposes. The ABA Task Force opposed proposals that require attorneys to identify and report suspicious activities to authorities and the related proposal that prevents attorneys from notifying a client that such information has been so reported—tipping off.

2. ABA House of Delegates Adopts Resolution 104. In 2003, the ABA House of Delegates adopted Resolution 104. This resolution regards the attorney-client relationship and confidentiality as it relates to U.S. anti-money laundering enforcement objectives. The Resolution opposes any law or regulation, implemented for anti-money laundering or terrorist financing purposes, that compels lawyers to disclose client confidential information to law enforcement authorities through SAR reporting requirements that otherwise compromises the independence of the bar or attorney-client relationship. The Resolution recognizes the importance of continued education of the profession as a result of the legitimate interests of the government in preventing money laundering and terrorist financing. The Resolution also commits the bar to review ethical rules regarding permissive disclosure of confidential information to determine if modifications may be appropriate to address law enforcement concerns.

C. U.S. Embraces and Implements the Initiative. The following information is from Bruce A. Zagaris, The Gatekeepers Initiative: An Emerging Challenge For Professional Advisors of International Business and Tax Matters, 2002 ABA/ABA Money Laundering Enforcement Seminar (October 27-29, 2002).
   
1. Actions of U.S. Treasury and U.S. Department of Justice.  As a result of the G-8 Summit in Moscow and other initiatives to prevent and combat transnational crime, the U.S. Treasury and Justice Departments in the National Money Laundering Strategy for 2000 offered an initiative to develop a partnership with associations of legal and financial professionals to ensure that money launderers are denied access to the financial system.  In particular, lawyers, accountants and auditors serve as the gatekeepers to the domestic and international financial system and hence are uniquely in a position either to facilitate money laundering or, on the other hand, to deter and detect the crime.  The initiative is designed to ensure that such gatekeepers are not unwitting facilitators of money laundering schemes.  Two action items are in play under the implementation of the Strategy.  The first is that a study group has been established consisting of the Departments of the Treasury and Justice, FinCEN, the SEC, and the federal bank regulators to examine how best to utilize accountants and auditors in the detection and deterrence of money laundering.  A second is that the Chief of the Asset Forfeiture and Money Laundering Section of the Department of Justice is reviewing the professional responsibilities of lawyers and accountants with regard to money laundering and will make recommendations ranging from enhanced professional education, standards or rules, to legislation as might be needed.   
 
2. Interagency Working Group to Propose Preliminary Recommendations. With respect to the review of professional responsibilities of gatekeepers, the Strategy requires an interagency working group to propose preliminary recommendations to the Money Laundering Steering Committee by the end of June.  There seem to be three options: (1) increased education; (2) application of new rules with respect to professional responsibility; and (3) application of SARs [sic Suspicious Activity Reports] on the federal and/or state levels to gatekeepers.
 
3. Interagency Task Force Meetings with ABA. To explore these options, an interagency task force has held initial meetings with members of the ABA. These meetings have been exploratory in nature, whereby the task force has set forth the conceptual nature of the initiative, the options, and solicited help and support of the ABA groups. Officials in the Inter-Agency Task Force have reported that their efforts are somewhat in arrears because of the press of work on the FATF on Anti-Money Laundering report on non-cooperative countries.  In other words, the Task Force has prioritized compliance by other countries over that in the U.S.   
 
4. U.S. National Money Laundering Strategy Report 2002. A priority in the U.S. National Money Laundering Strategy Report 2002 is to work with FATF countries to complete the revisions of the Forty Recommendations.  In this regard, the U.S. will start drafting the revised FATF Recommendations during fall 2002 with an anticipated completion date of spring 2003. 
 
5. U.S. Lawyers Involved in Business and Estate Planning Ask to be Exempted. In particular, many U.S. lawyers involved in business and estate planning do not believe they should be covered. Tax shelter laws in the U.S. already impose on lawyers reporting requirements with respect to this activity. For instance Section 6111 of the Internal Revenue Code of 1986, as amended, already requires a tax shelter organizer to register the shelter with the Secretary, no later than the day on which the shelter is first offered for sale, by filing a Form 8264 (.Application for Registration of a Tax Shelter.). In addition, Section 6112 of the Code requires a person who organizes a potentially abusive tax shelter or sells an interest therein to maintain for a period of seven years a list identifying each person who was sold an interest in any tax shelter with respect to which registration was required under Section 6111 or which the Secretary determines has a potential for tax avoidance. Treasury Regulations issued under Section 6112 require detailed information about the shelter. On international transactions, lawyers and clients must already comply with the Qualified Intermediary Regulations, Section 6038 regulations for foreign persons with ownership of U.S. corporations, foreign trust reporting, correspondent bank regulations under the USA Patriot Act, the Customs and Monetary Instruments Report for cross-border payments, IRS Form 8300 under I.R.C. Sec. 5060I for cash payments received in a business, and a host of other laws and regulations.  In addition, U.S. lawyers already operate under a complex mix of regulations, especially with respect to international transactions. Many of these laws apply uniquely in the U.S. and mean that additional (e.g., anti-money laundering reporting) laws would be duplicative.

D. Due Diligence Implications for U.S. Professionals.  The following information is also from Bruce A. Zagaris, The Gatekeepers Initiative: An Emerging Challenge For Professional Advisors of International Business and Tax Matters, 2002 ABA/ABA Money Laundering Enforcement Seminar (October 27-29, 2002).  

1. Implications to Professionals From Anti-Money Laundering Due Diligence Requirements. Many implications may flow from subjecting attorneys, accountants, auditors, and other independent professionals to anti-money laundering due diligence, such as the requirements to know your customer and identify and report suspicious activities.

2. Businesses Must Have a Compliance Officer to Develop Mechanisms to Prepare Due Diligence Plan. In the other lines of business to which anti-money laundering due diligence applies (e.g., banks, money-service businesses, savings & loans, credit institutions, and broker-dealers), the business must hire a compliance officer and develop mechanisms to prepare a due diligence plan [to] help implement it.  This includes the development of training, as well as internal and external audit procedures.  It is no excuse that the business is small and cannot afford such mechanisms.  A distinction between banks and financial institutions and law firms is that, unlike banks and financial institutions, some law firms are very small.

3. No State Has Adopted the Gatekeeper Initiative with Respect to Lawyers. Clearly the implications raised in this section do not apply yet to lawyers because no state has proactively applied the gatekeepers initiative.  For instance, although the United Kingdom has a law requiring professionals to make SARs and occasionally issues reports, citing the low incidence of the reports and warning enforcement actions against lawyers who do not obey the law, such actions have been rare. This section assumes that the U.S., if it adopts its anti-money laundering laws to professionals, will continue to proactively implement and enforce them.

4. Issues with Respect to Lawyer Reporting a Suspicious Activity and the “Tipping Off” Criminal Offense. Some issues that are likely to arise include the proper steps a lawyer/law firm should take after it must report a suspicious activity.  Currently anti-money laundering law would preclude them from disclosing the report to their client, since this would be tipping off a criminal offense. The more difficult issues include what does a law firm do vis-a-vis an existing client after it files a suspicious activity (transaction) report (“SAR”). Banks and financial institutions must grapple with this same problem.  Sometimes they obtain guidance from regulatory or law enforcement authorities. However, in the bulk of cases they are not able to obtain initially any reliable information. Continuing to do business with a client against whom a law firm has filed a SAR is precarious. Terminating a relationship is sensitive, especially if the report does not result in a prosecution or even a criminal investigation.  Terminating a relationship in the middle of an assignment may lead to liability due to breach of contract, malpractice, breach of ethical obligations (e.g., obligation of confidentiality, obligation to zealously represent the client) or commercial losses to the law firm (e.g., due to loss of work and overall loss of clients). 

5. Potential Criminal Liability to Law Firm Upon Filing a SAR. Another issue is whether filing a SAR would lead to criminal liability on the part of the law firm.  For instance, the filing of a SAR may trigger investigation into prior conduct between the law firm and the client and lead the regulatory and/or law enforcement authority to believe that the law firm should have known and acted earlier or that the law firm was a co-conspirator, aider, or abetter in some related activity.  In addition to the SAR violating the right to client confidentiality, the law firm may violate the client’s right to attorney-client privilege and right against self-incrimination.  In addition, in the event law enforcement authorities prosecute the law firm, the lawyer would have waived his or her own right against self-incrimination. 

6. Lawyers Protected From Criminal and Civil Liability. Under the FATF Recommendations, lawyers receive protection from criminal and civil liability where the reporting requirements cause them to breach a contractual, legislative, regulatory, or administrative restriction regarding disclosure. However, it is unclear if this protection extends to the violation of ethical rules and whether a lawyer may withdraw from representing clients for whom they have filed a SAR.  

7. Implications of Countries Exchanging SAR Information. In the international context, SAR information has gained increased significance because some countries are exchanging SAR information.  The EU has a policy on exchanging SARs.

8. U.S. Policy is to Exchange SAR Information. In accordance with the USA Patriot Act §§ 314(a) and (b), the U.S. is trying as a matter of policy to exchange SAR information. One fundamental obstacle is that, whereas the U.S. treats SAR as intelligence information that can be kept indefinitely, the EU policy is that, unless used for prosecution purposes, such intelligence information must be destroyed after a period of years. Just as importantly, the U.S. and many other countries prefer informal cooperation, whereby there are no formal rules. The problem with informal cooperation is that the rights of private individuals and entities, whether they are the targets or just third party stakeholders, are not protected.  Recent mutual assistance treaties in criminal matters (MLATs) that grant the government compulsory process rights, as delimited by the respective treaties, expressly state that the treaties do not create a right for a “private person” to obtain evidence.  In such MLATs, the U.S. has insisted on a provision that states as follows: 
 
This Treaty is intended solely for mutual legal assistance between the Parties.  The provisions of this Treaty shall not create any right on the part of any private person to obtain, suppress, or exclude any evidence, or to impede the execution of a request. 

9. Preventing MLATs From Being Used to Suppress or Exclude Evidence to Impede Criminal Investigations. The purpose is to prevent MLATs from being used to suppress or exclude evidence or to impede criminal investigations.  Hence, if adversely affected persons want to prevent the execution of requests that they believe were made in violation of the treaty, their only recourse under the treaty is to the executive authority of the requested country, not its courts.  Similarly, if they want to contest that the requested country violated the terms of the treaty in executing a request, they can complain only to the executive authorities of the respective countries. Hence, the CCBE [Conseil Consultative Europeén de Barreau] has urged that Bars and Law Societies throughout the EU [European Union] work with national governments to maintain consistency in implementing legislation with respect to the expression ascertaining the legal position and its interaction with the knowledge requirement for money laundering. 
 
10. Impact on the Attorney-Client Privilege. A major issue that will be impacted by anti-money laundering due diligence and the gatekeeper’s initiative is the attorney-client privilege.  One of the problems is that the privilege varies considerably among countries and among professionals (attorney-client vs. accountant-client). In a global world a client, whether intending to conduct legitimate or illegitimate activities, will be able to spot and take advantage of the gaps in the law. 
 
11. Professionals Warning Clients of Their Obligations with Respect to Anti-Money Laundering Due Diligence Requirements. To reduce risks and potential liabilities from any actions from potentially disgruntled clients, law firms are likely to follow the lead of banks and financial institutions:  they will insert into professional service agreements broad clauses, warning potential clients of their obligations as part of the anti-money laundering due diligence and seeking a waiver in such cases of their ethical obligations, such as privacy, obligation to zealously represent the client, and so forth.

12. Problems with Respect to Filing of SARs. The ability to send SARs to bar associations rather than the regulatory agency is not satisfactory for attorneys or their clients. Ultimately, the bar association is faced with the same requirements as the regulatory agency. Decisions must be made on whether to quickly undertake further investigations of a criminal nature or whether to defer action. The decision may result not from the quality of the SAR, but from the prioritization of resources in the context of the number of ongoing leads from other sources. Nevertheless, the above-mentioned concerns about privacy, liability, and so forth are not eliminated by investing the bar as a middleman. Further, reliance on the bar raises many sensitive issues about the capabilities of bar associations to act as a financial intelligence unit and the nature of the relationship between the bar association, attorneys, and clients once the bar association assumes the role of intermediary for the regulatory agencies.

E. ABA Opposes Gatekeeper Initiative for Lawyers. The following information is from the ABA Task Force on Gatekeeper Regulation and the Professional Section of Real Property, Probate and Trust Law Criminal Justice Section, Section of Litigation, Section of International Law and Practice Report to the House of Delegates:

RECOMMENDATION

RESOLVED, That the American Bar Association supports the enactment of reasonable and balanced initiatives designed to detect and prevent domestic and international money laundering and terrorist financing. 

FURTHER RESOLVED, That any efforts to establish and implement international and United States policies to combat domestic and international money laundering and terrorist financing should be consistent with the following principles: 

(1) lawyers play a critical and independent role in the administration of justice and in ensuring lawful compliance by persons and entities involved in commercial and financial activities; 

(2) the judiciary and the organized bar are responsible for establishing ethical rules governing the activities of lawyers and for ensuring that the profession adheres to the highest standards of professional and lawful conduct; and 

(3) there is a critical need for confidentiality in client communications with lawyers to ensure the independence of the bar, protect the lawyer-client relationship, and support the proper functioning of the legal system; 

FURTHER RESOLVED, That the American Bar Association: 

(1) opposes any law or regulation that, while taking action to combat money laundering or terrorist financing, would compel lawyers to disclose confidential information to government officials or otherwise compromise the lawyer-client relationship or the independence of the bar; and 

(2) will continue to review the Model Rules of Professional Responsibility and evaluate whether the rules permitting, in appropriate circumstances, disclosure of confidential information should be modified to permit disclosure of information demonstrating the clear intent of a client to commit criminal acts such as money laundering; and 

(3) urges bar associations and law schools to undertake education efforts to ensure that lawyers are informed regarding the scope of money laundering laws and the anti-money laundering requirements that apply to lawyers to safeguard the profession from being used to facilitate money laundering or terrorist financing activity. 

F. Implications for Transactional Lawyers. A chilling effect on the attorney-client relationship for transactional lawyers, such as tax lawyers, corporate lawyers, estate planning attorneys and business lawyers, will result from the Gatekeeper Initiative.  The client will have no assurance that his or her disclosures will be kept in confidence.  The Gatekeeper Initiative will also affect transactional lawyers and their clients engaged in international practices.
 
1. Definition of “Gatekeeper.” A “gatekeeper” is one who controls access. In the context of international money laundering and terrorist financing, lawyers are viewed as “gatekeepers” to the domestic and international monetary system. Some believe that the special relationship between lawyers and their clients gives lawyers an early inside view into crimes that could make their insights invaluable in the war on domestic and international criminal activity. Indeed, the confidentiality obligations of lawyers make them particularly attractive to those who desire to engage in money laundering activities. The Gatekeeper Initiative is designed to create additional hurdles for those who seek to gain access to this monetary system.

2. Genesis of The Gatekeeper Initiative. The Gatekeeper Initiative, which seeks to define the roles and responsibilities of lawyers in combating money laundering activities, has its genesis in the Ministerial Conference of the G-8 Countries on Combating Transnational Organized Crime held October 19-20, 1999, in Moscow. In a document known as the Moscow Communiqué, the G-8 Members agreed to bring their respective anti-money laundering regimes into closer alignment and “to consider putting certain responsibilities, as appropriate, on those professionals, such as lawyers, accountants, company formation agents, auditors, and other financial intermediaries who can either block or facilitate the entry of organized crime money into the financial system.”

3. Erosion of Attorney-Client Relationship. The horrifying events of September 11 have led to comprehensive laws and regulations designed to prevent these events from occurring again. But the quest to extinguish all forms of money laundering and terrorist financing may have the real, but unintended, consequence of severely eroding the attorney-client relationship and forever altering this relationship of trust and confidence clients place in their lawyers.

G. ABA Opposes Lawyers Filing SARs. The Letter from Alfred P. Carlton, Jr., ABA, The Honorable Orrin H. Hatch, Chair and The Honorable Patrick Leahy Ranking Democratic Member Committee on the Judiciary, 108th Congress (March 6, 2003) states that the ABA “opposes requiring lawyers to file suspicious-transaction reports on their client’s activities because of the unprecedented and significant adverse impact on the attorney-client relationship, the independence of the bar, and the compliance-counseling role of lawyers in our society.”

H. FATF Revised Anti-Money Laundering Recommendations. The FATF Recommendations issued in June 2003, have significant ethical implications for the legal profession. The FATF Recommendations provide that “Countries should apply the crime of money laundering to all serious offenses … including … predicate offenses.” The FATF designates twenty categories of predicate offenses to be adopted in the laws of each country. Tax crimes are not included in the list of predicate offenses unless they fall under a broader category such as “fraud,” and each country will decide whether to include tax crimes on its list of predicate offenses.

1. Financial Transactions Extended to Lawyers. Customer due diligence and record-keeping requirements governing financial institutions are extended to “lawyers, notaries, and other independent legal professions, and accountants when they prepare for or carry on transactions for their client” relating to certain specified activities including: (1) buying or selling real estate; (2) managing client money, securities, or other assets; (3) managing bank, savings, or securities accounts; (4) organizing contributions for the creation, operation, or management of companies; and (5) creating, operating, or managing legal persons or arrangements, and buying and selling business entities. These activities are referred to as financial transactions.

2. Verify Parties, Beneficial Owners and Business Purpose. The due diligence provisions require that lawyers verify identities of the parties and beneficial owners and the business purpose of the transaction. In addition, continuing due diligence on the source of the subject funds may also be required. Enhanced due diligence is required by lawyers with respect to high-risk transactions, such as those involving politically exposed persons.

3. Maintain All Necessary Records. Lawyers are required to maintain “all necessary records” regarding the specified transactions, including information obtained through due diligence, for at least five years after the client relationship ends. The involvement of a “complex, unusual large transaction” that lack an apparent economic or visible lawful purpose requires lawyers to investigate the background and purpose of the transaction and memorialize their findings and make this writing available to authorities upon appropriate authorization and subject to any legal privilege that applies.

4. “Tipping Off” Rule. Under the June 2003 FATF Recommendations, lawyers, notaries, or other independent legal professions, and accountants must report “suspicious activities” to government authorities or self-regulatory organizations, when the lawyer is engaging in a “financial transaction” on behalf of or for clients in the five areas described in connection with the due diligence requirements. It does not appear that contemplated financial transactions will trigger the SAR reporting requirements.

5. Definition of “Suspicious” Activity. Determining whether a transaction is “suspicious” is to be judged on an objective standard and whether the lawyer “suspects or has reasonable grounds to suspect” money laundering. The FATF Recommendations contain an exception to the SAR requirement if the information that leads to the “suspicion” is obtained in circumstances where lawyers are subject to professional secrecy or legal professional privilege, but it is not clear whether the term “professional secrecy” includes “confidential communications.” ABA Model Rule 1.6, as well as most states, permits lawyers to disclose client confidential information only when the lawyer reasonably believes that the client is engaged in specified illegal conduct. Mandatory disclosures of “suspicious activity” represents a serious departure from ethical obligations of lawyers and jeopardizes the lawyer-client communications that are required for proper legal advice and assistance provided to law-abiding clients.

I. ABA Response to Revised FATF Recommendations. The ABA Task Force on Gatekeeper Regulations and the Profession, which includes representatives from the Section of International Law and Practice, expressed to the FATF its concerns that imposing requirements on lawyers, similar to those on financial institutions, will be unreasonably and unnecessarily burdensome, especially for small firms and sole practitioners. Furthermore, the ABA states strongly that any anti-money laundering requirements must focus on lawyer activities that involve the actual transferring, holding, or moving of money for the client in order to avoid infringing on the attorney-client relationship.

J. Recommended Best Practices for a Lawyer Acting Solely as a Lawyer. The International Committee of the Real Property, Probate and Trust Law Section of the ABA recommends a “best practices” approach for U.S. lawyers who engage solely in the practice of law. It is proposed that those “best practices” for meeting the requirement of “Knowing Your Client” and “due diligence” include the following:

1. Know One’s Client:

1.  Identify the Client.

a.  Request a copy of the prospective client’s passport or other clear means of identification such as a driver’s license with a picture.

b. Insure the prospective c1ient is the principal and not an agent for someone else. If an agent, determine who the principal is and obtain the requisite identification.

c.  Ascertain a home address for the principal and, if relevant, the agent.

d.  Ascertain a work address for the principal and, if relevant, the agent.

e.  If the prospective client is an entity, obtain proof of creation and good standing, addresses of offices, names of officers and directors, partners or members and the purpose(s) of the entity.

f.  If the prospective client is a law, accounting or investment firm acting for a principal see 1.b. above.

g.  If the prospective client is a trust, obtain the identity of, and addresses for, the trustee(s) and/or beneficiaries, as well as a copy of the trust agreement.

h.  Obtain one or two letters of recommendation from a reputable, independent source, such as a financial institution, professional advisor or the like.

i.  If the engagement is ongoing, the required information should be updated periodically, at least annually.

2.  Identify and understand the nature of the engagement

a.  Identify the parties involved.

b.  Determine the nature of the engagement.

c.  Identify any pertinent relevant information necessary to represent the client for the engagement, such as insuring there are no conflicts of interest, or, if there are, obtaining appropriate waivers.

d.  If any information is unclear it should be verified.

e.  An engagement letter, including a description of the services to be rendered, should be prepared and executed by the client.

2. Due Diligence and Record Maintenance.

1. The lawyer should obtain full details regarding the (i) prospective client’s source of funds and (ii) contemplated transaction.

2.  If the transaction is complex or unusual, the lawyer should insure (i) it has economic substance and (ii) a lawful purpose.

3.  The lawyer should, when practicable, meet the client at the client’s place of business or home.

4.  The lawyer should obtain independent corroborative support of any relevant information that may be unclear or suspect.

5.  If the engagement expands, the lawyer should apply the above principles to the new aspects of the engagement.

6.  The lawyer should maintain records for at least 5 years.

XVII. Discussion Questions

1. What are the primary purposes of Title III of the USA Patriot Act?

2. What are the definitions of correspondent account, interbank account, payable-through account and covered financial institution?

3. What are the requirements with respect to establishing an anti-money laundering program under the USA Patriot Act?

4. What are some examples of failures by banks and financial institutions to establish anti-money laundering programs?

5. What are the requirements with respect to a foreign bank establishing a U.S. correspondent account with a U.S. bank?

6. What are the minimum requirements with respect to identification and verification of accountholders?

7. What are special measure matters and who can determine whether a special measure matter exits?

8. What are the special due diligence requirements for correspondent accounts and private banking accounts?

9. What are the prohibitions on U.S. correspondent accounts with foreign shell banks?

10. What are the rules and consequences of the cooperation and information sharing procedures?

11. Who do the Federal Banking Agencies consist of?

12. What are the requirements with respect to the filing of suspicious activity reports?

13. What is the Financial Action Task Force and the purpose of its Forty Revised Recommendations?

14. What is the Gatekeeper Initiative and discuss how it affects financial institutions and the potential impact on practicing lawyers?

15. What are the record keeping requirements and the requirements to file suspicious activity reports under the USA Patriot Act, Bank Secrecy Act, Federal Reserve and others?

16. What are the recommended best practices for a lawyer who is acting solely as a lawyer?

APPENDIX A

USA PATRIOT Act 
TITLE III—INTERNATIONAL MONEY LAUNDERING ABATEMENT AND ANTI-TERRORIST FINANCING ACT OF 2001 SEC. 301. SHORT TITLE.

