Responding to Money Laundering

Ernesto Savona

• Publisher: Routledge
• Year: 2005
• ISBN:
  9781135299194
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Responding to Money Laundering has its origin in the International Conference on Preventing and Controlling Money Laundering and the Use of Proceeds of Crime: A Global Approach organised by ISPAC, the International Scientific and Advisory Board of the United Nations in co-operation with the Crime and Justice Branch of the United Nations under the auspices of the Italian Government. This conference has been a milestone in the recent international debate on money laundering. Some of the main papers presented are substantially revised and collected in this book making a major contribution to the development of expertise in the field. Divided into two sections -- "Trends and Implications" and "Tuning the Instruments" -- the chapters develop an analysis of the different aspects of the money laundering problem and attempt to tune the instruments for combating them.
Globalization of the problem calls for globalization of the responses. By presenting a wide range of different approaches and

Part I

Trends and Implications

1
The Problem and its Diverse Dimensions

Lamberto Dini

1.
INTRODUCTION

Money laundering is an increasingly ramified, complex phenomenon that must be tackled in an integrated and interdisciplinary fashion. We must not waste resources but concentrate them on identifying and neutralising the underlying causes.

Money laundering is an activity aimed at concealing the unlawful source of sums of money. To shed their identity, funds of illicit origin are first employed in financial transactions before entering the legal circuit in various forms of investment. We do not know, but should not underestimate, the amount of illegally procured capital accumulated and laundered in the past, whose origins are now virtually undiscoverable.

Typically, laundering is effected through legitimate markets, banks and other financial intermediaries, generally used as unwitting tools. In some cases, however, there are dangerous interconnections between the management of financial intermediaries and criminal interests.

The sophistication of the financial side of criminal activities increases with the size of the sums to be laundered and the extensiveness of the illegal activities that generate them. In some cases organised crime wields a power capable of challenging the state itself.

Through money laundering, organised crime diversifies its sources of income and enlarges its sphere of action. The social danger of money laundering consists in the consolidation of the economic power of criminal organisations, enabling them to penetrate the legitimate economy.

In advanced societies, crime is increasingly economic in character. Criminal associations now tend to be organised like business enterprises and to follow the same tendencies as legitimate firms: specialisation, growth, expansion in international markets and linkage with other enterprises.

The holders of capital of illegal origin are prepared to bear considerable costs in order to legalise its use. Criminals may well find it acceptable to purchase control of loss-making businesses or low-yielding assets, as long as they provide an entry into the business community in respectable guise. This results in distortions of the market.

2.
THE ITALIAN EXPERIENCE

For years now, in the battle against organised crime, Italy has engaged the foe on the financial front. Disparities in economic development between different parts of the country facilitate the occupation of the territory by organised crime in the less developed areas, resulting in differences in the ability of civil society to respond to criminal violence.

Since the early eighties there has been full awareness of the importance of banking inspections as a tool for tracing the flows of illicit finance. Thanks to this method of inquiry courageous investigative magistrates, first and foremost Giovanni Falcone, made great strides in advancing our knowledge of the operating mechanisms of the Mafia.

Anti-laundering policy does not interfere with the orderly working of the market; it concentrates on watching over the access points through which “dirty” money can be funnelled into the system and on heightening awareness of the risks of criminal infiltration.

Action against money laundering does not consist solely in the repression of crime. The markets themselves have been improved in size, efficiency and transparency, in order to increase their professional competence and depth and hence their resistance to criminal infiltration. The regulations governing the various types of financial intermediation have been strengthened, developing synergy between the rules of prudential supervision and the anti-laundering provisions.

In this effort, the defence of several key points in bank operation is crucial: the control of ownership arrangements, the rules governing equity interests in banks, the quality of institutions’ organisation and the effectiveness of their internal controls. The 1993 Banking Law directs supervisory action to ensuring the sound and prudent management of banks, emphasising standards of conduct and reliability.

