The USA PATRIOT ACT in fighting foreign public corruption

The USA PATRIOT ACT in Fighting Foreign Public Corruption

I. INTRODUCTION: Why Developed Countries Should Fight Foreign Public

Corruption

During forty-two years Muammar Gaddafi was an authoritarian ruler of Lybia

till mass appraisal occurred in February 2011 demanding democratic elections. In

2010 Lybia was rated 146th out of 178 possible by the corruption perception index

launched by the Transparency International1. Wiki Leaks cable informed that

Gadhafi's regime controls over $32 billion deposited around the world including

hundreds of millions of dollars managed by several US banks2. When

demonstrations in Lybia started, Switzerland ordered its banks to freeze any funds

and assets belonging to Gadhafi3. Swiss government imposed the similar action

against illicit deposits of Tunisian leader Zine Al Abidine Ben Ali and Egyptian

dictator Hosni Mubarak4. These are the examples when assets forfeiture occurred

after the corrupted officials were deprived of their power. Western governments,

however, are reluctant to impose actions against illicit property of kleptocracs who

are still remaining in office. This approach has to be changed, because revolutions

obscuring dictators happen rarely.

On the other hand, developing nations are the recipients of foreign financial

aid, which comes from the developed countries. Only the US government spends

1 Transparency International, Corruption Perception Index 2010, http://www.transparency.org/policy_research/surveys_indices/cpi/2010TI corruption index (accessed May 13, 2011)2 Robert Windrem, Gadhafi controls $32 billion, turned down Madoff, diplomat wrote, http://openchannel.msnbc.msn.com/_news/2011/02/23/6115987-gadhafi-controls-32-billion-turned-down-madoff-diplomat-wrote (Feb. 23, 3011)3 Samuel Rubenfeld, Swiss Order Freeze of Gadhafi Assets,http://blogs.wsj.com/corruption-currents/2011/02/24/swiss-order-freeze-of-gadhafi-assets/ (Feb. 24, 2011)4 Ibid.

annually $34 billion overseas5, including $900,000 financial aid for Lybia in 20106

and $514 million to Egypt. Developed countries contribute to the World Bank and

International Monetary Fund, which are also important donors for developing

countries. Money of American taxpayers often go to the nations, which are rich on

natural resources and could be even wealthiest than the US if local kleptocrats

would not consume everything. Nevertheless, the US and the EU financial

institutions facilitate laundering billions of dollars by foreign corrupted officials.

Public corruption is not only the problem of developing world – it is the problem of

developed countries and the problem of every taxpayer from the jurisdictions,

which provide foreign financial aid.

This paper alleges, that the US has the legal recipe for improving global efforts in

prevention and fight against foreign public corruption. The USA Patriot Act, a law

passed by Congress to prevent and fight terrorism and money laundering, has powerful

provisions, which potentially can enhance the ability of developed countries to detect

proceeds of illicit activities within their financial system an forfeiture assets of foreign

kleptocrats. Additionally, the US anti-money laundering and anti-corruption efforts could

be more efficient if (1) the US government statutory acknowledged the nexus between

foreign public corruption and money laundering, and (2) Financial Action Task Force

(FATF)7 would have enhanced the international cooperating for combating public

corruption.

The paper begins with explaining the nexus between money laundering and foreign

public corruption. It then focuses on analyzing the Patriot Act’s anti-corruption

5 FACTBOX: Facts about U.S. foreign assistance, http://www.reuters.com/article/2010/01/06/us-usa-aid-factbox-idUSTRE6054DT20100106 (Jan 6th, 2010)6 Growing Criticism of U.S. Foreign Aid to Libya,

http://video.foxbusiness.com/v/4606571/growing-criticism-of-us-foreign-aid-to-libya/ (Mar 24, 2011)7 Intergovernmental body, which develops global anti-money laundering standards in financial sector

provisions, that includes enhanced regulation of private banking accounts; criminal

prosecution of foreign kleptocrats in the US; regime of “primary money laundering

concern”; foreign assets forfeiture. The separate section of the paper is devoted to the

explanation of the notion of correspondent banking, which is the core ground of Patriot

Act’s long-arm provisions. Finally, the paper outlines possible suggestions to improve the

global anti-corruption regime on the base of the Patriot Act’s long-arm provisions.

2. Symbiotic Relationship Between Corruption and Money Laundering:

A corrupted dictator needs a bank willing

to hide the proceeds of illegal enrichment,

“it takes two to tango”8.

A. Money Laundering

Money laundering is the process of conversion or transferring proceeds of criminal

activities to conceal the illicit origin of the property9. This process usually takes three

phases: placement, layering and integration10. United States criminalized money

laundering in 1986 by acknowledging the essential link between the drug trafficking and

need to obscure illegal profits. “War on drugs” in the US caused creation of first anti-

money laundering regime, which shortly became an international issue.

Due to rapid growth of a globalized economy, illicit financial flows can easily

overcome country borders. As such, rigid international cooperation for fighting money

laundering is essential. The leading intergovernmental body in developing international

8 Global Witness, Undue Diligence, 4, March 2009, (available at http://www.undue-diligence.org/Pdf/GW_DueDilligence_FULL_lowres.pdf)9 United Nations Convention Against Transnational Ogranized Crime, Art. 610 Peter Reuter & Edwin M. Truman, Chasing Dirty Money: The Fight Against Money Laundering, 3 (Institute For International Economics, 2004)

regulation standards against money laundering is FATF, which was established at G711

heads of state summit in 1989. Additionally, there are two intergovernmental treaties,

which design the legal framework for international cooperation in preventing and fighting

money laundering: (1) the UN Convention Against Illicit Trade in Narcotic Drugs and

Psychotropic Substances (1988) and (2) the UN Convention Against Transnational

Organized Crime (2000).

There are internationally recognized five categories of predicate offences that trigger

concealment of illegal funds: drug trafficking, other “blue collar” crimes, white-collar

crimes, corruption, and terrorism.12 Since the 9/11’s terrorist attacks the focus of world

anti money laundering regime switched from the “war on drugs” to the “war on

terrorism”. Alleging that money laundering provides financial fuel for terrorism, the

Congress developed legal tools for blocking foreign dirty money flows through the US

financial system. This example shows that by acknowledging a nexus between money

laundering and underlying crime, jurisdictions can design more efficient policies in

fighting the underlying crime itself. In October 2001, following the US proclamation of

“war on terrorism”, FAFT adopted 8 special recommendations on terrorism financing.

Stringent regulation of financial institutions became a weapon of global “war on

terrorism”. Nevertheless, terrorism as a predicated crime composes the smallest scale of

money laundering operations13 involving only tens or thousands of hundreds of dollars14.

This is like a drop in the ocean comparatively to the $1.26 trillion of estimated illicit

11 Economic and political group of 7 developed countries (France, Germany, Italy, Japan United Kingdom, and United States)12 Peter Reuter & Edwin M. Truman, Chasing Dirty Money: The Fight Against Money Laundering, supra, at 413 Peter Reuter & Edwin M. Truman, Chasing Dirty Money: The Fight Against Money Laundering, supra, at 4114 Id. at 42

financial flows in 200815. The huge percentage of this dirty money derives from the

developing countries with $725 - $810 billion of estimated average annual illicit

outflows16. At the same time, corruption is the main underlying crime for money

laundering in poor developing countries, which, conversely, are rich on natural resources.

The developing nations’ wealth goes to the pockets of the kleptocrats and corrupted

oligarchs, who are trying to hide the proceeds of their illegal enrichment in the reliable

western financial centers. Predicate crime of bribery and corruption composes the large

scale of illicit financial operations17 mainly affecting population of developing countries.

Yet the corruption is a disease of developing nations, it also harms developed countries,

which are transferring billions of taxpayers’ dollars of financial aid to the developing

countries. Therefore, the official public acknowledgement of the close nexus between

illicit financial flows and corruption is the important step of the global public policy in

fighting money laundering. After the “war on drugs” and the “war on terrorism”, the

world should begin the “war on corruption”.

B. Public Corruption

Transparency International, a leading world think tank on the issues of corruption,

defines corruption as “the misuse of entrusted power for private gain”18. The UN

Convention Against Corruption (“UNCAC”) specifies this broad definition and

distinguishes public and private corruption. Private corruption is “bribery and

15 Dev Kar and Karly Curci, Illicit Financial Flows from Developing Countries: 2000-2009, http://www.gfip.org/storage/gfip/documents/reports/IFF2010/gfi_iff_update_report-web.pdf (Jan. 2011)16 Id.17 Peter Reuter & Edwin M. Truman, Chasing Dirty Money: The Fight Against Money Laundering, supra, at 4118 Transparency International, FAQ About Corruption,

http://www.transparency.org/news_room/faq/corruption_faq (accessed Apr. 11, 2011)

embezzlement of property in the private sector”19, while public corruption is “bribery of

national and foreign public officials, bribery of officials of public international

organizations; embezzlement, misappropriation or other diversion of property by a public

official; trading in influence, abuse of functions, and illicit enrichment”. The core stone

of public corruption is the notion of “public official”, which UNCAC defines as: “(i) any

person holding a legislative, executive or judicial office of a State Party, whether

appointed or elected, whether permanent or temporary, whether paid or unpaid,

irrespective of that person’s seniority; (ii) any other person who performs a public

function, including for a public agency or public enterprise, or provides a public

service…(iii) any other person defined as a “public official” in the domestic law of a

State Party”20.

