Features : Money Launderers Find Fewer Places to Hide

New regulations and unprecedented global cooperation have combined to put the squeeze on money launderers.

In just a few short years, the global effort to clamp down on money laundering and terrorist financing has yielded dramatic results. Now there are only two countries left on the watch list: Nigeria and Myanmar, and even they are beginning to move toward international standards.

The reasons behind this remarkable success story are varied, as are the implications for nations that have cooperatedand those that have not. Nauru, for example, a tiny Pacific-island nation just south of the equator, turned to money laundering for Russian crime syndicates in the mid-1990s when its lucrative phosphate exports ran out. After being threatened by the US Treasury with being cut off from the US financial system, Nauru shut down its 400 shell banks.

Nauru got its reward in October when the Financial Action Task Force, or FATF, the global watchdog on money laundering, at its plenary meeting in Paris removed Nauru from its list of non-cooperative countries and territories. Meanwhile, Russia has developed one of the strongest anti-money-laundering units in the world, known as Rosfinmonitoring. For Nauru, however, that was far from the end of the story. Once one of the worlds wealthiest countries per capita, it is now among the poorestso poor, in fact, that Naurus president Ludwig Scotty appealed for urgent assistance at the United Nations General Assembly session in New York in September. He said that although the country has begun to strengthen governance and combat corruption, it has been left in dire need of financial aid.

The Cayman Islands, a Caribbean tax haven, was removed from the list of non-cooperative countries in June 2002 after beefing up its anti-money-laundering laws. When a country is placed on the FATF blacklist, its economy definitely suffers, because firms dont want to take the risk of dealing with the jurisdiction, says Samantha Pelosi, director of corporate compliance at Washington, DC-based Ruesch International. Banks in the Cayman Islands now have more business, she says, than before the country complied with the FATF 40 recommendations, which serve as the international standard. There is nothing wrong with a jurisdiction having low taxes or no taxes, Pelosi says, but offshore tax havens can attract nefarious people who try to take advantage of the system without being detected.

Prior to joining Ruesch International, which specializes in business-to-business international payment products, Pelosi was senior counsel at the Financial Crimes Enforcement Network, or FinCEN, which is the US Treasury Department bureau that safeguards the US financial system from money laundering. The USA Patriot Act of 2001 gives FinCEN the authority to determine that a foreign jurisdiction or financial institution is of primary money laundering concern and to take appropriate countermeasures.

After the September 11, 2001, terrorist attacks in the US, countries really made an effort to deny money launderers and terrorists use of their financial systems to conduct criminal activities, Pelosi says. Many countries modeled their anti-money-laundering laws on US laws or passed even stronger laws. The financial institutions in these countries made a good-faith effort to be good world citizens, she says. Before 9/11, a lot of countries didnt have financial intelligence units like FinCEN, she says.

The Cost of Coming Clean

Compliance with the money laundering regulations can be an expensive process. The US anti-money-laundering requirements are complicated and burdensome, and companies that comply spend significant time and money setting up their programs, which can put them at a competitive disadvantage, according to Pelosi.

The 40 recommendations comprise a complete set of counter-measures covering the criminal-justice system and law enforcement, the financial system and its regulation, and international cooperation. The revised recommendations now apply not only to money laundering but also to terrorist financing. Since the passage of the Patriot Act, US businesses across the spectrum have faced and still face increasing scrutiny over where their money comes from and where it is going, especially when dealing with large movements of funds through the international payments systems, says Michael Zeldin, global leader of Deloitte Financial Advisory Services anti-money-laundering group in New York, a subsidiary of Deloitte & Touche USA.

The US insurance industry is now being pushed into complying with anti-money-laundering requirements, which were announced by FinCEN on October 31. Within six months insurance companies subject to these rules must establish an anti-money-laundering program with written policies, procedures and internal controls and name a compliancy officer who is responsible for ensuring that the program is implemented effectively. The insurers will also be required to file Suspicious Activity Reports on transactions of at least $5,000. The new rules will not apply to group life insurance policies or group annuities.

Under a bill awaiting Congressional approval, US banks could receive some regulatory relief from the paperwork burden. If the bill passes, the banks will no longer be required to file Currency Transaction Reports for businesses that have been customers for 12 months or more. The challenge for firms and regulators is in acting in an appropriate manner, with risk-based compliance and assessment, says Michael Corrigan, partner, governance and regulation, at Deloitte & Touche in London. One firm may be doing something completely different from another just down the hall, he says. Cost is an issue, but there has been a recognition that there was a need for improvement.

There has been significant progress made, as indicated by the shrinking FATF blacklist, Corrigan says. The Cook Islands, Indonesia and the Philippines were removed from the list in February 2005. The idea was not to put countries on the list and leave them there, says Vincent Schmoll, principal administrator at the FATF Secretariat, which is housed in the Paris-based Organization for Economic Cooperation and Development. These countries did significant work to get off of the list, he says. They had plenty of incentive to do so, too. Developing countries recognize that a safe and sound banking system can attract investment rather than repel it, Schmoll says. A secure financial system is a basic necessity.

List of Non-Cooperative Countries and Territories

June 2005



June 2000

The Bahamas

The Cayman Islands

The Cook Islands





The Marshall Islands




The Philippines


St. Kitts & Nevis

St. Vincent & The Grenadines

The Group of Seven created the FATF in 1989 primarily to counter money laundering related to illegal drug trafficking. The FATF now has 31 country members. The European Commission and the Gulf Cooperation Council are also members. China, which began a campaign against money laundering in 2003, is an observer. The FATF is a standard-setter, Schmoll says. The same procedures are used by the International Monetary Fund and the World Bank.

UN Security Council Resolution 1617, which was adopted in July, strongly urges all countries to implement the standards embodied in the FATF recommendations on money laundering and terrorist financing, Schmoll says. Meanwhile, the FATF will continue its program of mutual evaluations, whereby members submit to an assessment by their peers of their laws and systems for fighting money laundering.

At its recent meeting in Paris, the FATF launched a project, in partnership with the Asia/Pacific Group on Money Laundering, to explore the symbiotic relationship among corruption, money laundering and terrorist financing.

When a country puts our anti-money-laundering standards in place, along with the necessary legal and law-enforcement systems, it can be hindered in implementing the recommendations because of endemic corruption, Schmoll says. He says the FATF is studying whether or not there is an evolving role for the organization in relation to the corruption issue.

Meanwhile, 14 Arab countries have endorsed tough new standards to regulate informal hawala money transfers, cash couriers and charities. The Middle East and North Africa regional FATF, formed in November 2004, agreed at a meeting in September to launch mutual evaluations in 2006, beginning with Jordan and the United Arab Emirates.

Gordon Platt