Four years after U.S. indictment, Ukraine Prime Minister goes to trial

One of the two foreign heads of state ever to face criminal charges in the United States for money laundering is about to go to trial in federal court in San Francisco. The little-noticed case against former Ukrainian Prime Minister Pavel Lazarenko is on the brink of opening statements now that an 11-woman, one-man jury has been selected.

Several motions must be resolved by U.S. District Judge Martin J. Jenkins before the lawyers from both sides give their opening statements to the jury. There are three lawyers on each side.

The prosecution is lead by Martha Boersch, a senior Assistant U.S. Attorney in San Francisco who will be assisted by a colleague from that office as well as an attorney from the organized crime and racketeering section of the Department of Justice in Washington

March 8, 2004
Four years after U.S. indictment, Ukraine Prime Minister goes to trial

One of the two foreign heads of state ever to face criminal charges in the United States for money laundering is about to go to trial in federal court in San Francisco. The little-noticed case against former Ukrainian Prime Minister Pavel Lazarenko is on the brink of opening statements now that an 11-woman, one-man jury has been selected.

Several motions must be resolved by U.S. District Judge Martin J. Jenkins before the lawyers from both sides give their opening statements to the jury. There are three lawyers on each side.

The prosecution is lead by Martha Boersch, a senior Assistant U.S. Attorney in San Francisco who will be assisted by a colleague from that office as well as an attorney from the organized crime and racketeering section of the Department of Justice in Washington.

The Lazarenko case is unique because it is the first time that the U.S. money laundering law has been utilized to indict a foreign public official for laundering the proceeds of extortion that was committed purely in a foreign country.

The Lazarenko indictment preceded several amendments to the money laundering law that were made by the USA Patriot Act of 2001 which expanded the predicate crimes by which foreign public officials could be indicted for money laundering.

Under the law, the proceeds of a handful of purely foreign crimes, if they form part of a transaction in or through the U.S., can activate a money laundering prosecution. The precedent-setting indictment alleges Lazarenko used the correspondent accounts of an Antiguan financial institution at several California banks to launder his corruption proceeds.

Lazarenko faces 52 counts in a unique indictment that also seeks to forfeit millions of dollars that he allegedly extorted from businesses doing business in the Ukraine.

For more than four years, since his arrest in 2000, Lazarenko has been in a federal prison near San Francisco awaiting trial on U.S. charges of money laundering, wire fraud and interstate transportation of stolen property. He is accused of laundering $114 million he extorted from Ukrainian persons who did business with his government when he was head of state.

If you are curious about the other head of state that has faced money laundering charges, the answer is General Manuel Noriega, the former strongman of Panama.

Former Ukraine chief’s challenge to U.S. laundering laws rebuffed
If you think former Panamanian dictator Manuel Noriega is the only former head-of-state who is presently serving time in a United States prison, you do not know about Pavel I. Lazarenko, the former prime minister of the Ukraine.

If you think former Panamanian dictator Manuel Noriega is the only former head-of-state who is presently serving time in a United States prison, you do not know about Pavel I. Lazarenko, the former prime minister of the Ukraine.

Two years in prison For two years since his arrest in 2000, Lazarenko has been in a federal prison near San Francisco awaiting trial on U.S. charges of money laundering, wire fraud and interstate transportation of stolen property. He is accused of laundering $114 million he extorted from Ukrainian persons who did business with his government when he was head of state. The precedent-setting indictment alleges Lazarenko used the correspondent accounts of an Antiguan financial institution at several California banks to launder his corruption proceeds.

Little-noticed case This unique and important U.S. money laundering case, which has not received the publicity that normally comes when a head of state is involved, is the first to charge a public official of another country with laundering the proceeds of extortion committed purely outside the U.S. Under the U.S. money laundering law, the proceeds of a handful of purely foreign crimes, if they form part of a transaction in or through the U.S., can activate a money laundering prosecution.

The indictment also accuses Lazarenko of defrauding his Ukrainian constituents by wire by depriving them “of their right to his honest and faithful services” as their prime minister.