UNCAC primarily focuses on public corruption, which poses serious threats on the

democratic processes in the developing countries. The most dangerous type of public

corruption is grand (political) corruption - a “misuse of entrusted power by political

leaders” taking place at the policy formulation end of politics21. In 2008, Global Integrity

established the grand corruption watchlist of countries with high risk of theft of public

resources. Lack of transparency in political financing, government accountability, and

weak oversight over state-owned enterprises were three main criteria in placing

jurisdictions to the grand corruption watchlist22. Algeria, Jordan, Liberia,

Mongolia, Ukraine, and Vietnam joined in 2009 the initial WatchList launched in 200823.

19 UNCAN, Art. 20, 2120 Id. art. 2021 Corruption glossary, http://www.u4.no/document/glossary.cfm#politicalcorruption (April 13, 2011)22 Global Integrity Report: 2009, http://report.globalintegrity.org/globalindex/findings.cfm#WatchList (April 13, 2011)23 Id.

Grand corruption by kleptocrats becomes a key priority of the UNCAC treaty

parties24.

The US concern regarding foreign public corruption raised in 1977 with

adoption of the US Foreign Corrupt Practices Act (FCPA), which criminalized

bribery of foreign public officials by the American corporations. FCPA defines

foreign official as "any officer or employee of a foreign government or any

department, agency, or instrumentality thereof, or of a public international

organization, or any person acting in an official capacity for or on behalf of any such

government or department"25. The global community supported the US initiative by

signing the OECD Anti-Corruption Convention in 1997, which established penalties

for domestic corporations that bribe foreign public officials.

Next phase of the US anti-corruption efforts started with the Patriot Act26, which

passed by the U.S. Congress on October 26, 2001, less then two months after the

9/11 attacks27. This Act provides additional legal tools for fighting foreign public

corruption, though its main goal is to prevent and obstruct terrorism. Anti-

corruption provisions are floating around different titles and sections of the Patriot

Act. There are three types of anti-corruption tools, which could be distinguished

within the Patriot Act: (1) enhanced due diligence of private banking accounts

maintained for non-US persons; (2) criminalization of foreign public corruption; and

(3) “long-arm” regulation of correspondent banking accounts. Two of these tools

are extending the US jurisdiction over foreign individuals residing abroad that

24 David Chaikin & J.C.Sharman, Corruption And Money Laundering: A Symbiotic Relationship, 9 (Macmillan, 2009)25

26 Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism27 See 107 P.L. 56; PUBLIC LAW 107-56 [H.R. 3162], OCT. 26, 2001

potentially raise risk of international conflict of laws. In next sections this paper will

examine all three types of the Patriot Act’s anti-corruption provisions and will

analyze the legitimacy and reasonableness of extraterritorial reach of two of them.

3. Patriot Act’s Anti-Corruption Provisions: Private Bankers of Foreign

Kleptocrats

The Patriot Act requires the US financial institutions to implement special due

diligence against any private banking account “that is required 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”28. A private banking account is

defined as an account or combination of accounts if (1) a minimum aggregate of

funds deposited is not less than $1,000,000; (2) account is established on behalf of 1

or more individuals who have a direct or beneficial interest in the account; and (3)

an employee of the financial institution is assigned to act as an liaison between the

institution and owner of the account.29 Enhanced due diligence means, that banks

have to identify the nominal and beneficial owners of the private banking accounts

opened for non-US person and ascertain source of funds deposited. Additionally, if

the account is opened on behalf or for the foreign political figure, the financial

institution has to detect and report any transactions that may involve foreign

corruption.30

28 107 P.L. 56, § 312(a)(i)(3)(B)29 107 P.L. 56, § 312(a)(i)(4)(B)30 107 P.L. 56, § 312(a)(i)(3)(B)

In 2004 a Permanent Subcommittee on Investigations issued a report on

enforcement and effectiveness of the Patriot Act.31 The hearing mainly revealed that

for more than decade Riggs bank, which used to be the banker for the US Presidents,

provided private banking services for foreign corrupt officials. Disregarding ant-

money laundering regulations, Riggs bank served as a private banker for Augusto

Pinochet, a Chilean military dictator. Close relationships between Riggs and

Pinochet started in 1994, when the bank officials flew to Chile and suggested private

banking services to Pinochet.32 Subsequently Riggs opened several accounts for

Pinochet in DC; moreover, the bank officials helped Pinochet to establish two

offshore shell corporations, which then became the clients of the bank. As a result,

Pinochet deposited around $8 million at Riggs private banking accounts. 33

Pinochet was not the only one foreign corrupt client of Riggs bank. Another

example of Riggs cooperation with foreign senior corrupted officials is Equatorial

Guinea, a poor African country reach on oil resources. Riggs opened and maintained

60 accounts and certificates of deposits for the Equatorial Guinean government, its

officials and family members, including wife and son of the President of the African

country.34 The total amount of Equatorial Guinean funds deposited at Riggs bank

rose to $700 million. 35 By providing services to foreign kleptocrats, Riggs bank

violated the Patriot Act’s provisions. Upon identifying nominal and beneficial

owners of the private banking accounts and ascertaining source of funds, Riggs

31 United States. Cong. Senate. Committee on Governmental Affairs. Money laundering and Foreign Corruption: Enforcement and Effectiveness of The Patriot Act. Hearing. July 15, 2004. 108th Cong., 2nd sess. Washington: Government Printing Office, 2004. 32 Id. at 433 Id. 34 Id. at 535 Id. at 6

should have reported to the agencies any suspicious transactions that could involve

the proceeds of foreign corruption. Riggs failed to comply with anti-money

laundering requirement simply because it was ignoring laws by suggesting private

banking services to foreign kleptocrats. Riggs didn’t report about the suspicious

source of money deposited at its accounts, but, conversely, assisted foreign corrupt

officials to hide the proceeds of illicit activities. When Congressional investigation

revealed Riggs’s obscene practices, the high civil monetary penalty was imposed on

the bank, which, finally, was soled for a discounted price.

Riggs case shows the effectiveness of the Patriot Act anti-corruption provisions,

which require enhanced due diligence on private banking accounts opened and

maintained for non-US person. The Riggs case, however, indicates that enhanced

regulation of private banking accounts solves only the problem only if the client is

an individual. The incentives for a foreign senior corrupt official to open an

individual private banking account in the US are low, because kleptocrat can access

the US system in a less risky way. There are a lot of fancy tools for a kleptocrat to

hide its personality behind the veil of the network of complicated corporate

structures, which are usually created just to conceal the real owner of the funds. If

such a foreign corporation becomes a client of the US bank, the chances to reveal the

corrupted beneficial owner of the account dramatically go down. Next section of

this paper shows how foreign corrupt leaders may use the corporate entities to

laundry proceeds of corruption to the US.

4. Criminal Jurisdiction Over Foreign Kleptocrats

In 2004 a jury of San Francisco federal court convicted the former Prime

Minister of Ukraine for corrupted conduct, which occurred outside of the US

territory. The Patriot Act amended the US anti-money laundering statute by

including to the list of predicate crimes the “offense against a foreign nation

involving bribery of a public official, or the misappropriation, theft, or

embezzlement of public funds by or for the benefit of public official.”36 This provided

a green light for the US government to prosecute Pavlo Ivanovich Lazarenko, a

political leader from Eastern Europe. Lazarenko, during his service as a Prime

Minister of Ukraine, engaged in numerous business relationships37 requiring

businesses to pay fifty percent of their profits38 in exchange for providing favorable

conditions for the business. For example, Peter Kiritchenko, a founder of the

“Agrosnabsbyt” company dealing with agriculture and metals, transferred a fifty

percent interest of Agrosnabsbyt to the relative of Lazarenko and 50 percent profits

to the Lazarenko’s accounts39. “To do any kind of serious trade one needed

Lazarenko agreement”, - testified Kiritchenko40. As a result of such “business deals,”

Lazarenko consolidated millions of dollars, which he kept in foreign banks and

laundered across the world through off-shore accounts and shell companies. A

natural gas company “United Energy Systems of Ukraine”, which was entitled to

receive money from customers for gas delivery, transferred $140 million to Somolli,

a Cypriot company41. Somolli then transferred $97 million to Kiritchenko’s accounts

36 18 U.S.C § 1956

37 United States v. Lazarenko, 564 F.3d 1026, 4 (9th Cir. 2009)38 “Lazarenko worked with everyone “50-50”, meaning that he would control 50% of the business and take 50% of the profits.” 39 Lazarenko, 564 F.3d 1026, at 440 Id. 41 Id. at 7

in Switzerland, Poland and the USA.42 Subsequently, Kiritchenko transferred $120

millions to Lazarenko’s accounts in Switzerland and Antigua.43 Afterwards,

Lazarenko transferred 38 millions from these accounts to his account in the USA.44

As a result of these manipulations, Lazarenko deposited big stake of the proceeds of

his corrupted activities to his accounts at the US banks.

