MONEY LAUNDERING AMIDST GLOBALIZATION

Freiberg Phillip

MONEY LAUNDERING

AMIDST GLOBALIZATION

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Freiberg Phillip

“And the whole earth was of one language, and of one speech.  And they said one to

another, … let us build us a city and a tower, whose top may reach unto heaven; and let

us make us a name, lest we be scattered abroad upon the face of the whole earth.  ”

(Genesis 11:5-8).

Introduction

Yet another human mega project RMS Titanic 1, despite being the

largest and most technologically advanced passenger steamship of

its time, has sunk during her maiden voyage from England to

America. Many have thought a tragedy like that was absolutely

impossible, since due to sophisticated design, water could only

fill some compartments but not all. The trade journal The Shipbuilder

and Marine Engine Builder in June 1911 writing about Olympic

and Titanic said "The captain may, by simply moving an electric

switch, instantly close the watertight doors throughout, making

the vessel virtually unsinkable."”2 Still, the water- tight doors

1 The second form of globalization was marked by the expansion of Britain’s trading empire in the nineteenth century. According to Cohen, this period was marked by a significant increase in trade between countries and the transfer of technological and cultural goodsbetween peoplesacross the globe. Daniel Cohen in his recent book Globalization and Its Enemies2005As Mr Ndlovo’s globalization ‘have the privilege to enjoy’. (BROWN, 2008)2 "Titanic - 2100 Science and Technology Videos". 2100science.com. 1912-04-14. Retrieved 2010-07-31. Wikipedia

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somehow failed to stop the water that quickly filled more

compartments than critically possible thus sending the ship with

1517 international passengers to meet the silent end by the coast

of Canada.

Globalization

In many respects the phenomenon of Globalization could be likened

to permanently disabling all of the watertight doors on a ship,

surrendering control of economy to unpredictable forces of demand

and supply. In globalization “ national markets are increasingly

opened to the global market, national cultures similarly are

opened to the global culture. National sovereignty is eroded in

terms of both control of the national economy” (Neack, 2008) p.8

Also (BROWN, 2008) mentions that “notions of absolute state

sovereignty are being weakened in favor of a more politically

interconnected and economically unified world.”

On one hand increasing globalization is good- capital, ideas,

people and goods can freely float in this liquid world finding

more effective ways to compete. Borders are becoming virtual,

money global, networks and culture universal. Less iron doors and

curtains mean faster turnaround time for global commerce and

economy, thus making new and improved products cheaper and more

readily available to the larger number of people. On the other

hand globalization “promotes the possibility for greater economic

inequality, ideological ethnic conflict and a failure to secure

human development.” (BROWN, 2008)

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With the fall of the Iron Curtain the world is becoming a smaller

place with the West being at an extraordinary peak of power in

relation to other civilizations. (The Clash of Civilizations?,

1993) Now all the countries are open to impacts of the

Globalization be it for good or for evil. In 1930ies Soviet Union

was immune to the financial crisis that plagued US and Europe

because it [USSR] did not participate much in the world economy

via trade and its currency was not convertible. But now all of

the safe harbors have been effectively eliminated. If the perfect

storm comes it will affect all now. There have been several

financial bubbles attributed directly to psychological factors

and lack of oversight. The latest example has been the subprime

housing bubble of 2008 in US, which has led to the burst of the

super bubble of the credit expansion. “A financial crisis that

began in New York and London and spread to manufacturing in rich,

then industrializing countries, has now hit the “bottom

billion”.”3Just like the Japanese tsunami that has smashed all

the walls, houses and cities on its deadly path, similarly did

the American subprime shockwave (fueled by Arab and Chinese ‘hot’

money) affect even the most remote corners of the globe.

After WWII, the Bretton Woods conference directed almost of all

the national currencies to became floating or semi- floating and

pegged to US Dollar. Today all the stocks are globally traded

instantaneously via the world wide web and there is no place to

hide from the turbulences of global economy for before

3 The Economist Mar 12 2009 3

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International Institutions and politicians could gather again the

world became one global economy. Thus in many respects the

globalization being a processes entirely of human doing that

reduces human agency to a merely a reactionary role. (BROWN,

2008)Therefore to prevent this global ship from sinking under the

weight of all the problems some internal mechanisms need to be

established throughout whole perimeter to avoid the tragedy but

at the same time not to impede the progress.

