Anti money laundering regime hard or soft law

THE ANTI-MONEY LAUNDERING MOVEMENT:

EMERGENCE OF A SOFT LAW REGIME?

SHANTANU BASU
NORTH CAROLINA STATE UNIVERSITY
RALEIGH, NC 27605

PRESENTED & SUBMITTED : NOVEMBER 28, 2007

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CONTENTS

Introduction – The Seeds of a New Global Regime ..........................................................................2
About this paper ..................................................................................................................................3
Constructivism and International Law in the Anti-Money Laundering Regime ...............................5
The Sandholtz & Sweet Constructivist Model ....................................................................................9
Origins of Illicit Money .....................................................................................................................11
Magnitude of Money Laundering .....................................................................................................12
The Basic Mechanics of Money Laundering ...................................................................................13
The Effects of Money Laundering ....................................................................................................14
The Macro Level: Multilateral Cooperation and Hard Law ...........................................................15
The United Nations at the Macro Level: Hard Law and Multilateral Cooperation .......................17
Bilateral Cooperation at Macro Level: Hard Law............................................................................26
The Micro Level and Domestic Law: In Synch with Hard International Law? .............................28
Regional Cooperation at the Meso Level: Supplementing Hard Law by Soft Law ........................31
Role of International Financial Institutions ......................................................................................31
Inter-governmental Cooperation at the Meso Level: Soft Law Supplement to Hard Law.............36
Non-governmental Cooperation at the Meso Level: Soft Law Supplement to Hard Law .............38
The Illicit Drug Trade and Enforcement .........................................................................................41
African ‘Blood’ Diamonds and Enforcement ..................................................................................44
Offshore Financial Centers: Umbrellas for Illegal Financial Activity? ............................................47
Conclusion .........................................................................................................................................53
References ..........................................................................................................................................56

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Introduction – The Seeds of a New Global Regime

The need for establishing order under a temporal ruler after the tumultuous Middle Ages in

Europe, that culminated in the Peace of Westphalia (1648), was driven by the internal

compulsions of states and people‘s desire for peace and order. Over four and a half centuries

later, the community of nations has to reckon with what Naim (Foreign Policy, Jan-Feb 2003,

29) calls the ―five crimes of globalization‖ – crimes that transcend national boundaries and affect

the lives of billions of people worldwide, viz. illegal trade in drugs, arms, intellectual property,

people and money. He states ―Like the war on terrorism, the fight to control to control these

illicit markets pits governments against agile, stateless, and resourceful networks empowered by

globalization.‖ (Foreign Policy, 2003, 29). If Martin Luther‘s ―denial of every extra-territorial or

independent communal form of life‖ (Figgis, 1916) laid the foundation for the Peace of

Westphalia (1648) by establishing ―the unity and universality and essential rightness of the

sovereign territorial State‖ (Figgis, 1916), the quest for global peace and order is perhaps making

way for a logical corollary to Westphalia – an international regime that is joining hands to

prevent the spread of criminality in the continuing quest for global peace and order and anti-

money laundering efforts are a manifestation of the emerging global resolve. As Anne Marie

Slaughter says, ―A new world order is emerging, with less fanfare but more substance than either

the liberal internationalist or new medievalist visions. The state is not disappearing, it is

disaggregating into its separate, functionally distinct parts…………………..are networking with

their counterparts abroad, creating a dense web of relations that constitutes a new,

transgovernmental order. Today's international problems—terrorism, organized crime,

environmental degradation, money laundering, bank failure, and securities fraud—created and

sustain these relations‖ (Slaughter, 1997, 2).

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About this paper

What is the role of international law in collective legitimation for system transformation in

the context of the anti-money laundering (AML) movement? How does international law create

constitutive and transformative practices at the meso and micro levels? Are such transformative

practices always effective? This paper seeks to answer these research questions in the framework

of Sandholtz and Sweet‘s model shown in the following diagram.