The extension of supervisory controls to non-bank intermediaries and the institution of general rules governing financial companies, which are now required to be listed in a special register, have fully defined the perimeter of intermediaries and the scope of the rules, including those on money laundering. Within the payment system, a monitoring threshold of 20 million lire has been set, above which transfers of cash or bearer instruments outside authorised circuits is prohibited and special precautions and controls are required.

Like many other countries, Italy is working to win the banks’ wholehearted support and active co-operation in the battle against money laundering. Computerisation of customer data analysis can help to create a protected environment. In the short run the intermediaries will incur substantial costs to install the requisite information systems. But they should also consider the operational advantages that may accrue from co-ordinated action with the institutions and the other components of the financial and productive system.

The link between crime and professionals in the field of finance is producing ever more complex combinations. A highly symptomatic development is the new exploitation of the age-old practice of usury, which is proliferating both nationally and internationally, Usury is no longer just the work of the free-lance “loan shark”. It is now one of the operational arms of organised crime to launder money, take over companies, strengthen its economic power and tighten its grip on the territory.

The spread of usury has been abetted by the economic difficulties of firms. Banks, even those with a strong local and mutualistic bent, will not service certain market segments. The causes also include the inefficiency of the government apparatus. The judicial process for the collection of debts often involves delays and cost that the creditor cannot afford. This favours the intervention of operators who find it preferable to take the law into their own hands through violence and intimidation.

Internationally, usury is proving to be a dangerously effective way of recycling illegal funds where the large-scale reallocation of small property holdings is under way, as in the countries of Eastern Europe. Here the spread of usury is facilitated by the laborious transition towards a radically reformed government, economy and society as well as by lack of familiarity with the classical operation of credit intermediation which is still underdeveloped.

3.
THE INTERNATIONAL CONTEXT

To set the discussion of money laundering in proper context, we must consider the principal tendencies unfolding in the international markets, both real and financial.

A first tendency consists in the growing internationalisation of production and of the structure of consumption and hence in the growing real integration between the various national economies. Between 1970 and 1992 the volume of world trade grew by more than 160 per cent and world income by around 90 per cent. Measured as the ratio of foreign trade to national income, the average degree of openness of national economies to the rest of the world stands at around 30 per cent today.

A second tendency is that of increasing financial integration. The stock of inter-national bank loans rose from 5 per cent of the industrial countries’ GDP in 1973 to more than 20 per cent in 1992; the stock of Eurocurrency bonds and bonds issued outside the issuer’s country rose from 3 per cent of the same aggregate in 1982 to 10 per cent in 1991. Direct investment expanded in the seventies and eighties; in 1993 the total was more than $160 billion, compared with $20 billion in 1970. The growth in cross-border financial transactions is more pronounced in countries that have recently removed the barriers to the free circulation of capital. Daily turnover in the foreign exchange market rose to $880 billion in 1992, while the value of world trade amounts to around $3,600 billion a year.

A third tendency is the growing role played in international financial transactions by non-bank international investors, especially pension funds, insurance companies and investment funds. In the eighties international investors’ assets grew as a percentage of households’ total financial assets from around 20 to 30 per cent and more in North America and Germany, from 15 to 26 per cent in Japan, from 10 to 36 per cent in France and from 40 to 60 per cent in the United Kingdom. The 100 largest investment funds in Europe and their counterparts in the United States are currently estimated to manage savings totalling more than $8 trillion.

Information technology and innovative financial instruments such as derivatives allow even small, highly specialised traders to mobilise massive resources in the markets. For example, the so-called “hedge funds”, some 800 funds with high minimum investment requirements, have a total capital of between $50 billion and $100 billion and are able to take on debts of up to ten times their capital base. Non-banks tend to operate under less stringent regulatory and supervisory regimes than banks. Hedge funds, for example, are usually established in offshore centres where controls are minimal.