Lazarenko sought to dismiss case Now, U.S. District Judge Martin J. Jenkins, in denying Lazarenko’s motion to dismiss the indictment, has issued an unpublished ruling that is the first judicial analysis of the legal theory that Assistant U.S. Attorney Martha Boersch developed and implemented in the indictment of the former Ukrainian leader. The application of the theory to a senior foreign political leader in a corruption setting is what makes the Lazarenko case unique.

U.S. laundering law far-reaching The U.S. money laundering law lists about 200 “specified unlawful activities” that can serve as a basis for laundering prosecution. Only a handful of them are foreign crimes (Title 18, USC Sec. 1956 (c) (7) (B) (i) – (iii)). One of them is extortion.

Extortion pre-dates PATRIOT Act Lazarenko was indicted in 2000, a year before enactment of the USA Patriot Act, which added foreign bribery and embezzlement of government funds as SUAs under the money laundering law. Lazarenko argued that those amendments to the laundering law showed that extortion is not a permissible SUA. The court disagreed saying “money laundering (is) separate from charges for the underlying crime.”

Correspondent account argument He also argued that correspondent accounts are established by financial institutions for their convenience to carry out international transactions, and, as such, are not under Lazarenko’s control. This argument fell on deaf ears. The court said it was sufficient that Lazarenko sent funds from “specifically identified accounts, whether correspondent accounts or not.”

Many U.S. financial institutions The correspondent accounts through which Lazarenko’s funds were channeled were at several San Francisco banks and securities firms, including Bank of America, Commercial Bank, Pacific Bank, WestAmerica Bank, Fleet Boston Robertson & Stephens, Hambrecht & Quist and Merrill Lynch. The accounts were held by European Federal Credit Bank (Euro Fed), of Antigua, which, according to the U.S., Lazarenko and his associate, Peter N. Kiritchenco, bought in August 1997 to do their laundering (MLA, Sept. 2001).

Extortion is extortion Lazarenko asserted that extortion could not serve as the “specified unlawful activity” because the money laundering law contemplates “only extortion by force, as opposed to extortion under color of office”.

The court said the money laundering law does not qualify the type of extortion that may serve as the SUA and concluded that extortion “under color of office” or “under color of official right” can serve as the SUA in a money laundering charge.

“(B)ecause extortion, in common law, included extortion under color of office, the Court finds that the extortion offense alleged in the indictment can serve as the SUA for the money laundering charges…, the judge said.” In framing Lazarenko’s alleged extortion, the indictment used language from the extortion law, the Hobbs Act (Title 18, USC Sec. 1951 (b) (2)) (MLA, September 2001).

Lazarenko was previously convicted of money laundering in Switzerland before returning to the U.S. where he was arrested on the San Francisco money laundering charges. It is expected that his novel trial will commence in late Fall probably with much less public fanfare than Manuel Noriega’s trial received in 1991. (Case No. CR 00-0284 MJJ, No. Dis. Cal.).

(Editor’s Note: Assistant U.S. Attorney Martha Boersch will be a speaker at Money Laundering Alert’s 8th Annual International Money Laundering Conference in Miami Beach, March 26-28, 2003.)

Powerful U.S. Senators probe OFAC’s anti-terror effectiveness
The Chairman and Ranking Minority Member of the U.S. Senate Finance Committee have sent a critical, probing letter to the director of OFAC that appears to be the first step in the first ever deep congressional investigation of the crucial agency’s effecti

The Chairman and Ranking Minority Member of the U.S. Senate Finance Committee, the body that oversees the operations of the Treasury Department, have sent a critical, probing letter to the Treasury’s Director of the Office of Foreign Assets Control that appears to be the first step in the first ever deep congressional investigation of the crucial agency’s effectiveness in detecting and blocking terrorist funds and the people who raise and harbor them.

A nine-page letter of December 22 by Senators Charles E. Grassley, the chairman, and Max Baucus, the ranking member, to Richard Newcomb, the longtime director of OFAC, requires the agency to respond by February 20. A long list of questions from the lawmakers leave no part of OFAC’s operations untouched.