This title may be cited as the “International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001”.

SEC. 302. FINDINGS AND PURPOSES. 

(a) FINDINGS.—The Congress finds that— 

(1) money laundering, estimated by the International Monetary Fund to amount to between 2 and 5 percent of global gross domestic product, which is at least $600,000,000,000 annually, provides the financial fuel that permits transnational criminal enterprises to conduct and expand their operations to the detriment of the safety and security of American citizens; (2) money laundering, and the defects in financial transparency on which money launderers rely, are critical to the financing of global terrorism and the provision of funds for terrorist attacks; (3) money launderers subvert legitimate financial mechanisms and banking relationships by using them as protective covering for the movement of criminal proceeds and the financing of crime and terrorism, and, by so doing, can threaten the safety of United States citizens and undermine the integrity of United States financial institutions and of the global financial and trading systems upon which prosperity and growth depend; (4) certain jurisdictions outside of the United States that offer ‘‘offshore’’ banking and related facilities designed to provide anonymity, coupled with weak financial supervisory and enforcement regimes, provide essential tools to disguise ownership and movement of criminal funds, derived from, or used to commit, offenses ranging from narcotics trafficking, terrorism, arms smuggling, and trafficking in human beings, to financial frauds that prey on law-abiding citizens; (5) transactions involving such offshore jurisdictions make it difficult for law enforcement officials and regulators to follow the trail of money earned by criminals, organized international criminal enterprises, and global terrorist organizations; (6) correspondent banking facilities are one of the banking mechanisms susceptible in some circumstances to manipulation by foreign banks to permit the laundering of funds by hiding the identity of real parties in interest to financial transactions; (7) private banking services can be susceptible to manipulation by money launderers, for example corrupt foreign government officials, particularly if those services include the creation of offshore accounts and facilities for large personal funds transfers to channel funds into accounts around the globe; (8) United States anti-money laundering efforts are impeded by outmoded and inadequate statutory provisions that make investigations, prosecutions, and forfeitures more difficult, particularly in cases in which money laundering involves foreign persons, foreign banks, or foreign countries; (9) the ability to mount effective counter-measures to international money launderers requires national, as well as bilateral and multilateral action, using tools specially designed for that effort; and (10) the Basle Committee on Banking Regulation and Supervisory Practices and the Financial Action Task Force on Money Laundering, of both of which the United States is a member, have each adopted international anti-money laundering principles and recommendations. 

(b) PURPOSES.—The purposes of this title are— 

(1) to increase the strength of United States measures to prevent, detect, and prosecute international money laundering and the financing of terrorism; (2) to ensure that— 

(A) banking transactions and financial relationships and the conduct of such transactions and relationships, do not contravene the purposes of subchapter II of chapter 53 of title 31, United States Code, section 21 of the Federal Deposit Insurance Act, or chapter 2 of title I of Public Law 91–508 (84 Stat. 1116), or facilitate the evasion of any such provision; and (B) the purposes of such provisions of law continue to be fulfilled, and such provisions of law are effectively and efficiently administered; (3) to strengthen the provisions put into place by the Money Laundering Control Act of 1986 (18 U.S.C. 981 note), especially with respect to crimes by non-United States nationals and foreign financial institutions; (4) to provide a clear national mandate for subjecting to special scrutiny those foreign jurisdictions, financial institutions operating outside of the United States, and classes of international transactions or types of accounts that pose particular, identifiable opportunities for criminal abuse; (5) to provide the Secretary of the Treasury (in this title referred to as the ‘‘Secretary’’) with broad discretion, subject to the safeguards provided by the Administrative Procedure Act under title 5, United States Code, to take measures tailored to the particular money laundering problems presented by specific foreign jurisdictions, financial institutions operating outside of the United States, and classes of international transactions or types of accounts; (6) to ensure that the employment of such measures by the Secretary permits appropriate opportunity for comment by affected financial institutions; (7) to provide guidance to domestic financial institutions on particular foreign jurisdictions, financial institutions operating outside of the United States, and classes of international transactions that are of primary money laundering concern to the United States Government; (8) to ensure that the forfeiture of any assets in connection with the anti-terrorist efforts of the United States permits for adequate challenge consistent with providing due process rights; (9) to clarify the terms of the safe harbor from civil liability for filing suspicious activity reports; (10) to strengthen the authority of the Secretary to issue and administer geographic targeting orders, and to clarify that violations of such orders or any other requirement imposed under the authority contained in chapter 2 of title I of Public Law 91–508 and subchapters II and III of chapter 53 of title 31, United States Code, may result in criminal and civil penalties; (11) to ensure that all appropriate elements of the financial services industry are subject to appropriate requirements to report potential money laundering transactions to proper authorities, and that jurisdictional disputes do not hinder examination of compliance by financial institutions with relevant reporting requirements; (12) to strengthen the ability of financial institutions to maintain the integrity of their employee population; and (13) to strengthen measures to prevent the use of the United States financial system for personal gain by corrupt foreign officials and to facilitate the repatriation of any stolen assets to the citizens of countries to whom such assets belong. 

SEC. 303. 4-YEAR CONGRESSIONAL REVIEW; EXPEDITED CONSIDERATION. 

(a) IN GENERAL.—Effective on and after the first day of fiscal year 2005, the provisions of this title and the amendments made by this title shall terminate if the Congress enacts a joint resolution, the text after the resolving clause of which is as follows: ‘‘That provisions of the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001, and the amendments made thereby, shall no longer have the force of law.’’

(b) EXPEDITED CONSIDERATION.—Any joint resolution submitted pursuant to this section should be considered by the Congress expeditiously. In particular, it shall be considered in the Senate in accordance with the provisions of section 601(b) of the International Security Assistance and Arms Control Act of 1976. 

Subtitle A—International Counter Money Laundering and Related Measures 
SEC. 311. SPECIAL MEASURES FOR JURISDICTIONS, FINANCIAL INSTITUTIONS, OR INTERNATIONAL TRANSACTIONS OF PRIMARY MONEY LAUNDERING CONCERN. 

(a) IN GENERAL.—Subchapter II of chapter 53 of title 31, United States Code, is amended by inserting after section 5318 the following new section: 
‘‘§ 5318A. Special measures for jurisdictions, financial institutions, or international transactions of primary money laundering concern 

‘‘(a) INTERNATIONAL COUNTER-MONEY LAUNDERING REQUIREMENTS.— 

‘‘(1) IN GENERAL.—The Secretary of the Treasury may require domestic financial institutions and domestic financial agencies to take 1 or more of the special measures described in subsection (b) if the Secretary finds that reasonable grounds exist for concluding that a jurisdiction outside of the United States, 1 or more financial institutions operating outside of the United States, 1 or more classes of transactions within, or involving, a jurisdiction outside of the United States, or 1 or more types of accounts is of primary money laundering concern, in accordance with subsection (c). 

‘‘(2) FORM OF REQUIREMENT.—The special measures described in— 

‘‘(A) subsection (b) may be imposed in such sequence or combination as the Secretary shall determine; 

‘‘(B) paragraphs (1) through (4) of subsection (b) may be imposed by regulation, order, or otherwise as permitted by law; and 

‘‘(C) subsection (b)(5) may be imposed only by regulation. 

‘‘(3) DURATION OF ORDERS; RULEMAKING.— 
Any order by which a special measure described in paragraphs (1) through (4) of subsection (b) is imposed (other than an order described in section 5326)— 

‘‘(A) shall be issued together with a notice of proposed rulemaking relating to the imposition of such special measure; and ‘‘(B) may not remain in effect for more than 120 days, except pursuant to a rule promulgated on or before the end of the 120-day period beginning on the date of issuance of such order. 

‘‘(4) PROCESS FOR SELECTING SPECIAL MEASURES.—In selecting which special measure or measures to take under this subsection, the Secretary of the Treasury— 

‘‘(A) shall consult with the Chairman of the Board of Governors of the Federal Reserve System, any other appropriate Federal banking agency, as defined in section 3 of the Federal Deposit Insurance Act, the Secretary of State, the Securities and Exchange Commission, the Commodity Futures Trading Commission, the National Credit Union Administration Board, and in the sole discretion of the Secretary, such other agencies and interested parties as the Secretary may find to be appropriate; and 

‘‘(B) shall consider— 
‘‘(i) whether similar action has been or is being taken by other nations or multilateral groups; 
‘‘(ii) whether the imposition of any particular special measure would create a significant competitive disadvantage, including any undue cost or burden associated with compliance, for financial institutions organized or licensed in the United States; 
‘‘(iii) the extent to which the action or the timing of the action would have a significant adverse systemic impact on the international payment, clearance, and settlement system, or on legitimate business activities involving the particular jurisdiction, institution, or class of transactions; and 
‘‘(iv) the effect of the action on United States national security and foreign policy. 

‘‘(5) NO LIMITATION ON OTHER AUTHORITY.— 
This section shall not be construed as superseding or otherwise restricting any other authority granted to the Secretary, or to any other agency, by this subchapter or otherwise. 

‘‘(b) SPECIAL MEASURES.—The special measures referred to in subsection (a), with respect to a jurisdiction outside of the United States, financial institution operating outside of the United States, class of transaction within, or involving, a jurisdiction outside of the United States, or 1 or more types of accounts are as follows: 

‘‘(1) RECORDKEEPING AND REPORTING OF CERTAIN FINANCIAL TRANSACTIONS.— 

‘‘(A) IN GENERAL.—The Secretary of the Treasury may require any domestic financial institution or domestic financial agency to maintain records, file reports, or both, concerning the aggregate amount of transactions, or concerning each transaction, with respect to a jurisdiction outside of the United States, 1 or more financial institutions operating outside of the United States, 1 or more classes of transactions within, or involving, a jurisdiction outside of the United States, or 1 or more types of accounts if the Secretary finds any such jurisdiction, institution, or class of transactions to be of primary money laundering concern. 

‘‘(B) FORM OF RECORDS AND REPORTS.— 
Such records and reports shall be made and retained at such time, in such manner, and for such period of time, as the Secretary shall determine, and shall include such information as the Secretary may determine, including—
‘‘(i) the identity and address of the participants in a transaction or relationship, including the identity of the originator of any funds transfer; 
‘‘(ii) the legal capacity in which a participant in any transaction is acting; 
‘‘(iii) the identity of the beneficial owner of the funds involved in any transaction, in accordance with such procedures as the Secretary determines to be reasonable and practicable to obtain and retain the information; and 
‘‘(iv) a description of any transaction. 

‘‘(2) INFORMATION RELATING TO BENEFICIAL OWNERSHIP.—In addition to any other requirement under any other provision of law, the Secretary may require any domestic financial institution or domestic financial agency to take such steps as the Secretary may determine to be reasonable and practicable to obtain and retain information concerning the beneficial ownership of any account opened or maintained in the United States by a foreign person (other than a foreign entity whose shares are subject to public reporting requirements or are listed and traded on a regulated exchange or trading market), or a representative of such a foreign person, that involves a jurisdiction outside of the United States, 1 or more financial institutions operating outside of the United States, 1 or more classes of transactions within, or involving, a jurisdiction outside of the United States, or 1 or more types of accounts if the Secretary finds any such jurisdiction, institution, or transaction or type of account to be of primary money laundering concern. 

‘‘(3) INFORMATION RELATING TO CERTAIN PAYABLE-THROUGH ACCOUNTS.—If the Secretary finds a jurisdiction outside of the United States, 1 or more financial institutions operating outside of the United States, or 1 or more classes of transactions within, or involving, a jurisdiction outside of the United States to be of primary money laundering concern, the Secretary may require any domestic financial institution or domestic financial agency that opens or maintains a payable-through account in the United States for a foreign financial institution involving any such jurisdiction or any such financial institution operating outside of the United States, or a payable through account through which any such transaction may be conducted, as a condition of opening or maintaining such account— 

‘‘(A) to identify each customer (and representative of such customer) of such financial institution who is permitted to use, or whose transactions are routed through, such payable-through account; and 

‘‘(B) to obtain, with respect to each such customer (and each such representative), information that is substantially comparable to that which the depository institution obtains in the ordinary course of business with respect to its customers residing in the United States. 

‘‘(4) INFORMATION RELATING TO CERTAIN CORRESPONDENT ACCOUNTS.—If the Secretary finds a jurisdiction outside of the United States, 1 or more financial institutions operating outside of the United States, or 1 or more classes of transactions within, or involving, a jurisdiction outside of the United States to be of primary money laundering concern, the Secretary may require any domestic financial institution or domestic financial agency that opens or maintains a correspondent account in the United States for a foreign financial institution involving any such jurisdiction or any such financial institution operating outside of the United States, or a correspondent account through which any such transaction may be conducted, as a condition of opening or maintaining such account— 

‘‘(A) to identify each customer (and representative of such customer) of any such financial institution who is permitted to use, or whose transactions are routed through, such correspondent account; and 

‘‘(B) to obtain, with respect to each such customer (and each such representative), information that is substantially comparable to that which the depository institution obtains in the ordinary course of business with respect to its customers residing in the United States. 

‘‘(5) PROHIBITIONS OR CONDITIONS ON OPENING OR MAINTAINING CERTAIN CORRESPONDENT OR PAYABLE-THROUGH ACCOUNTS.—If the Secretary finds a jurisdiction outside of the United States, 1 or more financial institutions operating outside of the United States, or 1 or more classes of transactions within, or involving, a jurisdiction outside of the United States to be of primary money laundering concern, the Secretary, in consultation with the Secretary of State, the Attorney General, and the Chairman of the Board of Governors of the Federal Reserve System, may prohibit, or impose conditions upon, the opening or maintaining in the United States of a correspondent account or payable-through account by any domestic financial institution or domestic financial agency for or on behalf of a foreign banking institution, if such correspondent account or payable-through account involves any such jurisdiction or institution, or if any such transaction may be conducted through such correspondent account or payable-through account. 

‘‘(c) CONSULTATIONS AND INFORMATION TO BE CONSIDERED IN FINDING JURISDICTIONS, INSTITUTIONS, TYPES OF ACCOUNTS, OR TRANSACTIONS TO BE OF PRIMARY MONEY LAUNDERING CONCERN.— 

‘‘(1) IN GENERAL.—In making a finding that reasonable grounds exist for concluding that a jurisdiction outside of the United States, 1 or more financial institutions operating outside of the United States, 1 or more classes of transactions within, or involving, a jurisdiction outside of the United States, or 1 or more types of accounts is of primary money laundering concern so as to authorize the Secretary of the Treasury to take 1 or more of the special measures described in subsection (b), the Secretary shall consult with the Secretary of State and the Attorney General. 

‘‘(2) ADDITIONAL CONSIDERATIONS.—In making a finding described in paragraph (1), the Secretary shall consider in addition such information as the Secretary determines to be relevant, including the following potentially relevant factors: 

‘‘(A) JURISDICTIONAL FACTORS.—In the case of a particular jurisdiction— 
‘‘(i) evidence that organized criminal groups, international terrorists, or both, have transacted business in that jurisdiction; 
‘‘(ii) the extent to which that jurisdiction or financial institutions operating in that jurisdiction offer bank secrecy or special regulatory advantages to nonresidents or nondomiciliaries of that jurisdiction; 
‘‘(iii) the substance and quality of administration of the bank supervisory and counter-money laundering laws of that jurisdiction; 
‘‘(iv) the relationship between the volume of financial transactions occurring in that jurisdiction and the size of the economy of the jurisdiction; 
‘‘(v) the extent to which that jurisdiction is characterized as an offshore banking or secrecy haven by credible international organizations or multilateral expert groups; 
‘‘(vi) whether the United States has a mutual legal assistance treaty with that jurisdiction, and the experience of United States law enforcement officials and regulatory officials in obtaining information about transactions originating in or routed through or to such jurisdiction; and 
‘‘(vii) the extent to which that jurisdiction is characterized by high levels of official or institutional corruption. 

‘‘(B) INSTITUTIONAL FACTORS.—In the case of a decision to apply 1 or more of the special measures described in subsection (b) only to a financial institution or institutions, or to a transaction or class of transactions, or to a type of account, or to all 3, within or involving a particular jurisdiction— 
‘‘(i) the extent to which such financial institutions, transactions, or types of accounts are used to facilitate or promote money laundering in or through the jurisdiction; 
‘‘(ii) the extent to which such institutions, transactions, or types of accounts are used for legitimate business purposes in the jurisdiction; and 
‘‘(iii) the extent to which such action is sufficient to ensure, with respect to transactions involving the jurisdiction and institutions operating in the jurisdiction, that the purposes of this subchapter continue to be fulfilled, and to guard against international money laundering and other financial crimes. 

‘‘(d) NOTIFICATION OF SPECIAL MEASURES INVOKED BY THE SECRETARY.—Not later than 10 days after the date of any action taken by the Secretary of the Treasury under subsection (a)(1), the Secretary shall notify, in writing, the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate of any such action. 

‘‘(e) DEFINITIONS.—Notwithstanding any other provision of this subchapter, for purposes of this section and subsections (i) and (j) of section 5318, the following definitions shall apply: 

‘‘(1) BANK DEFINITIONS.—The following definitions shall apply with respect to a bank: 

‘‘(A) ACCOUNT.—The term ‘account’— 
‘‘(i) means a formal banking or business relationship established to provide regular services, dealings, and other financial transactions; and 
‘‘(ii) includes a demand deposit, savings deposit, or other transaction or asset account and a credit account or other extension of credit. 

‘‘(B) CORRESPONDENT ACCOUNT.—The term ‘correspondent account’ means an account established to receive deposits from, make payments on behalf of a foreign financial institution, or handle other financial transactions related to such institution. 

‘‘(C) PAYABLE-THROUGH ACCOUNT.—The term ‘payable-through account’ means an account, including a transaction account (as defined in section 19(b)(1)(C) of the Federal Reserve Act), opened at a depository institution by a foreign financial institution by means of which the foreign financial institution permits its customers to engage, either directly or through a subaccount, in banking activities usual in connection with the business of banking in the United States. 

‘‘(2) DEFINITIONS APPLICABLE TO INSTITUTIONS OTHER THAN BANKS.—With respect to any financial institution other than a bank, the Secretary shall, after consultation with the appropriate Federal functional regulators (as defined in section 509 of the Gramm-Leach-Bliley Act), define by regulation the term ‘account’, and shall include within the meaning of that term, to the extent, if any, that the Secretary deems appropriate, arrangements similar to payable-through and correspondent accounts. 

‘‘(3) REGULATORY DEFINITION OF BENEFICIAL OWNERSHIP.—The Secretary shall promulgate regulations defining beneficial ownership of an account for purposes of this section and subsections (i) and (j) of section 5318. Such regulations shall address issues related to an individual’s authority to fund, direct, or manage the account (including, without limitation, the power to direct payments into or out of the account), and an individual’s material interest in the income or corpus of the account, and shall ensure that the identification of individuals under this section does not extend to any individual whose beneficial interest in the income or corpus of the account is immaterial.’’

‘‘(4) OTHER TERMS.—The Secretary may, by regulation, further define the terms in paragraphs (1), (2), and (3), and define other terms for the purposes of this section, as the Secretary deems appropriate.’’

(b) CLERICAL AMENDMENT.—The table of sections for subchapter II of chapter 53 of title 31, United States Code, is amended by inserting after the item relating to section 5318 the following new item: ‘‘5318A. Special measures for jurisdictions, financial institutions, or international transactions of primary money laundering concern.’’

SEC. 312. SPECIAL DUE DILIGENCE FOR CORRESPONDENT ACCOUNTS AND PRIVATE BANKING ACCOUNTS. 

(a) IN GENERAL.—Section 5318 of title 31, United States Code, is amended by adding at the end the following: 

‘‘(i) DUE DILIGENCE FOR UNITED STATES PRIVATE BANKING AND CORRESPONDENT BANK ACCOUNTS INVOLVING FOREIGN PERSONS.— 

‘‘(1) IN GENERAL.—Each financial institution that establishes, maintains, administers, or manages a private banking account or a correspondent account in the United States for a non-United States person, including a foreign individual visiting the United States, or a representative of a non-United States person shall establish appropriate, specific, and, where necessary, enhanced, due diligence policies, procedures, and controls that are reasonably designed to detect and report instances of money laundering through those accounts. 

‘‘(2) ADDITIONAL STANDARDS FOR CERTAIN CORRESPONDENT ACCOUNTS.— 

‘‘(A) IN GENERAL.—Subparagraph (B) shall apply if a correspondent account is requested or maintained by, or on behalf of, a foreign bank operating— 
‘‘(i) under an offshore banking license; or 
‘‘(ii) under a banking license issued by a foreign country that has been designated— 

‘‘(I) as noncooperative with international anti-money laundering principles or procedures by an intergovernmental group or organization of which the United States is a member, with which designation the United States representative to the group or organization concurs; or 

‘‘(II) by the Secretary of the Treasury as warranting special measures due to money laundering concerns. 

‘‘(B) POLICIES, PROCEDURES, AND CONTROLS.—The enhanced due diligence policies, procedures, and controls required under paragraph (1) shall, at a minimum, ensure that the financial institution in the United States takes reasonable steps— 
‘‘(i) to ascertain for any such foreign bank, the shares of which are not publicly traded, the identity of each of the owners of the foreign bank, and the nature and extent of the ownership interest of each such owner; 
‘‘(ii) to conduct enhanced scrutiny of such account to guard against money laundering and report any suspicious transactions under subsection (g); and 
‘‘(iii) to ascertain whether such foreign bank provides correspondent accounts to other foreign banks and, if so, the identity of those foreign banks and related due diligence information, as appropriate under paragraph (1). 

‘‘(3) MINIMUM STANDARDS FOR PRIVATE BANKING ACCOUNTS.—If a private banking account is requested or maintained by, or on behalf of, a non-United States person, then the due diligence policies, procedures, and controls required under paragraph (1) shall, at a minimum, ensure that the financial institution takes reasonable steps— 

‘‘(A) to ascertain the identity of the nominal and beneficial owners of, and the source of funds deposited into, such account as needed to guard against money laundering and report any suspicious transactions under subsection (g); and 

‘‘(B) to conduct enhanced scrutiny of any such account that is requested or maintained by, or on behalf of, a senior foreign political figure, or any immediate family member or close associate of a senior foreign political figure that is reasonably designed to detect and report transactions that may involve the proceeds of foreign corruption. 

‘‘(4) DEFINITION.—For purposes of this subsection, the following definitions shall apply: 

‘‘(A) OFFSHORE BANKING LICENSE.—The term ‘offshore banking license’ means a license to conduct banking activities which, as a condition of the license, prohibits the licensed entity from conducting banking activities with the citizens of, or with the local currency of, the country which issued the license.’’

‘‘(B) PRIVATE BANKING ACCOUNT.—The term ‘private banking account’ means an account (or any combination of accounts) that— 
‘‘(i) requires a minimum aggregate deposits of funds or other assets of not less than $1,000,000; 
‘‘(ii) is established on behalf of 1 or more individuals who have a direct or beneficial ownership interest in the account; and 
‘‘(iii) is assigned to, or is administered or managed by, in whole or in part, an officer, employee, or agent of a financial institution acting as a liaison between the financial institution and the direct or beneficial owner of the account.’’

