A brave new world: recent developments in anti-money laundering and related litigation traps for the unwary in international trust matters.

• Author: Zagaris, Bruce
• Position: Symposium: The International Trust, part 2

1. INTRODUCTION

   In 1998, governments and international organizations continued their active efforts to increase regulatory and criminal enforcement of various laws to stem the tide of transnational crime. These efforts were reflected in the criminalization of various business and financial transactions, the imposition of new due diligence measures on the private sector and the concomitant weakening of privacy and confidentiality laws, strengthened penalties for non-compliance with regulatory efforts, and new law enforcement techniques, such as undercover sting operations, wiretapping, expanded powers to search homes and businesses, and controlled deliveries. So obtrusive are many of the law enforcement techniques and the privatization of law enforcement, whereby governments transfer their responsibilities to the private sector, that many professionals engaged in international transfer of wealth counseling analogized the trends to those in Aldous Huxley's A Brave New World (or perhaps the Steve Miller Band's rendition).

   This discussion outlines the trends in six areas and draws some practice pointers from the trends. Section II will discuss the activities of international organizations that are driving much of the strategy, framework, and minimum standards for the development of an international anti-money laundering regime. Increasingly, international organizations, both of a universal and a more regional level, are consciously trying to build alliances and networks with each other and the private sector.

   In Section III, selective elements of the substantive law of anti-money laundering are considered in the context of recent developments, such as the continued erosion of secrecy and the imposition of increased due diligence requirements. Section IV discusses major case and miscellaneous developments, such as the failure of Russian offshore banks in Antigua.

   Section V highlights the growth of international tax enforcement, the increased reporting requirements and unilateral extraterritorial application of the law, the increasing bilateral and multilateral cooperation, and the new traps for the wary due to tax enforcement developments.

   In Section VI, international asset forfeiture trends are highlighted. These activities pose a much graver threat to the ability of clients to do business internationally than ten years ago. The goal of immobilizing the assets of transnational criminals has become increasingly the watchword. While the rights of innocent third parties are protected in principle, it sometimes takes a lot of money and professional acumen for such persons to obtain due process.

   Section VII focuses on criminal cooperation mechanisms. Section VIII discusses the use of international human rights provisions as a shield for defendants, fiduciaries, and intermediaries in the context of international anti-money laundering and financial crime cases.

   As an introductory matter, the life cycle of money laundering is important to grasp. It has three cycles: (1) placement, whereby the criminal has enormous amounts of dirty money in the form usually of cash that he needs to place or initiate in a way that neither law enforcement nor the private sector will identify as the proceeds of crime; (2) layering, which involves the creation of many layers between the dirty money and the ultimately cleaned money through the use of offshore vehicles, such as trusts in secrecy jurisdictions, in tandem with multiple, entitles, such as companies, and secrecy mechanisms, such as nominees, stamen, bearer shares, and sophisticated structuring; and (3) integration is achieved when the criminal has transformed the dirty money through enough layers of the laundering cycle that a legitimate banker, lawyer, or fiduciary, even one with cutting edge due diligence, would never suspect the criminal source of the money.(1) Integration means that, in 1999, the money of the many heirs of Joseph Kennedy, the famous former bootlegger during the prohibition days, now is not questioned. Indeed, the money even finances federal elections (e.g., of the U.S. President, Senate, and House). In Colombia, the money of the Cali cartel has been integrated for two or three decades into the leading pharmaceutical companies, soccer teams, and also the financing of political elections (e.g., the United States imposed sanctions due to the financing of Samper's election).

   Much of the emphasis of the politics of international anti-money laundering is to try to deprive criminals--especially transnational criminals--and organized crime of the fruits of the crimes and the means of their committing more crimes. Another goal is to allocate the seized proceeds to governments and law enforcement. Hence, the economics and politics of anti-money laundering are to redistribute economics and power of crime. To help with the fight, governments and international organizations have solicited the collaboration of the private sector to prevent money laundering through know-your-customer and identifying and reporting to law enforcement suspicious transactions.