Corruption in the new era

The process of Globalization, described in the introduction, has

made the vice of corruption a truly global problem. Today

organized crime is well educated, uses the cutting age technology4 , fluently speaks many languages, travels internationally and

is moving finances to safe harbors from the countries they

pillage. Thus to fight corruption today it is not enough to audit

companies and banks locally, more drastic collaborative measures

on an international scale are needed to stop this global

problem. Corruption is no longer a local problem, but a as many

would say a glocal one-that simultaneously exists locally and

globally. Talking about corruption UN Secretary Kofi Annan has 4 Italy's interior minister Roberto Maroni (photo) has formed a team of security officials to tackle the mafia and other criminal groups' growing use of Internet telephony including computer programmes such as Skype to avoid police wiretaps. The 'taskforce' of police and computer experts will seek technical and legal means of intercepting suspected criminals' conversations via Skype and other VoIP technologies and making these admissible in Italy's courts of law. A top-secret algorithm invented by Skype's programmers encrypts speakers' voices as they are carried over the Internet. No electronic trace of Skype conversations remains. The software creates a new temporary password for each conversation, meaning Skype conversations are currently impossible to intercept. http://www.adnkronos.com/AKI/English/Security/?id=3.0.3031811578

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said that corruption is “a key element in economic

underperformance and a major obstacle to poverty alleviation and

development.”

Money laundering and corruption

It goes without saying that Criminal proceeds need to be

legitimized. The process of such legitimization is often called

money laundering, thus corruption and money laundering go hand in

hand. Money Laundering is defined as ―conceal[ment] of the origins

of money (obtained illegally) by transfers involving foreign

banks or legitimate businesses‖..

Years ago, before the era of jumbo jets and internet banking

money laundering was used primarily to legitimize criminal funds

earned locally and intended to used locally as well. The process

was quite simple and involved a cash intensive business or

inflated inventory on accounting books. Today the situation has

drastically changed: Criminal activity happens all over the

globe. Money laundering is done internationally and criminal

proceeds are used internationally as well via ” increasingly

sophisticated combinations of techniques, such as the … use of

legal persons to disguise the true ownership and control of

illegal proceeds, and … use of professionals to provide advice

and assistance in laundering criminal funds.” Officials are not

even sure about the volume of the money that is laundered

globally. In 1996 the International Monetary Fund estimated that

2-5% of the worldwide global economy involved laundered money.

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But IMF is nevertheless warning the international community that

“Money laundering threatens economic and financial systems in many countries, and

the international financial community should strongly support anti-laundering

efforts.” (Quirk, 1997)

Money laundering 101

For the criminal proceeds to be legitimately used they first need

to be introduced into the financial system through a process

known as placement via Structuring. Structuring "smurfing,"

refers to breaking the criminal proceeds into smaller chunks that

are then used to acquire financial instruments that are later

deposited in a bank. Throughout the process shell companies and

trusts are also used to disguise the true owners of the capital.

Offshore banks in countries with lax banking regulations are

often used while layering or structuring the funds. After that a

complex procedure is carried out to camouflage the illegal source

also known as “layering”. After the footsteps have been cleared

the dirty money can be safely used to acquire goods such as

houses, shares, cars, businesses, etc. (“integration”)

Global community prevention efforts

Brown writes that “Real globalization’ happened with the advent

of an institutional component with 20th century’s high-speed

communication and financial transactions. (BROWN, 2008)

The international community became ever more aware that

globalization is used not only for good but for evil as well.

Perhaps the criminal elements are the first to embrace

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globalization as a means to expand their activities all over the

globe. They are the first to meticulously study the new rules and

regulations to find loopholes for their activity. “In response to

the monumental collective action problems associated with

globalization, it is becoming increasingly apparent that radical

changes to global governance are needed and that robust normative

principles are also needed.” (BROWN, 2008)

Financial Action Task Force

At the 1989 economic summit in Paris, the G7, understanding all

the negative effects of money laundering around the globe, has

set up the Financial Action Task Force (FATF). Its goal was to

prevent banks and financial institutions from laundering the

proceeds of criminal activities.”5 In order to implement its

goals, FATF has developed 40 Recommendations on money laundering,

such as:

implement international conventions

criminalize money laundering

implement customer due diligence, record keeping and

suspicious transaction reporting

establish a financial intelligence unit 

cooperate internationally fighting money laundering

FATF recommendations are expected to be implemented though

national legislation but allowing counties certain flexibility. 5 http://www.imf.org/external/pubs/ft/fandd/1997/03/pdf/quirk.pdf

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Following 9/11 The FATF issued 8 additional Special

Recommendations on Terrorist Financing introducing new

requirements relating to services such as alternative

remittance, wire transfers and cash couriers as well as non-

profit organizations.