After falling out of the president Kutchma favor, Lazarenko left Ukraine and

was detained in New York JFK airport attempting to cross the US border with fake

documents. The US Government alleged that Lazarenko “misused his office to

generate tens of millions for himself at the expense of the Ukrainian people and then

sought to avail himself of the US banking system to safeguard his criminal

proceeds”45. Though the “misuse of office” occurred in Ukraine and violated

Ukrainian law, the jury charged Lazarenko with indictment of conspiracy, money

laundering, wire fraud, and interstate transportation of stolen property46.

“Lazarenko suggests a potentially powerful new tool to promote the rule of

law abroad”47, says Matthew J. Spence who alleges in his note that the US should

prosecute corrupt foreign leaders in the US courts48. The efficiency of this legal tool

in fighting foreign public corruption is doubtful though, because of the several

reasons.

42 Id. 43 Id. 44 Id. 45 US v. Lazarenko, SENTENCING MEMORANDUM; RESPONSE TO DEFENDANT’S SENTENCING MEMORANDUM, August 18, 2006 (available at http://www.justice.gov/usao/can/press/press_documents/Lazarenko%20Sentencing%20Memo.pdf)46 Lazarenko, 564 F.3d 1026, at 547 Mathew J. Spence, American Prosecutors as Democracy Promoters: Prosecuting Corrupt Foreign Officials in US courts, 114 Yale L.J. 1185, 118548 Ibid.

Firstly, to prosecute corrupt foreign officials, the US government shall find

grounds to establish jurisdictions over them. Generally, international law limits

jurisdiction of the sovereign state to its territory and its citizens49. Principles of

territoriality and nationality derive from the fundamental notion of “sovereignty”

embedded into the UN Charter, which states that UN “is based on the principle of

sovereign equity of all its members”. Therefore, nations have to respect authority

and interests of other nations. The international law, however, imposes different

limits on the state’s exercise of its jurisdiction depending on whether it is

“jurisdiction to enforce” or “jurisdiction to prescribe”50. “Jurisdiction to prescribe”

indicates state’s power to regulate conduct, relations, status or interests of persons

and things by enacting laws, regulations and rules. 51 “Jurisdiction to enforce”

(adjudicative jurisdiction) is ancillary to jurisdiction to prescribe52 and signifies

state’s authority to “compel compliance or impose sanctions for noncompliance

with its administrative or judicial orders”53. Restrictions also vary depending on

whether “adjudicative jurisdiction” is conducted within civil or criminal procedure54.

There must be satisfied two requirements for imposition adjudicative jurisdiction in

criminal cases: (1) a person should violate the US law, and (2) a person should be in

the court at the time the trial begins.55 Before exercising adjudicative jurisdiction,

the court has to prove that prescriptive jurisdiction exists.56 A state has jurisdiction

to prescribe laws within its territory with respect to the (1) conduct, that wholly or

49 Restatement (Third) of Foreign Relations Law, § 402 (1987)50 Restatement (Third) of the Law, § 6 (2010)51 Id. 52 Restatement (Third) of Foreign Relations Law, § 421 (1987)53 Restatement (Third) of the Law, § 6 (2010)54 Restatement (Third) of Foreign Relations Law, § 422 (1987)55 Id. 56 Restatement (Third) of the Law, § 6 (2010)

in substantial part takes place within its territory; or (2) the status of persons, or

interests in things, present within its territory”57;

In Lazarenko case court’s adjudicative jurisdiction derives from the state’s

“jurisdiction to prescribe” that foreign corruption is a predicate crime of money

laundering. The underlying crime occurred in Ukraine in violation of Ukrainian law,

but this crime was an essential part of the money laundering offense, which

involved transferring proceeds of corruption to the territory of US. Therefore, the

conduct, in substantial part, takes place in the US. The US has criminal jurisdiction

to prescribe law with respect to foreign corrupt public officials, which transfer

proceeds of their corrupted activities into, from or through the US. Criminal

adjudicative jurisdiction, however, permits the court to try a person only if he or she

is before the court at the time the trial begins. Lazarenko case is, in fact, a result of

political circumstances, which caused the former Ukrainian Prime Minister to

escape from Ukraine after derogating relationships with the president. Lazaranko’s

run from Ukraine with fake Panamian passport and his attempt to illegally cross the

US border provided ground for the US court to establish jurisdiction over the foreign

public official. Lazarenko was before the court the trial began. The US government,

however, has no authority to bring a foreign person to trial without his or her

presence Therefore, Lazarenko case, when foreign corrupt leader becomes

politically weak and escapes from his country, is rather an exception from general

rule. Normally, the US courts have no criminal subject-matter (adjudicative)

jurisdiction over foreign corrupt officials.

57 Restatement (Third) of Foreign Relations Law, § 402 (1987)

Secondly, Foreign Sovereign Immunities Act of 1976 protects sovereigns and

currently in power officials from judicial procedures in courts. To overcome the

sovereign immunity protection, the US government has to prove that the foreign

official violated international “jus cogens” law. Public corruption has not yet

emerged to the level of peremptory norms of international law, which create

universal jurisdiction over foreign individuals committed such acts as genocide,

slavery, piracy, crimes against humanity, etc.

Thirdly, the prosecution of corrupted public foreign officials within the US

jurisdiction is problematic because of lack of sources for evidence. Witnesses are usually

residing abroad and could be also public leaders protected by the sovereign immunity. In

Commodity Futures Trading Com’n v. Nahas, the district court issued an order to the

defendant, a Brazilian citizen residing in Brazil, to comply with the US subpoena, which

Brazilian citizen ignored. Subsequently, the court froze the assets of Brazilian citizen,

who appealed the decision for lack of subject matter jurisdiction. The court of appeal

vacated the orders ruling that a “service of process, within another sovereign’s territory,

violates international law”58. The US court would violate international law by issuing

subpoena on foreign citizens residing abroad to testify in the US. Foreigners are not

obliged to comply with the US subpoena, unless the bilateral cooperation with foreign

agencies and courts is established. Lazarenko’s investigation in the US lasted for years,

partly because Yuliya Tymoshenko, a leader of Ukrainian orange democratic revolution

and the Ukrainian Prime Minister in 2007 – 2010, was one of the main witnesses in the

case who was not willing to testify. The indictment of Lazarenko grounded mainly on

banking records and testimony of Kiritchenko, a business partner of Lazarenko, who

agreed to testify against the former Prime Minister of Ukraine.

58 Commodity Futures Trading Com’n v. Nahas, 738 F.2d 487, 494 (C.A.D.C. 1984)

These considerations approve the Blake Puckett’s statement that criminal prosecution

of foreign corrupt leaders in the US courts is not an efficient tool in fighting foreign

public corruption.59

5. Civil jurisdiction over foreign kleptocrats

Civil penalties could be the alternative solution to the criminal prosecution of

foreign corrupt leaders in the US. The major anti-money laundering and anti-

corruption provisions of the USA Patriot Act are extending extraterritorially the US

civil jurisdiction over foreign persons. International law imposes fewer restrictions

on the civil adjudicative jurisdiction than on the criminal; therefore, long-arm civil

provisions might be more efficient than long-arm criminal provisions.

The Patriot Act’s extraterritorial civil anti-corruption tools are embedded

mainly in three legal constructions: (1) imposition on jurisdictions, financial

institutions, or international transactions a regime of “primary money laundering

concern”;60 (2) extraterritorial subpoena;61 and (3) presumption that funds

deposited into an account at a foreign bank, which has correspondent relationships

with U.S. financial institution, shall be deemed to have been deposited into the

interbank account in the United States.62 The first tool has features of the special

economic sanctions against foreign institutions and jurisdictions, while other two

provisions allow the US government to obtain information from foreign financial

institutions and to forfeiture assets of foreign individuals deposited in foreign

banks. All three tools are provided in Title III of the Patriot Act, which is mainly

59 Blake Puckett, Clans And The Foreign Corrupt Practices Act: Individualized Corruption Prosecution in Situations of Systematic Corruption, 41 Geo. J. Int’l L. 815, 82560 107 P.L. 56, Title III, § 31161 107 P.L. 56, Title III, § 31962 107 P.L. 56, Title III, § 319

devoted to the international money laundering abatement and anti-terrorist

financing. The Patriot Act alleges that money laundering “provides the financial fuel

that permits transnational criminal enterprises to conduct and expand their

operations”63. Unlike FCPA, which focuses on the US corporations that bribe foreign

politically exposed persons (“PEP”) 64, the Patriot Act focuses on the US financial

institutions that facilitate laundering proceeds of foreign illicit activities, including

foreign public corruption. The Patriot Act alleges that foreign criminals are able to

access the US financial system through correspondent accounts, which the US banks

open and maintain for foreign banks65. Correspondent banking facilities create space

for foreign banks’ manipulations and money laundering by hiding identities and real

parties of interest to financial transactions66. Therefore, all three extraterritorial

anti-money laundering legal provision of the Patriot Act are based on the enhanced

regulation of correspondent banking. This paper, firstly, examines each of the long-

arm civil anti-money laundering tools, and then provides the detailed explanation of

the function of the correspondent banking, which is the core stone of anti-money

laundering extraterritoriality in the Patriot Act

A. Primary Money Laundering Concern: a Unilateral Economic Sanctions

Regime

The UN Charter permits its member-states to impose unmilitary measures when

Security Council determines the existence of threat to the peace, breach of the peace, or

act of aggression.67 The objective of these measures is to maintain or restore international