Meso Level

Macro Level Micro Level

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This paper contends that as international law provides the constitutive framework at the macro

level, it also extends this to the micro and meso levels by creating transformative rules and

institutions as politics move from a state of anarchy to a state of negotiated settlement. These

three levels are dynamic and highly interactive. If international law brings together nations under

a single umbrella by providing them opportunities to communicate national view points amongst

each other by creating constitutive practices (such as conventions), equally it provides nations a

common platform to individually and collectively validate their often conflicting concerns

through transformative practices; either by attempting to synchronize domestic law with

international law and/or by creating institutions that carry the collective validation forward. Thus

if international law has demonstrated its constitutive power at the macro level by the medium of

mutual legal assistance treaties (MLATs), conventions and directives, it has also encouraged

such collective legitimation at the micro (national) level by attempting to synchronize domestic

legislation to the Vienna Convention, etc.; simultaneously, member nations have used this

constitutive power of law to build institutions at the meso level (such as the FATF or FSRBs)

that have been the source of much legislation and consensus-building. This paper therefore

briefly examines the role of the Vienna Convention and OECD Directives at the macro level,

their relation to domestic legislation at the micro (national) level and the creation and role of

institutions such as those of the UN, FATF and FSRBs and regional anti-money laundering

organizations, and international financial institutions, etc.. Finally, this paper briefly examines

the effect of the AML movement in three contemporary areas, viz. offshore financial centers,

illicit trade in narcotics and ‗blood‘ diamonds that show the inherent limitations of enforcement

in international law and the time, effort and moneys that would be required to establish this

nascent regime on a firmer footing.

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Constructivism and International Law in the Anti-Money Laundering Regime

Nigel Morris Cotteril quotes (Foreign Policy, May-June 2001, 16) historian Sterling

Seagrave in his book Lords of the Rim to describe merchants in China, 3000 years ago,

converting their gains from trade into readily movable assets, moving cash out to invest in other

businesses and trading at inflated prices to expatriate funds. The basic techniques remain, by and

large, the same, 3000 years later, only refined and professionalized– graduating from what

Savona called ―from a hand wash to a launderette‖ (1997, 21). Money laundering as a global

phenomenon has as much to do with domestic law as it does with international law, domestic

economics and international development, domestic economic compulsions of society and the

global economic costs of activities arising from money laundering as the discussion of the effects

of money laundering infra show. This is sought to be matched by a growing global resolve to

curb corruption, narcotics trade, trade in ‗blood‘ diamonds, etc., closely monitor movement of

illegal moneys across the global financial system and coordinate judicial, policial and

investigational cooperation among nations to control this contemporary ‗white-collar‘ evil.

Societies comprise ―socially knowledgeable and discursively competent actors who are

subject to constraints that are, in part material, in part institutional‖ (Ruggie, 2005, 885) that

affect politics and economics in all nations and across nations as viewpoints emerge and public

opinion is ranged behind such perspectives. As Nadelman states, ―…moral and emotional factors

related to neither political nor economic advantage but instead involving religious beliefs,

humanitarian sentiments, faith in universalism, compassion, conscience, paternalism, fear,

prejudice, and the compulsion to proselytize can and do play important roles in the creation and

the evolution of international regimes‖ (1990, 480).Viewed in this social construct, international

law provides the framework for the actors to arrive at collectively validated legal agreement – an

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exchange of opinions in an international forum and the building of consensus. This is the essence

of the constructivist view of international law – a world in which politics born out of values and

norms creates situations/disputes for which international law provides the constitutive dispute

resolution framework and may lead to the creation of an international regime which are ―sets of

implicit or explicit principles, norms, rules, and decision-making procedures around which

actors‘ expectations converge in a given area of international relations‖ (Krasner, 1983). When

standards become commonly accepted by various jurisdictions over time, they develop into soft

law as part of the new regime with hard law providing the platform upon which soft law

ultimately stands and supplements hard law.

Christian Reus-Smit opines that constructivism broadens the view of the relationship

between international politics and international law to ―include issues of identity and purpose, as

well as strategy………………….and by stressing the importance of discourse, communication

and socialization of human behavior‖ (2007, 23). Structures shape the interest and attitudes of

states. Such attitudes and interests are born of the respective states‘ social identities that also give

rise to dynamic shifting interests. Such attitudes and interest, in turn, exist because of ―the

routinized practices of knowledgeable social agents, which makes them human artifacts

amenable to transformation‖ (2007, 22). In other words, structures reflect national attitudes and

are the breeding ground for cooperation between nations. Robert Keohane advocated a ‗supply-

demand‘ approach stating that structures (institutions) were brought into being since they

reduced cheating, lowered transaction costs and increased information – all of which were

necessary ingredients of successful international cooperation (1982). However, Reus-Smit

disagrees with this narrow definition and says that purposive deliberation require fora that enable

―negotiation and stabilization of legitimate collective purposes and strategies‖ (Reus-Smit, 2007,