(b) REGULATORY AUTHORITY AND EFFECTIVE DATE.— 

(1) REGULATORY AUTHORITY.—Not later than 180 days after the date of enactment of this Act, the Secretary, in consultation with the appropriate Federal functional regulators (as defined in section 509 of the Gramm-Leach-Bliley Act) of the affected financial institutions, shall further delineate, by regulation, the due diligence policies, procedures, and controls required under section 5318(i)(1) of title 31, United States Code, as added by this section. 

(2) EFFECTIVE DATE.—Section 5318(i) of title 31, United States Code, as added by this section, shall take effect 270 days after the date of enactment of this Act, whether or not final regulations are issued under paragraph (1), and the failure to issue such regulations shall in no way affect the enforceability of this section or the amendments made by this section. Section 5318(i) of title 31, United States Code, as added by this section, shall apply with respect to accounts covered by that section 5318(i), that are opened before, on, or after the date of enactment of this Act. 

SEC. 313. PROHIBITION ON UNITED STATES CORRESPONDENT ACCOUNTS WITH FOREIGN SHELL BANKS. 

(a) IN GENERAL.—Section 5318 of title 31, United States Code, as amended by this title, is amended by adding at the end the following: 

‘‘(j) PROHIBITION ON UNITED STATES CORRESPONDENT ACCOUNTS WITH FOREIGN SHELL BANKS.— 

‘‘(1) IN GENERAL.—A financial institution described in subparagraphs (A) through (G) of section 5312(a)(2) (in this subsection referred to as a ‘covered financial institution’) shall not establish, maintain, administer, or manage a correspondent account in the United States for, or on behalf of, a foreign bank that does not have a physical presence in any country. 

‘‘(2) PREVENTION OF INDIRECT SERVICE TO FOREIGN SHELL BANKS.—A covered financial institution shall take reasonable steps to ensure that any correspondent account established, maintained, administered, or managed by that covered financial institution in the United States for a foreign bank is not being used by that foreign bank to indirectly provide banking services to another foreign bank that does not have a physical presence in any country. The Secretary of the Treasury shall, by regulation, delineate the reasonable steps necessary to comply with this paragraph. 

‘‘(3) EXCEPTION.—Paragraphs (1) and (2) do not prohibit a covered financial institution from providing a correspondent account to a foreign bank, if the foreign bank— 

‘‘(A) is an affiliate of a depository institution, credit union, or foreign bank that maintains a physical presence in the United States or a foreign country, as applicable; and ‘‘(B) is subject to supervision by a banking authority in the country regulating the affiliated depository institution, credit union, or foreign bank described in subparagraph (A), as applicable. 

‘‘(4) DEFINITIONS.—For purposes of this subsection— 

‘‘(A) the term ‘affiliate’ means a foreign bank that is controlled by or is under common control with a depository institution, credit union, or foreign bank; and ‘‘(B) the term ‘physical presence’ means a place of business that— 
‘‘(i) is maintained by a foreign bank; 
‘‘(ii) is located at a fixed address (other than solely an electronic address) in a country in which the foreign bank is authorized to conduct banking activities, at which location the foreign bank— 
‘‘(I) employs 1 or more individuals on a full-time basis; and ‘‘(II) maintains operating records related to its banking activities; and 
‘‘(iii) is subject to inspection by the banking authority which licensed the foreign bank to conduct banking activities.’’

(b) EFFECTIVE DATE.—The amendment made by subsection (a) shall take effect at the end of the 60-day period beginning on the date of enactment of this Act. 

SEC. 314. COOPERATIVE EFFORTS TO DETER MONEY LAUNDERING. 

(a) COOPERATION AMONG FINANCIAL INSTITUTIONS, REGULATORY AUTHORITIES, AND LAW ENFORCEMENT AUTHORITIES.— 

(1) REGULATIONS.—The Secretary shall, within 120 days after the date of enactment of this Act, adopt regulations to encourage further cooperation among financial institutions, their regulatory authorities, and law enforcement authorities, with the specific purpose of encouraging regulatory authorities and law enforcement authorities to share with financial institutions information regarding individuals, entities, and organizations engaged in or reasonably suspected based on credible evidence of engaging in terrorist acts or money laundering activities. 

(2) COOPERATION AND INFORMATION SHARING PROCEDURES.—The regulations adopted under paragraph (1) may include or create procedures for cooperation and information sharing focusing on— 

(A) matters specifically related to the finances of terrorist groups, the means by which terrorist groups transfer funds around the world and within the United States, including through the use of charitable organizations, nonprofit organizations, and nongovernmental organizations, and the extent to which financial institutions in the United States are unwittingly involved in such finances and the extent to which such institutions are at risk as a result; 

(B) the relationship, particularly the financial relationship, between international narcotics traffickers and foreign terrorist organizations, the extent to which their memberships overlap and engage in joint activities, and the extent to which they cooperate with each other in raising and transferring funds for their respective purposes; and 

(C) means of facilitating the identification of accounts and transactions involving terrorist groups and facilitating the exchange of information concerning such accounts and transactions between financial institutions and law enforcement organizations. 

(3) CONTENTS.—The regulations adopted pursuant to paragraph (1) may— 

(A) require that each financial institution designate 1 or more persons to receive information concerning, and to monitor accounts of individuals, entities, and organizations identified, pursuant to paragraph (1); and (B) further establish procedures for the protection of the shared information, consistent with the capacity, size, and nature of the institution to which the particular procedures apply. 

(4) RULE OF CONSTRUCTION.—The receipt of information by a financial institution pursuant to this section shall not relieve or otherwise modify the obligations of the financial institution with respect to any other person or account. 

(5) USE OF INFORMATION.—Information received by a financial institution pursuant to this section shall not be used for any purpose other than identifying and reporting on activities that may involve terrorist acts or money laundering activities. 

(b) COOPERATION AMONG FINANCIAL INSTITUTIONS.—Upon notice provided to the Secretary, 2 or more financial institutions and any association of financial institutions may share information with one another regarding individuals, entities, organizations, and countries suspected of possible terrorist or money laundering activities. A financial institution or association that transmits, receives, or shares such information for the purposes of identifying and reporting activities that may involve terrorist acts or money laundering activities shall not be liable to any person under any law or regulation of the United States, any constitution, law, or regulation of any State or political subdivision thereof, or under any contract or other legally enforceable agreement (including any arbitration agreement), for such disclosure or for any failure to provide notice of such disclosure to the person who is the subject of such disclosure, or any other person identified in the disclosure, except where such transmission, receipt, or sharing violates this section or regulations promulgated pursuant to this section. 

(c) RULE OF CONSTRUCTION.—Compliance with the provisions of this title requiring or allowing financial institutions and any association of financial institutions to disclose or share information regarding individuals, entities, and organizations engaged in or suspected of engaging in terrorist acts or money laundering activities shall not constitute a violation of the provisions of title V of the Gramm-Leach-Bliley Act (Public Law 106–102). 

(d) REPORTS TO THE FINANCIAL SERVICES INDUSTRY ON SUSPICIOUS FINANCIAL ACTIVITIES.—At least semiannually, the Secretary shall— 

(1) publish a report containing a detailed analysis identifying patterns of suspicious activity and other investigative insights derived from suspicious activity reports and investigations conducted by Federal, State, and local law enforcement agencies to the extent appropriate; and 

(2) distribute such report to financial institutions (as defined in section 5312 of title 31, United States Code). 

SEC. 315. INCLUSION OF FOREIGN CORRUPTION OFFENSES AS MONEY LAUNDERING CRIMES. 

Section 1956(c)(7) of title 18, United States Code, is amended— 

(1) in subparagraph (B)— 

(A) in clause (ii), by striking ‘‘or destruction of property by means of explosive or fire’’ and inserting ‘‘destruction of property by means of explosive or fire, or a crime of violence (as defined in section 16)’’; 

(B) in clause (iii), by striking ‘‘1978’’ and inserting ‘‘1978)’’; and 

(C) by adding at the end the following: ‘‘(iv) bribery of a public official, or the misappropriation, theft, or embezzlement of public funds by or for the benefit of a public official; ‘‘(v) smuggling or export control violations involving— 

‘‘(I) an item controlled on the United States Munitions List established under section 38 of the Arms Export Control Act (22 U.S.C. 2778); or ‘‘(II) an item controlled under regulations under the Export Administration Regulations (15 C.F.R. Parts 730–774); or ‘‘(vi) an offense with respect to which the United States would be obligated by a multilateral treaty, either to extradite the alleged offender or to submit the case for prosecution, if the offender were found within the territory of the United States;’’ and 

(2) in subparagraph (D)—

(A) by inserting ‘‘section 541 (relating to goods falsely classified),’’ before ‘‘section 542’’; 

(B) by inserting ‘‘section 922(1) (relating to the unlawful importation of firearms), section 924(n) (relating to firearms trafficking),’’ before ‘‘section 956’’; 

(C) by inserting ‘‘section 1030 (relating to computer fraud and abuse),’’ before ‘‘1032’’; and 

(D) by inserting ‘‘any felony violation of the Foreign Agents Registration Act of 1938,’’ before ‘‘or any felony violation of the Foreign Corrupt Practices Act’’. 

SEC. 316. ANTI-TERRORIST FORFEITURE PROTECTION. 

(a) RIGHT TO CONTEST.—An owner of property that is confiscated under any provision of law relating to the confiscation of assets of suspected international terrorists, may contest that confiscation by filing a claim in the manner set forth in the Federal Rules of Civil Procedure (Supplemental Rules for Certain Admiralty and Maritime Claims), and asserting as an affirmative defense that— 

(1) the property is not subject to confiscation under such provision of law; or 

(2) the innocent owner provisions of section 983(d) of title 18, United States Code, apply to the case. 

(b) EVIDENCE.—In considering a claim filed under this section, a court may admit evidence that is otherwise inadmissible under the Federal Rules of Evidence, if the court determines that the evidence is reliable, and that compliance with the Federal Rules of Evidence may jeopardize the national security interests of the United States. 

(c) CLARIFICATIONS.— 

(1) PROTECTION OF RIGHTS.—The exclusion of certain provisions of Federal law from the definition of the term ‘‘civil forfeiture statute’’ in section 983(i) of title 18, United States Code, shall not be construed to deny an owner of property the right to contest the confiscation of assets of suspected international terrorists under— 

(A) subsection (a) of this section; 

(B) the Constitution; or 

(C) subchapter II of chapter 5 of title 5, United States Code (commonly known as the ‘‘Administrative Procedure Act’’). 

(2) SAVINGS CLAUSE.—Nothing in this section shall limit or otherwise affect any other remedies that may be available to an owner of property under section 983 of title 18, United States Code, or any other provision of law. 

(d) TECHNICAL CORRECTION.—Section 983(i)(2)(D) of title 18, United States Code, is amended by inserting ‘‘or the International Emergency Economic Powers Act (IEEPA) (50 U.S.C. 1701 et seq.)’’ before the semicolon. 

SEC. 317. LONG-ARM JURISDICTION OVER FOREIGN MONEY LAUNDERERS. 

Section 1956(b) of title 18, United States Code, is amended— 

(1) by redesignating paragraphs (1) and (2) as subparagraphs (A) and (B), respectively, and moving the margins 2 ems to the right; 

(2) by inserting after ‘‘(b)’’ the following: ‘‘PENALTIES.— ‘‘(1) IN GENERAL.—’’; (3) by inserting ‘‘, or section 1957’’ after ‘‘or (a)(3)’’; and (4) by adding at the end the following: ‘‘(2) JURISDICTION OVER FOREIGN PERSONS.— For purposes of adjudicating an action filed or enforcing a penalty ordered under this section, the district courts shall have jurisdiction over any foreign person, including any financial institution authorized under the laws of a foreign country, against whom the action is brought, if service of process upon the foreign person is made under the Federal Rules of Civil Procedure or the laws of the country in which the foreign person is found, and— 

‘‘(A) the foreign person commits an offense under subsection (a) involving a financial transaction that occurs in whole or in part in the United States; 

‘‘(B) the foreign person converts, to his or her own use, property in which the United States has an ownership interest by virtue of the entry of an order of forfeiture by a court of the United States; or 

‘‘(C) the foreign person is a financial institution that maintains a bank account at a financial institution in the United States.

‘‘(3) COURT AUTHORITY OVER ASSETS.—A court described in paragraph (2) may issue a pretrial restraining order or take any other action necessary to ensure that any bank account or other property held by the defendant in the United States is available to satisfy a judgment under this section. 

‘‘(4) FEDERAL RECEIVER.— 

‘‘(A) IN GENERAL.—A court described in paragraph (2) may appoint a Federal Receiver, in accordance with subparagraph (B) of this paragraph, to collect, marshal, and take custody, control, and possession of all assets of the defendant, wherever located, to satisfy a civil judgment under this subsection, a forfeiture judgment under section 981 or 982, or a criminal sentence under section 1957 or subsection (a) of this section, including an order of restitution to any victim of a specified unlawful activity.

‘‘(B) APPOINTMENT AND AUTHORITY.—A Federal Receiver described in subparagraph (A)— 7
‘‘(i) may be appointed upon application of a Federal prosecutor or a Federal or State regulator, by the court having jurisdiction over the defendant in the case; 
‘‘(ii) shall be an officer of the court, and the powers of the Federal Receiver shall include the powers set out in section 754 of title 28, United States Code; and 
‘‘(iii) shall have standing equivalent to that of a Federal prosecutor for the purpose of submitting requests to obtain information regarding the assets of the defendant— 

‘‘(I) from the Financial Crimes Enforcement Network of the Department of the Treasury; or 

‘‘(II) from a foreign country pursuant to a mutual legal assistance treaty, multilateral agreement, or other arrangement for international law enforcement assistance, provided that such requests are in accordance with the policies and procedures of the Attorney General.’’

SEC. 318. LAUNDERING MONEY THROUGH A FOREIGN BANK. 

Section 1956(c) of title 18, United States Code, is amended by striking paragraph (6) and inserting the following: ‘‘(6) the term ‘financial institution’ includes— ‘‘(A) any financial institution, as defined in section 5312(a)(2) of title 31, United States Code, or the regulations promulgated thereunder; and ‘‘(B) any foreign bank, as defined in section 1 of the International Banking Act of 1978 (12 U.S.C. 3101).’’

SEC. 319. FORFEITURE OF FUNDS IN UNITED STATES INTERBANK ACCOUNTS. 

(a) FORFEITURE FROM UNITED STATES INTERBANK ACCOUNT.—Section 981 of title 18, United States Code, is amended by adding at the end the following: 

‘‘(k) INTERBANK ACCOUNTS.— 

‘‘(1) IN GENERAL.— 

‘‘(A) IN GENERAL.—For the purpose of a forfeiture under this section or under the Controlled Substances Act (21 U.S.C. 801 et seq.), if funds are deposited into an account at a foreign bank, and that foreign bank has an interbank account in the United States with a covered financial institution (as defined in section 5318(j)(1) of title 31), the funds shall be deemed to have been deposited into the interbank account in the United States, and any restraining order, seizure warrant, or arrest warrant in rem regarding the funds may be served on the covered financial institution, and funds in the interbank account, up to the value of the funds deposited into the account at the foreign bank, may be restrained, seized, or arrested. 

‘‘(B) AUTHORITY TO SUSPEND.—The Attorney General, in consultation with the Secretary of the Treasury, may suspend or terminate a forfeiture under this section if the Attorney General determines that a conflict of law exists between the laws of the jurisdiction in which the foreign bank is located and the laws of the United States with respect to liabilities arising from the restraint, seizure, or arrest of such funds, and that such suspension or termination would be in the interest of justice and would not harm the national interests of the United States. 

‘‘(2) NO REQUIREMENT FOR GOVERNMENT TO TRACE FUNDS.—If a forfeiture action is brought against funds that are restrained, seized, or arrested under paragraph (1), it shall not be necessary for the Government to establish that the funds are directly traceable to the funds that were deposited into the foreign bank, nor shall it be necessary for the Government to rely on the application of section 984. 

‘‘(3) CLAIMS BROUGHT BY OWNER OF THE FUNDS.—If a forfeiture action is instituted against funds restrained, seized, or arrested under paragraph (1), the owner of the funds deposited into the account at the foreign bank may contest the forfeiture by filing a claim under section 983. 

‘‘(4) DEFINITIONS.—For purposes of this subsection, the following definitions shall apply: 

‘‘(A) INTERBANK ACCOUNT.—The term ‘interbank account’ has the same meaning as in section 984(c)(2)(B). 

‘‘(B) OWNER.— 
‘‘(i) IN GENERAL.—Except as provided in clause (ii), the term ‘owner’— 

‘‘(I) means the person who was the owner, as that term is defined in section 983(d)(6), of the funds that were deposited into the foreign bank at the time such funds were deposited; and 

‘‘(II) does not include either the foreign bank or any financial institution acting as an intermediary in the transfer of the funds into the inter-bank account. 

‘‘(ii) EXCEPTION.—The foreign bank may be considered the ‘owner’ of the funds (and no other person shall qualify as the owner of such funds) only if— 

‘‘(I) the basis for the forfeiture action is wrongdoing committed by the foreign bank; or 

‘‘(II) the foreign bank establishes, by a preponderance of the evidence, that prior to the restraint, seizure, or arrest of the funds, the foreign bank had discharged all or part of its obligation to the prior owner of the funds, in which case the foreign bank shall be deemed the owner of the funds to the extent of such discharged obligation.’’

(b) BANK RECORDS.—Section 5318 of title 31, United States Code, as amended by this title, is amended by adding at the end the following: 

‘‘(k) BANK RECORDS RELATED TO ANTI-MONEY LAUNDERING PROGRAMS.— 

‘‘(1) DEFINITIONS.—For purposes of this subsection, the following definitions shall apply: 

‘‘(A) APPROPRIATE FEDERAL BANKING AGENCY.—The term ‘appropriate Federal banking agency’ has the same meaning as in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813). 

‘‘(B) INCORPORATED TERM.—The term ‘correspondent account’ has the same meaning as in section 5318A(f)(1)(B). 

‘‘(2) 120-HOUR RULE.—Not later than 120 hours after receiving a request by an appropriate Federal banking agency for information related to anti-money laundering compliance by a covered financial institution or a customer of such institution, a covered financial institution shall provide to the appropriate Federal banking agency, or make available at a location specified by the representative of the appropriate Federal banking agency, information and account documentation for any account opened, maintained, administered or managed in the United States by the covered financial institution. 

‘‘(3) FOREIGN BANK RECORDS.— 

‘‘(A) SUMMONS OR SUBPOENA OF RECORDS.— 
‘‘(i) IN GENERAL.—The Secretary of the Treasury or the Attorney General may issue a summons or subpoena to any foreign bank that maintains a correspondent account in the United States and request records related to such correspondent account, including records maintained outside of the United States relating to the deposit of funds into the foreign bank. 
‘‘(ii) SERVICE OF SUMMONS OR SUBPOENA.—A summons or subpoena referred to in clause (i) may be served on the foreign bank in the United States if the foreign bank has a representative in the United States, or in a foreign country pursuant to any mutual legal assistance treaty, multilateral agreement, or other request for international law enforcement assistance. 

‘‘(B) ACCEPTANCE OF SERVICE.— 
‘‘(i) MAINTAINING RECORDS IN THE UNITED STATES.—Any covered financial institution which maintains a correspondent account in the United States for a foreign bank shall maintain records in the United States identifying the owners of such foreign bank and the name and address of a person who resides in the United States and is authorized to accept service of legal process for records regarding the correspondent account. 
‘‘(ii) LAW ENFORCEMENT REQUEST.— Upon receipt of a written request from a Federal law enforcement officer for information required to be maintained under this paragraph, the covered financial institution shall provide the information to the requesting officer not later than 7 days after receipt of the request. 

‘‘(C) TERMINATION OF CORRESPONDENT RELATIONSHIP.— 
‘‘(i) TERMINATION UPON RECEIPT OF NOTICE.—A covered financial institution shall terminate any correspondent relationship with a foreign bank not later than 10 business days after receipt of written notice from the Secretary or the Attorney General (in each case, after consultation with the other) that the foreign bank has failed— 

‘‘(I) to comply with a summons or subpoena issued under subparagraph (A); or 

‘‘(II) to initiate proceedings in a United States court contesting such summons or subpoena. 
‘‘(ii) LIMITATION ON LIABILITY.—A covered financial institution shall not be liable to any person in any court or arbitration proceeding for terminating a correspondent relationship in accordance with this subsection. 
‘‘(iii) FAILURE TO TERMINATE RELATIONSHIP.—Failure to terminate a correspondent relationship in accordance with this subsection shall render the covered financial institution liable for a civil penalty of up to $10,000 per day until the correspondent relationship is so terminated.’’

(c) GRACE PERIOD.—Financial institutions shall have 60 days from the date of enactment of this Act to comply with the provisions of section 5318(k) of title 31, United States Code, as added by this section. 

(d) AUTHORITY TO ORDER CONVICTED CRIMINAL TO RETURN PROPERTY LOCATED ABROAD.— 

(1) FORFEITURE OF SUBSTITUTE PROPERTY.— Section 413(p) of the Controlled Substances Act (21 U.S.C. 853) is amended to read as follows: ‘‘(p) FORFEITURE OF SUBSTITUTE PROPERTY.— ‘‘(1) IN GENERAL.—Paragraph (2) of this subsection shall apply, if any property described in subsection (a), as a result of any act or omission of the defendant— ‘‘(A) cannot be located upon the exercise of due diligence; ‘‘(B) has been transferred or sold to, or deposited with, a third party; ‘‘(C) has been placed beyond the jurisdiction of the court; 

‘‘(D) has been substantially diminished in value; or ‘‘(E) has been commingled with other property which cannot be divided without difficulty. 

‘‘(2) SUBSTITUTE PROPERTY.—In any case described in any of subparagraphs (A) through (E) of paragraph (1), the court shall order the forfeiture of any other property of the defendant, up to the value of any property described in subparagraphs (A) through (E) of paragraph (1), as applicable. 

‘‘(3) RETURN OF PROPERTY TO JURISDICTION.—In the case of property described in paragraph (1)(C), the court may, in addition to any other action authorized by this subsection, order the defendant to return the property to the jurisdiction of the court so that the property may be seized and forfeited.’’

(2) PROTECTIVE ORDERS.—Section 413(e) of the Controlled Substances Act (21 U.S.C. 853(e)) is amended by adding at the end the following: 

‘‘(4) ORDER TO REPATRIATE AND DEPOSIT.— 

‘‘(A) IN GENERAL.—Pursuant to its authority to enter a pretrial restraining order under this section, the court may order a defendant to repatriate any property that may be seized and forfeited, and to deposit that property pending trial in the registry of the court, or with the United States Marshals Service or the Secretary of the Treasury, in an interest-bearing account, if appropriate. 

‘‘(B) FAILURE TO COMPLY.—Failure to comply with an order under this subsection, or an order to repatriate property under subsection (p), shall be punishable as a civil or criminal contempt of court, and may also result in an enhancement of the sentence of the defendant under the obstruction of justice provision of the Federal Sentencing Guidelines.’’

SEC. 320. PROCEEDS OF FOREIGN CRIMES. 