63 See 107 P.L. 56, Title III, § 302(b)(1)64 Politically exposed person65 See 107 P.L. 56, Title III, § 302(a)(2)66 107 P.L. 56, Title III, § 302(a)(6)67 United Nations Charter, Art. 39, 41

peace and security.68 These measures may include “complete or partial interruption of

economic relations”, in other words, - economic sanctions. While the UN Charter and

other international treaties provide the legal framework for multilateral economic

sanctions regime, the international customary law leaves space for jurisdictions to impose

unilateral economic sanctions.69 Unilateral economic sanctions could be divided into (1)

retortive measures, (2) counter measures and (3) punitive sanctions.70 The international

principles of proportionality, discrimination and necessity are governing the unilateral

economic sanctions.71 Firstly, before imposition of economic sanctions, a state has to

assess whether desired effect of the economic measure proportionally corresponds to the

required cost expenditure or potential cost losses.72 Secondly, the states has to be

reluctant in applying broad economic sanctions against totalitarian society, where

discriminating sanctions, like blocking assets of individuals and firms, could be more

efficient.73 Thirdly, economic measure should reasonably relate to its main objective.74

Economic sanctions are measures against the threats to certain internationally

recognized values or interests. It is a common practice for countries to impose economic

sanctions against jurisdictions or persons, which conduct acts of aggression, crimes

against humanity and human rights violations. The experience in taking economic

measures against jurisdictions or persons practicing corruption or conducting money

laundering is very low though and began in 2001 with FATF’s blacklisting of “non-

cooperative countries and territories”. In section below there will be analyzed the role of

FATF in developing the global anti-corruption regime. While FATF shows an example of

68 Id. art. 3969 Kern Alexander, Economic Sanctions: Law and Public Policy, 57 (Macmillan, 2009)70 Id. at 6071 Id. at 6472 Id.73 Id. 74 Id. at 65

multilateral sanctions against regimes involving money laundering and corruption, the

Patriot Act permits the US government to take unilateral “special measures” against

jurisdiction or institution “of primary money laundering concern”. In both situations, the

main objective of the sanctions is to prevent and fight money laundering, but this

indirectly effects corruption, which is one of the predicate crimes of money laundering.

Section 311 of the Patriot Act (“Section 311”) grants authority to the U.S. Secretary

of the Treasury (“Secretary”) to conclude, upon finding “reasonable grounds”, that a

foreign jurisdiction, institution, class of transactions, or type of account is “of primary

money laundering concern.”75 Such designation imposes on US financial institutions an

obligation to take certain “special measures” against the primary money laundering

concern.76 Factors, which should be considered by the government for defining a primary

money laundering concern, are different with respect to institutions and jurisdictions. In

finding “reasonable grounds” for a foreign jurisdiction, the Secretary must consider

potentially relevant jurisdictional factors, such as: (a) evidence that organized criminal

groups, international terrorists, or both, have transacted business in that jurisdiction; (b)

the extent to which that jurisdiction or financial institution operating in that jurisdiction

offer bank secrecy or special regulatory advantages to nonresidents or non-domiciliaries

of that jurisdiction; (c) the substance and quality of administration of the bank

supervisory and counter-money laundering laws of that jurisdiction; (d) the relationship

between the volume of financial transactions occurring in that jurisdiction and the size of

the economy of the jurisdictions; (e) the extent to which that jurisdiction is characterized

as an offshore banking or secrecy haven by credible international organizations or

multilateral expert groups; (f) whether the United States has mutual legal assistance treaty

75 107 P.L. 56, Title III, § 311(a)(a)(1)76 Id.

with that jurisdiction, and 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 (g) the extent to which that jurisdiction is

characterized by high levels of official or institutional corruption.77

In finding “reasonable grounds” to conclude that foreign institutions, transaction

or account is of primary money laundering concern, Secretary has to consider

institutional factors: (a) the extent to which such financial institution is used to facilitate

or promote money laundering in or through the jurisdiction (b) the extent to which it is

used for legitimate business purposes in the jurisdiction, and (c) extent to which such

finding is sufficient to ensure that the purposes of the Banking Secrecy Act continue to be

fulfilled, and to guard against international money laundering and other financial

crimes.78

When the Secretary deems a jurisdiction or institution to be of “primary money

laundering concern”, the Secretary imposes appropriate special measures, which will

adequately address the money laundering risks. Among five special measures provided

by Section 311, four require additional recordkeeping and information collection relating

to beneficial ownership, payable-through and correspondent accounts79. The most

stringent fifth measure prohibits all U.S. financial institutions from opening or

maintaining any correspondent or payable-through account for an institution defined to

be “of primary money laundering concern”80.

When selecting the appropriate measure, the Secretary has to balance the

following specific factors: (1) whether similar action has been or is being taken by other

77 107 P.L. 56, Title III, § 311(c)(2)(A)78 107 P.L. 56, Title III, § 311(c)(2)(B)79 107 P.L. 56, Title III, § 311(a)(b)80 107 P.L. 56, Title III, § 311(a)(b)(5)

nations or multilateral groups; (2) whether the imposition of a particular measure would

create a significant competitive disadvantage for U.S. financial institutions or would have

a significant adverse systematic impact on the international payment, clearance, and

settlement system, or on legitimate business activities involving the particular institution,

and (3) the effect of the action on U.S. national security and foreign policy. 81

A.1. Foreign Jurisdictions of Primary Money Laundering Concern

Since the Patriot Act’s enactment the U.S. government designated three

jurisdictions to be of primary money laundering concern: Ukraine, Nauru, and Burma82.

The US sanctioned the island of Nauru for providing licenses for offshore shell banks,

which have no physical presence anywhere in the world83. Burma appeared to be a

jurisdiction of primary money-laundering concern because it failed to establish effective

and enforceable anti-money laundering regulations, which could help the country to

overcome its status as a “haven for international drug trafficking”84. Financial Crimes

Enforcement Network (“FinCEN”)85 imposed the most stringent fifth special measure on

both Burma86 and Nauru87 prohibiting U.S. financial institutions from establishing,

maintaining, administering, or managing correspondent accounts for or on behalf of

financial institutions from these jurisdictions. The law enforcement requirement included

restrictions on “indirect correspondent accounts,” meaning that foreign banks have to

81 107 P.L. 56, Title III, § 311(a)(a)(4)(B)82 SECTION 311 - SPECIAL MEASURES, http://www.fincen.gov/statutes_regs/patriot/section311.html (Mar 30th, 2011)83 Notice of designation, 67 Fed.Reg 78859,78861 (Dec.26, 2002)84 Notice of proposed rulemaking, 68 Fed.Reg.66299,66300 (Nov.25, 2003)85 The authority of the Secretary of the Treasury under Section 311 of Patriot Act were delegated to the Director of FinCEN86 Final rule, 69 Fed.Reg. 19093 ,19097 (Apr. 12, 2004)87 Notice of proposed rulemaking, 68 Fed.Reg. 18917, 18921 (Apr.17, 2003)

avoid establishing any interbank accounts for Burmese and Nauru banks under the threat

to lose correspondent relationships with U.S. financial institutions.

The treatment, however, of Ukraine was different. “Ukraine suffers from widespread

corruption”, - begins the reasoning of FinCEN in finding88 Ukraine to be a jurisdiction of

primary money laundering concern. Additionally to the high level of corruption, the lack

of access to information regarding account holders, use of anonymous accounts, and no

legal requirement for domestic banks to identify beneficial owners caused Ukraine to be a

target of Patriot Act. Unlike Nauru and Burma, Ukraine has softer “record keeping” and

“information reporting” special measures. U.S. financial institutions were obligated to

identify and record the nominal or beneficial owners of accounts (1) being held by

anyone who has an address in Ukraine, or if (2) more than $ 50,000 was transferred from

the U.S. account into an account in the Ukraine, or vice-versa89. The US imposition of the

Patriot Act special measures against any foreign jurisdiction was positioned as part of an

international cooperation. It was in response to the FATF’s call to its members to take

additional countermeasures with respect to the blacklisted jurisdictions90. The factor of

taking similar measures by other nations or multinational groups seems to be crucial for

the US in designating jurisdictions to be of primary money laundering concern. The

withdrawal of Ukraine and Nauru from the FAFT blacklist of non-cooperative countries,

in 2003 and 2005, respectfully, was the core reason for the U.S. authorities to rescind91

designation of these jurisdictions to be of primary money laundering concern. FATF

excluded Ukraine and Nauru from the list of non-cooperative countries after they

88 Notice of proposed rulemaking, 67 Fed.Reg. 78859, 78862 (Dec.26, 2002)89 Id.90 FATF maintained the list of “non-cooperative countries and territories”91 Revocation of designation, 68 Fed.Reg 19071, 19071 (Apr. 17, 2003); 73 Fed.Reg 21178 – 21180 (Apr.18, 2008)

developed and adopted required anti-money laundering legislation. Burma remains the

only foreign country subject to Section 311 provisions.