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30). Such structures that represent the ―mutual will of the nations concerned‖ (von Martens,

1795, 47-48) therefore derive their legitimacy and gain consensus by their procedural and

substantive fairness. Further, as Slaughter, Tulumello and Wood state, substantial

institutionalized cooperation has taken an increasingly "legalized," "judicialized" or

constitutional form (1998, 370). The community of law created by the European Court of Justice

together with national courts of the European member states (Weiler, 1991), international

regimes, from the World Trade Organization (WTO) to the North American Free Trade

Agreement (NAFTA) and the World Bank, are a pointer in the direction that the anti-money

laundering movement too is taking, lending greater credence to Louis Henkin's celebrated

observation that "almost all nations observe almost all principles of international law and almost

all of their obligations almost all of the time" (1968, 42).

However, the evolution of new regimes does not involve all nations equally although all

nations may participate in constitutive fora. ―The evolution of global prohibition regimes,

……………… entails highly complex processes………. in which the norms of dominant

societies, notably those of Europe and the United States, are not only internationalized but also

internalized by diverse societies throughout the world‖ (Nadelman, 1990, 480). This process of

internationalizing norms by dominant societies has also been labeled ‗moral proselytization‘ by

Nadelman( 1990, 480). Thus in the case of the Basle Accord, the US pressured foreign

governments by threatening to cut off their access to the US financial system unless they

complied with the new standards. On account of the centrality of US financial markets in the

global financial system, this threat was very effective in encouraging foreign governments to

comply. A similar threat was made - and even more explicitly - by the US in its efforts to

encourage foreign states to begin to crack down on money laundering. The Kerry Amendment to

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1988 Anti-Drug Abuse Act empowered the US government to cut foreigners off from access to

the US financial system, including its clearing systems, if their governments refused to reach

specific anti-money laundering agreements with the US Treasury. Foreigners had to take this

threat seriously, especially since the US-based clearing systems CHIPS and Fedwire handle the

vast portion of all wire transfers sent and received in the world (Wyrsch, 1992, 518). The threat

was thus "a hefty club, since those systems are the underpinning of world trade and finance. A

haven that was not plugged in would not survive long." (Possamai, 1992, 136).

Despite American and European domination of the AML movement and their stewardship of

AML hard law initiatives, the fight against money laundering has been closely influenced by

‗soft‘ law instruments in which ―rules are enshrined‖ rather than emphasis on the content of

rules‖ alone (Stessens, 2000, 15). As Stessens states, ―these evolutions are especially notable as

they take place in the field of law enforcement, traditionally considered the exclusive

‗playground‘ of national courts and parliaments‖ (Stessens, 2000, 15). Stessens makes an

important point when he states that the primary causative factor for such ‗soft‘ law is the

reticence of financial institutions to submit to governmental control (2000, 15). Accordingly,

‗soft‘ law like the Basle Statement of Principles (1988) issued by the Basle Committee on

Banking Regulations and Supervisory Practices, much of which has been incorporated in anti-

money laundering domestic laws, ―provided a framework of rules in an area where formal

legislation was still lacking‖ (Stessens, 2000, 17). The political success of the emerging AML

regime is attributed by Helleiner to four major factors, viz.

The dominant role of the US;

The availability of resources and tools with European nations and the US to force non

cooperative offshore financial centers to join international regulatory regimes.

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Encouraging domestic interests to press for new international regulations as a way of

offsetting the impact of new domestic regulations

Encouraging compliance for ―reputational‖ reasons.

Increasingly important role of transnational policymaking communities in finance that

has fostered collective action in the regulatory arena (2000,11)

Hellneir further argues that these factors ―explain not only why regulatory cooperation and

coordination have been possible but also an interesting feature of it: the fact that it has not been

accompanied by the creation of strong international institutions or many binding treaties to

ensure compliance or enforcement‖. The two major international institutions at the center of the

regime - the Bank for International Settlements in the case of the Basle Accord and the Financial

Action Task Force (FATF) in the case of money laundering - have little direct authority over

member states (the life of FATF is extended every five years), yet they have contributed

substantially to the new AML regime. In both cases, Hellneir says that ―regulatory initiatives

have been pursued instead through intensive interaction between sovereign states. And even in

that respect, this cooperation and coordination have been characterized by voluntary agreements

and few binding rules…….. and consensual pattern of policymaking among leading financial

powers. (2000, 11) In sum, consensus-building using the constitutive power of international law

is gradually building the new AML regime at three levels, macro, micro and meso, with the

initial moves being made by the US, OECD and the UN, as discussed in the succeeding

paragraphs.