Section 981(a)(1)(B) of title 18, United States Code, is amended to read as follows: 

‘‘(B) Any property, real or personal, within the jurisdiction of the United States, constituting, derived from, or traceable to, any proceeds obtained directly or indirectly from an offense against a foreign nation, or any property used to facilitate such an offense, if the offense— 
‘‘(i) involves the manufacture, importation, sale, or distribution of a controlled substance (as that term is defined for purposes of the Controlled Substances Act), or any other conduct described in section 1956(c)(7)(B); 
‘‘(ii) would be punishable within the jurisdiction of the foreign nation by death or imprisonment for a term exceeding 1 year; and 
‘‘(iii) would be punishable under the laws of the United States by imprisonment for a term exceeding 1 year, if the act or activity constituting the offense had occurred within the jurisdiction of the United States.’’

SEC. 321. FINANCIAL INSTITUTIONS SPECIFIED IN SUB-CHAPTER II OF CHAPTER 53 OF TITLE 31, UNITED STATES CODE. 

(a) CREDIT UNIONS.—Subparagraph (E) of section 5312(2) of title 31, United States Code, is amended to read as follows: 

‘‘(E) any credit union;’’

(b) FUTURES COMMISSION MERCHANT; COMMODITY TRADING ADVISOR; COMMODITY POOL OPERATOR.—Section 5312 of title 31, United States Code, is amended by adding at the end the following new subsection: 

‘‘(c) ADDITIONAL DEFINITIONS.—For purposes of this subchapter, the following definitions shall apply: 

‘‘(1) CERTAIN INSTITUTIONS INCLUDED IN DEFINITION.—The term ‘financial institution’ (as defined in subsection (a)) includes the following: 

‘‘(A) Any futures commission merchant, commodity trading advisor, or commodity pool operator registered, or required to register, under the Commodity Exchange Act.’’

(c) CFTC INCLUDED.—For purposes of this Act and any amendment made by this Act to any other provision of law, the term ‘‘Federal functional regulator’’ includes the Commodity Futures Trading Commission. 

SEC. 322. CORPORATION REPRESENTED BY A FUGITIVE. 

Section 2466 of title 18, United States Code, is amended by designating the present matter as subsection (a), and adding at the end the following: 

‘‘(b) Subsection (a) may be applied to a claim filed by a corporation if any majority shareholder, or individual filing the claim on behalf of the corporation is a person to whom subsection (a) applies.’’

SEC. 323. ENFORCEMENT OF FOREIGN JUDGMENTS. 

Section 2467 of title 28, United States Code, is amended— (1) in subsection (d), by adding the following after paragraph (2): ‘‘(3) PRESERVATION OF PROPERTY.— 

‘‘(A) IN GENERAL.—To preserve the availability of property subject to a foreign forfeiture or confiscation judgment, the Government may apply for, and the court may issue, a restraining order pursuant to section 983(j) of title 18, at any time before or after an application is filed pursuant to subsection (c)(1) of this section. 

‘‘(B) EVIDENCE.—The court, in issuing a restraining order under subparagraph (A)— 
‘‘(i) may rely on information set forth in an affidavit describing the nature of the proceeding or investigation underway in the foreign country, and setting forth a reasonable basis to believe that the property to be restrained will be named in a judgment of forfeiture at the conclusion of such proceeding; or 
‘‘(ii) may register and enforce a restraining order that has been issued by a court of competent jurisdiction in the foreign country and certified by the Attorney General pursuant to subsection (b)(2). 

‘‘(C) LIMIT ON GROUNDS FOR OBJECTION.—No person may object to a restraining order under subparagraph (A) on any ground that is the subject of parallel litigation involving the same property that is pending in a foreign court.’’; (2) in subsection (b)(1)(C), by striking ‘‘establishing that the defendant received notice of the proceedings in sufficient time to enable the defendant’’ and inserting ‘‘establishing that the foreign nation took steps, in accordance with the principles of due process, to give notice of the proceedings to all persons with an interest in the property in sufficient time to enable such persons’’; (3) in subsection (d)(1)(D), by striking ‘‘the defendant in the proceedings in the foreign court did not receive notice’’ and inserting ‘‘the foreign nation did not take steps, in accordance with the principles of due process, to give notice of the proceedings to a person with an interest in the property’’; and (4) in subsection (a)(2)(A), by inserting ‘‘, any violation of foreign law that would constitute a violation or an offense for which property could be forfeited under Federal law if the offense were committed in the United States’’ after ‘‘United Nations Convention’’. 

SEC. 324. REPORT AND RECOMMENDATION. 

Not later than 30 months after the date of enactment of this Act, the Secretary, in consultation with the Attorney General, the Federal banking agencies (as defined at section 3 of the Federal Deposit Insurance Act), the National Credit Union Administration Board, the Securities and Exchange Commission, and such other agencies as the Secretary may determine, at the discretion of the Secretary, shall evaluate the operations of the provisions of this subtitle and make recommendations to Congress as to any legislative action with respect to this subtitle as the Secretary may determine to be necessary or advisable. 

SEC. 325. CONCENTRATION ACCOUNTS AT FINANCIAL INSTITUTIONS. 

Section 5318(h) of title 31, United States Code, as amended by section 202 of this title, is amended by adding at the end the following: 

‘‘(3) CONCENTRATION ACCOUNTS.—The Secretary may prescribe regulations under this subsection that govern maintenance of concentration accounts by financial institutions, in order to ensure that such accounts are not used to prevent association of the identity of an individual customer with the movement of funds of which the customer is the direct or beneficial owner, which regulations shall, at a minimum— 

‘‘(A) prohibit financial institutions from allowing clients to direct transactions that move their funds into, out of, or through the concentration accounts of the financial institution;

‘‘(B) prohibit financial institutions and their employees from informing customers of the existence of, or the means of identifying, the concentration accounts of the institution; and 

‘‘(C) require each financial institution to establish written procedures governing the documentation of all transactions involving a concentration account, which procedures shall ensure that, any time a transaction involving a concentration account commingles funds belonging to 1 or more customers, the identity of, and specific amount belonging to, each customer is documented.’’

SEC. 326. VERIFICATION OF IDENTIFICATION. 

(a) IN GENERAL.—Section 5318 of title 31, United States Code, as amended by this title, is amended by adding at the end the following: 

‘‘(l) IDENTIFICATION AND VERIFICATION OF ACCOUNTHOLDERS.— 

‘‘(1) IN GENERAL.—Subject to the requirements of this subsection, the Secretary of the Treasury shall prescribe regulations setting forth the minimum standards for financial institutions and their customers regarding the identity of the customer that shall apply in connection with the opening of an account at a financial institution. 

‘‘(2) MINIMUM REQUIREMENTS.—The regulations shall, at a minimum, require financial institutions to implement, and customers (after being given adequate notice) to comply with, reasonable procedures for— 

‘‘(A) verifying the identity of any person seeking to open an account to the extent reasonable and practicable; 

‘‘(B) maintaining records of the information used to verify a person’s identity, including name, address, and other identifying information; and 

‘‘(C) consulting lists of known or suspected terrorists or terrorist organizations provided to the financial institution by any government agency to determine whether a person seeking to open an account appears on any such list. 

‘‘(3) FACTORS TO BE CONSIDERED.—In prescribing regulations under this subsection, the Secretary shall take into consideration the various types of accounts maintained by various types of financial institutions, the various methods of opening accounts, and the various types of identifying information available. 

‘‘(4) CERTAIN FINANCIAL INSTITUTIONS.—In the case of any financial institution the business of which is engaging in financial activities described in section 4(k) of the Bank Holding Company Act of 1956 (including financial activities subject to the jurisdiction of the Commodity Futures Trading Commission), the regulations prescribed by the Secretary under paragraph (1) shall be prescribed jointly with each Federal functional regulator (as defined in section 509 of the Gramm-Leach-Bliley Act, including the Commodity Futures Trading Commission) appropriate for such financial institution. 

‘‘(5) EXEMPTIONS.—The Secretary (and, in the case of any financial institution described in paragraph (4), any Federal agency described in such paragraph) may, by regulation or order, exempt any financial institution or type of account from the requirements of any regulation prescribed under this subsection in accordance with such standards and procedures as the Secretary may prescribe. 

‘‘(6) EFFECTIVE DATE.—Final regulations prescribed under this subsection shall take effect before the end of the 1-year period beginning on the date of enactment of the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001.’’

(b) STUDY AND REPORT REQUIRED.—Within 6 months after the date of enactment of this Act, the Secretary, in consultation with the Federal functional regulators (as defined in section 509 of the Gramm-Leach-Bliley Act) and other appropriate Government agencies, shall submit a report to the Congress containing recommendations for— 

(1) determining the most timely and effective way to require foreign nationals to provide domestic financial institutions and agencies with appropriate and accurate information, comparable to that which is required of United States nationals, concerning the identity, address, and other related information about such foreign nationals necessary to enable such institutions and agencies to comply with the requirements of this section; 

(2) requiring foreign nationals to apply for and obtain, before opening an account with a domestic financial institution, an identification number which would function similarly to a Social Security number or tax identification number; and 

(3) establishing a system for domestic financial institutions and agencies to review information maintained by relevant Government agencies for purposes of verifying the identities of foreign nationals seeking to open accounts at those institutions and agencies. 

SEC. 327. CONSIDERATION OF ANTI-MONEY LAUNDERING RECORD. 

(a) BANK HOLDING COMPANY ACT OF 1956.— 

(1) IN GENERAL.—Section 3(c) of the Bank Holding Company Act of 1956 (12 U.S.C. 1842(c)) is amended by adding at the end the following new paragraph: ‘‘(6) MONEY LAUNDERING.—In every case, the Board shall take into consideration the effectiveness of the company or companies in combatting money laundering activities, including in overseas branches.’’

(2) SCOPE OF APPLICATION.—The amendment made by paragraph (1) shall apply with respect to any application submitted to the Board of Governors of the Federal Reserve System under section 3 of the Bank Holding Company Act of 1956 after December 31, 2001, which has not been approved by the Board before the date of enactment of this Act. 

(b) MERGERS SUBJECT TO REVIEW UNDER FEDERAL DEPOSIT INSURANCE ACT.— 

(1) IN GENERAL.—Section 18(c) of the Federal Deposit Insurance Act (12 U.S.C. 1828(c)) is amended— 

(A) by redesignating paragraph (11) as paragraph (12); and 

(B) by inserting after paragraph (10), the following new paragraph: ‘‘(11) MONEY LAUNDERING.—In every case, the responsible agency, shall take into consideration the effectiveness of any insured depository institution involved in the proposed merger transaction in combatting money laundering activities, including in overseas branches.’’

(2) SCOPE OF APPLICATION.—The amendment made by paragraph (1) shall apply with respect to any application submitted to the responsible agency under section 18(c) of the Federal Deposit Insurance Act after December 31, 2001, which has not been approved by all appropriate responsible agencies before the date of enactment of this Act. 

SEC. 328. INTERNATIONAL COOPERATION ON IDENTIFICATION OF ORIGINATORS OF WIRE TRANSFERS. 

The Secretary shall— 

(1) in consultation with the Attorney General and the Secretary of State, take all reasonable steps to encourage foreign governments to require the inclusion of the name of the originator in wire transfer instructions sent to the United States and other countries, with the information to remain with the transfer from its origination until the point of disbursement; and 

(2) report annually to the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate on—

(A) progress toward the goal enumerated in paragraph (1), as well as impediments to implementation and an estimated compliance rate; and 

(B) impediments to instituting a regime in which all appropriate identification, as defined by the Secretary, about wire transfer recipients shall be included with wire transfers from their point of origination until disbursement. 

SEC. 329. CRIMINAL PENALTIES. 

Any person who is an official or employee of any department, agency, bureau, office, commission, or other entity of the Federal Government, and any other person who is acting for or on behalf of any such entity, who, directly or indirectly, in connection with the administration of this title, corruptly demands, seeks, receives, accepts, or agrees to receive or accept anything of value personally or for any other person or entity in return for— 

(1) being influenced in the performance of any official act; 

(2) being influenced to commit or aid in the committing, or to collude in, or allow, any fraud, or make opportunity for the commission of any fraud, on the United States; or 

(3) being induced to do or omit to do any act in violation of the official duty of such official or person, shall be fined in an amount not more than 3 times the monetary equivalent of the thing of value, or imprisoned for not more than 15 years, or both. A violation of this section shall be subject to chapter 227 of title 18, United States Code, and the provisions of the United States Sentencing Guidelines. 

SEC. 330. INTERNATIONAL COOPERATION IN INVESTIGATIONS OF MONEY LAUNDERING, FINANCIAL CRIMES, AND THE FINANCES OF TERRORIST GROUPS. 

(a) NEGOTIATIONS.—It is the sense of the Congress that the President should direct the Secretary of State, the Attorney General, or the Secretary of the Treasury, as appropriate, and in consultation with the Board of Governors of the Federal Reserve System, to seek to enter into negotiations with the appropriate financial supervisory agencies and other officials of any foreign country the financial institutions of which do business with United States financial institutions or which may be utilized by any foreign terrorist organization (as designated under section 219 of the Immigration and Nationality Act), any person who is a member or representative of any such organization, or any person engaged in money laundering or financial or other crimes. 

(b) PURPOSES OF NEGOTIATIONS.—It is the sense of the Congress that, in carrying out any negotiations described in paragraph (1), the President should direct the Secretary of State, the Attorney General, or the Secretary of the Treasury, as appropriate, to seek to enter into and further cooperative efforts, voluntary information exchanges, the use of letters rogatory, mutual legal assistance treaties, and international agreements to— 

(1) ensure that foreign banks and other financial institutions maintain adequate records of transaction and account information relating to any foreign terrorist organization (as designated under section 219 of the Immigration and Nationality Act), any person who is a member or representative of any such organization, or any person engaged in money laundering or financial or other crimes; and 

(2) establish a mechanism whereby such records may be made available to United States law enforcement officials and domestic financial institution supervisors, when appropriate. 

Subtitle B—Bank Secrecy Act Amendments and Related Improvements SEC. 351. AMENDMENTS RELATING TO REPORTING OF SUSPICIOUS ACTIVITIES. 

(a) AMENDMENT RELATING TO CIVIL LIABILITY IMMUNITY FOR DISCLOSURES.—Section 5318(g)(3) of title 31, United States Code, is amended to read as follows: 

‘‘(3) LIABILITY FOR DISCLOSURES.— 

‘‘(A) IN GENERAL.—Any financial institution that makes a voluntary disclosure of any possible violation of law or regulation to a government agency or makes a disclosure pursuant to this subsection or any other authority, and any director, officer, employee, or agent of such institution who makes, or requires another to make any such disclosure, shall not be liable to any person under any law or regulation of the United States, any constitution, law, or regulation of any State or political subdivision of any State, or under any contract or other legally enforceable agreement (including any arbitration agreement), for such disclosure or for any failure to provide notice of such disclosure to the person who is the subject of such disclosure or any other person identified in the disclosure. 

‘‘(B) RULE OF CONSTRUCTION.—Subparagraph (A) shall not be construed as creating— 
‘‘(i) any inference that the term ‘person’, as used in such subparagraph, may be construed more broadly than its ordinary usage so as to include any government or agency of government; or 
‘‘(ii) any immunity against, or otherwise affecting, any civil or criminal action brought by any government or agency of government to enforce any constitution, law, or regulation of such government or agency.’’

(b) PROHIBITION ON NOTIFICATION OF DISCLOSURES.—Section 5318(g)(2) of title 31, United States Code, is amended to read as follows: 

‘‘(2) NOTIFICATION PROHIBITED.— 

‘‘(A) IN GENERAL.—If a financial institution or any director, officer, employee, or agent of any financial institution, voluntarily or pursuant to this section or any other authority, reports a suspicious transaction to a government agency— 
‘‘(i) the financial institution, director, officer, employee, or agent may not notify any person involved in the transaction that the transaction has been reported; and 
‘‘(ii) no officer or employee of the Federal Government or of any State, local, tribal, or territorial government within the United States, who has any knowledge that such report was made may disclose to any person involved in the transaction that the transaction has been reported, other than as necessary to fulfill the official duties of such officer or employee. 

‘‘(B) DISCLOSURES IN CERTAIN EMPLOYMENT REFERENCES.— 
‘‘(i) RULE OF CONSTRUCTION.—Notwithstanding the application of subparagraph (A) in any other context, subparagraph (A) shall not be construed as prohibiting any financial institution, or any director, officer, employee, or agent of such institution, from including information that was included in a report to which subparagraph (A) applies— 

‘‘(I) in a written employment reference that is provided in accordance with section 18(w) of the Federal Deposit Insurance Act in response to a request from another financial institution; or 
‘‘(II) in a written termination notice or employment reference that is provided in accordance with the rules of a self-regulatory organization registered with the Securities and Exchange Commission or the Commodity Futures Trading Commission, except that such written reference or notice may not disclose that such information was also included in any such report, or that such report was made. 

‘‘(ii) INFORMATION NOT REQUIRED.— Clause (i) shall not be construed, by itself, to create any affirmative duty to include any information described in clause (i) in any employment reference or termination notice referred to in clause (i).’’. 

SEC. 352. ANTI-MONEY LAUNDERING PROGRAMS. 

(a) IN GENERAL.—Section 5318(h) of title 31, United States Code, is amended to read as follows: 

‘‘(h) ANTI-MONEY LAUNDERING PROGRAMS.— 

‘‘(1) IN GENERAL.—In order to guard against money laundering through financial institutions, each financial institution shall establish anti-money laundering programs, including, at a minimum— 

‘‘(A) the development of internal policies, procedures, and controls; 

‘‘(B) the designation of a compliance officer; 

‘‘(C) an ongoing employee training program; and 

‘‘(D) an independent audit function to test programs.

‘‘(2) REGULATIONS.—The Secretary of the Treasury, after consultation with the appropriate Federal functional regulator (as defined in section 509 of the Gramm-Leach-Bliley Act), may prescribe minimum standards for programs established under paragraph (1), and may exempt from the application of those standards any financial institution that is not subject to the provisions of the rules contained in part 103 of title 31, of the Code of Federal Regulations, or any successor rule thereto, for so long as such financial institution is not subject to the provisions of such rules.’’

(b) EFFECTIVE DATE.—The amendment made by subsection (a) shall take effect at the end of the 180-day period beginning on the date of enactment of this Act. 

(c) DATE OF APPLICATION OF REGULATIONS; FACTORS TO BE TAKEN INTO ACCOUNT.—Before the end of the 180-day period beginning on the date of enactment of this Act, the Secretary shall prescribe regulations that consider the extent to which the requirements imposed under this section are commensurate with the size, location, and activities of the financial institutions to which such regulations apply. 

SEC. 353. PENALTIES FOR VIOLATIONS OF GEOGRAPHIC TARGETING ORDERS AND CERTAIN RECORD-KEEPING REQUIREMENTS, AND LENGTHENING EFFECTIVE PERIOD OF GEOGRAPHIC TARGETING ORDERS. 

(a) CIVIL PENALTY FOR VIOLATION OF TARGETING ORDER.—Section 5321(a)(1) of title 31, United States Code, is amended— 

(1) by inserting ‘‘or order issued’’ after ‘‘subchapter or a regulation prescribed’’; and 

(2) by inserting ‘‘, or willfully violating a regulation prescribed under section 21 of the Federal Deposit Insurance Act or section 123 of Public Law 91–508,’’ after ‘‘sections 5314 and 5315)’’. 

(b) CRIMINAL PENALTIES FOR VIOLATION OF TARGETING ORDER.—Section 5322 of title 31, United States Code, is amended— 

(1) in subsection (a)— 

(A) by inserting ‘‘or order issued’’ after ‘‘willfully violating this subchapter or a regulation prescribed’’; and 

(B) by inserting ‘‘, or willfully violating a regulation prescribed under section 21 of the Federal Deposit Insurance Act or section 123 of Public Law 91–508,’’ after ‘‘under section 5315 or 5324)’’; and 

(2) in subsection (b)— 

(A) by inserting ‘‘or order issued’’ after ‘‘willfully violating this subchapter or a regulation prescribed’’; and 

(B) by inserting ‘‘or willfully violating a regulation prescribed under section 21 of the Federal Deposit Insurance Act or section 123 of Public Law 91–508,’’ after ‘‘under section 5315 or 5324),’’. 

(c) STRUCTURING TRANSACTIONS TO EVADE TARGETING ORDER OR CERTAIN RECORDKEEPING REQUIREMENTS.—Section 5324(a) of title 31, United States Code, is amended— 

(1) by inserting a comma after ‘‘shall’’; 

(2) by striking ‘‘section—’’ and inserting ‘‘section, the reporting or recordkeeping requirements imposed by any order issued under section 5326, or the recordkeeping requirements imposed by any regulation prescribed under section 21 of the Federal Deposit Insurance Act or section 123 of Public Law 91–508—’’; 

(3) in paragraph (1), by inserting ‘‘, to file a report or to maintain a record required by an order issued under section 5326, or to maintain a record required pursuant to any regulation prescribed under section 21 of the Federal Deposit Insurance Act or section 123 of Public Law 91–508’’ after ‘‘regulation prescribed under any such section’’; and 

(4) in paragraph (2), by inserting ‘‘, to file a report or to maintain a record required by any order issued under section 5326, or to maintain a record required pursuant to any regulation prescribed under section 5326, or to maintain a record required pursuant to any regulation prescribed under section 21 of the Federal Deposit Insurance Act or section 123 of Public Law 91–508,’’ after ‘‘regulation prescribed under any such section’’. 

(d) LENGTHENING EFFECTIVE PERIOD OF GEOGRAPHIC TARGETING ORDERS.—Section 5326(d) of title 31, United States Code, is amended by striking ‘‘more than 60’’ and inserting ‘‘more than 180’’

SEC. 354. ANTI-MONEY LAUNDERING STRATEGY. 

Section 5341(b) of title 31, United States Code, is amended by adding at the end the following: 

‘‘(12) DATA REGARDING FUNDING OF TERRORISM.—Data concerning money laundering efforts related to the funding of acts of international terrorism, and efforts directed at the prevention, detection, and prosecution of such funding.’’
 
SEC. 355. AUTHORIZATION TO INCLUDE SUSPICIONS OF ILLEGAL ACTIVITY IN WRITTEN EMPLOYMENT REFERENCES. 

Section 18 of the Federal Deposit Insurance Act (12 U.S.C. 1828) is amended by adding at the end the following: 

‘‘(w) WRITTEN EMPLOYMENT REFERENCES MAY CONTAIN SUSPICIONS OF INVOLVEMENT IN ILLEGAL ACTIVITY.— 

‘‘(1) AUTHORITY TO DISCLOSE INFORMATION.—Notwithstanding any other provision of law, any insured depository institution, and any director, officer, employee, or agent of such institution, may disclose in any written employment reference relating to a current or former institution-affiliated party of such institution which is provided to another insured depository institution in response to a request from such other institution, information concerning the possible involvement of such institution-affiliated party in potentially unlawful activity. 

‘‘(2) INFORMATION NOT REQUIRED.—Nothing in paragraph (1) shall be construed, by itself, to create any affirmative duty to include any information described in paragraph (1) in any employment reference referred to in paragraph (1). 

‘‘(3) MALICIOUS INTENT.—Notwithstanding any other provision of this subsection, voluntary disclosure made by an insured depository institution, and any director, officer, employee, or agent of such institution under this subsection concerning potentially unlawful activity that is made with malicious intent, shall not be shielded from liability from the person identified in the disclosure. 

‘‘(4) DEFINITION.—For purposes of this subsection, the term ‘insured depository institution’ includes any uninsured branch or agency of a foreign bank.’’