The tendencies mentioned are bound to persist and intensify. Further advances will be made in information technology and financial innovation. The elimination of the barriers to the free circulation of goods and capital will proceed. The liberalisation of the economy in China, Russia and Central and Eastern Europe will increase the size of the world markets enormously. These tendencies bring unquestionable benefits on the economic plane. Yet there is no denying that they also greatly complicate the prevention and repression of money laundering.

The greater ease with which the proceeds from illegal activities can be transferred abroad is a problem not only for the countries of origin but also for those of destination. Once they are established in the latter’s economic structures, funds of illicit provenance, particularly if they belong to organised crime, can contaminate the business environment and make the path of economic development more uncertain, since free enterprise can be threatened and subdued when it comes into conflict with the economic interests of criminals.

In general the countries of the Third World and Eastern Europe have a strong need to attract resources from abroad in order to finance growth and development programmes, while their systems and institutions for checking criminal activities are often limited and insufficient. Both of these factors are at odds with the need to prevent money laundering. The fight against crime is therefore closely linked with the objective of promoting economic development and combating poverty.

4.
ELEMENTS OF A POLICY OF PREVENTION

The principal difficulty in the fight against money laundering lies in the existence of conflicting interests and calculations of expedience between agents, sectors, geographical areas and governments. Since criminal organisations operate at the international level, the fragmentation of legal arrangements represents a major impediment for the institutions in the face of the extreme flexibility of manoeuvre enjoyed by operators.

The economic cost of controls based on obligations and prohibitions is often underestimated, while the benefits they produce tend to be overrated. The latter error stems from the difficulty of envisaging the avoidance stratagems that those subject to control may adopt, that is to say the difficulty of picturing the context in dynamic terms. At times the costs are underestimated because they are not viewed comprehensively to include not only the direct compliance costs but also the indirect costs of an allocative nature that can distort the decisions of economic agents towards less efficient solutions.

One crucial issue is the economic interest of firms, intermediaries and institutions in co-operating to combat money laundering. The conditions for fruitful collaboration can be realised only if the collective gain is accompanied by individual benefits. To be sure, sanctions for non-compliance with obligations and prohibitions increase the individual’s interest in co-operating, but rigid rules in themselves will rarely be effective. It would be better to institute rewards and penalties commensurate with the actual contribution made towards the objective on the one hand and the unwillingness to co-operate on the other. Such rewards and penalties can of course take a wide variety of forms and be consistent with the standards established by the various national business communities.

For this reason, together with the controls carried out by the authorities, the tendency is to encourage the development of self-discipline and self-regulation within individual markets. Rules of conduct based on professional ethics can serve as a useful connecting rod between intervention by the authorities and the forces of the market.

The advantages of such an arrangement are most evident where self-regulation is accompanied by self-monitoring, self-government and specific sanctions that can detect and isolate those who fail to comply with the code that the profession has instituted.

Still with a view to prevention, a particularly useful form of international cooperation could be the exchange of administrative information concerning not only financial flows but also the markets for products, corporate control and labour. The aim is automatic detection of anomalous situations on the basis of significant deviations from the norm Without prejudice to confidentiality, the exchange of information could be a potent tool for tracing the routes taken by the proceeds of criminal activity. Here again international co-ordination displays significant network externalities; consequently, the greater the number of data flows exchanged and of countries taking part, the more advantageous it is.

In general, in the battle against organised crime information is a crucial weapon. Criminal organisations fear effective information systems in the hands of the authorities. In turn, they use information bases of their own to defend themselves and expand. The interest of organised crime in taking over banks and financial institutions stems in part from the enormous strategic criminal potential of the information that banks have about customers and markets. Defending banks’ independence thus means, among other things, protecting the wealth of information they handle in order to maintain the special confidentiality of the bank-customer relati...

Table of contents

• COVER PAGE
• TITLE PAGE
• COPYRIGHT PAGE
• ACKNOWLEDGEMENTS
• INTRODUCTION
• NOTES ON CONTRIBUTORS
• PART I: TRENDS AND IMPLICATIONS
• PART II: TUNING THE INSTRUMENTS
• AFTERWORD