The Sandholtz & Sweet Constructivist Model

The pernicious social and economic effects of illegal activities ranging from illegal

trafficking in drugs to corruption and the encouragement given by some states to such activities

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either as perpetrators or as shelters, has engendered an international regime that is seeking to

create an enforcement system that is being integrated between multilateral, bilateral and

unilateral levels of action. Sandholtz and Sweet (2007, 239) have proposed a model of

international governance that has three levels, viz. macro, micro and meso. The macro level

refers to the rule system that ―enables and sustains social activity‖ (Sandholtz & Sweet, 2007,

239). In the context of the AML movement the macro level would refer to the various

conventions and directives that have been held or issued from time to time while the micro level

would refer to the enactment of domestic legislation provided in such conventions and directives.

The meso level would refer to institutions such as the FATF, regional FATF-Style Regional

Bodies (FSRBs), etc.

The interaction of these three levels ―from identity construction to instrumental action‖

(Reus-Smit, 2007, 31) forms the basis of the AML movement. Applied to the AML movement,

in this model of governance, all international (macro level) conventions and directives flow

backward to the enactment of domestic legislation in pursuance of such conventions (micro

level) and laterally to the creation of both international and regional institutions that facilitate

enforcement at the meso level and forward again to the macro level (see diagram on p. 2 supra).

At the heart of this constructivist model therefore, lays the constitutive power of international

law that also has a coercive element, albeit through the medium of collective approval and

resultant individual domestic law, arising from communications between nations based each

upon their individual perceptions of morality and priorities. This explains what Stessens calls the

―twin track fight‖ (2000, 108) against money laundering. This ‗fight‘ consists of ―a preventive

approach founded in banking law and a repressive approach founded in criminal law‖ (Stessens,

2000, 108), aligning domestic law to meet international legal commitments.

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The criminalization of money laundering has a repressive effect. On the other hand, the

preventive approach is one in which financial institutions are required to report transactions

within a defined legal framework to prevent third parties from aiding and abetting laundering of

proceeds of crime. Both the approaches are institutionalized at a macro level in international

conventions, bilateral agreements and MLATs while their enforcement is subject to domestic law

and international executive cooperation enshrined in institutions such the FATF or the FSRBs,

World Bank and the IMF as discussed in this paper.

Origins of Illicit Money

A substantial quantity of illicit flows are drugs-related while the rest emanate from

organized crime such as gambling, arms trade, human smuggling, car theft, prostitution, body

organ trafficking, corruption, etc. There are also a long list of financial transactions, which, while

not necessarily illegal (arms sales ―commissions‖ for instance), certainly do not operate in a

transparent manner. These types of financial dealings constitute the grey economy. More

imaginative ways of moving legitimate finance into the grey economy by accounting jugglery

such as ―black‖ accounts, over invoicing and/or under invoicing and price manipulation

constantly expands this economy as money laundering becomes a relative concept. Naim

(2005), Winer (2002), Winer and Roule (2003) among others, suggest that under financial

globalization illegal and informal flows are playing an increasingly significant role within the

global capital circuits, and national legal systems are lagging behind in designing effective ways

of dealing with them. : In many respects, the contemporary global financial system has become a

money launderer‘s dream. Conversely, it is a nightmare for law enforcement agencies that have

to work through a jurisdictional and bureaucratic morass in their efforts to follow and seize the

money. (Williams 2001, 110). So far as the offshore havens that act as primary conduits for this

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illicit capital are concerned, ―it has been estimated that the equivalent of one third of one year‘s

global GDP is held in tax havens‖ (Levi 2001, 210). At the same time, it is also estimated that

some 75 percent of drug-trafficking operations (Weiland 1984) use the same offshore havens. As

Maingot (1995) also points out, although there is nowhere in the world that has a greater

concentration of offshore havens than the Caribbean, quantities of these supposedly independent

territories are still (at least nominally) under the jurisdiction of European countries. The refusal

of European governments to enforce regulation on these offshore (and onshore) havens,

however, openly flies in the face of self-proclaimed wars on drugs and terrorism. Thus while, on

the one hand is a bona fide desire to curb the menace, yet the lure of revenues propels states into

retaining and even sometimes strengthening money laundering institutions (as the discussion on

OFCs infra shows).