SEC. 356. REPORTING OF SUSPICIOUS ACTIVITIES BY SECURITIES BROKERS AND DEALERS; INVESTMENT COMPANY STUDY. 

(a) DEADLINE FOR SUSPICIOUS ACTIVITY REPORTING REQUIREMENTS FOR REGISTERED BROKERS AND DEALERS.—The Secretary, after consultation with the Securities and Exchange Commission and the Board of Governors of the Federal Reserve System, shall publish proposed regulations in the Federal Register before January 1, 2002, requiring brokers and dealers registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934 to submit suspicious activity reports under section 5318(g) of title 31, United States Code. Such regulations shall be published in final form not later than July 1, 2002. 

(b) SUSPICIOUS ACTIVITY REPORTING REQUIREMENTS FOR FUTURES COMMISSION MERCHANTS, COMMODITY TRADING ADVISORS, AND COMMODITY POOL OPERATORS.—The Secretary, in consultation with the Commodity Futures Trading Commission, may prescribe regulations requiring futures commission merchants, commodity trading advisors, and commodity pool operators registered under the Commodity Exchange Act to submit suspicious activity reports under section 5318(g) of title 31, United States Code. 

(c) REPORT ON INVESTMENT COMPANIES.— 

(1) IN GENERAL.—Not later than 1 year after the date of enactment of this Act, the Secretary, the Board of Governors of the Federal Reserve System, and the Securities and Exchange Commission shall jointly submit a report to the Congress on recommendations for effective regulations to apply the requirements of subchapter II of chapter 53 of title 31, United States Code, to investment companies pursuant to section 5312(a)(2)(I) of title 31, United States Code. 

(2) DEFINITION.—For purposes of this subsection, the term ‘‘investment company’’— 

(A) has the same meaning as in section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a–3); and 

(B) includes any person that, but for the exceptions provided for in paragraph (1) or (7) of section 3(c) of the Investment Company Act of 1940 (15 U.S.C. 80a–3(c)), would be an investment company. 

(3) ADDITIONAL RECOMMENDATIONS.—The report required by paragraph (1) may make different recommendations for different types of entities covered by this subsection. 

(4) BENEFICIAL OWNERSHIP OF PERSONAL HOLDING COMPANIES.—The report described in paragraph (1) shall also include recommendations as to whether the Secretary should promulgate regulations to treat any corporation or business or other grantor trust whose assets are predominantly securities, bank certificates of deposit, or other securities or investment instruments (other than such as relate to operating subsidiaries of such corporation or trust) and that has 5 or fewer common shareholders or holders of beneficial or other equity interest, as a financial institution within the meaning of that phrase in section 5312(a)(2)(I) and whether to require such corporations or trusts to disclose their beneficial owners when opening accounts or initiating funds transfers at any domestic financial institution. 

SEC. 357. SPECIAL REPORT ON ADMINISTRATION OF BANK SECRECY PROVISIONS. 

(a) REPORT REQUIRED.—Not later than 6 months after the date of enactment of this Act, the Secretary shall submit a report to the Congress relating to the role of the Internal Revenue Service in the administration of subchapter II of chapter 53 of title 31, United States Code (commonly known as the ‘‘Bank Secrecy Act’’). 

(b) CONTENTS.—The report required by subsection (a)— 

(1) shall specifically address, and contain recommendations concerning— 

(A) whether it is advisable to shift the processing of information reporting to the Department of the Treasury under the Bank Secrecy Act provisions to facilities other than those managed by the Internal Revenue Service; and 

(B) whether it remains reasonable and efficient, in light of the objective of both anti-money-laundering programs and Federal tax administration, for the Internal Revenue Service to retain authority and responsibility for audit and examination of the compliance of money services businesses and gaming institutions with those Bank Secrecy Act provisions; and 

(2) shall, if the Secretary determines that the information processing responsibility or the audit and examination responsibility of the Internal Revenue Service, or both, with respect to those Bank Secrecy Act provisions should be transferred to other agencies, include the specific recommendations of the Secretary regarding the agency or agencies to which any such function should be transferred, complete with a budgetary and resources plan for expeditiously accomplishing the transfer. 

SEC. 358. BANK SECRECY PROVISIONS AND ACTIVITIES OF UNITED STATES INTELLIGENCE AGENCIES TO FIGHT INTERNATIONAL TERRORISM. 

(a) AMENDMENT RELATING TO THE PURPOSES OF CHAPTER 53 OF TITLE 31, UNITED STATES CODE.—Section 5311 of title 31, United States Code, is amended by inserting before the period at the end the following: ‘‘, or in the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism’’. 

(b) AMENDMENT RELATING TO REPORTING OF SUSPICIOUS ACTIVITIES.—Section 5318(g)(4)(B) of title 31, United States Code, is amended by striking ‘‘or supervisory agency’’ and inserting ‘‘, supervisory agency, or United States intelligence agency for use in the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism’’. 

(c) AMENDMENT RELATING TO AVAILABILITY OF REPORTS.—Section 5319 of title 31, United States Code, is amended to read as follows: ‘‘§ 5319. Availability of reports ‘‘The Secretary of the Treasury shall make information in a report filed under this subchapter available to an agency, including any State financial institutions supervisory agency, United States intelligence agency or self-regulatory organization registered with the Securities and Exchange Commission or the Commodity Futures Trading Commission, upon request of the head of the agency or organization. The report shall be available for a purpose that is consistent with this subchapter. The Secretary may only require reports on the use of such information by any State financial institutions supervisory agency for other than supervisory purposes or by United States intelligence agencies. However, a report and records of reports are exempt from disclosure under section 552 of title 5.’’

(d) AMENDMENT RELATING TO THE PURPOSES OF THE BANK SECRECY ACT PROVISIONS.—Section 21(a) of the Federal Deposit Insurance Act (12 U.S.C. 1829b(a)) is amended to read as follows:

‘‘(a) CONGRESSIONAL FINDINGS AND DECLARATION OF PURPOSE.— 

‘‘(1) FINDINGS.—Congress finds that— 

‘‘(A) adequate records maintained by insured depository institutions have a high degree of usefulness in criminal, tax, and regulatory investigations or proceedings, and that, given the threat posed to the security of the Nation on and after the terrorist attacks against the United States on September 11, 2001, such records may also have a high degree of usefulness in the conduct of intelligence or counter-intelligence activities, including analysis, to protect against domestic and international terrorism; and 

‘‘(B) microfilm or other reproductions and other records made by insured depository institutions of checks, as well as records kept by such institutions, of the identity of persons maintaining or authorized to act with respect to accounts therein, have been of particular value in proceedings described in subparagraph (A).

‘‘(2) PURPOSE.—It is the purpose of this section to require the maintenance of appropriate types of records by insured depository institutions in the United States where such records have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings, recognizes that, given the threat posed to the security of the Nation on and after the terrorist attacks against the United States on September 11, 2001, such records may also have a high degree of usefulness in the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism.’’

(e) AMENDMENT RELATING TO THE PURPOSES OF THE BANK SECRECY ACT.—Section 123(a) of Public Law 91–508 (12 U.S.C. 1953(a)) is amended to read as follows: 

‘‘(a) REGULATIONS.—If the Secretary determines that the maintenance of appropriate records and procedures by any uninsured bank or uninsured institution, or any person engaging in the business of carrying on in the United States any of the functions referred to in subsection (b), has a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings, and that, given the threat posed to the security of the Nation on and after the terrorist attacks against the United States on September 11, 2001, such records may also have a high degree of usefulness in the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism, he may by regulation require such bank, institution, or person.’’

(f) AMENDMENTS TO THE RIGHT TO FINANCIAL PRIVACY ACT.—The Right to Financial Privacy Act of 1978 is amended— 

(1) in section 1112(a) (12 U.S.C. 3412(a)), by inserting ‘‘, or intelligence or counterintelligence activity, investigation or analysis related to international terrorism’’ after ‘‘legitimate law enforcement inquiry’’; 

(2) in section 1114(a)(1) (12 U.S.C. 3414(a)(1))— 

(A) in subparagraph (A), by striking ‘‘or’’ at the end; 

(B) in subparagraph (B), by striking the period at the end and inserting ‘‘; or’’; and 

(C) by adding at the end the following: ‘‘(C) a Government authority authorized to conduct investigations of, or intelligence or counterintelligence analyses related to, international terrorism for the purpose of conducting such investigations or analyses.’’; and 

(3) in section 1120(a)(2) (12 U.S.C. 3420(a)(2)), by inserting ‘‘, or for a purpose authorized by section 1112(a)’’ before the semicolon at the end. 

(g) AMENDMENT TO THE FAIR CREDIT REPORTING ACT.— 

(1) IN GENERAL.—The Fair Credit Reporting Act (15 U.S.C. 1681 et seq.) is amended— 

(A) by redesignating the second of the 2 sections designated as section 624 (15 U.S.C. 1681u) (relating to disclosure to FBI for counterintelligence purposes) as section 625; and 

(B) by adding at the end the following new section: ‘‘§ 626. Disclosures to governmental agencies for counterterrorism purposes ‘‘(a) DISCLOSURE.—Notwithstanding section 604 or any other provision of this title, a consumer reporting agency shall furnish a consumer report of a consumer and all other information in a consumer’s file to a government agency authorized to conduct investigations of, or intelligence or counterintelligence activities or analysis related to, international terrorism when presented with a written certification by such government agency that such information is necessary for the agency’s conduct or such investigation, activity or analysis.

‘‘(b) FORM OF CERTIFICATION.—The certification described in subsection (a) shall be signed by a supervisory official designated by the head of a Federal agency or an officer of a Federal agency whose appointment to office is required to be made by the President, by and with the advice and consent of the Senate. 

‘‘(c) CONFIDENTIALITY.—No consumer reporting agency, or officer, employee, or agent of such consumer reporting agency, shall disclose to any person, or specify in any consumer report, that a government agency has sought or obtained access to information under subsection (a).

‘‘(d) RULE OF CONSTRUCTION.—Nothing in section 625 shall be construed to limit the authority of the Director of the Federal Bureau of Investigation under this section. 

‘‘(e) SAFE HARBOR.—Notwithstanding any other provision of this title, any consumer reporting agency or agent or employee thereof making disclosure of consumer reports or other information pursuant to this section in good-faith reliance upon a certification of a governmental agency pursuant to the provisions of this section shall not be liable to any person for such disclosure under this subchapter, the constitution of any State, or any law or regulation of any State or any political subdivision of any State.’’

(2) CLERICAL AMENDMENTS.—The table of sections for the Fair Credit Reporting Act (15 U.S.C. 1681 et seq.) is amended— 

(A) by redesignating the second of the 2 items designated as section 624 as section 625; and

(B) by inserting after the item relating to section 625 (as so redesignated) the following new item: ‘‘626. Disclosures to governmental agencies for counterterrorism purposes.’’.

(h) APPLICATION OF AMENDMENTS.—The amendments made by this section shall apply with respect to reports filed or records maintained on, before, or after the date of enactment of this Act. 

SEC. 359. REPORTING OF SUSPICIOUS ACTIVITIES BY UNDERGROUND BANKING SYSTEMS. 

(a) DEFINITION FOR SUBCHAPTER.—Section 5312(a)(2)(R) of title 31, United States Code, is amended to read as follows: ‘‘(R) a licensed sender of money or any other person who engages as a business in the transmission of funds, including any person who engages as a business in an informal money transfer system or any network of people who engage as a business in facilitating the transfer of money domestically or internationally outside of the conventional financial institutions system;’’

(b) MONEY TRANSMITTING BUSINESS.—Section 5330(d)(1)(A) of title 31, United States Code, is amended by inserting before the semicolon the following: ‘‘or any other person who engages as a business in the transmission of funds, including any person who engages as a business in an informal money transfer system or any network of people who engage as a business in facilitating the transfer of money domestically or internationally outside of the conventional financial institutions system;’’

(c) APPLICABILITY OF RULES.—Section 5318 of title 31, United States Code, as amended by this title, is amended by adding at the end the following: 

‘‘(l) APPLICABILITY OF RULES.—Any rules promulgated pursuant to the authority contained in section 21 of the Federal Deposit Insurance Act (12 U.S.C. 1829b) shall apply, in addition to any other financial institution to which such rules apply, to any person that engages as a business in the transmission of funds, including any person who engages as a business in an informal money transfer system or any network of people who engage as a business in facilitating the transfer of money domestically or internationally outside of the conventional financial institutions system.’’

(d) REPORT.—Not later than 1 year after the date of enactment of this Act, the Secretary of the Treasury shall report to Congress on the need for any additional legislation relating to persons who engage as a business in an informal money transfer system or any network of people who engage as a business in facilitating the transfer of money domestically or internationally outside of the conventional financial institutions system, counter money laundering and regulatory controls relating to underground money movement and banking systems, including whether the threshold for the filing of suspicious activity reports under section 5318(g) of title 31, United States Code should be lowered in the case of such systems. 

SEC. 360. USE OF AUTHORITY OF UNITED STATES EXECUTIVE DIRECTORS. 

(a) ACTION BY THE PRESIDENT.—If the President determines that a particular foreign country has taken or has committed to take actions that contribute to efforts of the United States to respond to, deter, or prevent acts of international terrorism, the Secretary may, consistent with other applicable provisions of law, instruct the United States Executive Director of each international financial institution to use the voice and vote of the Executive Director to support any loan or other utilization of the funds of respective institutions for such country, or any public or private entity within such country. 

(b) USE OF VOICE AND VOTE.—The Secretary may instruct the United States Executive Director of each international financial institution to aggressively use the voice and vote of the Executive Director to require an auditing of disbursements at such institutions to ensure that no funds are paid to persons who commit, threaten to commit, or support terrorism. 

(c) DEFINITION.—For purposes of this section, the term ‘‘international financial institution’’ means an institution described in section 1701(c)(2) of the International Financial Institutions Act (22 U.S.C. 262r(c)(2)). 

SEC. 361. FINANCIAL CRIMES ENFORCEMENT NETWORK. 

(a) IN GENERAL.—Subchapter I of chapter 3 of title 31, United States Code, is amended— 

(1) by redesignating section 310 as section 311; and 

(2) by inserting after section 309 the following new section: ‘‘§ 310. Financial Crimes Enforcement Network 

‘‘(a) IN GENERAL.—The Financial Crimes Enforcement Network established by order of the Secretary of the Treasury (Treasury Order Numbered 105-08, in this section referred to as ‘FinCEN’) on April 25, 1990, shall be a bureau in the Department of the Treasury. 

‘‘(b) DIRECTOR.— 

‘‘(1) APPOINTMENT.—The head of FinCEN shall be the Director, who shall be appointed by the Secretary of the Treasury. 

‘‘(2) DUTIES AND POWERS.—The duties and powers of the Director are as follows: 

‘‘(A) Advise and make recommendations on matters relating to financial intelligence, financial criminal activities, and other financial activities to the Under Secretary of the Treasury for Enforcement. 

‘‘(B) Maintain a government-wide data access service, with access, in accordance with applicable legal requirements, to the following: 
‘‘(i) Information collected by the Department of the Treasury, including report information filed under subchapter II of chapter 53 of this title (such as reports on cash transactions, foreign financial agency transactions and relationships, foreign currency transactions, exporting and importing monetary instruments, and suspicious activities), chapter 2 of title I of Public Law 91–508, and section 21 of the Federal Deposit Insurance Act. 
‘‘(ii) Information regarding national and international currency flows. 
‘‘(iii) Other records and data maintained by other Federal, State, local, and foreign agencies, including financial and other records developed in specific cases. 
‘‘(iv) Other privately and publicly available information. 

‘‘(C) Analyze and disseminate the available data in accordance with applicable legal requirements and policies and guidelines established by the Secretary of the Treasury and the Under Secretary of the Treasury for Enforcement to— 

‘‘(i) identify possible criminal activity to appropriate Federal, State, local, and foreign law enforcement agencies;
‘‘(ii) support ongoing criminal financial investigations and prosecutions and related proceedings, including civil and criminal tax and forfeiture proceedings; 
‘‘(iii) identify possible instances of noncompliance with subchapter II of chapter 53 of this title, chapter 2 of title I of Public Law 91–508, and section 21 of the Federal Deposit Insurance Act to Federal agencies with statutory responsibility for enforcing compliance with such provisions and other appropriate Federal regulatory agencies; 
‘‘(iv) evaluate and recommend possible uses of special currency reporting requirements under section 5326; 
‘‘(v) determine emerging trends and methods in money laundering and other financial crimes; 
‘‘(vi) support the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism; and 
‘‘(vii) support government initiatives against money laundering. 

‘‘(D) Establish and maintain a financial crimes communications center to furnish law enforcement authorities with intelligence information related to emerging or ongoing investigations and undercover operations. 

‘‘(E) Furnish research, analytical, and informational services to financial institutions, appropriate Federal regulatory agencies with regard to financial institutions, and appropriate Federal, State, local, and foreign law enforcement authorities, in accordance with policies and guidelines established by the Secretary of the Treasury or the Under Secretary of the Treasury for Enforcement, in the interest of detection, prevention, and prosecution of terrorism, organized crime, money laundering, and other financial crimes. 

‘‘(F) Assist Federal, State, local, and foreign law enforcement and regulatory authorities in combatting the use of informal, nonbank networks and payment and barter system mechanisms that permit the transfer of funds or the equivalent of funds without records and without compliance with criminal and tax laws. 

‘‘(G) Provide computer and data support and data analysis to the Secretary of the Treasury for tracking and controlling foreign assets. 

‘‘(H) Coordinate with financial intelligence units in other countries on anti-terrorism and anti-money laundering initiatives, and similar efforts. 

‘‘(I) Administer the requirements of subchapter II of chapter 53 of this title, chapter 2 of title I of Public Law 91–508, and section 21 of the Federal Deposit Insurance Act, to the extent delegated such authority by the Secretary of the Treasury. 

‘‘(J) Such other duties and powers as the Secretary of the Treasury may delegate or prescribe. 

‘‘(c) REQUIREMENTS RELATING TO MAINTENANCE AND USE OF DATA BANKS.—The Secretary of the Treasury shall establish and maintain operating procedures with respect to the government-wide data access service and the financial crimes communications center maintained by FinCEN which provide—

‘‘(1) for the coordinated and efficient transmittal of information to, entry of information into, and withdrawal of information from, the data maintenance system maintained by the Network, including— 

‘‘(A) the submission of reports through the Internet or other secure network, whenever possible; 

‘‘(B) the cataloguing of information in a manner that facilitates rapid retrieval by law enforcement personnel of meaningful data; and 

‘‘(C) a procedure that provides for a prompt initial review of suspicious activity reports and other reports, or such other means as the Secretary may provide, to identify information that warrants immediate action; and 

‘‘(2) in accordance with section 552a of title 5 and the Right to Financial Privacy Act of 1978, appropriate standards and guidelines for determining— 

‘‘(A) who is to be given access to the information maintained by the Network; 

‘‘(B) what limits are to be imposed on the use of such information; and 

‘‘(C) how information about activities or relationships which involve or are closely associated with the exercise of constitutional rights is to be screened out of the data maintenance system. 

‘‘(d) AUTHORIZATION OF APPROPRIATIONS.—There are authorized to be appropriated for FinCEN such sums as may be necessary for fiscal years 2002, 2003, 2004, and 2005.’’

(b) COMPLIANCE WITH REPORTING REQUIRE- MENTS.—The Secretary of the Treasury shall study methods for improving compliance with the reporting requirements established in section 5314 of title 31, United States Code, and shall submit a report on such study to the Congress by the end of the 6-month period beginning on the date of enactment of this Act and each 1-year period thereafter. The initial report shall include historical data on compliance with such reporting requirements. 

(c) CLERICAL AMENDMENT.—The table of sections for subchapter I of chapter 3 of title 31, United States Code, is amended— 

(1) by redesignating the item relating to section 310 as section 311; and 

(2) by inserting after the item relating to section 309 the following new item: ‘‘310. Financial Crimes Enforcement Network.’’

SEC. 362. ESTABLISHMENT OF HIGHLY SECURE NETWORK. 

(a) IN GENERAL.—The Secretary shall establish a highly secure network in the Financial Crimes Enforcement Network that— 

(1) allows financial institutions to file reports required under subchapter II or III of chapter 53 of title 31, United States Code, chapter 2 of Public Law 91–508, or section 21 of the Federal Deposit Insurance Act through the secure network; and 

(2) provides financial institutions with alerts and other information regarding suspicious activities that warrant immediate and enhanced scrutiny. 

(b) EXPEDITED DEVELOPMENT.—The Secretary shall take such action as may be necessary to ensure that the secure network required under subsection (a) is fully operational before the end of the 9-month period beginning on the date of enactment of this Act. 

SEC. 363. INCREASE IN CIVIL AND CRIMINAL PENALTIES FOR MONEY LAUNDERING. 

(a) CIVIL PENALTIES.—Section 5321(a) of title 31, United States Code, is amended by adding at the end the following: 

‘‘(7) PENALTIES FOR INTERNATIONAL COUNTER MONEY LAUNDERING VIOLATIONS.—The Secretary may impose a civil money penalty in an amount equal to not less than 2 times the amount of the transaction, but not more than $1,000,000, on any financial institution or agency that violates any provision of subsection (i) or (j) of section 5318 or any special measures imposed under section 5318A.’’

(b) CRIMINAL PENALTIES.—Section 5322 of title 31, United States Code, is amended by adding at the end the following: 

‘‘(d) A financial institution or agency that violates any provision of subsection (i) or (j) of section 5318, or any special measures imposed under section 5318A, or any regulation prescribed under subsection (i) or (j) of section 5318 or section 5318A, shall be fined in an amount equal to not less than 2 times the amount of the transaction, but not more than $1,000,000.’’ 

SEC. 364. UNIFORM PROTECTION AUTHORITY FOR FEDERAL RESERVE FACILITIES. 

Section 11 of the Federal Reserve Act (12 U.S.C. 248) is amended by adding at the end the following: 

‘‘(q) UNIFORM PROTECTION AUTHORITY FOR FEDERAL RESERVE FACILITIES.— 

‘‘(1) Notwithstanding any other provision of law, to authorize personnel to act as law enforcement officers to protect and safeguard the premises, grounds, property, personnel, including members of the Board, of the Board, or any Federal reserve bank, and operations conducted by or on behalf of the Board or a reserve bank. 

‘‘(2) The Board may, subject to the regulations prescribed under paragraph (5), delegate authority to a Federal reserve bank to authorize personnel to act as law enforcement officers to protect and safeguard the bank’s premises, grounds, property, personnel, and operations conducted by or on behalf of the bank. 

‘‘(3) Law enforcement officers designated or authorized by the Board or a reserve bank under paragraph (1) or (2) are authorized while on duty to carry firearms and make arrests without warrants for any offense against the United States committed in their presence, or for any felony cognizable under the laws of the United States committed or being committed within the buildings and grounds of the Board or a reserve bank if they have reasonable grounds to believe that the person to be arrested has committed or is committing such a felony. Such officers shall have access to law enforcement information that may be necessary for the protection of the property or personnel of the Board or a reserve bank. 

‘‘(4) For purposes of this subsection, the term ‘law enforcement officers’ means personnel who have successfully completed law enforcement training and are authorized to carry firearms and make arrests pursuant to this subsection. 