A.2. Foreign Institutions of Primary Money Laundering Concern

FinCEN is more eager to impose special measures on foreign financial institutions,

rather than on jurisdictions. Since late 2001, thirteen banks from around the world

experienced the Patriot Act’s “long arm” jurisdiction. Unlike with respect to jurisdictions,

FinCEN designates institutions to be of “primary money laundering concern” without the

prior similar actions taken by other nations or multilateral groups. The story of Banco

Delta Asia, which is licensed in Macau - a special administrative region to China, shows

a good example of Section 311 potential effect on world’s affairs. In September 2005,

FinCEN publicly stated that for more than 20 years, Banco Delta Asia was providing

financial services for North Korean clients engaged in illicit activities92. Immediately

upon the US agency’s notice, approximately $40 million was withdrawn from deposit

accounts in Banko Delta Asia.93 In response to the U.S. allegations, Macau authorities

appointed an “administrative committee”, which temporally replaced the management of

the bank94. Macau government retained independent accounting firms to investigate bank

internal weaknesses regarding money-laundering accusations from U.S. authorities95. As

a result, over fifty North Korean accounts at the bank, including twenty accounts held by

the state-owned North Korean banks, were frozen. The big stake of frozen accounts

belonged to individuals and companies accused by the U.S. government for

counterfeiting U.S. currency and financing the production of weapons of mass

92 Notice of finding, 70 Fed.Reg 55214, 55215 (Sep. 20, 2005)93 Id. 94 Final rule, 72 Fed.Reg 12730, 12733 (Mar. 19, 2007)95 Id.

destruction. To protect its financial institutions from the U.S. sanctions, some foreign

jurisdictions responded similarly. China government froze the North Korean accounts at

the Bank of China’s Macau branch; Vietnam and Mongolia blocked banks in its

jurisdictions from doing business with North Korean entities96. At the same time,

following the US allegations, Macau government enacted a series of new regulations on

money laundering, broadening the scope of predicate crimes, and introduced more

stringent punishment for money laundering, enhancing requirements of recordkeeping

and suspicious transactions reporting97. Notwithstanding these developments, the US

Department of Treasury found that complete change of banks’ management and control

didn’t occur, leaving the risk for Banco Delta Asia to continue “egregious historical

practices”98. In 2007, the U.S. government issued the final rule99 imposing on Banco

Delta Asia the fifth special measure, which prohibits all U.S. financial institutions from

establishing or maintaining correspondent accounts for the targeted institution “This had

an effect of ordering all banks in the world to block any US dollar accounts they held

with Banco Delta Asia.”100. The North Korean economy faced a tremendous challenge as

its institutions, either for licit or illicit transactions, couldn’t obtain US dollar accounts

from any bank in the world, because of the burden of reputational risk, which foreign

banks were not ready to face. Imposition of Section 311 special measure on Macau bank

was part of international economic pressure, which caused North Korea to stop its nuclear

weapon development and allow foreign inspections101.

96 Kern Alexander, Economic Sanctions, Law and Public Policy, supra, at 295 – 29697 Final rule, 72 Fed.Reg 12730, 12732 (Mar. 19, 2007)98 See Id. at 12734 99 Id. 100 Kern Alexander, Economic Sanctions, Law and Public Policy, supra, at 295 – 299 101 Id.

Recent example of imposing Patriot Act’s special measures on foreign institution is

designation of the Lebanese Canadian Bank (LCB) as institution “of primary money

laundering concern”. On February 17, 2011, the US Department of the Treasury issued a

notice with intent to designate LCB as a financial institution of primary money

laundering concern102 and impose on it a fifth special measure103, which prohibits US

banks to establish or maintain, directly or indirectly, correspondent accounts for LCB.

FinCEN broadened its definition of LCB to all its branches, offices and subsidiaries

operating in Lebanon or any other jurisdiction.104 This includes, but is not limited to, LCB

Investments (Holding) SAL, LCB Finance SAL, LSB Estates SAL, LCB Insurance

Brokerage House SAL, Dubai-based Tabadul for Shares and Bonds LLC, and Prime

Bank Limited in Gambia105. FinCEN requires all US financial institutions to review their

account records and to ensure that no accounts are maintained for the LCB. Moreover,

the US financial institutions have to imply special due-diligence action by notifying its

correspondent account holders that they may not provide services to LCB, which are

conducted through correspondent relationships with the US financial institution. Few

days after the notice of intent appeared at FinCEN webpage, mass media announced that

LCB, which is the eighth biggest bank in Lebanon, would be sold106. This is likely to

happen, because the fifth special measure imposed by US has the same effect as ordering

to all banks in the world to rescind their correspondent relationships with LCB. As the

Banko Delta Asia case shows, to overcome the burden of “primary money laundering

concern” designation, the change of control over target financial institution has to occur.

102 Notice of finding, 76 Fed.Reg. 9403 , (Feb.17, 2011)103 Notice of proposed rulemaking, 76 Fed.Reg. 9268, (proposed Feb. 17, 2011)104 Id. at 9270105 Id.106 Mariam Karouny, Lebanese bank for sale after U.S. laundering claim, http://www.reuters.com/article/2011/03/03/lebanon-bank-idUSLDE7221KS20110303 (March 3, 2011)

The US Government accused LCB for facilitating money laundering of proceeds from

international drug trafficking, and for connection of bank managers to Hizbollah officials

outside the Lebanon107.

5.B. Extraterritorial Subpoena

Section 319 of the Patriot Act (“Section 319”) provides legal tools for the US

government to obtain confidential information about the funds deposited offshore. 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, including

records maintained outside of the United States relating to the deposit of funds into the

foreign bank”108. This means that the US government empowered US law enforcement

agencies to get information regarding records about customers of the largest banks of any

jurisdiction in the world. Within seven days of receiving a written request, the US bank

must obtain the requested information from the foreign bank109. If the foreign bank fails

to comply with the subpoena, the Government obliges the US bank to terminate

correspondent relationships. Failure to do so results in a civil penalty of up to $10 000 per

day.110 Such provisions of the Patriot Act hide potential conflict of laws, when a foreign

bank in order to comply with the US regulation will have to violate domestic bank

secrecy laws. A fear of loosing a correspondent account with an US financial institution

caused banks in some countries to protect themselves through adding special disclosure

clauses into the contracts with customers. David Chaikin conducted a survey of standard

107 Notice of finding, 76 Fed.Reg. 9405, (Feb.17, 2011)108 107 P.L. 56, Title III, § 319(b)(k)(3)(A)(i)109 107 P.L. 56, Title III, § 319(b)(k)(3)(B)110 107 P.L. 56, Title III, § 319(b)(k)(3)(C)

contract terms changed by Australian banks in light of the Patriot Act’s long-arm

provisions111. He concluded that there is a trend among banks in Australia to embed

clauses that “expressly permit disclosure of confidential information to foreign authorities

for anti-money laundering purposes”112. For example, an Australian Macquarie Bank

states in bank-customer contract that it “may in absolute discretion, with or without

notice to you, disclose or otherwise report the details of any transaction or activity, or

proposed transaction or activity in relation to [your account] (including any personal

information) to any reporting body authorized to accept reports under any laws relating to

the AML/CTF Act applicable in Australia or elsewhere113”.

Long-arm provisions of the Patriot Act regarding obtaining information about

foreign banks’ records bear the high potential for causing international conflict of laws

that had actually happened in the SWIFT case.

In June 2006, a series of press114 reports uncovered the US access to the records

maintained by the SWIFT115, which facilitates the majority of world’s international

banking transactions. Office of Foreign Assets Control of the US Department of Treasury

(“OFAC”) for the purpose of terrorism investigation issued subpoena on wire transfers

data held on the SWIFT’s US server. SWIFT compliance with the subpoena triggered the

negative reaction of the European Union community, which claimed that SWIFT data

had to be protected according to the EU Data Protection Directive 95/46/E ("the

Directive")116. The Directive restricts transfer of personal data to the third parties, unless 111 David Chaikin, A Critical Examination of How Contract Law Is Used by Financial Institutions Operating In Multiple Jurisdictions, 34 Melbourne U.L.R. 34, 47 (2010)112 Id. at 50113 Id. 114 Glenn R. Simpson, Treasury Tracks Financial Data In Secret Program, The WallStreet Journal,June 23, 2006 Friday115 Society for Worldwide Interbank Financial Telecommunication116 EUROPE'S PRIVACY COMMISSIONERS RULE AGAINST SWIFT, https://www.privacyinternational.org/article/europes-privacy-commissioners-rule-against-swift (November 24, 2006)

the adequate level of protection is granted.117 The EU started negotiating the EU-US

SWIFT data protections agreement, which would limit the scope of the US access to the

wire transfers information and would protect privacy rights of the EU citizens

transferring funds through SWIFT system. After the process of lengthy negotiations, the

European Parliament approved in summer of 2010 the final Agreement on the Terrorist

Financing Tracking Program (TFTP) between the European Union and the United

States118. This agreement “respects the right balance between the need to guarantee the

security of citizens against the threat of terrorism and the need to guarantee their

fundamental rights and civil liberties”, commented José Manuel Barroso, the European

Commission President.119 The EU signed the treaty with intention to develop its own data

procession system120 similar to the US terrorist financing trafficking program121, which

provides legal tools to identify proceeds of illicit activities.