Magnitude of Money Laundering

Naim (2003, op. cit) estimated the global money laundering effort to be worth anywhere

between $800 billion to $2 trillion per annum (2003, 34). The lucrative nature of this trade is

borne out by several key indicators. Ronen Palan (2002, 151-176) estimated that in 1999 Africa

had five offshore financial centers (OFCs), the Asia Pacific region 17, Europe 19, 6 in the

Middle East and 24 in the Americas. While the Cayman Islands has a population of 36,000, it has

more than 2,200 mutual funds, 500 insurance companies, 60,000 businesses, 600 banks and trust

companies with about $800 billion in assets (Naim, Moises, 2003, 34). Some analysts like

Kochan (IMF, 1994) and Marcel Cassard (April, 1991, 73-77) maintain that more than half of the

world's stock of money passes through these tax havens. In addition, it is estimated that about 20

percent of total private wealth and about 22 percent of banks' external assets are invested

offshore (Kochan, 1994 & Cassard, 1991, 73-77). Walter and Dorothy Diamond (1998),

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however, estimate the current total assets located in tax havens at $5.1 trillion. James R. Hines

and Eric M. Rice (1994, 49-82) estimate that by 1994 the gross amount of U.S. investment in tax

havens was $359 billion of $1.39 trillion, of over one-quarter of corporate activity conducted

worldwide. Such tax havens operate by tempting foreign capital by providing juridical rather

than de facto abodes (Robert H. Jackson and Carl G. Rosberg, 1991, 1-31). Thus what began as

began as a panacea for their economic disadvantages (Abbott, Jason, 2000, 157), has translated

into a global operation, much of which may be illegal. However, it may be remembered that

OFCs are only a part of the global money laundering movement, or as it is called, riciclaggio in

Italian, blanqueo in Spanish and blanchiment in French (Savone, 1997, p. 10) and do not include

Asian systems like hawala and hundi or the Latin American casas de cambio. Roman Emperor

Vespasianus‘ dictum of pecunia non olet (money does not stink) (Concise Oxford Dictionary of

Quotations, Oxford, 1986, 262) therefore no longer rings true.

The Basic Mechanics of Money Laundering

Money laundering is an all-encompassing term for illegal moneys transiting through a

legal international monetary system masquerading as legal funds. Van Duyne (1998, 359-74)

defines it as the process of falsely legitimizing one‘s income and assets. In the first - or

placement - stage of money laundering, the launderer introduces his illegal profits into a

financial system by breaking up large amounts of cash into less conspicuous smaller sums that

are then deposited directly into a bank account, or by purchasing a series of monetary

instruments (checks, money orders, etc.) that are then collected and deposited into accounts at

another location. The funds having entered the financial system, the second – or layering – stage

takes place in which the launderer engages in a series of conversions or movements of the funds

to distance them from their source. Such funds may be channeled through the purchase and sales

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of investment instruments, or wired to a series of accounts at various banks all over the world or

disguise the transfers as payments for goods or services, thus giving them a legitimate

appearance. Having successfully processed his criminal profits through the first two phases, the

launderer moves them to the third stage – integration – in which the funds re-enter the legitimate

economy. The launderer might choose to invest the funds into real estate, luxury assets, or

business ventures. At every stage the moneys may move either closer or away from their origin,

depending on the risks of detection, rates of return, etc. This explains what Stessens calls the

―twin track fight‖ (2000, 108) against money laundering. This ‗fight‘ consists of ―a preventive

approach founded in banking law and a repressive approach founded in criminal law‖ (Stessens,

2000, 108).

The Effects of Money Laundering

Morris-Cotteril (2001, 17) stated that on account of money laundering, people pay more

for insurance because of fraud, higher taxes on account of social security fraud and for public

works where corruption is endemic. Bartlett states (2002, 11) that money laundering activity

increases the probability that individual customers, or the institution itself, would be defrauded

by corrupt individuals within the institution. Taking this further, Bartlett stated that money

laundering increased the probability that the financial institution itself would become corrupt or

even be controlled by criminal interests (2002, 7). Ultimately reputational loss may lead to a loss

of critical investor interest leading to the collapse of the financial institution. Money laundering

weakens the financial sector's role in economic growth and their ability to raise market resources