‘‘(5) The law enforcement authorities provided for in this subsection may be exercised only pursuant to regulations prescribed by the Board and approved by the Attorney General.’’

SEC. 365. REPORTS RELATING TO COINS AND CURRENCY RECEIVED IN NONFINANCIAL TRADE OR BUSINESS. 

(a) REPORTS REQUIRED.—Subchapter II of chapter 53 of title 31, United States Code, is amended by adding at the end the following new section: ‘‘§ 5331. Reports relating to coins and currency received in nonfinancial trade or business ‘‘(a) COIN AND CURRENCY RECEIPTS OF MORE THAN $10,000.—Any person— 

‘‘(1) who is engaged in a trade or business; and 

‘‘(2) who, in the course of such trade or business, receives more than $10,000 in coins or currency in 1 transaction (or 2 or more related transactions), shall file a report described in subsection (b) with respect to such transaction (or related transactions) with the Financial Crimes Enforcement Network at such time and in such manner as the Secretary may, by regulation, prescribe. 

‘‘(b) FORM AND MANNER OF REPORTS.—A report is described in this subsection if such report— 

‘‘(1) is in such form as the Secretary may prescribe; 

‘‘(2) contains—

‘‘(A) the name and address, and such other identification information as the Secretary may require, of the person from whom the coins or currency was received; 

‘‘(B) the amount of coins or currency received; 

‘‘(C) the date and nature of the transaction; and 

‘‘(D) such other information, including the identification of the person filing the report, as the Secretary may prescribe. 

‘‘(c) EXCEPTIONS.— 

‘‘(1) AMOUNTS RECEIVED BY FINANCIAL INSTITUTIONS.—Subsection (a) shall not apply to amounts received in a transaction reported under section 5313 and regulations prescribed under such section. 

‘‘(2) TRANSACTIONS OCCURRING OUTSIDE THE UNITED STATES.—Except to the extent provided in regulations prescribed by the Secretary, subsection (a) shall not apply to any transaction if the entire transaction occurs outside the United States. 

‘‘(d) CURRENCY INCLUDES FOREIGN CURRENCY AND CERTAIN MONETARY INSTRUMENTS.— 

‘‘(1) IN GENERAL.—For purposes of this section, the term ‘currency’ includes— 

‘‘(A) foreign currency; and 

‘‘(B) to the extent provided in regulations prescribed by the Secretary, any monetary instrument (whether or not in bearer form) with a face amount of not more than $10,000. 

‘‘(2) SCOPE OF APPLICATION.—Paragraph (1)(B) shall not apply to any check drawn on the account of the writer in a financial institution referred to in subparagraph (A), (B), (C), (D), (E), (F), (G), (J), (K), (R), or (S) of section 5312(a)(2).’’

(b) PROHIBITION ON STRUCTURING TRANSACTIONS.— 

(1) IN GENERAL.—Section 5324 of title 31, United States Code, is amended— 

(A) by redesignating subsections (b) and (c) as subsections (c) and (d), respectively; and (B) by inserting after subsection (a) the following new subsection: 

‘‘(b) DOMESTIC COIN AND CURRENCY TRANSACTIONS INVOLVING NONFINANCIAL TRADES OR BUSINESSES.—No person shall, for the purpose of evading the report requirements of section 5333 or any regulation prescribed under such section— 

‘‘(1) cause or attempt to cause a nonfinancial trade or business to fail to file a report required under section 5333 or any regulation prescribed under such section; 

‘‘(2) cause or attempt to cause a nonfinancial trade or business to file a report required under section 5333 or any regulation prescribed under such section that contains a material omission or misstatement of fact; or 

‘‘(3) structure or assist in structuring, or attempt to structure or assist in structuring, any transaction with 1 or more nonfinancial trades or businesses.’

(2) TECHNICAL AND CONFORMING AMENDMENTS.—

(A) The heading for subsection (a) of section 5324 of title 31, United States Code, is amended by inserting ‘‘INVOLVING FINANCIAL INSTITUTIONS’’ after ‘‘TRANSACTIONS’. 

(B) Section 5317(c) of title 31, United States Code, is amended by striking ‘‘5324(b)’’ and inserting ‘‘5324(c)’’.

(c) DEFINITION OF NONFINANCIAL TRADE OR BUSINESS.— 

(1) IN GENERAL.—Section 5312(a) of title 31, United States Code, is amended— 

(A) by redesignating paragraphs (4) and (5) as paragraphs (5) and (6), respectively; and (B) by inserting after paragraph (3) the following new paragraph: 

‘‘(4) NONFINANCIAL TRADE OR BUSINESS.— The term ‘nonfinancial trade or business’ means any trade or business other than a financial institution that is subject to the reporting requirements of section 5313 and regulations prescribed under such section.’’

(2) TECHNICAL AND CONFORMING AMENDMENTS.— 

(A) Section 5312(a)(3)(C) of title 31, United States Code, is amended by striking ‘‘section 5316,’’ and inserting ‘‘sections 5333 and 5316,’’

(B) Subsections (a) through (f) of section 5318 of title 31, United States Code, and sections 5321, 5326, and 5328 of such title are each amended— 
(i) by inserting ‘‘or nonfinancial trade or business’’ after ‘‘financial institution’’ each place such term appears; and 
(ii) by inserting ‘‘or nonfinancial trades or businesses’’ after ‘‘financial institutions’’ each place such term appears. 

(c) CLERICAL AMENDMENT.—The table of sections for chapter 53 of title 31, United States Code, is amended by inserting after the item relating to section 5332 (as added by section 112 of this title) the following new item: ‘‘5331. Reports relating to coins and currency received in nonfinancial trade or business.’’

(f) REGULATIONS.—Regulations which the Secretary determines are necessary to implement this section shall be published in final form before the end of the 6-month period beginning on the date of enactment of this Act. 

SEC. 366. EFFICIENT USE OF CURRENCY TRANSACTION REPORT SYSTEM. 

(a) FINDINGS.—The Congress finds the following: 

(1) The Congress established the currency transaction reporting requirements in 1970 because the Congress found then that such reports have a high degree of usefulness in criminal, tax, and regulatory investigations and proceedings and the usefulness of such reports has only increased in the years since the requirements were established. 

(2) In 1994, in response to reports and testimony that excess amounts of currency transaction reports were interfering with effective law enforcement, the Congress reformed the currency transaction report exemption requirements to provide— 

(A) mandatory exemptions for certain reports that had little usefulness for law enforcement, such as cash transfers between depository institutions and cash deposits from government agencies; and 

(B) discretionary authority for the Secretary of the Treasury to provide exemptions, subject to criteria and guidelines established by the Secretary, for financial institutions with regard to regular business customers that maintain accounts at an institution into which frequent cash deposits are made.

(3) Today there is evidence that some financial institutions are not utilizing the exemption system, or are filing reports even if there is an exemption in effect, with the result that the volume of currency transaction reports is once again interfering with effective law enforcement. 

(b) STUDY AND REPORT.— 

(1) STUDY REQUIRED.—The Secretary shall conduct a study of— 

(A) the possible expansion of the statutory exemption system in effect under section 5313 of title 31, United States Code; and 

(B) methods for improving financial institution utilization of the statutory exemption provisions as a way of reducing the submission of currency transaction reports that have little or no value for law enforcement purposes, including improvements in the systems in effect at financial institutions for regular review of the exemption procedures used at the institution and the training of personnel in its effective use. 

(2) REPORT REQUIRED.—The Secretary of the Treasury shall submit a report to the Congress before the end of the 1-year period beginning on the date of enactment of this Act containing the findings and conclusions of the Secretary with regard to the study required under subsection (a), and such recommendations for legislative or administrative action as the Secretary determines to be appropriate. 

Subtitle C—Currency Crimes and Protection 
SEC. 371. BULK CASH SMUGGLING INTO OR OUT OF THE UNITED STATES. 

(a) FINDINGS.—The Congress finds the following: 

(1) Effective enforcement of the currency reporting requirements of subchapter II of chapter 53 of title 31, United States Code, and the regulations prescribed under such subchapter, has forced drug dealers and other criminals engaged in cash-based businesses to avoid using traditional financial institutions. 

(2) In their effort to avoid using traditional financial institutions, drug dealers and other criminals are forced to move large quantities of currency in bulk form to and through the airports, border crossings, and other ports of entry where the currency can be smuggled out of the United States and placed in a foreign financial institution or sold on the black market. 

(3) The transportation and smuggling of cash in bulk form may now be the most common form of money laundering, and the movement of large sums of cash is one of the most reliable warning signs of drug trafficking, terrorism, money laundering, racketeering, tax evasion and similar crimes. 

(4) The intentional transportation into or out of the United States of large amounts of currency or monetary instruments, in a manner designed to circumvent the mandatory reporting provisions of subchapter II of chapter 53 of title 31, United States Code,, is the equivalent of, and creates the same harm as, the smuggling of goods. 

(5) The arrest and prosecution of bulk cash smugglers are important parts of law enforcement’s effort to stop the laundering of criminal proceeds, but the couriers who attempt to smuggle the cash out of the United States are typically low-level employees of large criminal organizations, and thus are easily replaced. Accordingly, only the confiscation of the smuggled bulk cash can effectively break the cycle of criminal activity of which the laundering of the bulk cash is a critical part. 

(6) The current penalties for violations of the currency reporting requirements are insufficient to provide a deterrent to the laundering of criminal proceeds. In particular, in cases where the only criminal violation under current law is a reporting offense, the law does not adequately provide for the confiscation of smuggled currency. In contrast, if the smuggling of bulk cash were itself an offense, the cash could be confiscated as the corpus delicti of the smuggling offense. 

(b) PURPOSES.—The purposes of this section are— 

(1) to make the act of smuggling bulk cash itself a criminal offense; 

(2) to authorize forfeiture of any cash or instruments of the smuggling offense; and 

(3) to emphasize the seriousness of the act of bulk cash smuggling. 

(c) ENACTMENT OF BULK CASH SMUGGLING OFFENSE.—Subchapter II of chapter 53 of title 31, United States Code, is amended by adding at the end the following: ‘‘§ 5332. Bulk cash smuggling into or out of the United States 

‘‘(a) CRIMINAL OFFENSE.— 

‘‘(1) IN GENERAL.—Whoever, with the intent to evade a currency reporting requirement under section 5316, knowingly conceals more than $10,000 in currency or other monetary instruments on the person of such individual or in any conveyance, article of luggage, merchandise, or other container, and transports or transfers or attempts to transport or transfer such currency or monetary instruments from a place within the United States to a place outside of the United States, or from a place outside the United States to a place within the United States, shall be guilty of a currency smuggling offense and subject to punishment pursuant to subsection (b). 

‘‘(2) CONCEALMENT ON PERSON.—For purposes of this section, the concealment of currency on the person of any individual includes concealment in any article of clothing worn by the individual or in any luggage, backpack, or other container worn or carried by such individual.

‘‘(b) PENALTY.— 

‘‘(1) TERM OF IMPRISONMENT.—A person convicted of a currency smuggling offense under subsection (a), or a conspiracy to commit such offense, shall be imprisoned for not more than 5 years. 

‘‘(2) FORFEITURE.—In addition, the court, in imposing sentence under paragraph (1), shall order that the defendant forfeit to the United States, any property, real or personal, involved in the offense, and any property traceable to such property, subject to subsection (d) of this section. 

‘‘(3) PROCEDURE.—The seizure, restraint, and forfeiture of property under this section shall be governed by section 413 of the Controlled Substances Act. 

‘‘(4) PERSONAL MONEY JUDGMENT.—If the property subject to forfeiture under paragraph (2) is unavailable, and the defendant has insufficient substitute property that may be forfeited pursuant to section 413(p) of the Controlled Substances Act, the court shall enter a personal money judgment against the defendant for the amount that would be subject to forfeiture. 

‘‘(c) CIVIL FORFEITURE.— 

‘‘(1) IN GENERAL.—Any property involved in a violation of subsection (a), or a conspiracy to commit such violation, and any property traceable to such violation or conspiracy, may be seized and, subject to subsection (d) of this section, forfeited to the United States. 

‘‘(2) PROCEDURE.—The seizure and forfeiture shall be governed by the procedures governing civil forfeitures in money laundering cases pursuant to section 981(a)(1)(A) of title 18, United States Code. 

‘‘(3) TREATMENT OF CERTAIN PROPERTY AS INVOLVED IN THE OFFENSE.—For purposes of this subsection and subsection (b), any currency or other monetary instrument that is concealed or intended to be concealed in violation of subsection (a) or a conspiracy to commit such violation, any article, container, or conveyance used, or intended to be used, to conceal or transport the currency or other monetary instrument, and any other property used, or intended to be used, to facilitate the offense, shall be considered property involved in the offense.’’

(c) CLERICAL AMENDMENT.—The table of sections for subchapter II of chapter 53 of title 31, United States Code, is amended by inserting after the item relating to section 5331, as added by this Act, the following new item: ‘‘5332. Bulk cash smuggling into or out of the United States.’’

SEC. 372. FORFEITURE IN CURRENCY REPORTING CASES. 

(a) IN GENERAL.—Subsection (c) of section 5317 of title 31, United States Code, is amended to read as follows: 

‘‘(c) FORFEITURE.— 

‘‘(1) CRIMINAL FORFEITURE.— 

‘‘(A) IN GENERAL.—The court in imposing sentence for any violation of section 5313, 5316, or 5324 of this title, or any conspiracy to commit such violation, shall order the defendant to forfeit all property, real or personal, involved in the offense and any property traceable thereto. 

‘‘(B) PROCEDURE.—Forfeitures under this paragraph shall be governed by the procedures established in section 413 of the Controlled Substances Act. 

‘‘(2) CIVIL FORFEITURE.—Any property involved in a violation of section 5313, 5316, or 5324 of this title, or any conspiracy to commit any such violation, and any property traceable to any such violation or conspiracy, may be seized and forfeited to the United States in accordance with the procedures governing civil forfeitures in money laundering cases pursuant to section 981(a)(1)(A) of title 18, United States Code.’’

(b) CONFORMING AMENDMENTS.— 

(1) Section 981(a)(1)(A) of title 18, United States Code, is amended— 

(A) by striking ‘‘of section 5313(a) or 5324(a) of title 31, or’’; and 

(B) by striking ‘‘However’’ and all that follows through the end of the subparagraph. 

(2) Section 982(a)(1) of title 18, United States Code, is amended— 

(A) by striking ‘‘of section 5313(a), 5316, or 5324 of title 31, or’’; and 

(B) by striking ‘‘However’’ and all that follows through the end of the paragraph. 

SEC. 373. ILLEGAL MONEY TRANSMITTING BUSINESSES. 

(a) SCIENTER REQUIREMENT FOR SECTION 1960 VIOLATION.—Section 1960 of title 18, United States Code, is amended to read as follows: ‘‘§ 1960. Prohibition of unlicensed money transmitting businesses 

‘‘(a) Whoever knowingly conducts, controls, manages, supervises, directs, or owns all or part of an unlicensed money transmitting business, shall be fined in accordance with this title or imprisoned not more than 5 years, or both. 

‘‘(b) As used in this section— 

‘‘(1) the term ‘unlicensed money transmitting business’ means a money transmitting business which affects interstate or foreign commerce in any manner or degree and— 

‘‘(A) is operated without an appropriate money transmitting license in a State where such operation is punishable as a misdemeanor or a felony under State law, whether or not the defendant knew that the operation was required to be licensed or that the operation was so punishable; 

‘‘(B) fails to comply with the money transmitting business registration requirements under section 5330 of title 31, United States Code, or regulations prescribed under such section; or 

‘‘(C) otherwise involves the transportation or transmission of funds that are known to the defendant to have been derived from a criminal offense or are intended to be used to be used to promote or support unlawful activity; 

‘‘(2) the term ‘money transmitting’ includes transferring funds on behalf of the public by any and all means including but not limited to transfers within this country or to locations abroad by wire, check, draft, facsimile, or courier; and 

‘‘(3) the term ‘State’ means any State of the United States, the District of Columbia, the Northern Mariana Islands, and any commonwealth, territory, or possession of the United States.’’

(b) SEIZURE OF ILLEGALLY TRANSMITTED FUNDS.—Section 981(a)(1)(A) of title 18, United States Code, is amended by striking ‘‘or 1957’’ and inserting ‘‘, 1957 or 1960’’. 

(c) CLERICAL AMENDMENT.—The table of sections for chapter 95 of title 18, United States Code, is amended in the item relating to section 1960 by striking ‘‘illegal’’ and inserting ‘‘unlicensed’’. 

SEC. 374. COUNTERFEITING DOMESTIC CURRENCY AND OBLIGATIONS. 

(a) COUNTERFEIT ACTS COMMITTED OUTSIDE THE UNITED STATES.—Section 470 of title 18, United States Code, is amended— 

(1) in paragraph (2), by inserting ‘‘analog, digital, or electronic image,’’ after ‘‘plate, stone,’’; and (2) by striking ‘‘shall be fined under this title, imprisoned not more than 20 years, or both’’ and inserting ‘‘shall be punished as is provided for the like offense within the United States’’. 

(b) OBLIGATIONS OR SECURITIES OF THE UNITED STATES.—Section 471 of title 18, United States Code, is amended by striking ‘‘fifteen years’’ and inserting ‘‘20 years’’. 

(c) UTTERING COUNTERFEIT OBLIGATIONS OR SECURITIES.—Section 472 of title 18, United States Code, is amended by striking ‘‘fifteen years’’ and inserting ‘‘20 years’’. 

(d) DEALING IN COUNTERFEIT OBLIGATIONS OR SECURITIES.—Section 473 of title 18, United States Code, is amended by striking ‘‘ten years’’ and inserting ‘‘20 years’’. 

(e) PLATES, STONES, OR ANALOG, DIGITAL, OR ELECTRONIC IMAGES FOR COUNTERFEITING OBLIGATIONS OR SECURITIES.— 

(1) IN GENERAL.—Section 474(a) of title 18, United States Code, is amended by inserting after the second paragraph the following new paragraph: ‘‘Whoever, with intent to defraud, makes, executes, acquires, scans, captures, records, receives, transmits, reproduces, sells, or has in such person’s control, custody, or possession, an analog, digital, or electronic image of any obligation or other security of the United States; or’’. 

(2) AMENDMENT TO DEFINITION.—Section 474(b) of title 18, United States Code, is amended by striking the first sentence and inserting the following new sentence: ‘‘For purposes of this section, the term ‘analog, digital, or electronic image’ includes any analog, digital, or electronic method used for the making, execution, acquisition, scanning, capturing, recording, retrieval, transmission, or reproduction of any obligation or security, unless such use is authorized by the Secretary of the Treasury.’’

(3) TECHNICAL AND CONFORMING AMENDMENT.—The heading for section 474 of title 18, United States Code, is amended by striking ‘‘or stones’’ and inserting ‘‘, stones, or analog, digital, or electronic images’’. 

(4) CLERICAL AMENDMENT.—The table of sections for chapter 25 of title 18, United States Code, is amended in the item relating to section 474 by striking ‘‘or stones’’ and inserting ‘‘, stones, or analog, digital, or electronic images’’. 

(f) TAKING IMPRESSIONS OF TOOLS USED FOR OBLIGATIONS OR SECURITIES.—Section 476 of title 18, United States Code, is amended— 

(1) by inserting ‘‘analog, digital, or electronic image,’’ after ‘‘impression, stamp,’’; and (2) by striking ‘‘ten years’’ and inserting ‘‘25 years’’. 

(g) POSSESSING OR SELLING IMPRESSIONS OF TOOLS USED FOR OBLIGATIONS OR SECURITIES.—Section 477 of title 18, United States Code, is amended— 

(1) in the first paragraph, by inserting ‘‘analog, digital, or electronic image,’’ after ‘‘imprint, stamp,’’; 

(2) in the second paragraph, by inserting ‘‘analog, digital, or electronic image,’’ after ‘‘imprint, stamp,’’; and 

(3) in the third paragraph, by striking ‘‘ten years’’ and inserting ‘‘25 years’’. 

(h) CONNECTING PARTS OF DIFFERENT NOTES.— Section 484 of title 18, United States Code, is amended by striking ‘‘five years’’ and inserting ‘‘10 years’’. 

(i) BONDS AND OBLIGATIONS OF CERTAIN LENDING AGENCIES.—The first and second paragraphs of section 493 of title 18, United States Code, are each amended by striking ‘‘five years’’ and inserting ‘‘10 years’’. 

SEC. 375. COUNTERFEITING FOREIGN CURRENCY AND OBLIGATIONS. 

(a) FOREIGN OBLIGATIONS OR SECURITIES.—Section 478 of title 18, United States Code, is amended by striking ‘‘five years’’ and inserting ‘‘20 years’’. 

(b) UTTERING COUNTERFEIT FOREIGN OBLIGATIONS OR SECURITIES.—Section 479 of title 18, United States Code, is amended by striking ‘‘three years’’ and inserting ‘‘20 years’’. 

(c) POSSESSING COUNTERFEIT FOREIGN OBLIGATIONS OR SECURITIES.—Section 480 of title 18, United States Code, is amended by striking ‘‘one year’’ and inserting ‘‘20 years’’. 

(d) PLATES, STONES, OR ANALOG, DIGITAL, OR ELECTRONIC IMAGES FOR COUNTERFEITING FOREIGN OBLIGATIONS OR SECURITIES.— 

(1) IN GENERAL.—Section 481 of title 18, United States Code, is amended by inserting after the second paragraph the following new paragraph: ‘‘Whoever, with intent to defraud, makes, executes, acquires, scans, captures, records, receives, transmits, reproduces, sells, or has in such person’s control, custody, or possession, an analog, digital, or electronic image of any bond, certificate, obligation, or other security of any foreign government, or of any treasury note, bill, or promise to pay, lawfully issued by such foreign government and intended to circulate as money; or’’. 

(2) INCREASED SENTENCE.—The last paragraph of section 481 of title 18, United States Code, is amended by striking ‘‘five years’’ and inserting ‘‘25 years’’. 

(3) TECHNICAL AND CONFORMING AMENDMENT.—The heading for section 481 of title 18, United States Code, is amended by striking ‘‘or stones’’ and inserting ‘‘, stones, or analog, digital, or electronic images’’. 

(4) CLERICAL AMENDMENT.—The table of sections for chapter 25 of title 18, United States Code, is amended in the item relating to section 481 by striking ‘‘or stones’’ and inserting ‘‘, stones, or analog, digital, or electronic images’’. 

(e) FOREIGN BANK NOTES.—Section 482 of title 18, United States Code, is amended by striking ‘‘two years’’ and inserting ‘‘20 years’’. 

(f) UTTERING COUNTERFEIT FOREIGN BANK NOTES.—Section 483 of title 18, United States Code, is amended by striking ‘‘one year’’ and inserting ‘‘20 years’’. 

SEC. 376. LAUNDERING THE PROCEEDS OF TERRORISM. 

Section 1956(c)(7)(D) of title 18, United States Code, is amended by inserting ‘‘or 2339B’’ after ‘‘2339A’’. 

SEC. 377. EXTRATERRITORIAL JURISDICTION. 

