As the whole area of sound business practice enters a new age, Global
Reinsurance invited experts in the area of professional ethos and anti-money laundering activities to share their views about the future fight against dirty money.
World leaders in the fight against money laundering met in Bermuda late this summer to discuss `The New Ethos of Doing Business', with the events of September 11, the Patriot Act and the resulting stigmatisation of the offshore community as the backdrop. They gathered at the invitation of local law firm Mello Jones & Martin and partner Saul Froomkin, who has long been an active leader in the global struggle against money laundering, speaking around the world and raising issues with the most important minds in the world.
Among the speakers at the symposium were:
• David D Aufhauser, general counsel of the US Department of Treasury - a modern Eliott Ness, fighting a new kind of international crime with sophisticated equipment and the enormous reserves of the US Treasury behind him;
• The Right Honourable Lord Millett, a member of the Appellate Committee of the House of Lords, which is the final Court of Appeal in the UK, and on the Judicial Committee of the Privy Council, which is the final Court of Appeal for Bermuda and other British territories in the West Indies; and
• Professor Barry AK Rider, director of the Institute of Advanced Legal Studies in London. He has been active in fighting the spread of money laundering over the past 20 years and is a leader in the intellectual thought processes that accompany the fight against it.
The day after the symposium, these four met with Global Reinsurance to discuss in greater detail some of the issues posed by the financial distribution systems of terrorists, drug dealers and other criminals.
Society's best hope in dealing with such criminal activity is not bombs dropped from high altitude. Like the Mafia, many criminal organisations are organised in such a way that when the head is lopped off, another takes its place. Attacking the cartels and criminal cells at their weakest point - the flow of money - is a central plank in ongoing attempts to bring these criminals to justice
Roger Crombie: Money launderers belong to slim organisations, fast-witted and determined to defeat you and your colleagues. They can think on their feet. Governments, on the other hand, are larger, more cumbersome organisations. Can we think fast enough, and act fast enough, to win this battle?
David Aufhauser: If you have the intelligence, and the ability to penetrate criminal organisations, yes.
Barry Rider: There always has to be a reason why people would launder money, given the expense and the danger of doing so. It is not a risk-free activity, even if relatively few people are brought to justice. So the first thing to ascertain is the reason for laundering, and then target such resources as you have in those areas that you rate as being of sufficient seriousness. That is why an awful lot of resources in financial intelligence, that have been deployed against ordinary areas of financial crime, are now moving into other arenas, to deal with, for example, terrorist property, because that now has a higher profile than pursuing, say, the proceeds of securities fraud. So I think that, yes, governments are sometimes slow to respond, but they do generally have resources far beyond the means of those they seek to control.
Saul Froomkin: Another factor is that there is a new sensitivity. Fifteen or 20 years ago, when we were talking about money laundering, people laughed at us. Then the fight against narco-terrorism and the laundering of narco-dollars became of greater importance and people showed a greater sensitivity. Suddenly now we have worldwide terrorism and international economic crime being a major factor. I think governments generally are more sensitive, so they are putting more resources into people who are trained in combating such crime.
David Aufhauser: Money laundering transactions are never consummated. That is to say: money is generated through crime, it is transferred, it comes through the pipeline, and then it is parked or invested somewhere. At any juncture in that spectrum, we can seize the money, or the goods it has been turned into, so time is infinite for us.
Barry Rider: Also, we must not forget what has happened over the last ten years with the pressure that has been brought, legally and otherwise, on those in the financial services industry to be far more responsible and far more responsive to law enforcement agencies. Those in the markets are really in the front line.
Lord Millett: I question the notion that we have infinite time because trails go cold and money ends up in innocent hands.
Roger Crombie: With increasing globalisation, do we need a global police force?
Saul Froomkin: Again, some of us have been talking for years about some kind of international exchange of information, because you have people collecting information all over the world about the same things and the same people, but they never share what they know. Barry has been talking about that for many, many years and nothing has ever happened. We lack an international database on the bad guys, be they terrorists or money launderers or narco-terrorists. We just don't have one.
Barry Rider: I think that is right. But there have been some developments in the past. For example, the Commonwealth governments set up the Commonwealth Commercial Crime Unit in 1980. The difficulty with the supranational approach is that, unless there is a strong sense of ownership by the US or by the European powers, matters seem to drift off into obscurity. That has been one of the problems with some of the regional initiatives we have seen in the Pacific and Africa: we do need strong financial sponsorship and ownership by the big powers. There are currently plans to set up regional financial intelligence units - we effectively have one or two already. The problem is that if you are dealing with very small jurisdictions, or developing jurisdictions, or very corrupt jurisdictions, particularly some of the transitional states in central and eastern Europe, any system is only as good as what is put into it. The first step is, obviously, having the international agreements. Without those, you have nothing. But what worries me is that in many of these jurisdictions, there is not the competence - and perhaps the integrity - to ensure that what goes into such a database is reliable and usable. I think it's a particularly serious problem where you are seeking assistance from a small, undeveloped place. That, I think, is perpetually going to mean putting people into such places, which I think has been the experience of people in the various law enforcement agencies: at the end of the day, you have to put your own people in. The questions that raises include definition; they are not there as diplomats, they are there to do a job.