(Bartlett, 2002, 9). Money laundering distorts investment and depresses productivity. Laundered

illicit funds are often placed in what are known as "sterile" investments, or investments that do

not generate additional productivity for the broader economy and often form the financial muscle

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for crime and corruption, e.g. real estate, art, antiques, jewelry, and high-value consumption

assets such as luxury automobiles, yachts and aircraft (Bartlett, 2002, 17-22). By transferring

resources to ―safer‖ havens, laundering affects economic development by draining an economy

of its capital flows as in the case of Russia (Loungani & Mauro, 2000 and Mauro, 1997, 83). The

UK's financial supervisory authorities estimate that illicit transactions in UK accounts that

originated in Nigeria amounted to about $1.3 billion between 1996 and 2000 (BBC, 2001). It is

thus evident that the high costs associated with money laundering and its sheer magnitude make

it an area of primary concern for most nations and thereby conditions legal responses at the

macro and micro levels and by the creation of institutions at the meso level. Having discussed

the global fallout of money laundering we now turn to the discussion on global, regional and

national level AML measures and institutions and the interplay of hard and soft law at three

levels.

The Macro Level: Multilateral Cooperation and Hard Law

The emergence of popular sovereignty and the related idea of procedural justice has

given rise to the principle of non-discrimination and self-legislation, i.e. those who are covered

by a law are also its authors ―without regard to the particularistic interest of the parties or the

strategic exigencies that may exist in any specific occurrence‖ (Ruggie, 1993, 11). As in the case

of forcible humanitarian intervention, an ―argumentation framework‖ (Sandholtz & Sweet, 267)

has emerged insofar as the AML movement is concerned, for, as Byers argues, ―customary rule-

creating processes give rules a legal specificity that enables them to shape future behavior

through a sense of obligation, thus constraining and modifying state power‖ (Byers, 1995, 109).

At the same time the emergence of a prohibition regime, as Nadelman (1990, 481) argues,

―provide an element of standardization to cooperation among governments that have few other

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law enforcement concerns in common. And they create an expectation of cooperation that

governments challenge only at the cost of some international embarrassment. In these respects,

international prohibition regimes amount to more than the sum of the unilateral acts, bilateral

relationships, and international conventions that constitute them‖ (1990, 481). While preserving

the sovereignty norm by allowing states to enact laws relating to money laundering, multilateral

cooperation has provided the instrumentality of a convention in which states agree, in-principle,

to enact enabling domestic legislation in conformity with their commitment to the convention

and also establish institutions that provide administrative and expert support to signatory states

and often directly aid in creating a new body of law. The evolution of such a system is in

consonance with Koh's (1997) model of "transnational legal process" that focuses on

transnational processes of interaction involving not just states, but governmental and

nongovernmental actors and domestic and international legal institutions. For Koh, compliance

with international rules is not explained entirely by the functional benefits it provides but, rather,

by the process of internalization of international legal norms into the internal value sets of

domestic legal systems (Koh, 1997, 106). This internalization occurs through a complex process

of repeated interaction, norm enunciation and interpretation, which occurs in such varied

contexts as transnational public law litigation in domestic courts, international commercial

arbitration, and lobbying of legislatures by nongovernmental organization‖ (Koh, 1997, 106 )

Up to the Second World War most national criminal justice systems dealt with crimes

that had a victim (unlike in money laundering where there is no single direct victim). While such

systems were familiar with the traditional forms of confiscation of illicit gains by way of

instrumentum sceleris or objectum sceleris, they did not provide for producta/fructa sceleris.

This large gap in law thus resulted in the lack of competence of national law courts to take away

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profits from crime (Regina vs. Cuthbertson, 1981). Even in systems such as Belgium where

confiscation was provided for in national laws for drug offenses, these did not extend to other

criminal acts. In effect, even in systems such as those of The Netherlands and Switzerland where

there were no limitations, enforcement was not effective.

Continuing with the tradition of its domestic Banking Secrecy Act (1970), the US

introduced the domestic Foreign Corrupt Practices Act (1977) that it tried to push in the United

Nations (ECOSOC) with drafts modeled on the US Act. However, it met with little success,

coming as it did in the heydays of the Cold War and mutual suspicions between the North and

the South and was finally abandoned in 1979. Similarly, the OECD Declaration on International

Investment and Multinational Enterprises that included language on transnational bribery as also

the report of a special commission appointed by the ICC in 1977 (in line with the above UN

initiative) ran into controversies and was not followed up (Pieth, 122). As Koh aptly puts it, the

process of interaction and internalization is constitutive: each instance of interaction and norm

interpretation "generates a legal rule which will guide future transnational interactions between

the parties; future transactions will further internalize those norms; and eventually, repeated

participation in the process will help to reconstitute the interests and even the identities of the

participants in the process," so that they perceive compliance to be in their self-interest (Koh,

1997, 2646). It took another two decades for consensus on such perceived benefits of compliance

on tackling money laundering to emerge.