The letter, which was obtained by Money Laundering Alert, cites a number of problems in OFAC’s performance, including poor record-keeping and the agency’s ability to impose and enforce sanctions in a timely or complete fashion.

Citing an article in the October 2003 issue of Money Laundering Alert, Grassley and Baucus pointed out OFAC’s failure to block the assets of individuals identified as terrorists and terrorist financiers by the United Nations and other international agencies. Another news organization had reported that the UN and European Union ordered their members to block the assets of suspected al Qaeda members and associates of Osama bin Laden in early 2001, but OFAC did not do so until one month after 9/11.

Not a bank regulator

The senators, who will likely hold hearings after OFAC responds, criticize the agency’s reliance on financial institutions’ “self-confessions” and banking regulatory examinations to detect violations of its regulations. Because OFAC is not considered a “bank regulator,” it does not have the authority to monitor transactions at financial institutions to ensure compliance. A 2002 report by Treasury’s Inspector General recommended that OFAC request this authority, but the agency has not done so.

OFAC rules cover terrorists, drug lords

OFAC became more visible after the terrorist attacks of 9/11. The regulations OFAC administers require all U.S. financial institutions and persons to block the assets and refuse the transactions of “designated” terrorists, narcotics traffickers and the nationals of countries with whom the U.S. has no diplomatic relations. The names of individuals “designated” come almost exclusively from law enforcement and intelligence agencies.

Penalties now made public

In April 2003, as a form of violations deterrent, OFAC began to publicize its penalties, which can be large. Included in the first subjects of penalties OFAC announced then were the New York Yankees, Wal-Mart, Playboy Enterprises and several well-known financial institutions and law firms. In nearly all of those cases, the penalized activity dealt with doing business in Cuba or another country designated by OFAC for diplomatic reasons.

Could be the first ever

If Grassley pursues hearings that explore the questions he and Baucus posed, it will be the first thorough congressional oversight investigation OFAC has ever encountered.

Colombia confirms link between cocaine sales and purchase of AK-47s, helicopters

Persons looking for evidence of the link between drug trafficking and terrorism will want to take a look at last week’s arrest of “Commandante Sonia,” one of the most influential members of the Revolutionary Armed Forces of Colombia, or FARC.

Authorities confiscated a laptop belonging to Sonia, whose real name is Nayibe Rojas Valderrama. The computer files provide important financial information linking the sale of narcotics to the financing of weapons purchases on the black market.

On March 9, the Colombian newspaper, El Tiempo, quoted Raul Reyes, second in command of FARC, who confirmed the purchase of 10,000 AK-47s. Sonia’s laptop revealed shopping sprees for military hardware such as AK-47s, R-15 rifles and even a helicopter. FARC appears a smart weapons consumer – records found on the laptop show that it often obtains competitive bids on its purchases.

Sonia tried to erase all her computer files before her arrest, but was not able to complete the project. Her back-up files, which escaped erasure, reveal that the helicopter was destined to transport weapons and narcotics. Colombian authorities estimate that between five and seven tons of cocaine are exported monthly from the Caqueta region, where Sonia was arrested. Cocaine sales generate approximately $1.2 billion each month for the FARC. Computer files show that one kilogram of cocaine in the international market brings in about $30,000 dollars.

March 12, 2004
Israeli forces seize millions in alleged terror funds from Palestinian banks

Armed men recently burst into 13 Palestinian banks in Ramallah, waving guns and herding employees into corners. Then, after covering security cameras with plastic bags or disabling them altogether, the men made off with millions of dollars. Despite the modus operandi, this was no average bank robbery; it was an official action of the Israeli government in its fight against terrorist financing.

The unprecedented raids, conducted February 25 by Shin Bet and other Israeli security forces, enabled Israel to examine hundreds of accounts and to confiscate between $6.7 and $8.9 million from branches of the Cairo Amman Bank and the Arab Bank. The Israelis were aided by computer experts from two of the banks, who had been arrested the previous night.

While the United States condemned the action, Israeli officials said they hope it will dampen the wave of suicide bombings and shootings that plague their cities and have killed more than 900 Israelis.