2. DEVELOPMENTS OF INTERNATIONAL ORGANIZATIONS

   Multilateral organizations have set the framework for anti-money laundering standards, mechanisms, and institutions.(2) The United Nations pioneered the 1988 Vienna Convention Against the Trafficking in Illegal Narcotic and Psychotropic Substances, which contains the requirements to criminalize money laundering and immobilize the assets of persons involved in illegal narcotics trafficking.(3)

   In 1989, the G-7 Economic Summit Group established the Financial Action Task Force (FATF), which operates out of the Office of Economic Cooperation and Development (OECD) headquarters in Paris.(4) FATF has issued a set of forty recommendations (Forty Recommendations) that concern legal requirements, financial and banking controls, and external affairs.(5) FATF operates through a Caribbean FATF (CFATF)(6) and is in the process of establishing a similar group in Asia. It issues an annual report that provides an overview of progress and problems in international anti-money laundering.(7)

   The G-10 Basle Group of Central Banks has actively provided guidelines for central bank supervisors and regulatory controls.(8) As mentioned below, on September 23, 1997, the Basle Group issued guidelines on supervision.(9)

   Regionally, the Council of Europe's 1991 Convention on Laundering, Search, Seizure and Confiscation of Assets has become the major international convention that obligates signatory governments to cooperate against anti-money laundering from all serious crimes.(10)

   The European Union, as a signatory to the 1988 Vienna Drug Convention and due to its own actions to combat financial crimes against the Communities, issued a 1991 Anti-Money Laundering Directive that it is poised to strengthen.(11) As mentioned below, it is now in the process of an initiative against cybercrimes.(12)

   An important regional organization in the anti-money laundering has been the Inter-American Drug Abuse Control Commission (CICAD). At its meeting on November 4-7, 1997, CICAD anti-money laundering experts recommended an ongoing assessment of compliance with standards and the creation of national financial intelligence units (FIUs).(13) National governments and international organizations are striving to create mechanisms to monitor regularly compliance with international standards.

   Because the recent FATF annual reports and topologies provide cutting-edge discussions of the status of money laundering trends, they are discussed next.

   1. FATF 1997 Annual Report

      In June 1997, the Financial Action Task Force on Money Laundering issued its annual report for 1996-97.(14) The report highlighted the annual survey of money laundering methods and countermeasures covering a global overview of trends and techniques.(15) These methods included the increased use by money launderers of non-bank financial institutions, especially bureaux de change, remittance businesses and non-financial professionals.(16) Special attention was devoted to the money laundering threats of new payment technologies.(17)

      The work of the FATF in 1996-97 focused on three main areas: "(i) reviewing money laundering methods and countermeasures; (ii) monitoring the implementation of anti-money laundering measures by its members; and (iii) undertaking an external relations program[] to promote the widest possible international action against money laundering."(18)

      1. Reviewing Money Laundering Methods and Countermeasures

      A significant achievement of FATF during 1996-97 was the annual survey of money laundering methods and countermeasures.(19) The survey provides a global overview of trends and techniques, especially the issue of money laundering through new payment technologies, such as smart cards and banking through the Internet.(20) FATF reviewed the issue of electronic fund transfers and examined ways to improve the appropriate level of feedback that should be provided to reporting financial institutions.(21)

      1. Trends in FATF Members

         While drug trafficking remains the single largest source of illegal proceeds, non-drug related crime is increasingly important.(22) The most noticeable trend is the continuing increase in the use by money launderers of non-bank financial institutions and of non-financial businesses relative to banking institutions. The trend reflects the increased level of compliance by banks with anti-money laundering measures. The survey noted, "Outside the banking sector, the use of bureaux de change or money remittance businesses remains the most frequently cited threat."(23)

         FATF members have continued to expand their money laundering laws, covering non-drug related predicate offenses, improving confiscation laws, and expanding the application of their laws in the financial sector in order to apply preventive measures to non-bank financial institutions and non-financial businesses.(24)

         FATF discussed money laundering threats...