FATF also does assessment of each member country against it

recommendations and issues reports of the jurisdictions that, are

believed to be uncooperative with other jurisdictions in

international efforts against money laundering. FATF's Eighth

NCCT Review listed no countries as non-cooperative. FATF issued a

"Statement" on 25 February 2009 noting concerns and encouraging

greater compliance by the following countries:6

1. Iran

2. Pakistan

3. Turkmenistan

4. Uzbekistan

5.São Tomé and Príncipe

While, under international law, the ‘FATF Blacklist’ has no

formal sanction, in reality, a jurisdiction placed on the FATF

Blacklist often found itself under intense financial pressure.

UN CONVENTION AGAINST TRANSNATIONAL ORGANIZED CRIME

The CONVENTION of 2 November 2000 has been adopted as a response

to events of 9/11. International community saw the tragic events

in US as a direct result of financial sponsorship from abroad. 6 http://www.fatf-gafi.org/dataoecd/18/28/42242615.pdf

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Articles 6-7 deal with “Criminalization of the laundering of

proceeds of crime” and “Measures to combat money-laundering ”,

demanding of each country to label money laundering as a

criminal offence, when committed intentionally. States Parties to

the Convention should implement feasible measures to detect and

monitor the movement of cash and appropriate negotiable

instruments across their borders without impeding in any way the

movement of legitimate capital. Convention also calls for the

development and promotion of global, regional, sub regional and

bilateral cooperation among judicial, law enforcement.

At the same time it is worth noting that the situation is still

dire. Italian weekly newspaper L'Espresso 7 recently published an

article by Loretta Napoleoni titled ‘Terrorists- Drug dealers’.

Napoleoni claims that Starting from 2005 Talibs are self-

financing, not only by selling counterfeit goods at the mega

market in Kvett, but also through joint ventures with the drug

dealers of opium. They do not have the lack of money since then.

For the last 10 years the production of heroin has increased 3

fold. “We are talking about nearly 500 bn USD of such global

revenue to be able to support the most mighty army in the world

and create the constant threat for the West and the rest.” She

says that the past model of the financing –was the financing of

the terrorism, i.e. Finances were coming from the financial

capitals: New York, London and from 1990ies from Dubai. All the

7 (as retrieved from a Russian website http://inopressa.ru/article/09May2011/espressoedit/laden_ter.html)

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transactions were happening in front of Americans, that did not

want pay any attention since Talibs were fighting America’s

enemies. But Since 2005 terrorists are capable of self-financing

due to flourishing military economy starting from smuggling of

oil and armaments, finishing with prostitution-the horizon of

criminal activity is limitless.

UNITED NATIONS CONVENTION AGAINST CORRUPTION

This convention has been adopted by the United Nations General

Assembly in  on 31 October 2003 by Resolution 58/4. As of 5

November 2010, the convention had been ratified, accepted,

approved or acceded by 144 countries (which became thus States

Parties to the convention).Chapter III, Articles 15-44 deal with

Criminalization and Law Enforcement States have to reexamine

their laws and criminalize activity has fallen through the cracks

of the legal system. Article 23 specifically deals with Laundering of proceeds of

crime. UNCAC calls for establishing as criminal offences, when committed

intentionally. It specifically mentions the conversion or

transfer of property, knowing that such property is the proceeds

of crime, for the purpose of concealing or disguising the illicit

origin of the property or of helping any person who is involved

in the commission of the predicate it. UNCAC also calls for better

cooperation between national and international bodies and with

civil society.

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Country specific measures

Moving from international organizations, it is worth mentioning

how US, as a financial system founding country is dealing with

money laundering. As observed by Burges “ the international

economic and monetary system needs leadership, a country that is

prepared, consciously or unconsciously, under some system of

rules that it has internalized, to set standards of conduct for

other countries and to seek to get others to follow them,” (Burges, 2008)

Following discussion on US, this paper will review the anti-

money laundering procedures of Cyprus within the superstructure

of European Union. Even thou Cyprus8 is not a financial capital

of the world, this country has been identified as a paradise for

tax optimization and regrettably for money laundering too. Thus

it is worth noting its government’s fight against the crime.

United States of America

Overall American anti-money laundering efforts can be divided

into preventive measures and criminal sanctions.