Protest by Palestinians

Palestinian officials deplored the raids, and suggested that further action of that kind could threaten their banking system. “It’s like the mafia,” Palestinian Prime Minister Ahmed Qureia said. “I think it should be dealt with in a very serious way.”

Israel, however, charges that Palestinians banks have been hijacked to finance militant groups such as Hamas and Islamic Jihad, and that much of their funding originates in Syria, Iran and Lebanon and is deposited in Palestinian banks.

Alerted to the raids, dozens of Palestinians gathered nearby and threw stones at soldiers, who retaliated with tear gas, non-lethal bullets and live rounds, injuring 42 people.

D]epositors can appeal

In the aftermath, though, it appears there is little the Palestinians can do – even with international support. However, an Israeli security source has said that those who lost money can appeal to the army for restitution.

While Israel has raided Palestinian banks in the past, this operation was unprecedented in scale. As Israeli newspaper Ha’aretz described it, the action was “an expression of an understanding that has emerged quite belatedly in the political and security echelons, that the economic front is one of the main battlefields in the war against terrorism.”

“The chain of terror that ends with the suicide bomber in a city bus does not begin with those who send the bomber or with the bomber’s spiritual mentors,” the newspaper continued. “The first link in the chain is the fund raiser. To produce the explosives, to purchase weapons and most of all, to pay the families of the suicide bombers and their commanders — all this costs a lot of money.”

March 11, 2004
Bank of America “risk scoring” AML program provides a potent customer identification tool

When Bank Secrecy Act compliance examiners come to your financial institution, they will want to see how you have met the Customer Identification Program duties mandated by the Bank Secrecy Act regulations issued under Section 326 of the USA Patriot Act.

Risk-based approach

One great way to prove that you have taken seriously the “risk-based” approach to customer identification suggested by the rule is to show your automated risk scoring tool. Oh, you don’t have one?

Invaluable tool

Well, Bank of America does, and its senior vice president for compliance risk management, Henry W. Grant, shared the details of this invaluable tool with participants of an Association of Certified Anti-Money Laundering Specials (ACAMS) webcast on March 11 titled “Discover Your AML Danger Zones Through Risk Scoring: How and Why?.”

Section 326

Patriot Act Section 326 says “the CIP must include risk-based procedures for verifying the identity of each customer to the extent reasonable and practicable. The procedures must enable the bank to form a reasonable belief that it knows the true identity of each customer.”

Three criteria

That’s what the Bank of America program does. It conducts a risk assessment based on three criteria. First, country of residence for individuals, or country where headquarters is located for companies. Second, type of product they want the bank to supply. Third, the type of individual or entity they are.


In each category the potential client is given a score between 1.0 and 3.0, with 3.0 being the most risky. The three categories are then combined to give a composite score, also between one and three. Someone receiving a 1.0 would be about as pure as Mother Theresa, and a politically exposed person from Afghanistan might get a 3.0.

Research-based nation scoring

The scores for each company, product and customer type are based on years of painstaking research, and still require dynamic updates. Some criteria for country scores include: whether international non-governmental anti-money laundering organizations such as the Financial Action Task Force have blacklisted the nation, whether or not it is a member of the FATF, the quality of its local laws and banking regulations, and the strength of its banking industry – just to name a few.

Product scoring

The second risk rating, based on the type of product they want, is calculated using a number of product-related factors. Most notably, it is based upon the likelihood that the product requested would be used for money laundering or terror financing.

“You don’t see interest rate swapping being used to finance terror,” Grant said. “But securities, you might see that.”

Customer-type scoring

The third factor, customer type, looks at the occupation or type of company requesting service. Again, those who have a history of involvement in criminal activities receive the highest ratings. Political figures or those in political organizations score toward the high end of the scale, higher than multi-national corporations.

About monitoring

Grant made clear that just because someone receives a “high” risk assessment figure does not mean they will automatically be denied an account. He said the number is more important in determining which individuals or groups might require greater scrutiny.

“It’s a question of ‘How much do we need to evaluate someone, and how much do we need to monitor them?’” he said.

Consistent and centralized

As Grant noted, one of the strengths of this system is that it is consistent and centralized, two key factors for a bank with so many branches around the world.