The United Nations at the Macro Level: Hard Law and Multilateral Cooperation

Nadelman stated that ―The most important inducement to the creation of international

prohibition regimes is the inadequacy of unilateral and bilateral law enforcement measures in the

face of criminal activities that transcend national borders.‖ (481, 1990) It is therefore not

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surprising that the United Nations has played a significant role in the anti-money laundering

movement. While the UN General Assembly developed MLATs on limited issues such as

extradition and criminal matters, yet these were intended to facilitate bilateral cooperation only.

The first major integrated global approach to tackling the single largest source of illicit moneys,

viz. drugs, came with the UN Convention Against Illicit Traffic in Narcotic and Psychotropic

Substances (1988), also called the Vienna Convention. Apart from codifying an international

commitment to suppress the illegal drug trade, the Convention contemplated subsequent

agreements and enactment of domestic legislation as the true enforcement mechanism. The

integration of legal approaches was also novel in that this Convention utilized four of the six

modalities of inter-state cooperation, viz. recognition of foreign penal judgments (Article 8),

freezing and seizure of assets (Article 5), extradition (Article 6) and mutual legal assistance

(Article 7) (Bassiouni and Gualtierei, 2000, 123). By ―drastically inflating‖ (Stessens, 2000, 113)

the criminal liability for money laundering, Article 3(1) this Convention internationalized and

legalized the anti-money laundering movement and created ―supervenience…… a non-reductive

relationship of dependence, in which properties at one level are fixed or constituted by those at

another‖ (Wendt, 1996, 49). Implicit in this Convention was the view of international politics as

―both a rule-governed and rule-constitutive form of reason and action and of international law as

a central component of the normative structures that are produced by, and constitutive of, such

politics‖ (Reus-Smit, 2007, 23). The Vienna Convention was also the embodiment of what

Jurgen Habermas called ―self-legislation‖ (1996) at the ―interstices of idiographic, purposive,

ethical and instrumental reason and action‖ of nations (Reus-Smit, 2003, 621) or the culmination

of state-sponsored ―moral proselytism‖ (Nadelman, 1990, 481).

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In order to expand the effort to fight international organized crime, the UN adopted The

International Convention Against Transnational Organized Crime (2000) (Palermo Convention)

(Shott, 2006, III-3). International support for this Convention was preceded by the adoption of

the Dakar Declaration on the Prevention and Control of Organized Transnational Crime and

Corruption (1998) by African states, Manila Declaration on the Prevention and Control of

Transnational Crime by Asian states (UN General Assembly, 2000, p.5) reflecting the emerging

consensus on the AML issue. This convention, also named for the city in which it was signed,

contains a broad range of provisions to fight organized crime and commits countries that ratify

this convention to implement its provisions through passage of domestic laws. With respect to

money laundering, the Palermo Convention, inter alia specifically obligates each ratifying

country to:

• Criminalize money laundering and include all serious crimes as predicate offenses of

money laundering, whether committed in or outside of the country, and permit the required

criminal knowledge or intent to be inferred from objective facts (Article 6);

• Establish regulatory regimes to deter and detect all forms of money laundering, including

customer identification, record-keeping and reporting of suspicious transactions (Article 7 (i)

(a));

Authorize the cooperation and exchange of information among administrative,

regulatory, law enforcement and other authorities, both domestically and internationally, and

consider the establishment of a financial intelligence unit to collect, analyze and disseminate

information (Article 7 (1) (b) and

Promote international cooperation (Article 7 (3) and (4))

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This convention went into force on September 29, 2003, having been signed by 147 countries

and ratified by 82 countries, indicative of increasing anti-AML international cooperation (Shott,

2006, III-4). The Palermo Convention is significant because its anti-money laundering (AML)

provisions adopted the same approach previously adopted by the FATF in its Forty

Recommendations on Money Laundering (Shott, 2006, III-4). The Convention sought to

strengthen the power of governments in combating serious crimes. The treaty provides the basis

for stronger common action against money-laundering, greater ease of extradition, measures on

the protection of witnesses and enhanced judicial cooperation. It also created a funding

mechanism to assist countries in implementing the Convention. The Convention aims to help

countries synchronize their national laws, so that no uncertainty exists as to whether a crime in

one country is also a crime in another. The fact of a large number of nations having either signed

and/or ratified this Convention reflects growing global concern against AML and its

ramifications, financial and for national security.