Preventive Measures: US Bank Secrecy Act of 1970 attempts to

prevent ‘dirty’ money from entering the US financial system in

the first place. These laws require financial institutions to

8 For American companies, though, there are still obvious attractions. Cyprus offers the lowest corporate tax rate in the EU, 10%, as well as a bevy of tax breaks and 33 international treaties to prevent double-taxation.Forbes.com

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report cash transactions in excess of $10,000, identifying the

individual making the transaction as well as the source of the

cash. Additionally, a Suspicious Activity Report (SAR) must be

filed if the financial institution regards a transaction to be

“suspicious”9. Any attempts to circumvent the system, by

structuring cash deposits to amounts lower than $10,000 also

violates the law. The financial database called the Financial

Crimes Enforcement Network (FinCEN), creates reports of abnormal

financial activity made available to US criminal investigators

around the globe.

Criminal sanctions: Money laundering has been criminalized in

the United States by the Money Laundering Control Act of 1986.

This legislation prohibits individuals from engaging in a

financial transaction with proceeds that were generated from

certain crimes, known as “specified unlawful activities” (SUAs).

There is no minimum threshold of money. According to the law

merely passing money from one person to another, done with the

intent to disguise the source, ownership, location or control of

the money, is regarded as the financial transaction.

US legal “arms” also stretch abroad. Recently US Justice

Department and the IRS obtained a court order demanding that UBS

Bank of Switzerland turn over records on the 19,000 Americans

believed to have secret Swiss accounts. 

UBS finally agreed to pay a $780 million fine, cease its offshore

9 defined as a knowing or suspecting that the funds come from illegal activity or disguise funds from illegal activity

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banking activities with Americans, and for the first time in

history turn over the names of more than 4,000 U.S. citizens

suspected of tax fraud. UBS having a major presence in the U.S.

could not survive as a global banking power without access to the

U.S. market.10

The USA PATRIOT Act  

After the events of 9/11 the U.S. Congress  has adopted The USA

PATRIOT Act   that was signed into law by President George W.

Bush on October 26, 2001. The Patriot Act divided into three

subtitles, with the first dealing primarily with strengthening

banking rules against money laundering, especially on the

international stage. The second attempts to improve communication

between law enforcement agencies and financial institutions, as

well as expanding record keeping and reporting requirements.

Specifically USA PATRIOT Act, Title III titled "International Money

Laundering Abatement and Financial Anti-Terrorism Act of 2001,"

is intended to facilitate the prevention, detection and

prosecution of international money laundering and the financing

of terrorism. It primarily amends portions of the Money Laundering

Control Act of 1986 (MLCA) and the Bank Secrecy Act of 1970(BSA).

The European Union and Cyprus

10 Read more: http://www.cbsnews.com/stories/2009/12/30/60minutes/main6038169.shtml#ixzz1M9nORMXs

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The EU directive 2005/60/EC  on the prevention of the use of the

financial system for the purpose of money laundering and

terrorist financing attempts to prevent such crimes by requiring

banks, to investigate and report usage of cash in excess of

€15,000.

Forbes reports that ‘150 miles from Beirut, closer to the Middle

East than to Europe, Cyprus has been a mecca for money laundering

--even terror financing, according to a post-Sept. 11 U.S.

congressional hearing’. Russia, a country described by Wikileaks

as a "mafia state" with widespread corruption, bribery and

protection rackets has very close connections with Cyprus.

Russian off-shore companies which benefit from generous fiscal

conditions on the island, is the major conduit for capital

invested in Russia (37.4  billion euros in 2010). Most of this

money was originally sourced in Russia itself. Nearly 16 billion

dollars moving from Russia to Cyprus and the Russian deposits in

Cyprus are the biggest part of the total 22.7 billion of deposits

in foreign currency.11

“In July, 2001, the Internal Revenue Service of the United

States of America, officially approved Cyprus’s “Know-Your-

Customer” rules which form a basic part of Cyprus’s anti-money

laundering system. As a result of the above approval, banks in

11 (http://www.moneymarketing.co.uk/analysis/cyprus-plans-sweeping-changes-to-bring-in-offshore-investors/186764.article)

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Cyprus which may be acquiring US Securities on behalf of their

customers.”12

Desiring further integration into the global and European

communities Cyprus has enacted laws, over the past decade, that

comply with international standards, requiring, persons entering

or leaving the country to declare currency or gold bullion worth

$15,500 or more. Banks must report large cash deposits and

suspicious transactions just like in US.

On 13/12/2007 the Cypriote House of Representatives enacted “The

Prevention and Suppression of Money Laundering Activities

Law” .Under the current Law, the Cyprus legislation has been

harmonised with the Third European Union Directive on the

prevention of the use of the financial system for the purpose of

money laundering and terrorist financing (Directive 2005/60/ΕC).