Not yet available

In response to a question from one of the webcast participants, Grant said the Bank of America risk assessment tool is not available commercially. However, in a follow-up interview with Premium, he said that may change in the future.

March 12, 2004
U.S. revokes visas of Guatemalan past president Portillo while ICE pursues smell of corruption

As rumors abound that the U.S. government may be closing in on legal action against the immediate past president of Guatemala, Alfonso Portillo, the former vice president, Juan Francisco Reyes, and former Portillo assistant, Julio Giron, the U.S. has sent an ominous signal by canceling their visas.

Portillo, whose term ended in January, fled Guatemala for Mexico – via El Salvador – last month, on the same day that a Guatemalan court stripped him of his legal immunity as a member of the Central American Parliament (Parlacen). Portillo is under investigation for allegedly moving millions of dollars in public funds and alleged corruption proceeds from Guatemala through Panama to the United States in a scheme known as the Panama Connection.

Although Portillo is not considered a fugitive, Guatemalan prosecutors say they will forbid him from leaving the country if he returns while the laundering investigation is underway.

An ICE spokesperson, who said “Guatemala asked the ICE task force for assistance,” confirmed that the agency “is investigating former and actual government officials for money laundering.” The Miami-based ICE task force is investigating the money laundering of foreign corrupt officials in Dominican Republic, Ecuador, Guatemala, Honduras, Nicaragua and Peru.

The U.S. visas were revoked under a provision of the U.S. immigration law, which states that if there are suspicions that a person will use a visa to enter the U.S. legally and then remain in the country as an immigrant, the visa can be cancelled.

Well placed sources of say ICE representatives have met with representatives of the new Guatemalan government who expressed a willingness to cooperate in the anti-corruption efforts of the U.S. agency. Guatemala has a decades-old reputation as one of the most corrupt countries in Latin America. Guatemala is the only Latin American country that is on the Paris-based Financial Action Task Force’s list of “Non-Cooperative Countries and Territories,” which names jurisdictions that are deemed to be dragging their feet in the global assault on money laundering.

Other well-known officials with close ties to Portillo have also lost their visas recently for their alleged corruption. Among them are Luis Armando Rabbe Tejanda, former communication minister, whose visa was revoked in 2002 amid corruption accusations; Jose Armando Llort Quiteño, former director of the Guatemalan bank, Credito Hipotecario Nacional, who is accused of money laundering through the bank; Cesar Augusto Medina Farfan, Portillo’s friend, who was allegedly involved in the Panama Connection; Manuel Maza Castellanos, former finance minister, who is a fugitive and is under investigation for embezzling $20 million in state funds.

The U.S. did not cancel the visas of the former first lady, Evelyn Morataya de Portillo, and Juan Francisco Reyes Wyld, the former vice president’s son.

Other Portillo administration officials have left or attempted to leave the country amidst investigations. Marcos Tulio Abadio, former tax director, who is wanted in connection with the disappearance of $6 million in public funds, left Guatemala a few weeks ago. Former comptroller Oscar Dubon Palma was arrested recently while trying to cross the border between Nicaragua and Costa Rica.

Last week, Guatemala’s new vice president, Eduardo Stein, said that at least 12 officials of the former administration are under investigation for laundering embezzled public funds. He said the U.S. government is helping to track the routes used to launder the money.

John Hamilton, U.S. ambassador to Guatemala, said last week that the U.S. banking system should not be used as a depository for illicit funds. “Our policy is that any money coming from corruption is not welcome in my country,” he said referring to accounts allegedly opened by ex-government officials.

Portillo is believed to have opened bank accounts in Panama with stolen public funds or bribes from criminal elements. The Panamanian Financial Intelligence Unit discovered several accounts that have indicators of money laundering. Guatemalan Attorney General Juan Luis Florido announced this week that evidence against Portillo is being gathered to request his extradition from Mexico.

