FATF’s new laundering ‘typologies’ report eyes insurance industry role in laundering

March 5, 2004
FATF’s new laundering ‘typologies’ report eyes insurance industry role in laundering

To some it may have appeared that “Mr. X” was a sadly ill-fated yacht owner, what with his frequent mishaps and correspondingly costly insurance premiums. Accident after accident must have humiliated the aspiring captain as he worked through his intermediary agents to collect on a dog-eared insurance policy – a plan that was costing him an arm and a leg, and despite his occasional claims was still earning the insurance company a tidy profit.

Appearances can be deceiving, and in cases of money laundering through insurance the best ones always are. It turns out Mr. X is no sailor; he never even owned a boat. His ocean-going follies were a ruse, and his intermediary agents were bribed to file false claims. The dirty money Mr. X used to pay for his coverage came back to him in the form of clean checks from the insurance company.
This scenario, which actually occurred, is one of the insurance-related typologies included in the Financial Action Task Force’s Report on Money Laundering and Terrorist Financing Typologies 2003-2004. The Paris-based FATF, the international agency that issues recommendations and best practices for anti-money laundering officials and private sector institutions, holds an annual exercise to examine the methods and trends of money laundering, and since 2001, of terrorist financing.

While the typologies are stimulating and seem to shed light on laundering methods, the “red flags” could be generously described as a thorough rehash of past reports.

From customers more interested in cancellation terms than policy benefits, to large cash payments, to payments made through offshore banks, to overpayments of policy premiums with requests for reimbursement to third parties, the red flags in this section of the report are grossly simplistic and are unlikely to ferret out the clever launderer.

Experts from 35 nations attended the 2003 meeting in mid-November, in Oaxaca, Mexico. In addition to looking at the use of the insurance industry to launder money, experts also examined the use of wire transfers and non-profit organizations to finance terror and the policy implications of “politically exposed persons” and “gatekeepers” – the lawyers, accountants and other professionals who can facilitate laundering transactions.

Andrea Gaiteri, the training and documentation manager of the financial intelligence unit of Citizens Financial Group, said she always reads the FATF typologies report closely to gather examples for her training program.

“Overall, I find the annual FATF typologies reports invaluable, and I use them each year to gather information for my courses,” she said. “I think this year’s report information on insurance products will prove helpful.”

March 5, 2004
U.S. State Department says Internet is a ‘powerful’ laundering vehicle

As the use of the Internet continues to rise, criminals are increasingly using it as a vehicle to move their illicit funds to offshore financial centers while avoiding detection.

This is one of the highlights of the 2003 International Narcotics Control Strategy Report of the U.S. State Department released on March 1. In a section of the report that focuses on offshore financial centers, the department says that because the Internet enables criminals to transfer funds instantaneously, it provides opportunities for poorly regulated offshore centers to increase their customer base.

The Internet also provides opportunities for terrorist organizations to enter their illicit funds into the financial system while eluding law enforcement efforts to interdict the funds.

Internet gambling has become a “powerful vehicle” for criminals to launder funds and evade taxes, the report says. Virtual casinos are profitable for governments that sell licenses for the sites and may share in the site operator’s profits. But those governments exert inadequate controls, the U.S. report concludes, adding that the reported number of offshore financial centers having Internet gambling sites more than doubled from 2002 to 2003. Thirty offshore financial centers were reported as having these sites in 2003.

The report says these sites represent a difficult problem for law enforcement, as the Internet server that hosts the site is often located in a country other than the country that licensed the website making it difficult to trace money movements.

The INCSR reports the results of a July 2003 International Monetary Fund study of 40 offshore financial sectors. The IMF concluded that most of the centers need to strengthen their weak regulatory regimes, and lack the technical skills to ensure compliance with anti-money laundering and terrorist financing rules and international norms.

The INCSR is issued each year and provides status reports on the efforts of most countries to combat money laundering and terrorist financing. This year’s report also comments on the Financial Action Task Force’s new 40 Recommendations and the expected establishment of two new FATF-style regional bodies, in the Middle East and Central Asia.

March 4, 2004
U.S. State Department again gives Latin America poor marks on laundering controls

According to the U.S. State Department’s 2003 International Narcotics Control Strategy Report money laundering conditions in Latin America are about as bad now as they were last year.

The INCSR, an annual report that gives the views of the U.S. government on money laundering and terrorist financing conditions in most countries. The money laundering section of the report is attached to a section that deals with drug trafficking conditions and which forms the basis for the decision by the president of the United States to “certify” countries that are deemed to be deficient in those controls. A certification can lead to the cessation of U.S. bilateral assistance.