SWIFT case shows the unilateral attempts by the US to access foreign financial

records violate the principle of territoriality in international jurisdiction. The US didn’t

have adjudicative jurisdiction to subpoena foreign entities, which reside abroad and have

very limited connections to the US territory. Therefore, the US unilateral actions to track

foreign banking records should be replaced by the multilateral cooperation with other

strong jurisdictions. This is particularly important, because the EU has well-developed

117 EU Data Protection Directive 95/46/E, Chapter IV118 European Union Delegation to the US, EUROPEAN COMMISSION WELCOMES EUROPEAN PARLIAMENT'S APPROVAL OF THE AGREEMENT ON THE TERRORIST FINANCING PROGRAM (TFTP), http://www.eurunion.org/eu/2010-News-Releases/EUROPEAN-COMMISSION-WELCOMES-EUROPEAN-PARLIAMENT-S-APPROVAL-OF-THE-AGREEMENT-ON-THE-TERRORIST-FINANCING-PROGRAM-TFTP.html (July 8, 2010)119 European Union Delegation to the US, supra120 EU-US SWIFT Data Transfer Agreement Passes European Parliament Vote, http://news.softpedia.com/news/SWIFT-Data-Transfer-Agreement-with-US-Passes-European-Parliament-146985.shtml (accessed April 22, 2011)121 US Department of Treasury, Terrorist Finance Tracking Program (TFTP) http://www.treasury.gov/resource-center/terrorist-illicit-finance/Terrorist-Finance-Tracking/Pages/tftp.aspx (accessed April 22, 2011)

experience in adopting preventive measures against extraterritorial reach of the US law.122

The European Commission’s regulation imposes countermeasures against extraterritorial

foreign acts and requires residents of the EU to inform the Commission about any cases

when their economic and/or financial interests are affected, directly or indirectly, by the

extraterritorial implementation of foreign jurisdiction123. Implementation of the USA

Patriot Act’s long-arm provisions, especially its “deeming language” of interbank

accounts assets forfeiture and regime “of primary money laundering concern”, poses the

high risk of triggering countermeasures from the EU. This diminishes the Patriot Act’s

efficiency in detecting and fighting money laundering at financial institutions and

jurisdictions from the European Union.

Example of the EU-US SWIFT agreement confirms that in any extraterritorial legal

act there has to be the right balance between protection of basic human rights and public

interest, like between the privacy rights and need to fight terrorism, or between the

ownership rights and need to fight terrorism. The US has very poor standing to convince

the EU to implement similar to the Patriot Act’s long-arm legal tools for fighting money

laundering though this could develop an effective global anti-money laundering regime.

The reason is that the official Patriot Act’s goal is to prevent and detect terrorism.

Terrorism, however, involves very small percentage of the illicit financial flows,

conversely to the public corruption, which causes laundering of billions of dollars to the

world financial centres. Illicitly gained funds flow from the developing world that

enhances poverty and deprives billions of people worldwide from basic human needs and

human rights.

122 In response to the unilateral economic US sanctions against Cuba, Iran and Lybia, the EU adopted regulation protecting its members against the effects of extraterritorial application of legislation adopted by a third country; See: Council Regulation (EC) No 2271/96 of 22 November 1996123 Council Regulation (EC) No 2271/96, art. 2

5.C.“Deeming” Language of Assets Forfeiture

Forfeiture the proceeds of illicit activities deprives criminals from illegally gained

profits and reduces incentives to commit money laundering. The UN Convention against

Transnational Organized Crime (1999) and the UN Convention Against Illicit Traffic in

Narcotic Drugs and Psychotropic Substances (“Vienna Convention”, 1988) provided a

legal framework for international assistance in seizure and forfeiture of illegally obtained

assets. With enactment of the UN Convention Against Corruption (2005), there was

recognized the need of international cooperation in freezing, seizure and forfeiture the

proceeds of corruption.124 The US, however, established the long-arm jurisdiction for

forfeiture proceeds of illicit activities without the requirement of international assistance.

The most drastic long-arm provisions of the Patriot Act permit the US authorities to

seize, arrest and forfeit funds at the correspondent accounts even if these funds are not the

direct proceeds of illegal activities. Section 319 states that “if funds deposited into an

account at a foreign bank, and that foreign bank has an interbank account in the United

States with covered financial institution, the funds shall be deemed to have been

deposited into the interbank account in the United States”. In real life, this means that if a

foreign citizen abroad deposited funds at the account of a foreign bank, which has a

correspondent relationship with US financial institutions, US authorities may forfeit these

funds. To grant extraterritorial jurisdiction to the US government, Congress emphasized

that “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 bank125”.

124 UN Convention Against Corruption, Art. 31125 107 P.L. 56, Title III, § 319(a)(k)(1)(B)(2)

The Patriot Act’s Long-arm forfeiture provisions were first challenged in the

United States v. Union Bank.126 In that case, the US government seized over $2.8 million

from a correspondent account held by Union Bank (Jordan) at the Bank of New York.

The seized funds corresponded to the value of 124 cashier’s checks deposited at Union

Bank in Jordan. US authorities claimed that the checks were the proceeds of Canadian

telemarketing fraud conspiracy, which victimized eighty Americans, and therefore were

forfeitable. The United States appealed the decision of the district court, which found

that Union Bank was the owner of some portion of the seized funds and, therefore, was

eligible to contest the assets seizure. Union Bank contested the seizure claiming to be an

“innocent owner” of the seized funds. Analyzing the intent of the Congress in Section

319 to treat foreign deposit as domestic one, a court stated: “once the cashier’s checks

were deposited into accounts at Union Bank (Jordan), those checks were deemed to have

been deposited into the interbank account of Union Bank in the United States”127. This

“deeming language” leaves no legal standing for foreign banks to contest the forfeiture of

the funds at their correspondent accounts on the ground of an innocent owner defense,

that forbids civil forfeiture of assets if the owner “did not know of the conduct giving rise

to forfeiture”128. Moreover, the Union Bank case excludes the possibility for foreign

banks to use Constitutional protection of excessive fine under the Eighth Amendment,

which prohibits government from imposing cruel and unusual punishment. The court

found that civil forfeiture of funds at interbank account is not a punitive action against the

Union Bank129. Lack of recourse is not an issue for the US government, which urges

foreign banks to “protect themselves by contract” or other means, giving the foreign

126 United States v. Union Bank, 487 F.3d 8, (1st Cir. 2007)127 Id. at 23128 18 U.S.C. § 983(d)

129 Union Bank, 487 F.3d 8 at 2

depositor incentive to appear in a US court and assert the innocent owner defense of the

forfeiture130. Therefore, banks are likely to find the contractual way of shifting

responsibility for possible assets loss onto its customers.

In the US legal system, the forfeiture of proceeds of criminal activity can be civil,

criminal or administrative. In criminal forfeiture, “in personam” action is taken against a

convicted person as part of the sentence in a criminal case. In a civil case “in rem”

forfeiture government attacks property and the prior indictment is not required. Both

actions, unlike in administrative forfeiture, require judicial order. Ownership shift in

interbank accounts is a legal fiction131 embedded into the US civil forfeiture statute. It

means that the government has to prove that funds deposited in a foreign bank, which has

correspondent relationships with US financial institutions are derived or were used to

commit a crime. The burden of proof in civil forfeiture is comparatively light meaning

that government initially has to show probable cause, The probable cause can be shown

by proving reasonable belief that funds were “involved in” a transaction or attempted

transaction in violation of money laundering statutes132. When probable cause exists,

which is less then prima facie showing, but more than mere suspicion, the burden of

proof shifts to the owner of the funds.133.

The process of civil forfeiture starts with funds seizure pursuant to a court warrant. To

convert property from seizure to forfeiture, the government has 60 days to send notice of

seizure to all interested parties, and if no one challenges the forfeiture within 30 days,

title of funds will be transferred to the government automatically by default. This is

130 Id. at 28131 Todd Barnet, Legal Fiction And Forfeiture: A Historical Analysis of The Civil Asset Forfeiture Reform Act, 40 Duq. L. Rev. 77, (2001)132 George Chamberlin, What Is Considered Property Involved In Money Laundering Offense…, 135 A.L.R. Fed. 367, (2010)133 Id. at 2b

imperative as every individual or entity from any country in the world can be subject to

the US jurisdiction because of the Patriot Act “deeming language”.

Ownership shift, described above, occurs strictly for the purposes of the

governmental forfeiture of the proceeds of illicit activities. Tamam v. Fransabank134

shows that “deeming language” granting long-arm jurisdiction over foreign persons,

doesn’t apply in the tort cases. In Tamam, Israeli citizens sued five Lebanese banks for

providing financial services for Hizbullah-related organizations. The Israeli plaintiffs

were injured in attacks conducted by Hizbullah, a Lebanese terrorist organization, in

2006. Though all factual circumstances occurred outside of the US and all victims were

non-US citizens, Israeli filed a claim in US under the Alien Torts Claim Act. Plaintiffs

alleged that court has to establish personal jurisdiction over the Lebanese banks, which

maintained the bank accounts for Hizbullah front groups. The only connection of the

Lebanese bank to the US was its correspondent banking with US financial institutions.