March 8, 2004
U].S. Treasury creates high-level office to consolidate supervision of FinCEN, OFAC

For the first time, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) and the Financial Crimes Enforcement Network (FinCEN) will report to the same person. Secretary of the Treasury John W. Snow announced today that a new Office of Terrorism and Financial Intelligence, or TFI, was being formed to “bring under one umbrella” and unify the U.S. effort against international money laundering and terrorist financing.

FinCEN collects and analyzes information for law enforcement agencies, issues and enforces regulations under the Bank Secrecy Act, the centerpiece of the U.S. anti-money laundering regulatory effort. OFAC administers and enforces economic and trade sanctions against designated countries, drug traffickers, terrorists and terrorist organizations.

The two leading members of the Senate Finance Committee have recently launched a probe of the effectiveness of OFAC, questioning its ability to fight terrorist financing. FinCEN has a new director in William J. Fox, who has taken an active approach to quieting its critics who complained that the bureau did little to assist financial institutions in their complex new duties that were born with passage of the USA Patriot Act of 2001.

“Putting everything under a single office will be the best way to achieve accountability,” said Molly Millerwise, a Treasury Department spokeswoman, adding that Treasury will re-allocate its current budget to fund the new office.

TFI will be led by a undersecretary, who will be appointed by President Bush, and two assistant secretaries who have not been appointed. They will need Senate confirmation. Currently, Treasury has two undersecretaries – one for international affairs and one for domestic finance.

Millerwise would not disclose a timeline for the reorganization or for the appointment of the new undersecretary.

“Treasury’s Office of Terrorism and Financial Intelligence will enhance the precision of our relentless fight to dismantle the terrorists’ network of financial and logistical support and disrupt their plans to harm America and all other nations that value liberty and freedom,” said Treasury Secretary Snow in a prepared statement.

The new office has been discussed for some time inside the Treasury Department, which has been anxious to reclaim a prominent role in the law enforcement arena after it lost two of its main enforcement inhabitants, the U.S. Customs Service and Secret Service, to the new Department of Homeland Security one year ago, in March 2003.

TFI is expected to have the duty of using intelligence and financial data to detect how terrorists exploit the financial system and design methods to stop them. It will also coordinate enforcement of the USA Patriot Act regulations that FinCEN issues.

March 8, 2004
U.S. Federal Reserve strengthens anti-money laundering unit, creates new section

The U.S. Federal Reserve Board, which through its examiners in 12 Federal Reserve Banks across the nation supervises many of the nation’s large multinational and foreign banks that do business in the United States, has restructured and strengthened its anti-money laundering supervisory controls.

It has created a new “Anti-Money Laundering Policy and Compliance Section” that will be responsible for establishing AML supervisory policy and examination procedures for the thousands of Federal Reserve examiners at the 12 Federal Reserve Banks that dot the U.S. landscape.

The new section will work alongside two other sections, Enforcement and Special Investigations. All three report to Herbert A. Biern, Senior Associate Director of the Federal Reserve’s Division of Banking Supervision and Regulation.

The Enforcement Section focuses on regulatory noncompliance and violations by financial institutions, while the Special Investigations Section concentrates on violations by individuals and coordinates efforts with law enforcement agencies where criminal charges are in play.

John Byrne, the American Bankers Association’s expert on money laundering issues, said, “After the Federal Reserve lost Rick Small, P.J. Johnson and Carmina Hughes the question was what was going to be the strategy of the Federal Reserve on money laundering matters. This upgrading of its capabilities tells us the Fed will continue to be in the forefront on this issue.”

Biern, who is the senior Federal Reserve official on enforcement matters and money laundering issues, serves as the main supervision liaison with U.S. and foreign enforcement and regulatory agencies on money laundering. He is the primary liaison with federal and state regulators on enforcement actions and information sharing.

With the wave of new Bank Secrecy Act regulations prompted by the 2001 USA Patriot Act about to subside with the issuance of the final few rules in the coming months, financial institutions supervised by the Federal Reserve may soon expect the issuance of the new examination manual that will guide the Fed’s examinations.

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:

  • Accountants
  • Antique vendors
  • Auction houses
  • Car dealerships
  • Casinos
  • Jewelers and dealers in precious metals
  • Lawyers
  • Real estate agents