Section 1029 of title 18, United States Code, is amended by adding at the end the following: ‘‘(h) Any person who, outside the jurisdiction of the United States, engages in any act that, if committed within the jurisdiction of the United States, would constitute an offense under subsection (a) or (b) of this section, shall be subject to the fines, penalties, imprisonment, and forfeiture provided in this title if— 

‘‘(1) the offense involves an access device issued, owned, managed, or controlled by a financial institution, account issuer, credit card system member, or other entity within the jurisdiction of the United States; and 

‘‘(2) the person transports, delivers, conveys, transfers to or through, or otherwise stores, secrets, or holds within the jurisdiction of the United States, any article used to assist in the commission of the offense or the proceeds of such offense or property derived therefrom.’’

CHAPTER 9 COMPLIANCE: INTRODUCTION, RECORD-KEEPING & REPORTING

I. Learning Objectives:

1. understand the compliance requirements in the Bank Secrecy Act and the Patriot Act.

2. understand the requirements for Suspicious Activity Reports (SARs).

3. understand the role of the Office of Foreign Assets Control (OFAC) of the U.S. Treasury Department.

4. understand compliance programs, due diligence, enhanced due diligence, know your customer programs and customer identification programs.

5. understand the role of the compliance officer in an institution’s compliance obligations.

6. understand the role of a training manual in the compliance program.

7. understand the record-keeping and reporting requirements under the BSA and Patriot Act.

II. Introduction*

Obviously, the term “compliance,” as utilized in the context of anti-money laundering regimes, expresses the requirement of certain institutions and businesses to actually follow the laws.  In the United States, the Bank Secrecy Act requires financial institutions to follow certain procedures to ensure their fulfillment of the law.  The BSA of 1970 has three primary components: (1) it requires all domestic banks to keep certain records of customer transactions and to obtain an identification number (typically, a social security number) from anyone opening an account; (2) Title II of the BSA gives the Secretary of the Treasury the power to specify reporting duties; and (3) it requires banks to set up internal departments and compliance officers for the BSA.

Prior to the enactment of the PATRIOT Act (the Act), the Secretary of the Treasury had implemented only three reporting requirements under the BSA:  (1) banks had to file a Currency Transaction Report, or CTR, every time they carry out a transaction above $10,000.00; (2) every person who physically transports, mails or ships currency or other monetary instruments in excess of $10,000.00 to a place outside the United States, or into the United States from anywhere outside, is required to file a Currency and Monetary Instruments Report (CMIR) with the US Customs Services; and (3) all persons subject to American jurisdiction and with a financial interest in, or with signatory or other authority over, bank accounts, securities, or other financial accounts in foreign jurisdiction with an aggregate value greater than $10,000.00 are required to file an annual report with the Department of Treasury.

Initially, the BSA was not followed by banks until the 1980’s, when the IRS and the Treasury Department began fining banks for failing to comply with the requirements of the BSA.  This is despite the fact that the BSA carried with it criminal and civil penalties for any institution which knowingly did not comply with these duties.  The various reports required by the BSA were filed by financial institutions with FinCEN, the agency within the Treasury Department responsible for collecting and processing CTR’s and CMIR’s.  Part of the problem that led to various amendments of the BSA was that the FinCEN was not capable of processing the millions of reports that began to flow into it each year as banks began to take the reporting requirements seriously.  Banks are required to keep these reports on file for no less than five years, and they must produce a copy at the request of FinCEN.

Since the passage of the PATRIOT Act and the resulting amendments to the BSA, banks are now required to file Suspicious Activity Reports (SAR’s). “Suspicious” activity means that there is a transaction of at least $5,000.00 and the bank has reason to suspect that its derivation is illegal and/or the purpose of the transaction is to evade reporting. Furthermore, banks are prohibited from telling their customers if such a report has been filed on them, and the financial institution has immunity from civil litigation by its customers.

With Title III of the PATRIOT Act, known as the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 came increased reporting and compliance requirements to the BSA.  Subtitle A of the Act deals with international anti-money laundering measures.  Subtitle B of the Act addresses the amendments to the BSA.  First, the amendments clarify that financial institutions will not be liable for disclosures of information made under regulations of the government.  Further, financial institutions and their employees are not permitted to notify the customer of any report.  Additionally, the Act added changes to the BSA involving brokers and commodities traders, requiring them to submit suspicious activity reports.  The Act also changed the definition of a “financial institution,” essentially making any business that engages in the transmission of funds fall within the definition of “financial institution.” Once again, the Act provides that FinCEN will be responsible for creating a database of all of these records, which will (supposedly) be accessible by other government agencies, with civil and criminal penalties for violations of the Act by financial institutions.  As far as non-financial businesses are concerned, any trade or business (i.e., a retail store) that receives more than $10,000 in currency for a transaction has to report that transaction and the name and address of the individual to FinCEN.
As part of the overall compliance requirements, financial institutions must designate a special compliance officer, train employees to detect money laundering, commission independent audits, and establish policies and procedures to identify risks and minimize opportunities for abuse.  These programs must be in writing and be approved by the senior management of the financial institution, and audited annually by an impartial third party or outside auditing firm.  Additionally, financial institutions must comply with the “know your customer” requirements, perform the necessary due diligence when dealing with accounts of non-U.S. persons or institutions, continually screen the government lists of nations and persons whose accounts must be seized or frozen.

Through the implementation of the PATRIOT Act, the compliance requirements of the BSA have been strengthened, and the paper tiger of compliance finally has gotten teeth to enforce these requirements.

Our primary focus is to fully understand the various recordkeeping and reporting requirements placed upon the financial institutions and other Money Services Businesses (MSBs) by the Bank Secrecy Act of 1970 (BSA), as strengthen by the U.S. PATRIOT Act of 2001.1 

Recordkeeping and reporting requirements are best demonstrated by reference to the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of the Treasury2 wherein Title III of the Act elevated FinCEN’s to bureau status and thereby granting it “new authorities and opportunities to augment its primary mission.”3  Once in 1994 and with the passing of the USA PATRIOT Act in 2001, FinCen’s operation both broadened and it was elevated to bureau status. 

Defining FinCEN

The Financial Crimes Enforcement Network (FinCEN) is a network.  FinCEN was established via a statutory the authority outlined in Treasury Order Number 105-08, in April 1990.  Its overarching charter is “…to provide a government-wide, multi-source intelligence and analytical network.”4  

Once in 1994 and with the passing of the USA PATRIOT Act in 2001, FinCen’s operation both broadened and it was elevated to bureau status respectfully.  Currently one of its aims is bringing people and information together to fight the complex problem of money laundering.  Since its creation in 1990, FinCEN has worked to maximize information sharing among law enforcement agencies and its other partners in the regulatory and financial communities.  Through cooperation and partnerships, FinCEN's network approach encourages cost-effective and efficient measures to combat money laundering domestically and internationally.

The primary mission of FinCEN as outlined on the WEB site at http://www.fincen.gov/af_mission.html, is the following:

          “…is to support law enforcement investigative efforts and foster interagency and global cooperation against domestic and international financial crimes; and to provide U.S. policy makers with strategic analyses of domestic and worldwide money laundering developments, trends and patterns.  FinCEN works toward those ends through information collection, analysis and sharing, as well as technological assistance and innovative, cost-effective implementation of the Bank Secrecy Act and other Treasury authorities.”

Section 314(a) of the USA PATRIOT Act of 2001

Section 314(a) of the USA PATRIOT Act of 2001 gave the Secretary of the Treasury the authority to adopt regulations to encourage regulatory authorities and law enforcement authorities to engage in the sharing of information with financial institutions regarding individuals, entities, and organizations engaged in or reasonably suspected, based on good evidence, or engaging in terrorist acts or money laundering services.  FinCEN exercised its rulemaking authority by issuing a proposed rule on March 5, 2002 and the final rule on September 26, 2002 whose focus was to implement this authority.5 

The Act promulgates new requirements for both financial institutions and non-financial institutions.  Under the Act, a “financial institution,” whether domestic or foreign, is defined very broadly. 

The act is therefore applicable to the following financial and non-financial institutions:

“…an insured bank; a commercial bank or a trust company; private bankers; an agency or branch of a foreign bank in the United States; any credit union; a thrift institution; a broker or dealer registered with the SEC under the Securities Exchange Act of 1934; a broker or dealer in securities or commodities (whether registered with the SEC or not); an investment banker or investment company; a currency exchange; an issuer, redeemer, or cashier of traveler's checks, checks, money orders, or similar instruments; an operator of a credit card system; an insurance company; a dealer in precious metals, stones, or jewels; a pawnbroker; a loan or finance company; a travel agency; a licensed sender of money or any other person who engages as a business in the transmission of funds, formally or informally; a telegraph company; a business engaged in vehicle sales, including automobile, airplane and boat sales; persons involved in real state closings and settlements; the United States Postal Service; an agency of the federal or any state or local government carrying out a duty or power of a business described in the definition of a “financial institution” a state-licensed or Indian casino with annual gaming revenue of more than $1,000,000; and certain other businesses designated by Treasury (collectively “Financial Institutions"). A non-financial institution is simply any institution that does not fall under the Financial Institution category (“Non-Financial Institution”).”6

Statutory Reporting Requirements

Currency Transactions Reports.  The Act requires Non-Financial Institutions to report certain cash and currency transactions (“CTRs”) to the Financial Crimes Enforcement Network (“FinCEN”), a part of the Department of Treasury.  However, it does not repeal a similar provision under the Internal Revenue Code (26 U.S.C. § 6050I).  CTRs require entities or persons who receive $10,000 or more in coins or currency (which includes monetary instruments typically in bearer form, such as travelers' checks, bearer negotiable instruments, etc.) to report the transaction. It is a crime to "structure" payment of coins or currency to avoid the $10,000 reporting requirement. Non-Financial Institutions previously were required to report to I.R.S. They are now required to report to FinCEN as well.  Treasury’s proposed regulation and interim rule implementing the Currency Transactions Reports provision are similar to the current cash reporting requirements already applicable to trades and businesses under the Internal Revenue Code, 26 U.S.C. § 6050I, and its corresponding regulation, 26 C.F.R. § 1.6050I-1 (i.e., Form 8300).  Annual statements will continue to be required under the Internal Revenue Code, but are not required under the FinCEN rule.  Under FinCEN's rule, the filing of a Form 8300 will satisfy both I.R.S. and FinCEN. 

Suspicious Activity Reports for Brokers, Dealers and Commodities Merchants.  After consultation with the SEC and the Federal Reserve, Treasury published proposed regulations, which went in to effect on July 1, 2002.  This regulation now requires Suspicious Activity Reports (“SARs”) by securities broker/dealers.  
Money Services Businesses (MSB) that conduct the business of selling money orders or traveler’s checks are required to record cash purchases involving $3,000-$10,000, inclusive.  The statute mandates that multiple cash purchases of monetary instruments totaling $3,000.00 or more be treated as one purchase if the following criteria is evident:

They are made at the same time, or
The MSB has knowledge that such purchases occurred during one business day.

Mandatory Recording of Specific Information of Money Transfer of $3,000.00 or more.  MSBs that provide money transfer services are required to obtain and record specific information for each money transfer of $3,000.00 or more.  This requirement does not consider the method of payment to mitigate this requirement.  

Sharing of Information on Terrorism and Money Laundering.  The Act requires Treasury to improve sharing of law enforcement and regulatory information to assist Financial Institutions to identify and report suspicions of terrorism and money laundering.  Financial Institutions are required to designate someone to receive the information and monitor accounts of persons or entities identified by the government.  If prior “notice” is given to Treasury, two or more Financial Institutions (or an association of Financial Institutions) may share information with each other about money laundering or suspected terrorist activities.7 

Conclusion 

Financial Institutions are required to adopt anti-money laundering programs.  The programs must include the development of internal policies, procedures and controls, designation of a compliance officer, ongoing training, and an independent audit system.  Regulations have been announced which cover mutual funds, operators of credit card systems and money services businesses (such as money transfer companies and check cashers).  Banks, savings associations, credit unions, registered brokers and dealers in securities, futures commission merchants and casinos can comply by establishing anti-money laundering programs in compliance with existing FinCEN regulations or with those of their respective regulating agencies.  All engaged in the business of generating, issuing or servicing CTRs, MTs, cash purchases in statutory specified amounts are required to comply with the statutory recordkeeping requirements under 31 CFR part 103 and other relevant statutes. 

Record-Keeping and Reporting

U.S. Reporting Forms

There are many reporting forms available for compliance with the Bank Secrecacy Act.  The Financial Crimes Enforcement Network provides many of these forms in as fill-in Acrobat documents.  The following list is the most used forms: 

Money Services Businesses Registration Form - The form asks for the identity of the MSB owner, the locations where services are offered and other information. MSBs include money transmitters, currency exchangers, check cashers, issuers of traveler’s checks or money orders, and sellers or redeemers of traveler’s checks or money orders. Money Services Businesses in the U.S. have until December 31 to register.

Currency Transaction Report (FinCEN Form 104, formerly IRS Form 4789) - All U.S. financial institutions, including banks, money transmitters, check cashers and currency exchange houses must use this form to report to the U.S. government cash transactions involving more than $10,000. The form was updated in August 2003. Older forms will not be accepted after August 31, 2004. 

Designation of Exempt Person Form (Treasury Department Form TD F90-22.53) - U.S. banks that exempt customers from currency transaction reporting duties must use the form to report the exemption to the U.S. government. The form was updated in January 1999.

Currency Transaction Report for Casinos (FinCEN Form 103, former IRS Form 8362) - U.S. casinos that operate outside of Nevada must use this form to report to the U.S. government cash transactions involving more than $10,000. The form was updated in March 2003. Older forms will not be accepted after September 30, 2003. 

Currency Transaction Report by Casinos Nevada (Internal Revenue Service Form 8852) - U.S. casinos that operate in Nevada must use this form to report to the U.S. government cash transactions involving more than $10,000. The form was updated in May 1997.

Suspicious Activity Report Form - U.S. banks and other "depository institutions" must use this form to report a wide range of "suspicious activity." The form was updated in July 2003. Older forms will not be accepted after December 31, 2003.

Suspicious Activity Report for Securities and Futures Industries (FinCEN Form 101) - Securities and futures industries must report suspicious activity using this SAR-SF form. The form was issued in January 2003.

Suspicious Activity Report for Casinos and Card Clubs (FinCEN Form 102) - Every reporting casino and card club must file this form for any suspicious transaction relevant to a possible violation of law or regulation. The form was updated in April 2003 and replaced Treasury Department Form TD F 90-22.49. Older forms will not be accepted after December 31, 2003.

Suspicious Activity Report for Money Services Businesses (TD F 90-22.56) - MSBs that are money transmitters or issuers, sellers or redeemers of money orders or traveler's checks are required to report suspicious activity by filing the SAR-MSB Form. October 2002.

The Report of Cash Payments Received in a Trade or Business (Internal Revenue Service Form 8300) - U.S. trades and businesses, including car dealers, jewelers, attorneys and others, must use this form to report cash transactions of more than $10,000. The form was updated in August 1994.

Report of Foreign Bank and Financial Accounts (Treasury Department Form TD F90-22.1) - U.S. persons must use this form, which is commonly known as the FBAR, to report a U.S. person's financial interest in or signature or other authority over one or more bank account, securities account, or other financial account in foreign countries with a value of $10,000 or more. The form was updated in July 2000.

Report of International Transportation of Currency or Monetary Instruments (FinCEN Form 105, former Customs Form 4790) - Anyone transporting more than $10,000 in cash or unrestricted monetary instruments into or out of the U.S. must use this form to report the transportation to the U.S. government. 

Discussion Questions:

1. Discuss the compliance requirements of the Bank Secrecy Act and the Patriot Act.
2. When are Suspicious Activity Reports (SARs) required?
3. Discuss the AML annual audit compliance requirements.
4. Discuss the role of OFAC.
5. Discuss compliance programs, due diligence, enhanced due diligence,  know your customer programs and customer identification programs.
6. Discuss compliance programs, due diligence, know your customer programs and customer identification programs.
7. Discuss the role of the compliance officer in an institution’s compliance obligations.
8. Discuss the role of a training manual in the compliance program.
9. Discuss the Office of Foreign Assets Control’s “Specially Designated Nationals and Blocked Persons” list and the compliance obligations of financial institutions with respect to it.
10. Discuss the minimum elements of an employee compliance training program.
11. Discuss how compliance obligations vary depending on an institution’s size, location or volume of business.
12. Discuss the civil and criminal penalties for non-compliance.
13. Discuss the record-keeping and reporting requirements under the BSA and Patriot Act.

CHAPTER 10: ADVANCED TOPICS IN COMPLIANCE

I. Learning Objectives

1. To understand Customer Identification Programs.
2. To understand an internal compliance program to monitor for the Office of Foreign Assets Control.
3. To understand the annual audit of an AML compliance program.
4. To understand the Patriot Act and special compliance issues for non-traditional and high-      risk businesses.
5. To understand section 312 of the Patriot Act and money laundering and terrorism in correspondent banking relationships and money laundering and terrorism in private banking relationships.
6. To understand enhanced due diligence and monitoring for high-risk clients including international and foreign political figures.
7. To understand account transaction monitoring and suspicious activity investigations for foreign banks with offices in the United States.
8. To understand global anti-money laundering industry standards: what are the new best practices in the field and how do you implement them?
    	
A. Customer Identification Program (CIP) and Regulations under Section 326 of the Patriot Act*

The Financial Crimes Enforcement Network (“FinCEN”), a part of the U.S. Treasury, drafted and approved rules implementing the reporting requirements of section 326 of the USA PATRIOT Act (the Act).  The purpose was to provide a tool to protect the U.S. financial system from money laundering, terrorist financing, identity theft and other forms of fraud.  The rules apply to the following types of financial institutions:

Banks and trust companies
Savings associations
Credit unions
Securities brokers and dealers
Mutual funds
Futures commission merchants and futures introducing brokers

The Act required financial institutions to develop a Customer Identification Program (CIP or “Know Your Customer” rules) that implement reasonable procedures to:

Collect identifying information about customers opening an account;
Verify that the customers are who they say they are;

Maintain records of the information used to verify their identity; and

Determine whether the customer appears on any list of suspected terrorists or terrorist organizations.

As part of this CIP, financial institutions are required to develop procedures to collect relevant identifying information including a customer’s name, address, date of birth, and a taxpayer identification number (or social security number).  Part of the identification process requires financial institutions to verify the identity of customers opening accounts, such as using documentation as a driver’s license or passport.  However, the final rules implementing section 326 allow financial institutions the flexibility to use methods of identifying and verifying the identity of their customers appropriate to their individual circumstances (internet banking), but places the onus of responsibility on the institution, requiring them to assess risks associated with that document and take whatever reasonable steps may be required to minimize that risk.

Additionally, financial institutions must maintain records on file to leave a paper trail of their efforts at compliance at CIP, regularly check terrorist lists “when such lists are identified by Treasury…” Financial institutions may rely on the information gathered from each other as part of the CIP process, in order to avoid multiple redundant verification processes, but must keep a record of any discrepancies that arise during the CIP process.  All records must be kept for five years.

B. Suspicious Activity Reports (“SARS”)

The Act requires financial institutions and business owners to file Suspicious Activity Reports (“SARS”) for certain transactions.  Previously, under the Currency and Financial Reporting Act, anyone who transported more than $10,000.00 into or out of the United States was required to report that fact to the Treasury Department. Banks, credit unions and certain other institutions were required to report cash transactions in excess of $10,000.00 to the Treasury Department. Businesses and non-financial institutions were required to report transactions exceeding $10,000.00 to the IRS. The Act now requires financial institutions to file SARs with FinCEN for any transaction involving more than $5,000.00 which they suspect may be derived from criminal activity.

Businesses are also now required to file SARs for transactions exceeding $10,000.00. In addition, businesses dealing with the transfer of money, traveler's checks, or money orders are under a similar obligation for suspicious activities involving more than $2,000.00. An interesting feature of this new reporting requirement is that the individual entity or institution that makes the report is not permitted to notify the participant that he or she is being reported. The Act grants immunity to the business or institution and its officers and employees in connection with filing a SAR.  Failure to file a SAR will result in a federal investigation and possibly a fine.  Essentially, failure to file a SAR in one year will automatically result in an investigation, as the government will assume the particular financial institution has failed in its anti-money laundering compliance.

C. Internal Compliance Program to Monitor for the Office of Foreign Assets Control

According to the Mission Statement of the Department of the Treasury, the Office of Foreign Assets Control (“OFAC”) administers and enforces economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries, terrorists, international narcotics traffickers, and those engaged in activities related to the proliferation of weapons of mass destruction. OFAC acts under Presidential wartime and national emergency powers, as well as authority granted by specific legislation, to impose controls on transactions and freeze foreign assets under US jurisdiction. Many of the sanctions are based on United Nations and other international mandates, are multilateral in scope, and involve close cooperation with allied governments.

All U.S. citizens, corporations, and legal residents fall under the authority of OFAC, and can be held responsible for sanction violations.  As a result, most banks have software that automatically block transactions over a certain amount, and contain filters with every name on the OFAC’s master list of “Specially Designated Nations and Blocked Persons” (“SDNlist”), which also contain geographical names for embargoed countries and cities.  Transactions are blocked as a matter of law if they involve the interests of any of the names on the SDNlist.

The act of freezing transactions under OFAC is different the anti-money laundering procedures under the Bank Secrecy Act or the PATRIOT Act.  Whereas the latter attempt to seize assets involved or somehow connected to certain money-laundering/terrorism crimes, illegal activity, or predicate crimes, OFAC compliance achieves certain foreign policy goals by freezing assets, and are typically “protective” in nature (freezing Kuwaiti assets following Iraq’s invasion).  These procedures help put pressure on certain countries, or preserve a “pool” of resources for lawsuits.  The building of a “criminal profile,” such as is typically the case in the “Know Your Customer” requirements of the PATRIOT Act, do not play a role:  the compliance for OFAC is very simple and automatic.  Once a transaction has been blocked, a blocked account for the blocked party is established in an interest-bearing account, and the OFAC is notified within ten days.

D. Annual Audit of an AML Compliance Program

Financial institutions must perform an independent self-audit of their anti-money laundering program under the PATRIOT Act, with direct reporting to the Directorate or Audit Committee.  It is strongly recommended that an annual review be conducted by a financial institution’s Chief Compliance Officer to ensure period review of the entire compliance system.

The scope of the audit or independent review must be sufficient to assess anti-money laundering risks of all major business lines, products, and locations, including branches and overseas offices.  It also must verify compliance with the bank's anti-money laundering policies and procedures, and the scope of the review must be adequate and addresses the following items for applicable functions of the financial institution:  BSA reporting requirements, CTRs, SARs, customer identification program, identifying and reporting suspicious activities, recordkeeping requirements, funds transfer operations, on-going training, OFAC compliance, customer due diligence, and compliance with information sharing requirements, among others.

E. The Patriot Act: Special Compliance Issues for Non-Traditional and High-Risk 
Businesses*

Part of the USA PATRIOT Act’s (the Act) novelty involved the new relationships developed between the government and other non-traditional and high-risk businesses.  It makes it easier for federal investigators to obtain certain forms of “wire communication” evidence.  It allows investigators pursuing any criminal offense will be able to obtain the content of both voicemail and e-mail by obtaining a search warrant, which must be supported by probable cause but is not subject to the more elaborate requirements of a wiretap application.  Previously, voicemail was protected through stare decisis and Title III of the 1968 Omnibus Crime Control and Safe Streets Act (originally applied to wiretap/voice communications).