New York court dismissed the claim because plaintiffs didn’t prove that use of

correspondent account was “at very root of the action” which caused the injuries135. The

court dismissed the Israeli claim because maintaining or establishing a correspondent

banking account is not enough to subject a foreign bank to personal jurisdiction. On the

other hand, for the purposes of forfeiture, which is an action of government and has

government interests, personal jurisdiction over foreign financial institutions and

individuals derives merely from maintaining the correspondent relationships between

banks. It means that only the governmental enforcement action can trigger ownership

shift of funds deposited in interbank accounts. For purposes of fighting terrorism and

money laundering the US Congress made an exception from the basic principles of the

134 Tamam v. Fransabank, 677 F. Supp. 2d 720 (N.Y.S.D. 2010)135 Id. at 20

property law. Attempt to challenge the “deeming language” of assets forfeiture failed,

when Trans Union, a foreign institution, tried to contest in the US court the seizure of

funds in its correspondent account in the US. There is, however, likelihood, that strong

foreign jurisdiction, like the EU, could impose countermeasures against the US for illegal

seizure of foreign national’s property. Therefore, it is essential for the US government to

initiate cooperation with other developed countries regarding forfeiture of proceeds of

illicit activities at correspondent accounts. This paper discusses below the possible

outcomes of such kind of cooperation, but, firstly, the detailed explanation of

correspondent banking relationships is required. Patriot Act’s anti-money laundering

provisions are mainly grounded on the issue of the “correspondent account”, which is a

legal basis for the US to extend prescriptive and adjudicative jurisdiction on the foreign

persons.

6. Correspondent Banking: Invisible International Journey of Money

In previous sections this paper analyzed the forfeiture of Union Bank’s assets from

its correspondent account maintained by the US bank. To understand precisely the legal

nature of this case, it is necessary to track to journey of money. The US government

claimed that forfeited funds were the proceeds of fraud scheme, which victimized

American citizens. Perpetrators convinced American individuals to send the cashier’s

checks to Montreal in exchange of promise to obtain profits from the lottery.136 The

perpetrators then sold the checks to the restaurant owner in Montreal, who, in turn, sold

them to the Israeli citizen. Finally, the checks were sold to the money changer in

Jerusalem, who subsequently, sold them to Mohammed Ghaleb Esseileh. Esseileh was

operating a money exchange business and deposited all checks into his and his business

accounts at the Union Bank in Jerusalem. Upon receiving the checks deposits the Union

136 Id. at 7

Bank transmitted them to its correspondent banking account in New York, which then

presented the checks to the issuing bank. So, finally checks arrived back to the US,

providing a link to the US territory and allowing the US government to forfeiture funds.

Basically, the similar link to the US territory can be found regarding almost every

international transfer in the US currency.

Let’s assume, that the Union Bank was exercising a wire transfer in US currency

from the account of Mr. Smith, a Jordanian citizen, to the banking account of his wife,

Mrs. Smith, in Ukraine (Ukrainian bank). The process of transferring money ends up in

changing records in credit and debit accounts at the ledgers of Union Bank and Ukrainian

bank. In order to execute these changes banks have to (a) find a secure way for

interbank communication; and (b) to establish reciprocal accounts with each other.

Additionally, when the international transfer is in US dollars, banks must obtain US

currency reserve in order to clear the transaction. To do that, banks use the correspondent

banking, when one bank (correspondent) provides banking services for another bank

(beneficiary)137. A big part of international business is conducted in the US dollars and

some countries have a dollarized economy, thus foreign banks need a constant access to

the US currency. To satisfy its commercial needs in the US currency, foreign banks may

open a branch in the US, or establish its subsidiary, a separate legal entity within US

jurisdiction.138 Through correspondent relationships with American banks, foreign banks

can access the US dollars without costly physical presence in the US. By opening a

correspondent account within an existing US financial institution, a foreign bank can

provide its clients with a wide range of services available at the US correspondent bank,

137 United States. Cong. Senate. Permanent Subcommittee on Investigations, Report on Correspondent Banking: A Gateway for Money Laundering, 107th Cong., 1st sess. Comm. Print, 2001 138 Id.

including quick clearing of international transactions in US dollars.139 World financial

centers like New York, London, Dubai, and Hong-Kong have dozens of banks, which

provide mainly correspondent services for foreign banks. Usually, every bank willing to

engage in international business maintains correspondent accounts with several banks

worldwide.140 An alternative way for smaller banks to get access to the US currency is to

establish correspondent relationships with a domestic bank, which maintains an account

in the US.

For the purposes of interbank communication and facilitation movements of funds

across countries, bankers developed electronic international funds transfer systems..

SWIFT (Society of Worldwide Interbank Financial Telecommunication) is the most

popular international funds transfer system, which in 2010 was providing services for

more than 9,000 financial institutions from 209 countries and territories.141 SWIFT, a

privately owned corporation headquartered in Belgium142, sends daily millions of

standardized financial messages. In the US, banks can also use CHIPS (Clearing House

Interbank Payment System) and Fedwire (Federal Reserve Wire Network) for

international transactions.143 Unlike SWIFT and CHIPS, Fedwire, is a governmental

entity. 144

Mechanically, the journey of Smith’s money can have four possible routes. Under

the first scenario, the Union Bank receives payment order #1 from Mr. Smith and

transmits via SWIFT payment order #2 to its bank-correspondent in the US (US 1),

139 Id.140 Id. at 12141SWIFT, Company Information, http://www.swift.com/about_swift/company_information/index.page (accessed March 30, 2011) 142 Supra.143 Principles of payment systems / by James J. White, Robert S. Summers; St. Paul, Minn.: Thomson/West, c2008; §7-1 at pg. 379144 Id.

which immediately issues and sends payment order #3 via CHIPS to the New York

Clearing House145, or via Fedwire to the Federal Reserve Bank of New York146. From the

US clearing system, payment order #4 is transferred to the Ukrainian bank correspondent

in the US (US 2). Finally, the US correspondent of Ukrainian bank issues and sends

payment order #5 via SWIFT to Mrs. Smith’s account in Ukraine. The process of

transferring money from Jordan to Ukraine engages four banks from three different

jurisdictions.

It looks like:

Mr. Smith Union Bank US 1 Clearing House or Federal Reserve US 2 Ukrainian bank

Under the second scenario, assume that both Union Bank and Ukrainian bank have the

same US correspondent. The journey of funds will follow a different route:

Mr.Smith Union Bank US correspondent Ukrainian bank

International transactions in the US dollars can also be cleared outside of the US

financial system. Under the third and fourth possible scenario, both Union Bank and

Ukrainian bank obtain access to the US dollars through Eurodollar deposit at a non-US

bank, which has a US bank-correspondent. Eurodollar is a term coined during the Cold

War,147 when demand for US dollars raised in Europe, and big European banks started to

provide deposits in US dollars for other banks148. Assume, that Union Bank and

Ukrainian bank have deposits in Eurodollars through correspondent relationships with

banks in London. In this case, dollar transfers won’t reach the US jurisdiction and will

not be reflected in the ledger books of any US financial institutions. The London bank,

145 Id. at 381146 Id.147 Corinne R. Rutzke, The Libyan Asset Freeze and Its Application to Foreign Government Deposits in Overseas Branches of United States Banks, AM. U.J. INT’L L. & POL’Y 242, 252 (1988)148 Ibid. 254

however, will have to cover dollar claims from foreign banks through maintaining a

correspondent account with the US bank. The journey of your inheritance will look like:

Mr. Smith Union Bank London correspondent1 the UK clearing institution-> London correspondent 2 Ukrainian bank

Under the forth scenario, the Union Bank and Ukrainian bank both have the US

dollar deposit accounts at the same bank in London. No national clearing system is

involved in the transaction, which entirely occurs within London bank internal system:

Mr. Smith Union Bank London correspondent Ukrainian bank

The journey of Mr. Smith’s money from Union Bank to Ukraine is, in fact, a series

of book record changes in ledgers of banks from different jurisdictions, which

communicate with each other through secure international funds transfer systems. This

change of records creates a link of funds deposited in foreign banks to the US territory,

where bank-correspondent resides.

7. The Patriot Act in The Global Fight Against Public Corruption

The Patriot Act’s long-arm provisions emerge as an alternative to criminally

punishing foreign kleptocrats by simply freezing their illicit funds and blocking ways for

concealment the proceeds of corruption. The US practice in fighting terrorism through

enhanced regulation of correspondent interbank accounts could become a successful

international legal tool in fighting public corruption. Yet, there are two obstacles to make

it happen: (1) the US government should statutory acknowledge the nexus between public

corruption and money laundering as it did with the link between terrorism and money

laundering, and (2) cooperation between the EU and US in fighting public corruption

should be negotiated with FATF assistance. There is a good moment for the US to

overcome these obstacles.

Under pressure from international experts and outstanding critique of its efficiency

by think tanks,149 FATF officially acknowledged the link between corruption and money

laundering. FAFT Recommendations, last updated in 2003, provided international

standards causing adoption of anti-money laundering legislature in all jurisdictions.