Here are highlights of what the INCSR says about half a dozen Latin American countries that are important in the global anti-money laundering effort:


    The report says that although Brazil is still considered a nation of “primary concern” in the money laundering field, a condition that is “primarily related to drugs, corruption, and trade in contraband.”

    The tri-border area of Brazil, Paraguay and Argentina is a major concern to the U.S. The INCSR says the area is “suspected to be a source of terrorist financing” and plagued by much arms and drug trafficking activity and a lack of cross-border reporting requirements and currency controls.

    “In 2003, Brazilian courts handed down their first criminal conviction for money laundering,” the INCSR says. There has been a sharp spike in money laundering cases that reach Brazilian courts – 132 in 2003, up from 34 in 2002.


    Colombia continues as “a regional leader in the fight against money laundering,” but “drug money laundering from Colombia’s lucrative cocaine and heroin trade continues to penetrate its economy and affect is financial institutions,” says the report.

    The INCSR says enforcement continues to be a challenge for Colombia due to “limited resources for prosecutors and investigators.” Other problems such as difficulties in establishing predicate offenses and corruption “further contribute to Colombia’s limited success in achieving money laundering convictions and successful forfeitures of criminal property.”

    Colombia has yet to criminalize terrorist financing, the INCSR says.


    Guatemala is a major transshipment country for illegal narcotics from Colombia and precursor chemicals from Europe, according to the INCSR. Combined with a weak anti-money laundering regime, widespread corruption and increasing organized crime activity, this makes Guatemala a money laundering haven.

    The report says there are major impediments to Guatemala’s anti-money laundering efforts because it “lacks the legislation and technology to permit police and prosecutors immediate access to public registries; corruption hampers enforcement; and authorities are not permitted to use seized assets to fund anti-money laundering initiatives.”

    The report says there have been some improvements in the country’s anti-money laundering regime, although Guatemala remains on the Financial Action Task Force’s list of Non-Cooperative Countries and Territories list (NCCT).


    Mexico, which is now in the throes of a major scandal involving widespread corruption in its Congress, is plagued by an illicit drug trade that continues to be the principal source of funds laundered through the Mexican financial system, says the INCSR.

    Mexico remains “one of the most challenging money laundering jurisdictions for the United States,” the report says. Despite the country’s advances in international cooperation and information sharing, it is still difficult for U.S. law enforcement to obtain key financial records from Mexico and to obtain the extradition of money launderers.

    The INCSR says Mexico needs to improve the mechanisms for asset forfeiture and money laundering cooperation with the United States, and increase efforts to control the bulk smuggling of currency across its borders.


    “Money laundering remains a serious problem in Panama” despite some progress in its efforts to fight money laundering, the INCSR say.

    Money laundering “is a potential threat to the stability of the country’s legitimate financial institutions,” says the report. Panama is particularly vulnerable to money laundering because of its “proximity to major drug-producing countries, its sophisticated international banking sector, U.S. dollar-based economy, and the Colon Free Zone’s (CFZ) role as an originating or transshipment point for goods purchased with narcotics dollars.”

    The INCSR says that “captive insurance has become one of the most important sectors of Panama’s offshore financial industry, following banking.” Furthermore, “lack of control over transfer of negotiable (bearer) bonds is another potential vulnerability that could be exploited by money launderers.”


    Paraguay is a principal money laundering center, says the U.S. State Department. The INCSR says that laundering is facilitated by the multi-billion dollar contraband “re-export” trade that is centered in Ciudad del Este, the heart of Paraguay’s “informal economy.” According to the report, this area has no controls on the amount of currency that can be brought into or out of the country, and there are no cross-border reporting requirements.

    Raids in Ciudad del Este have led to the seizure of arms catalogs, bomb-making materials, extremist Islamic materials, and receipts of wire transfers from Paraguay to the Middle East and the United States.

    “These included most of the 46 suspicious financial transactions by ethnic Arabs that the (Paraguay Financial Intelligence Unit) had compiled immediately following September 11, 2001 which showed millions in dollars of wire transfers from Ciudad del Este to Lebanon,” the report says.

    March 4, 2004
    Manhattan banks being scrutinized in laundering investigation

    Hudson United Bank will pay a $5 million fine and has agreed to ramp-up its anti-money laundering compliance program as a result of the failure by one of its branches to monitor the money laundering risks posed by a number of its accounts, according to a settlement reached with the Manhattan District Attorney’s Office on March 2.

    The bank’s AML deficiencies were uncovered as part of an ongoing investigation of New York City banks that do business with international money services businesses (MSBs), which are viewed by some government agencies as posing a major laundering and terrorist financing risk.