Saul Froomkin: The Americans have given themselves one of the biggest problems, because of a lack of sharing and cooperation between the Drug Enforcement Agency, the Central Intelligence Agency, the Federal Bureau of Investigation and the Internal Revenue Service. In my experience, they are frustrated because they are not able, statutorily, to share information with one another. I think that may be changing under the new Homeland philosophy.
Barry Rider: Certainly, dealing with the US, seeking mutual assistance - a procedure I was actively involved in from 1980 through to the early 1990s - there were very serious institutional obstacles to obtaining information from the Federal agencies. We generally used to try to operate by going through the State Department and then appeal to the FBI or the others. I think that's changed ...
David Aufhauser: That's prehistoric ... (general agreement from the participants).
Roger Crombie: You speak of a database of `bad guys' and you, Mr Aufhauser, have referred to the possibility of a database with all the world's transactions in it...
David Aufhauser: I have referred to the theoretical possibility ...
Roger Crombie: Is the reason we do not have such a database that it would, inevitably, capture the activities of the good guys as well?
Saul Froomkin: That's part of the problem, but, again, it is a question of being able to rely on the integrity of your partners. Your friend today may be your foe tomorrow, and are you going to share all your intelligence with people that may, for various reasons, be on the other side of the equation? That's part of it.
Barry Rider: We are not talking just about terrorists here; we are talking about all kinds of international money laundering. Corruption is a big problem. Frankly, the perceived level of institutional corruption in many parts of the world, particularly the developing world, is so high that I do not think that your average American law enforcement agent would be very happy to offer unrestricted access.
Roger Crombie: Do we, then, need to change some of our legal concepts? Innocent until proven guilty has been coming under fire. The British are making changes to some of the most basic tenets of law. Is that a way forward?
Lord Millett: It would lead to more efficiency, I suppose, and a greater number of convicted wrongdoers. So, in that sense, it would be a way forward. But we should not trample on civil rights in the process, and that would be resisted. Curiously, the judges appear to have come down, generally, in favour of change. But it must be well thought-out, and what I think we would insist on is judicial control.
Roger Crombie: Until the events of September 11, we were proceeding without a real understanding of the situation. Do we not have to enforce some new controls?
Lord Millett: Not only since September 11. Organised crime was with us before then, and is always with us. So is corruption. Terrorism is merely an additional focus we face.
Saul Froomkin: It may be the case that we simply have to learn to live with terrorism, as you have in the UK, for 30 years or more. It's a shock when it hits you for the first time, as it has in the US. It opened the eyes of a lot of naïve people who thought that terrorism happened in some far-off land. Suddenly, it was brought home to them - literally - that this is a problem they have, too. How long that feeling is going to last, one does not know. I am always surprised at how casually people act when there is a bomb threat; they just carry on as if it were just another day.
Lord Millett: I think it is important that we do just that, because the moment we start to change our way of life and give up our precious civil liberties, then the terrorist has won.
Barry Rider: Without giving away any secrets, if you go to the offices of the Law Lords, there are no bomb blast-proof curtains. It is very much business as usual.
Saul Froomkin: So the question is whether our American legal colleagues will become used to the idea that they are under attack. I hope not.
Barry Rider: We [in the UK] have become inured to it; we often do not even comment on it. Whereas, if you go to Sicily, for example, you will see judges, magistrates and prosecutors going about with perhaps ten or 12 armed guards, all the time. Now, that is in Sicily, not the rest of Italy, and I am not suggesting that as a recommended lifestyle, but I mention this because there are profound issues of security that have nothing to do with September 11.
Lord Millett: That's right. Any judge in England who has tried an Irish terrorist case will be given a lifetime armed guard. That's politic.
Roger Crombie: Is it the general view that we are moving toward a two-tier world of `good guy jurisdictions' and then the others?
Barry Rider: We have to look historically at the way international politics have developed in terms of law enforcement. The general view is that Interpol has not worked awfully well. The Americans have always had some reservations about Interpol, although I think that has changed in the last four or five years. Interpol is a police club, constitutionally, an association of police forces, and has therefore excluded from its mission other networks, such as those of central banks and financial regulators. Over the last 15 to 20 years, in promoting integrity, stability and other important values, we have placed increasing reliance on agencies outside the police, particularly in the area of financial crime and money laundering. That is one reason why Interpol became more and more irrelevant. It is trying to regain its former importance, very much with US involvement, but in the meantime, what happened was that various groups fell upon intelligence-related organisations, security organisations and other important networks, largely organised from Europe.