Conclusion

Brown writes that ‘globalization creates a strange

world where ... it has altered people’s

expectations more than it has increased their

ability to act’. (BROWN, 2008) In this ‘a strange

world’ some firms are ‘too big to fail’ and as

global as the world itself; individual actors can

challenge superpowers via terrorism and a computer

virus sent from Starbucks can affect the global

12 Forbes.com

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economy as much and as quickly as a flu that spread from a

Mexican swine to UK ex- prime minister’s wife.

Today the global community is simply unable to revert the

process of globalization via stepping backwards and lowering the

‘iron doors’, discussed in the introduction, for this will

trigger consequences that we are not yet able to predict. But

leaving the Globalization “on its unbridled course then there is

a real possibility that it could seriously affect the ability of

the human race to coexist peacefully, or to continue to exist at

all. (BROWN, 2008)

Thus it seems that the only thing that could be done today is the

establishment and execution of universal rules via which

globalization will developed as a man controllable process. This way

perhaps it will benefit the whole human family and not just the

“Free World”13.

In the world financial capital -London at 30 St Mary Axe, there

is a building also known as the Gherkin. The design of this

building is as peculiar as its name. This building is constructed

with a concept of redistribution ‘of loads from failing columns

to other columns via embedding steel cables in the floors at the

building perimeter.’ These cables thus redistribute gravity loads

13 The very phrase "the world community" has become the euphemistic collectivenoun (replacing "the Free World") to give global legitimacy to actionsreflecting the interests of the United States and other Western powers.' (The Clash of Civilizations?, 1993)

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to other columns if an exterior column were to be severely

damaged.”

Globalization, if it is done right, should be like those steel

cables that connect the supporting columns of the whole

structure. Only when all the countries cooperate and are equally

resolute when it comes to fighting corruption and money

laundering can they succeed. With international cooperation and

uniformity in legal framework there will be no loopholes and safe

harbors for those that want to launder criminal funds-

international financial structure thus withstand any shock just

like the Japanese skyscrapers did. In an interconnected world

one country’s failure to have stringent anti-money laundering and

anti- corruption laws will mean that criminals from other

countries will flock to its shores, thus negating everybody’s

efforts. The Economist writes: “Governments, .. should think more

in terms of reducing risk and increasing resilience to shocks …

the sort that comes not from other states but networks of states

and non-state actors, or from the unintended consequences of

global flows of finance, technology and so on.”14Even though “for

the relevant future, there will be no universal civilization, but

instead a world of different civilizations, each of which will

have to learn to coexist with the others” let us not forget that

that “civilizations are dynamic; they rise and fall”. (The Clashof Civilizations?, 1993)

14 The Economist Jan 28 2010

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Collapse of the system comes from a decline in the capability or

willingness of the

major actor to continue providing the necessary public goods.(Burges, 2008)

Today humanity is at the point when international cooperation is

vital for its survival. Perhaps the West brought up with the

notion that the Tower of Babel is an impossible and sinful

project should re-evaluate it and put joint efforts to succeed

this time around. This time, in case of a failure, there will be

too many people and too little space to be scattered…instead

humanity will be buried under the rubble of the global tower it

still aspires to build.

“And the LORD  came down to see the city and the tower, which the children of men

builded. And the LORD  said, Behold, the people is one, and they have all one language;

and this they begin to do: and now nothing will be restrained from them, which they

have imagined to do. [And the LORD  said] let us go down, and there confound their

language, that they may not understand one another's speech. So the LORD  scattered

them abroad from thence upon the face of all the earth: and they left off building the

city. Therefore is the name of it called Babel; because the LORD did there confound the

language of all the earth: and from thence did the LORD scatter them abroad upon the

face of all the earth.”

(Genesis 11:6-9)

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Bibliography

The Clash of Civilizations? (1993). FOREIGN AFFAIRS, 72(3).

BROWN, G. W. (2008). Political Studies Review, 1.

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Burges, S. W. (2008). Consensual Hegemony:Theorizing Brazilian

Foreign Policy after the Cold War. International Relations, 1, pp.

65-84.

Glebov, S. (2009). Black Sea security as a regional concern for

the Black Sea states and the global powers. Southeast European

and Black Sea Studies, 9(3), 351–365.

Neack, L. (2008). The New Foreign Policy: Power Seeking in aGlobolized Era.

Lanham: Rowman & Littlefield Publishers, Inc.

Quirk, P. E. (1997). Money Laundering: Muddying the Macroeconomy.

Finance & Development, p. 9.

Shearman, P. a. (2009). The roots of Russian conduct. Small Wars &

Insurgencies, 20( 2), 251 - 275.

Unknown. (1611). King James Version of the Holy Bible. London.

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