    New York City investigators found that a now-closed Manhattan office of Hudson United failed to adequately monitor accounts held by offshore money remitters, casas de cambio (money exchange houses) and black market currency dealers in South America for money laundering risks. The bank purchased these accounts in June 2002, and closed them in November 2003 as a result of the investigation but not before more than $1 billion flowed through them, according to the New York District Attorney’s office.

    As part of the agreement to enhance its anti-money laundering efforts, the bank will hire a new AML compliance officer.

    The Hudson settlement comes on the heels of another case that New York City prosecutors are calling the biggest of its kind in the state, involving the Manhattan financial corporation Beacon Hill Service Corp. As part of the same investigation in which Hudson United stumbled, Beacon Hill was convicted on February 23 in Manhattan Supreme Court of four counts of operating an unlicensed money transmitting business in violation of New York’s banking law.

    The corporation received funds from shell corporations and South American casas de cambio, among others, and transmitted $31.5 million to accounts in Pakistan, Lebanon, Jordan, Dubai, Saudi Arabia and elsewhere in the Middle East. From 1997 through early 2003, wire transfers from 40 Beacon Hill accounts totaled more than $6 billion.

    Prosecutors said Beacon Hill received and moved money by checks, wire transfers and bank drafts. In an attempt to shield clients it did not keep records. The clients paid fees for Beacon Hill to deposit money in accounts in countries with strict corporate and bank secrecy laws, said the New York prosecutor’s office.

    The investigation is ongoing and is examining other New York banks that provide similar services to money transmitters, as well as their customers and recipients that may be involved in money laundering.
    March 3, 2004
    U.S. senator brings to light ‘horrors’ of conduct by FBI agents

    A four-year-old internal study by the U.S. Federal Bureau of Investigation on improper and often criminal conduct by its agents provides a “laundry list of horrors,” says U.S. Senator Charles Grassley, who released the report.

    Grassley, who is chairman of the Senate Finance Committee and co-chair of the Senate Caucus on International Narcotics Control, released the report late last month and accused the FBI of trying to cover up its findings.

    The inquiry and report, which were completed in 2000, were initiated by former FBI Director Louis Freeh but not made public.

    The agency had good reason not to trumpet the report. It examines 107 instances of misconduct by agents between 1986 and 1999 but does not name criminal cases that may have been affected by the misconduct or the persons involved. Its most sensational findings document the theft by agents of funds destined for informants, taking of bribes by agents and submitting of false vouchers and receipts. It also says agents disclosed classified information, violated narcotics policies and committed rape. In one incident, an agent shot his wife with his FBI revolver.

    Investigators found that agents often had a history of disciplinary proceedings that sometimes began before they were hired by the FBI, and that dismissals resulting from misconduct were “infrequent.” In 77 cases, the agents were fired.

    “The shocking report is a laundry list of horrors,” Grassley said in a February 18 letter to the FBI, “with examples of agents who committed rape, sexual crimes against children, …, attempted murder of a spouse, and narcotics violations, among many others.”

    Although the report does not specify what cases may have been harmed by the misconduct it is a fair inference that since most of the crimes the FBI investigates are “specified unlawful activities” under the money laundering law, the malfeasance by FBI agents probably jeopardized some money laundering investigations.

    Even before Grassley’s revelation, the FBI had concluded that a review of its disciplinary procedures was in order. In May 2003, it commissioned an independent review of the procedures. The commission said FBI disciplinary cases move too slowly, and that offenses are vague and often ill-defined.

    It said the procedure that sets the level of punishment was seriously flawed and provided little guidance to the adjudicative process. The commission made 32 recommendations.

    In May 2003, the FBI won a struggle with the U.S. Bureau of Immigration and Customs Enforcement (ICE) of the Department of Homeland Security (DHS) over who shall have the lead role in terrorist financing cases. A “Memorandum of Agreement,” which placed ICE in a secondary position to the FBI in that visible arena, infuriated many former Customs Service agents who became ICE agents in the reorganization that created DHS. The agents were already smarting from being placed under the same roof with agents of the old Immigration and Naturalization Service which migrated from the Justice Department.

    A General Accounting Office report in November 2003 found flaws in terrorist financing investigations under FBI leadership, a finding that Grassley pursued through questions he posed to the agency.

    March 2, 2004
    OFAC again falls under microscope as senators probe Halliburton, GE offshore deals in Iran, Syria

    The two powerful U.S. Senators who have been asking the U.S. Treasury Department’s Office of Foreign Assets Control some penetrating and uncustomary questions about its effectiveness in tracking terrorist funds have one again lifted their pens in muted anger. This time they are questioning whether a federal law that prohibits U.S. companies from conducting business in countries named as terrorist supporters should be broadened to include their foreign subsidiaries.

    A creative federal prosecutor could dream of ways that the U.S. money laundering law could fit in the fact pattern that the senators are pointing out.