Countries with lack of anti-money laundering regulation were blacklisted in FATF list of

“non-cooperative countries and territories”. Though FATF doesn’t have legal

enforcement powers, this action had a powerful effect on blacklisted governments, which

under threat of losing international business relations had to develop AML regulations. In

2010, FATF issued a reference guide150 on the use of its Recommendations in the fight

against corruption where it emphasized the important role of anti-money laundering and

counter-terrorist financing measures in combating corruption. In February 2011 the

experts meeting, hosted by FATF, outlined the organization’s further priorities, which

will be focused on intersections between anti-money laundering and anti-corruption

regimes151. FATF started to review its recommendations; moreover, it is maintaining the

list of high-risk jurisdictions, which have problems of complying with FATF standards152.

FATF is seeking the tools to improve the preventive measures, assets recovery and

mutual legal assistance practices regarding laundering the proceeds of corrupt activities.

Patriot Act’s long-arm jurisdiction provisions introduce possible solutions for all three

149 Global Witness, Undue Diligence, supra, at 106 - 111150 FATF, A Reference Guide and Information Note on the Use of the FATF Recommendations to Support the Fight Against Corruption, http://www.fatf-gafi.org/dataoecd/59/44/46252454.pdf (April 15th, 2011)151 FATF, President's Summary of Outcomes from the FATF Experts' Meeting on Corruption, http://www.fatf-gafi.org/document/46/0,3746,en_32250379_32235720_47219438_1_1_1_1,00.html (April 15th, 2011)152FATF, Improving Global AML/CFT Compliance: update on-going process, http://www.fatf-gafi.org/document/49/0,3746,en_32250379_32236992_47221809_1_1_1_1,00.html (accessed April 16th, 2011)

challenges FAFT is facing. The paper below mainly alleges that US Government could

be more efficient in fighting foreign public corruption by enhancing cooperation with

foreign jurisdictions. Then it outlines suggestions for FATF to improve global anti-

corruption regime by using the practice of Patriot Act’s long-arm provisions. The detailed

discussion of these suggestions will be the subject of the dissertation, which the author of

the paper is going to write during the next 5 years.

7.1. Preventive Measures and Extraterritorial Subpoena

Access to wire transfers information is an essential condition for detecting proceeds

of grand corruption. The US has good practice in accessing to the bank records for the

purpose of tracking the proceeds of illicit activities. The US Bank Secrecy Act requires

the US financial institutions to file suspicious transaction reports, which include reports

about any transfer of deposit of more that $10,000. 153 Transaction is deemed suspicious

if it involves the funds of senior foreign public officials. FATF is currently working to

improve its Recommendation 6, which requires countries to conduct enhanced due

diligence concerning PEPs. To strengthen this standard FATF could maintain the lists of

PEPs from every jurisdiction similarly to the list of terrorists and terrorist associated

organizations.

Banks usually exercise due diligence to ascertain whether their clients are not

terrorists, but banks are not eager conduct the same due diligence with respect to the

PEPs. The example of failure to identify its client and the source of funds deposited is the

story about the son of President of Congo. “Record of terrorists checked”,- eloquently

states the Bank of East Asia stamp at Denis Christel Sassou Nguesso’s credit card bill154.

153 31 U.S.C. § 1051

154 Global Witness, Undue Diligence, supra, at 57

Nguesso, the son of the corrupted president of the Republic of Congo, who also happened

to be the head of the public government agency selling Congo’s oil, withdrew $35,313.36

from the account of his offshore company to satisfy his luxurious personal shopping

needs155. Hong Kong bank allowed the transaction after verifying that Nguesso was not a

terrorist, but it didn’t check him with PEPs records. This information became public mere

accidently156, but the case illustrates the need to establish PEPs filters in the banks

similarly to terrorist filters. Such internal controls might be difficult to implement at

financial institutions from developing countries, where corrupted public officials oppose

to the transparency of their financial activities, but the “long-arm jurisdiction” example of

the Patriot Act’s Section 319 could be helpful. Strong jurisdictions like the EU could

subpoena almost any bank in the world to provide records of PEPs through strengthening

the due diligence regulations of its domestic banks. For example, the EU and the US

could instruct domestic financial institutions to request their correspondent foreign banks

to provide payment records involving name of Mr. Nguesso and his offshore

corporations. Extraterritorial subpoenaing will encourage the EU countries to revise PEP

filters within banks of their jurisdiction. This could reveal the defects of the EU financial

system following the example of the US, when Congressional investigation on

enforcement and effectiveness of the Patriot Act revealed the practices of tie relationships

between big US banks and foreign corrupted officials157.

7.2. Assets Forfeiture

155 Supra, at 55156 Supra, at 59157 Committee on Governmental Affairs. Money laundering and Foreign Corruption: Enforcement and Effectiveness of The Patriot Act. Hearing. July 15, 2004. 108th Cong., supra at 1-6

FATF emphasizes the importance of effective laws and procedures to freeze, seize

and confiscate the proceeds of corruption and laundered assets158. By depriving corrupt

officials from stolen property, regulators diminish incentives for kleptocrats to conduct

crimes for illicit personal enrichment. The warning example of failure to forfeiture the

proceeds of grand corruption is the story of Riggs bank, which was holding $700 million

for Equatorial Guinea’s president, his family and high governmental officials. While

Equatorial Guinea is Africa’s third largest oil exporter, its population lives in poverty,

because the countries natural wealth is captured and controlled by the corrupted

government. After congressional investigation revealed to the public that Riggs

facilitated laundering funds for kleptocrats, the bank transferred Equatorial Guinea

money from its accounts159. The tie with foreign corrupted PEPs caused big problems for

Riggs, which finally had to pay huge fines and was sold for a discount. On the other

hand, Riggs meltdown didn’t deprive president Obiang’s family from illicitly gained

assets. There is evidence160 that $700 million was placed around the world settling in

HSBC Luxemburg, HSBC Spanish, branch Barklays in Paris and other banks. All these

banks have connection to the US financial system through correspondent relationships.

Therefore, US could use power under the Patriot Act Section 319 and order American

correspondent banks to get from its foreign beneficiaries the records associated with the

Equatorial Guinea’s PEPs. When the US would get the records revealing information

about deposits at Obiang’s accounts, Department of Treasury could have used the power

to seizure these funds, which “shall be deemed to have been deposited at the interbank

account” with the US financial institution. This would force the foreign bank to seek for

158 FATF, A Reference Guide and Information Note on the Use of the FATF Recommendations to Support the Fight Against Corruption, supra at 8159 Global Witness, Undue Diligence, supra, at 49-66160 Supra

recourse from its corrupted client by freezing his accounts and encouraging him to

challenge the civil forfeiture in the US court, as court advised in the United States v. Bank

Union. The US government, however, should consider that if the Patriot Act’s “long-

arm” reaches financial institutions of strong jurisdiction like the EU, there is a risk of

imposing countermeasures by the EU against US extraterritorial jurisdiction. This threat

reduces the likelihood of imposition of the Patriot Act’s “deeming language” of assets

forfeiture on the financial institutions from developed countries. Additionally, the Patriot

Act’s obesity with terrorism financing leaves too small a room to impose long-arm

jurisdiction over proceeds of foreign public corruption. It is even difficult to obtain the

PEPs account records from the foreign affiliates of the US banks. There was an attempt to

subpoena HSBC USA to reveal information about accounts opened for Obiang’s family

in HSBC affiliates in Spain, Luxemburg and Cyprus, but bank secrecy laws of the EU

jurisdictions “barred disclosure of information”161. Section 319 of the Patriot Act requires

an US bank to terminate correspondent relationships if a foreign bank doesn’t comply

with the subpoena, but this didn’t happen in the HSBC case. This indicates the need to

develop bilateral EU-US agreement regarding detection and forfeiture of the proceeds of

grand corruption, which could enhance the EU regulation of interbank accounts and adapt

for anti-corruption purposes the Patriot Act’s long-arm legal tools against terrorism

finance.

7.3. Regime of Primary Money Laundering Concern

The high efficacy of imposing special measures on jurisdiction and institutions

designated by the US government to be “of primary money laundering concern” provides

examples for FATF to improve its blacklisting strategy. Countries with lack of AML

161 Global Witness, Undue Diligence, supra, at 35

regulation were blacklisted between 2000 and 2007 in FATF list of “non-cooperative

countries and territories”. Though FATF doesn’t have legal enforcement powers, this

action had a powerful effect on blacklisted governments, which under threat of losing

international business relations had to develop anti-money laundering regulations. In light

of its efforts to adapt anti-money laundering standards for fight against corruption, FATF

could develop the list of jurisdictions “of primary ground corruption”. Transparency

International index rating of corruption perception will be helpful for designating

jurisdictions “of primary ground corruption”. By blacklisting jurisdiction of grand

corruption, FATF would bring a green light for its members to impose restrictive

measures against blacklisted countries. For example, the US could impose the fifth

special measure forbidding its financial institutions to provide correspondent banking

services for banks from jurisdictions “of primary ground corruption”. The similar

reaction from the EU could deprive blacklisted countries from access to the Euro and the

US dollar and cause its isolation from the international business. Kleptocracts would

loose the means to launder kickback and bribes, but will get incentive to raise the

transparency in governance declining the level of corruption.