The Act also increases the amount of information obtainable for ISP’s (Internet Service Providers) to include “records of session times and durations,” “temporarily assigned network address[es],” and “means and source of payment” for services “including any credit card or bank account number.”  This is in additional to the previously allowed information to be produced from ISP’s via an administrative or grand jury subpoena, including the “name, address, local and long distance telephone toll billing records, telephone number or other subscriber identity, ... length of service, [and] the types of service ... utilized.”

In addition to requiring the maintenance and reporting of certain electronic information from telephone companies and ISP’s, the Act also broadened the definition of “financial institution” from federally insured depository institutions, credit unions, securities brokers and futures and commission merchants to include “dealers in precious metals, stones or jewels, pawnbrokers, loan or finance companies, private bankers, insurance companies, travel agencies, telegraph companies, sellers of vehicles…and persons engaged in real estate closings and settlements.”

The same requirements for traditional financial institutions are now applicable for the institutions encompassed within the new, expanded definition of “financial institutions.  These include the development of internal policies, procedures, and controls; the designation of a compliance officer; an ongoing employee training program; and an independent audit function to test programs.  Again, these include “know your customer” regulations and the development and implementation of anti-money laundering programs.  Such standards include implementing policies and procedures to detect and deter money laundering, designating a compliance officer, conducting ongoing employee training, and completing independent audits of the compliance program to ensure its effectiveness.

Section 312 of the Patriot Act:

a. Money Laundering and Terrorism in Correspondent Banking Relationships

Section 312 of the USA PATRIOT Act generally requires a U.S. financial institution that maintains a correspondent account or private banking account for a non-U.S. person to establish appropriate and, if necessary, enhanced due diligence procedures to detect and report instances of money laundering.  In the case of certain correspondent accounts, the additional standards required by subsection 5318(i)(2) require a U.S. financial institution to, at a minimum, do three things: (1) Ascertain the identity, and the nature and extent of the ownership interests, of the owners of any foreign bank correspondent whose shares are not publicly traded.  (2) Conduct enhanced scrutiny of the correspondent account to guard against money laundering and satisfy its obligation to report suspicious transactions under the terms of 31 U.S.C. 5318(g). (3) Ascertain whether any foreign bank correspondent in turn provides correspondent accounts to third party foreign banks; if so the U.S. financial institution must ascertain the identity of those third party foreign banks and related due diligence information required under the general rules of paragraph 5318(i)(1).

b. Money Laundering and Terrorism in Private Banking Relationships

In the case of private banking accounts, a U.S. financial institution must comply at a minimum, with the following requirements of subsection 5318(i)(3):  (1) The U.S. financial institution must take reasonable steps to ascertain the identity of the nominal and beneficial owners of the account and the source of funds deposited into the account, as needed to guard against money laundering and report any suspicious transactions under the terms of 31 U.S.C. 5318(g). (2) The U.S. financial institution must take reasonable steps to conduct enhanced scrutiny, that is reasonably designed to detect and report transactions that may involve the proceeds of foreign corruption, for any private banking account that is requested or maintained by, or on behalf of, a senior foreign political figure (or any immediate family member or close associate of such a political figure).

A private banking account for this purpose is any account or combination of accounts that requires a minimum aggregate deposit of at least $1 million, is established on behalf of one or more individuals who have either a direct or beneficial ownership interest in the account, and that is assigned to, or administered or managed by, in whole or in part, an officer, employee or agent of a financial institution who serves as liaison between the institution and the account's direct or beneficial owner or owners.

F. Enhanced Due Diligence and Monitoring for High-Risk Clients including International and Foreign Political Figures

In addition to the minimum required due diligence procedures for correspondent accounts for financial institutions, three additional requirements are necessary for high-risk foreign banks.  These are: (1) Enhanced scrutiny to guard against money laundering and to ensure detection and reporting of illegal activity, which includes obtaining and reviewing details of the foreign bank's anti-money laundering program, monitoring of transactions and screen the person who has authority to direct transaction through the correspondent account; (2) Know your correspondent bank's correspondent banks; identity of foreign bank's correspondent banks, assess and minimize risks associated with the bank's correspondent banks; and (3) Unless bank is publicly traded, obtain identification and share of each owner of the foreign bank.

In addition to the private banking requirements outlined above, financial institutions must exercise reasonable diligence in seeking to determine whether an individual is a senior foreign political figure, and may rely on the customer's statement that he is not.  If a financial institution is dealing with a senior foreign political figure, the minimum requirements need to be enhanced by procedures and policies to detect and report transactions that may involve the proceeds of foreign corruption.  The inability to perform the enhanced due diligence requirements must be met with a plan addressing when to refuse, suspend, file a SAR, or close the account.

G. Account Transaction Monitoring and Suspicious Activity Investigations for Foreign Banks with Offices in the US

Section 319 of the Act requires U.S. correspondent banks to maintain certain records concerning foreign banks that have a U.S. correspondent account. This section also provides authority for the Secretary of the Treasury and the Attorney General to subpoena the foreign bank's offshore records concerning the account, and authorizes forfeiture of deposits in the foreign bank. The purpose is to enhance the powers of U.S. law enforcement authorities to monitor correspondent accounts and seize funds that might otherwise be outside of U.S. jurisdiction.

Section 313 of the Act prohibits "covered financial institutions" from maintaining a U.S. correspondent account for a foreign bank that does not have a physical presence in any country (a "foreign shell bank").  In addition, a covered financial institution is required to take "reasonable steps" to ensure that a correspondent account for any foreign bank is not being used by that foreign bank to provide banking services indirectly to a foreign shell bank. The Act requires the Secretary to promulgate regulations that delineate the reasonable steps necessary to comply with this requirement. The Act does not prohibit a covered financial institution from providing a correspondent account to a foreign shell bank that (i) is an affiliate of a depository institution, credit union, or foreign bank that maintains a physical presence in the United States or a foreign country, and (ii) is subject to supervision by the regulator of the affiliated financial institution. The foreign shell bank exception is "intended to be narrowly construed to protect the U.S. financial system from shell banks to the greatest extent possible."

Additional due diligence policies must ensure that the domestic financial institutions take "reasonable steps" (i) to ascertain, for any such foreign bank the shares of which are not publicly traded, the identity of each of the owners of the foreign bank, and the nature and extent of the ownership interest of each owner; (ii) to conduct "enhanced scrutiny" of the account and report any suspicious transactions; and (iii) to ascertain whether any such foreign bank itself provides correspondent accounts to other foreign banks, and, if so, identify those banks and gather related due diligence information.

H. Global Anti-Money Laundering Industry Standards: What are the New Best Practices in the Field and How do You Implement Them?

The Anti-Money Laundering practices have developed from various national and international efforts to control money laundering and terrorist financing.  In the US, this has been accomplished through legislation like The Bank Secrecy Act of 1970, The Money Laundering Control Act of 1986, The Anti-Drug Abuse Act of 1988, Section 2532 of the Crime Control Act of 1990, Section 206 of the FDIC Improvement Act of 1991, The Annunzio-Wylie Anti-Money Laundering Act of 1992, The Money Laundering Suppression Act of 1994, The Money Laundering and Financial Crimes Strategy Act of 1998, and the USA PATRIOT Act of 2001.	

On the international front, the FATF helps promote anti-money laundering policies by spreading an anti-money laundering message, monitoring the 40 Recommendations (and Special Recommendations on Terrorist Financing), and publishing typologies exercises.

The fundamental controls for anti-money laundering regimes are effective BSA compliance, and customer due diligence programs, compliance with OFAC guidelines, suspicious activities monitoring and reporting programs, and risk-based anti-money laundering programs.  All of this includes appropriate training and outside monitoring by third parties, verifying customer identification, paying special attention to foreign correspondence banks, and regularly checking the lists of suspicious countries and persons.

Other Compliance Issues including those Required by the USA Patriot Act.

To satisfy the Act, financial institutions are required to define a solution to spot patterns of behavior likely to reveal money laundering.  Nearly all have pursued technology as part of the answer - namely, exception-based money laundering detection software that can be implemented relatively quickly on a business unit-by-business-unit basis.

However, simple compliance with all of the requirements of the PATRIOT Act and other international anti-money laundering regimes presents a dilemma that goes beyond a simple computer program to correct.  Given the vast changes that occurred with the post-September 11 merging of the anti-money laundering and terrorist financing regimes, it was clear that problems would arise. U.S. and international law enforcement agencies have experienced difficulties refocusing their efforts, keeping track of rapid and significant amendments to laws and new regulations, new partnerships and bureaucracies, as well as different perspectives in the international community. Governments, organizations, and institutions have been wary of moving too quickly with the new regime for fear of alienating allies, violating fundamental rights to due process and privacy, and incurring burdensome costs.  Additionally, in the United States, the Treasury Department, pursuant to the USA PATRIOT Act, has issued hundreds of pages of complex regulations that force banks and financial institutions, their counsel, and many other professionals to participate in law enforcement activities and regulatory processes.

III. Introduction to Compliance   

A. . Customer Identification Program (CIP) and Regulations under Section 326 of the Patriot Act.  Know Your Customer.

Ted Dreyer, How to Get From KYC to CIP available at http://www.complianceheadquarters.com/AML/AML_Articles/kyc_to_cip.html#1

Many institutions have wondered about the differences between their existing customer identification or “Know Your Customer” policies and the new CIP requirements. Specifically, institutions have questioned whether their existing KYC policies satisfy the new CIP requirements. To answer that question some background information on KYC is helpful.

B. KYC Background

On December 7, 1998, the OCC, the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision each published "Know Your Customer" proposals. The proposed rules would have required each bank and savings association to develop a comprehensive program designed to determine the identity of its customers; determine its customers' sources of funds; determine the normal and expected transactions of its customers; monitor account activity for transactions that are inconsistent with those normal and expected transactions; and report any transactions of its customers that were determined to be suspicious in accordance with the OCC's existing suspicious activity reporting regulations. 	In response to its Know Your Customer proposal, the OCC alone received over 16,000 comments during the comment period. Virtually all of those submitting comments opposed adoption of the proposed rule. In light of those comments, the regulators withdrew the proposal. In doing so, however, the regulators stated its belief that banks should adopt their own policies and procedures to determine the identities of their customers, and should have systems and controls that will allow them to identify suspected illegal conduct.

Because the KYC proposal was withdrawn, institutions have created their existing customer identification policies without specific regulatory requirements or guidelines. Obviously these existing policies vary from institution to institution. Many institutions have relied heavily on credit reports and reports of bad checks or accounts closed. They are good sources for discovering the financial problems associated with a named party. However, they focus on financial misbehavior of a party and are not probably not very effective to help determine whether someone is truly who they say they are. 

The new CIP regulation establishes a host of specific requirements for the collection, documentation, verification and retention of customer information. Therefore, it is highly likely that existing policies will have to be adjusted. However, the existing policies should serve as a useful building block towards developing a CIP that complies with Section 326. The following questions address many of the requirements of the CIP regulation. 

Answer the following questions about your existing policy, and make the necessary adjustments to meet the CIP requirements. All references to the regulation mean the CIP regulation, 31 CFR § 103.121.

C. CIP Coverage

Does your existing policy apply to all types of accounts?

The regulation provides that an account covered by CIP includes a wide range of formal banking relationships including loans, deposit accounts, safe deposit leases, cash management, custodian and trust services.

Does your existing policy distinguish a formal business entity for an informal relationship? Does it treat the business entity as the customer to be identified if it’s a legal entity, and treat the individual opening the account as the customer for an entity that is not a legal person?

The regulation provides that an individual who opens an account for an entity that is not a legal person (such as a book club or bowling team) is the customer for CIP purposes. If the entity is a legal person (such as a corporation or trust), then the entity is the customer. This affects not only which party must be verified, but also which information to collect.

Does your existing policy treat the custodian of an account opened for a minor as the “customer”?

The regulation provides that an individual who opens an account for an individual that lacks legal capacity (such as a minor) is the customer for CIP purposes, not the beneficiary. This also affects which party must be verified and which information to collect.

Does your existing policy cover your subsidiaries? 

As noted in the preamble to the regulation, the CIP must be a part of your BSA compliance program. Therefore, it will apply throughout your U.S. operations (including subsidiaries) in the same way as the BSA compliance program requirement.

D. Identification Procedures

Does your existing policy include risk-based procedures for verifying the identity of each customer?
 
The regulation provides that a CIP must contain procedures for verifying the identity of each customer and that they must be risk-based. This ties into the next question regarding the minimum requirements for this risk assessment.

Are these procedures based on your assessment of the relevant risks, including the various types of accounts you maintain, the various methods of opening accounts you provide, the various types of identifying information available, and your size, location, and customer base?

The regulation provides that you should take these factors into account in doing your risk assessment. These are just the minimum. You should, of course, consider other factors, if appropriate.

Does your existing policy specify the identifying information that will be obtained from each customer?

The regulation requires that this information include name, street address, ID number and, in the case of individuals, date of birth. Other information, such as telephone numbers may be specified and other information may be needed for businesses or foreign citizens.

Does your existing policy address situations where, based on your risk assessment of a new account opened by a customer that is not an individual, you will obtain information about individuals with authority or control over such account, including signatories, in order to verify the customer’s identity?

The regulation only requires this in cases where you cannot verify a non-individual customer. This is an exception to the general rule that signers on an account do not need to be verified.

E. Identity Verification

Does your existing policy contain procedures for verifying the identity of the customer, within a reasonable time after the account is opened? Does it describe when you will use documents, non-documentary methods, or a combination of both methods? 

The regulation contains this requirement. What a “reasonable time” is might depend on what type of account is being opened – a loan that will be funded the same day would require quicker verification than a real estate loan that might not close for weeks. The use of a combination of documents and non-documentary methods is encouraged in the preamble “because identification documents may be obtained illegally and may be fraudulent, and in light of the recent increase in identity theft”.

Does your existing policy contain procedures that set forth the documents that you will use? 

The regulation requires the documents to be specified. Obviously, the documents will vary depending on whether the customer is an individual, corporation, partnership, trust, sole proprietor, or other entity, as well as on whether the customer is from the U.S. or another country. 

Does your existing policy contain procedures that describe the non-documentary methods the financial institution will use?

The regulation requires the CIP to describe what methods other than documents will be used to verify identity and when these methods will be used. This may be done by an automated verification solution or it may be done manually. At a minimum, the procedures must address each of the situations stated in the next question.

Does your existing policy describe non-documentary procedures to address situations where: 
An individual is unable to present an unexpired government-issued identification document that bears a photograph or similar safeguard; 
You are not familiar with the documents presented; 
The account is opened without obtaining documents; 
The customer opens the account without appearing in person; and
Where you are otherwise presented with circumstances that increase the risk that you will be unable to verify the true identity of a customer through documents?

The regulation provides that all of these situations should be covered in your CIP. In connection with the last situation, you should try to anticipate what the circumstances might be that would increase the risk of not being able to identify the customer through documents at your institution.

Does your existing policy include procedures for responding to circumstances in which you cannot form a reasonable belief that you know the true identity of a customer? These procedures should describe: 
When you should not open an account;
The terms under which a customer may use an account while you attempt to verify the customer’s identity;
When you should close an account, after attempts to verify a customer’s identity have failed; and
When you should file a Suspicious Activity Report 

The regulation does not require that you close or refuse to open an account in any particular circumstances, only that you specify when you will do so in your CIP. Keep in mind that the rule does not give protection from liability for errors and does not eliminate the need for adverse action notices where required. Procedures for filing Suspicious Activity Reports should be consistent with the instructions on the Suspicious Activity Report form.

F. Record Retention

Does your existing policy include procedures for making and maintaining a record of information that includes:

All required identifying information about a customer 
A description of any document that was relied on, noting the type of document, any identification number contained in the document, the place of issuance and, if any, the date of issuance and expiration date;
A description of the methods and the results of any non-documentary measures undertaken to verify the identity of the customer and
A description of the resolution of any substantive discrepancy discovered when verifying the identifying information obtained?

The regulation requires that all of these four elements be included in your CIP record keeping.

Does your existing policy include retention of the required identifying information for five years after the date the account is closed or, in the case of credit card accounts, five years after the account is closed or becomes dormant?

The regulation specifies a two-tiered retention period. The required identifying information (name, address, ID number and date of birth) must be kept for five years after the account is closed.

Does your existing policy include retention of the document description, non-documentary methods and results, and resolution of discrepancies for five years after the record is made?

The regulation specifies that the records other than the required identifying information must be kept for five years after the record is made.

G. Government List Review

Does your existing policy include procedures for determining whether the customer appears on any list of known or suspected terrorists or terrorist organizations issued by any Federal government agency and designated as such by Treasury in consultation with the Federal functional regulators? The procedures must require the financial institution to make such a determination within a reasonable period of time after the account is opened, or earlier, if required by another Federal law or regulation or Federal directive issued in connection with the applicable list. The procedures must also require the financial institution to follow all Federal directives issued in connection with such lists.

The regulation contains this requirement. Although no lists have been designated, when such guidance is issued this will have a significant effect on your work flow for account opening. In the meantime, your policy should indicate that you will check any such list(s) and follow any directives when they are available.

H. Adequate Notice

Does your existing policy include procedures for providing your customers with adequate notice that you are requesting information to verify their identities?

The regulation requires that your give “adequate notice” to your customers that you are requesting information to verify their identities. This notice must be given in any manner “reasonably designed to ensure that a customer is able to view the notice, or is otherwise given notice, before opening an account.” Although lobby posters or other signs are acceptable for customers that come into your institution, your CIP should specify how customers that do not open accounts face-to-face will be handled. This can happen when accounts are opened by mail, phone or Internet, when one spouse comes in to your institution but the other one doesn’t, and when accounts are opened by third parties such as dealers or agents.

I. Conclusion

The bottom line is that KYC compliance is not CIP compliance. Although CIP does build on KYC principles, the compliance requirements set out in section 326 are extensive and much more detailed than what was expected under KYC guidance. The questions and answers discussed above highlight each explicit requirement of section 326. Although formal examination procedures have not yet been released, it seems reasonable that regulatory examiners will expect your CIP to address each of these areas in some fashion. On October 1, 2003, your CIP must be board approved and fully implemented. Now is the time insure that your CIP meets all the regulatory expectations.

2. Suspicious Activity Reports (SARs)Suspicious Activity Report available at http://encyclopedia.thefreedictionary.com/Suspicious%20activity%20report.

A Suspicious Activity Report (or SAR) is a report regarding suspicious or potentially suspicious financial activity, filed with the Financial Crimes Enforcement Network (FINCEN), an arm of the United States Department of the Treasury.

SARs are filed primarily by financial institutions such as banks, credit unions and check cashing establishments. Casinos are required to file a separate report called a SAR-C. FINCEN requires a SAR report to be filed by a financial institution when the financial institution experiences a potential loss (also known as risk or exposure) of $25,000 or more, a potential loss of $10,000 or more when a suspect can be identified, for any potential loss when an employee is involved (such as embezzlement or misuse of position) or any transaction or set of transactions that may be deemed suspicious (such as structuring to avoid a CTR). A similar, though less detailed report called a "Currency transaction report" (CTR) is required under the Bank Secrecy Act for any cash transaction or transactions greater than $10,000. 

SAR reports include detailed information about transactions that are or appear to be fraudulent, and the individuals conducting such transactions. While many institutions file thousands of SARs a year, very few people will have a SAR filed with thier name included. The goal of SAR filings is to help the Federal government identify individuals, groups and organizations involved in fraud, terrorist financing and money laundering. At the same time, neither the financial institution, nor the Federal government is required to notify an individual or organization that a SAR has been filed that includes their name. Financial institutions usually undergo an investigations process prior to filing a SAR to assure that the information reported is appropriate and accurate. This process will often include review by financial investigators, management and attorneys prior to filing.

An institution can file these reports as a paper form, electronically on tape or floppy disk, or through a special secure internet connection. 

Financial institutions face very heavy penalties for failing to properly file Suspicious Activity Reports, including large fines and regulatory restrictions. This regulatory compliance has become increasingly important for financial institutions in recent years, with entire departments and executive positions springing up to ensure regulatory compliance, in SARs as well as the Bank Secrecy Act and the Sarbanes-Oxley Act.

3. Internal Compliance Program to Monitor for the Office of Foreign Assets Control

“The Treasury’s Office of Foreign Assets Control (‘‘OFAC’’) administers laws that impose economic sanctions against, including the restriction of transactions with, certain foreign countries, their nationals, or ‘‘specifically designated nationals.’’ The Workprogram includes examination procedures to determine whether institutions are complying with the OFAC requirements.”

“Regulation H, Section 208.14, requires that financial institutions establish and maintain adequate internal procedures to assure and monitor compliance with the BSA (Refer to BSA Manual—Regulation H).”

“The sophistication and comprehensiveness of the institution’s internal compliance program should be gauged by the type of activities engaged in by the institution and the quantity of transactions subject to the BSA and related rules and regulations. As an example, a ‘‘wholesale’’ institution that conducts no cash transactions needs only to have an internal compliance program that ensures that should a covered transaction be presented to the institution, the institution’s employees will have sufficient education to understand that the transaction may be subject to Bank Secrecy Act requirements and the employee has the means to obtain additional instructions from manuals or employees at other branches of the institution. As an alternative, an institution that conducts a retail operation needs to have specific and comprehensive internal compliance procedures. It is your responsibility to determine the appropriateness of the internal compliance program based on the institution’s activities. Keep in mind that all institutions, throughout the organization, should maintain a program to detect, and where necessary, report unusual or suspicious activities possibly related to money laundering.”

4. Annual Audit of an AML Compliance Program

“While the Work program is designed to maximize the efficiency of the review process (by using a sampling or by requiring the institution to perform an analysis), it is not designed to be all inclusive; therefore, specific situations or problems identified while conducting examinations may require additional procedures that would not otherwise be required.”

“Regulation H, Section 208.14, requires that financial institutions provide for independent testing for BSA compliance to be conducted by bank personnel or an outside party (Refer to BSA Manual—Regulation H).”

“Evidence of violations of, or noncompliance with, specific provisions of the BSA may beindicative of a systemic failure of the internalaudit program. As you complete the following examination procedures, you must determine whether apparent violations were caused by misinterpretations, oversight, or technical matters rather than by an inadequate compliance program. If you feel the institution’s compliance program is inadequate, you may want to enhance your BSA examination (i.e., use a larger sampling of transactions).”

“Regulation H, Section 208.14 requires that financial institutions provide BSA training for appropriate personnel, including, but not limited to, tellers, customer service representatives, lending officers, private and personal banking officers and all other customer contact personnel (Refer to BSA Manual—Regulation H).”

“The sample size of CTRs you should review will depend upon several factors such as the size and location of the institution, the detail and accuracy of reports, and your comfort level with the institution’s internal control procedures.”

Discussion Questions: 

1.	Discuss Customer Identification Programs.
2.	Discuss an internal compliance program to monitor for the Office of Foreign Assets Control.
3.	Discuss the annual audit of an AML compliance program.
4.	Discuss the Patriot Act and special compliance issues for non-traditional and high-risk businesses.
5.	Discuss section 312 of the Patriot Act and money laundering and terrorism in correspondent banking relationships and money laundering and terrorism in private banking relationships.
6.	Discuss enhanced due diligence and monitoring for high-risk clients including international and foreign political figures.
7.	Discuss account transaction monitoring and suspicious activity investigations for foreign banks with offices in the United States.
8.	Discuss global anti-money laundering industry standards: what are the new best practices in the field and how do you implement them?