More recently, networks have developed of financial intelligence units, usually composed of traditional elements of security and intelligence and financial regulators. This has all developed outside the traditional law enforcement networks. You now have the Egmont Group, which is really a club of 100 or so countries. It works really well, because you're dealing with some major players, but the difficulty is that this very important network is not structured. It lacks a permanent secretariat as such. But if you are not part of the Egmont group, you really are a poor relation. This is a difficulty that faces even powerful governmental organisations, such as the International Monetary Fund or the World Bank, which are trying to help forward some of the smaller and developing states.
David Aufhauser: I think you also made an interesting point about the ways in which developing countries transfer their wealth abroad.
Barry Rider: Yes, I think that most developing countries see the debate on money laundering in terms of the flow of funds. I have been running programmes out in South Africa for their intelligence services. You find that the people running anti-money laundering programmes are people with an exchange control or reserve bank background, and they think primarily in terms of flow of funds out of the country. They are not talking in terms of the kind of money laundering circles and cycles that we would normally be concerned with.
Saul Froomkin: The irony is that the flight of capital is a huge problem to them. Money laundering is not. The reverse applies in our part of the world, where the flight of capital and exchange control is not a big problem, but money laundering is.
Barry Rider: But it can be. Take the example of Mozambique, a few years ago, when a group of known criminals bought up a very significant part of Mozambique. So there is also the danger of penetration [of crime fighting systems by criminals].
Saul Froomkin: That's right, but I think that the point of the question being raised was the threat of a parallel banking system.
Barry Rider: I think that is also a reality, one that has occurred without anyone planning it or intentionally including anyone in it. I think that's just the force of economics. Countries or organisations that want to do business with the US, for example, or have any part of their business transacted through a bank in the US, now have to deal with the Patriot Act, and not just that Act, but others in force throughout the West. The costs involved in now establishing a `know your customer' regime and the required due diligence - for, for example, business from Indonesia or Nigeria, or the Philippines or Israel, or Turkey or Malta - are so great that effectively it may price that business out of the Western market. And that does not count all the risk exposures, which is another factor. So I think that there is a danger that you will see a second-tier international banking system develop beyond and below the Western system. Effectively, you have that in the Indonesian sub-continent. I think there is another danger, and that is that if we go down the path - and I think we will - of much greater electronic surveillance over the financial world, then I think you will see more and more people being forced into alternative banking systems that do not rely on the electronic data transmissions and the whole apparatus of Western banking.
Roger Crombie: Is it generally the view that some jurisdictions are not going to be able to pass muster?
David Aufhauser: I believe that legislation such as the Patriot Act will improve and enhance the business environment, because some jurisdictions will find it impossible to comply with it, or as they attempt to comply with it, their business and commerce will evaporate. You don't want the bar room scene from Star Wars, with every scoundrel in the world in your country, to characterise who you are and what you are.
Saul Froomkin: The analogy I think about dates back to when I was on the Bermuda team that negotiated the tax treaty with the US some years ago. A number of important elements on the island were concerned that we would lose all our business. We were assured that would not happen, and in fact it did not happen. We entered into the treaty, and it has been in force ever since and, according to the information I have, we lost virtually no business at all, which meant that the business we had here was good business, because otherwise it would have left. I suspect that the same thing will happen when we go along with the club and do what is expected of us internationally. We will succeed, provided that we have a level playing field. While there is a Liechtenstein, or a Switzerland, which, so far, is not playing the game, there will not be a level playing field. That is where we could have a problem, because the legitimate business that may want to come here may very well ask: "Even though we are legitimate, why do we want to take a chance and have all our information disclosed to the world, when we can go to a Switzerland or a Liechtenstein and keep that information to ourselves?" So I think that, if we have a level playing field, there is no question that we will continue to be successful.
Roger Crombie: The smaller jurisdictions don't have much say in the matter, though.
Saul Froomkin: (They) do not, but neither do Liechtenstein or the rest of them, so far. Our friends the Americans have indicated, as has the OECD, that serious consequences will follow for those that do not play the game. If that happens, then we will all be onside. But if it is only an idle threat, then there will be problems, I think, and we will end up with not only a parallel banking system, but a parallel international business system as well.
Roger Crombie: Mr Aufhauser, earlier you made a passing reference to insurance companies in the area of money laundering. What was your thrust?
David Aufhauser: I was making an allusion to one additional tax burr in our saddle, right now, which is excessive value pricing, the parking of profits offshore. The reinsurance industry, particularly, has gained from litigation in the US on the subject, in Tax Court.
Roger Crombie: One final question. Have you run into resistance over the Patriot Act?
David Aufhauser: The Act is so new that there is not very much to report yet. Many of the rules and regulations that have been promulgated are not yet final and have not yet come into effect. The curtain call is out there, but it is premature to talk about resistance. Certainly, international money centre banks and significant lobbyists for broker/dealers have come in with strong recommendations and suggestions about how we should recognise reality, but they have really been quite receptive and seem to think it is a good idea.