    Senators Charles Grassley, chairman of the Senate Finance Committee, and Max Baucus, the panel’s ranking member on February 19 asked OFAC to state whether it has that power. Earlier, on December 22, the two lawmakers sent a critical letter questioning OFAC’s ability to detect and block terrorist funds in timely matter. The director of OFAC, Richard Newcomb, has not yet responded but when he does congressional hearings led by the senators are sure to follow.

    The latest initiative by the senators seeks to determine the level of scrutiny OFAC applies to companies that use their foreign subsidiaries to earn profits in nations that are targets of U.S. sanctions programs.

    The senators have also asked Halliburton, General Electric and ConocoPhillips, whose subsidiaries conduct business in OFAC-sanctioned Iran and Syria to respond to several pointed questions.

    ‘Independence’ questioned

    “OFAC is responsible for enforcing sanctions against nations that support terrorism and our investigation will determine if they are fulfilling their responsibilities. If these companies are going through the back door to invest in terrorist nations, Congress must take action to immediately close, lock and seal those doors,” Grassley said in a statement.
    Foreign subsidiaries of U.S. companies are allowed to conduct business within OFAC designated countries when the subsidiary is independent of its parent company.

    According to the senators, Halliburton’s subsidiary with operations in Iran, Halliburton Products and Services, Ltd. (HPSL), consists solely of a post office box in the Cayman Islands, and operates under Halliburton’s name and corporate logo when it sells its products in Iran.

    General Electric’s subsidiary, General Electric Hydro, sells its products in Iran, and ConocoPhillips’ Conoco, Ltd., invests in a natural gas plant in Syria.

    OFAC plays key role

    OFAC plays a key role in the effort to block and freeze terrorist and drug money. September 11 put it under intense pressure to revamp its procedures and to contribute more to the war against terrorist financing. Since then, it has issued dozens of lists of “designated” terrorists and several others on narcotics traffickers.

    Once the lists are issued, U.S. financial institutions, businesses and individuals are obligated to stop doing business with the listed persons and entities and to block any assets they hold.

    OFAC fines hit unlikely targets

    OFAC imposes money penalties on U.S. persons and companies that are found to violate its regulations. In April 2003, OFAC began publicizing its penalties and announced that it had imposed penalties on The New York Yankees, Playboy, Wal-Mart and other less conspicuous targets for violations of its sanctions programs.

    OFAC’s programs are not all about terrorists and drug traffickers. They also reflect the present political and diplomatic persuasions of the United States. In February, it announced plans to penalize a Michigan couple a total of $15,000 for traveling to Cuba in 2001 to deliver medicine to Catholic nuns. It also banned the practices of a New York non-profit organization “Send a Piana to Havana,” saying the group could no longer send pianos and parts to 90 Cuban music schools.

    It recently advised the Institute for Electrical and Electronic Engineers, an engineering society in New Jersey, that its practice of editing scholarly papers from Iran was punishable by half a million dollars in fines and up to 10 years in jail because providing such a service for people in a blacklisted nation is impermissible.
    March 1, 2004
    UK businesses brace on first day of inclusion in nation’s anti-money laundering rules

    As of today, March 1, all United Kingdom businesses that deal in high volumes of cash are subject to anti-money laundering rules that require reporting of suspicious activity under the Proceeds of Crime Act of 2002. Previously, the burden of meeting AML regulations fell only upon the shoulders of those in the regulated financial services industry.

    Reminiscent of complaints from U.S. institutions, many UK industries are not altogether clear on what constitutes “suspicious activity.” And since penalties for failing to file these reports carry a hefty fine and a possible prison sentence, many are concerned.

    This uncertainty is likely to yield, at least in the short term, a deluge of “defensive” filings that could bog down an already belabored National Criminal Intelligence Service (NCIS), the UK’s Financial Intelligence Unit responsible for disseminating reports to law enforcement under the Proceeds of Crime Act.

    A 2003 audit by KPMG revealed that the Economic Crimes Branch of the NCIS has a backlog of 58,000 unprocessed suspicious activity reports. In total of roughly 100,000 such reports were filed in 2003, more than five times the 18,000 filed in 2000. This year, the NCIS expects that number to double.

    The UK’s move to include non-bank financial institutions in the fight against laundering is in line with the recommendations of the Paris-based Financial Action Task Force, the international body that determines “best practices” in this arena. It is also in line with the European Union’s second directive on money laundering, the heart of which is an effort to bring lawyers, accountants and other possible facilitators of laundering into the reporting fold.

    While all businesses dealing heavily in cash are required to report, those likely to be affected include:

    Antique vendors
    Auction houses
    Car dealerships
    Jewelers and dealers in precious metals
    Real estate agents