The UN Security Council, for its part too has played an important role by Resolutions

that are hard law. Unlike an international convention, which requires signing, ratification, and

implementation by the UN member country to have the effect of law within that country, a

Security Council Resolution passed in response to a threat to international peace and security

under Chapter VII of the UN Charter, is binding upon all UN member countries. The UN

Security Council has acted under Chapter VII of the UN Charter to require member States to

freeze the assets of the Taliban, Osama Bin Laden and Al-Qaeda and entities owned or

controlled by them, as designated by the ―Sanctions Committee‖ (now called the 1267

Committee). The initial Resolution 1267 of October 15, 1999, dealt with the Taliban and was

followed by 1333 of December 19, 2000 on Osama Bin Laden and Al-Qaeda. On September 28,

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2001, the UN Security Council adopted Resolution 1373, which obligates countries to

criminalize actions to finance terrorism. It further obligates countries to:

• deny all forms of support for terrorist groups;

• suppress the provision of safe haven or support for terrorists, including freezing funds or

assets of persons, organizations or entities involved in terrorist acts;

• prohibit active or passive assistance to terrorists; and

• cooperate with other countries in criminal investigations and sharing information about

planned terrorist acts.

On September 28, 2001, the Security Council adopted the U.S.-sponsored Resolution 1373,

which called on all member States to: (1) "prevent and suppress the financing of terrorist acts;"

(2) freeze without delay the resources of terrorists and terror organizations; (3) prohibit anyone

from making funds available to terrorist organizations; (4) suppress the recruitment of new

members by terrorism organizations and eliminate their weapon supplies; (5) "deny safe haven to

those who finance, plan, support or commit terrorist acts, or provide safe havens" to terrorists;

(6) "afford one another the greatest measure of assistance in connection with criminal

investigations" involving terrorism; (7) prevent the movement of terrorists or terrorist groups by

effective border controls and control over travel documentation; and (8) cooperate in any

campaign against terrorists, including one involving the use of force. While it contains strong

language, the resolution still has gray areas, such as its failure to define the term "terrorist."

Invoking Chapter 7 of the U.N. Charter, which requires all member States to cooperate and gives

the Security Council authority to take action, including the use of force, against those who refuse

to do so, the resolution draws on several commitments that have already been made in treaties

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and past resolutions and made them immediately binding on all member States. Many of its

clauses require changes in national laws, such as those dealing with border controls and asylum.

From an implementation perspective, an important aspect of Resolution 1373 is the

establishment of the Counter-Terrorism Committee (CTC) of the Security Council, consisting of

all members of the Council, to monitor member States' implementation of the resolution. The

CTC is divided into three five-member subcommittees, each of which oversees one-third of the

U.N. member States. All member States must report to the CTC on the steps they have taken

toward implementation. It is the duty of the CTC to review these reports and advise the

appropriate subcommittee on whether it should follow up with a particular member state to

achieve compliance with the resolution and whether the member state requires assistance in that

regard. Although the CTC will not define terrorism in a legal sense, its work will help develop

minimum standards for an international CTFE regime.

In December 2004, at the eleventh meeting in Geneva, the Ad Hoc Group of Experts on

International Cooperation in Tax Matters addressed the issue of mutual assistance in tax

collection, which is not dealt with in Article 26 of the United Nations Model Double Taxation

Convention concerning exchange of information. The subject of a new international instrument

for promoting international assistance in tax collection in the form of a multilateral convention

on mutual administrative assistance in tax matters was explored during the meeting. The Ad Hoc

Group recommended the inclusion of new provisions on mutual assistance in tax collection. The

U.N. General Assembly has adopted a resolution renaming the Ad Hoc Group of Experts on

International Cooperation in Tax Matters the Committee or Group of Experts on International

Cooperation in Tax Matters. Its role would be, inter alia, to continue to work on the UN Model

Double Taxation Convention between Developed and Developing Countries, the Manual for the

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Negotiation of Bilateral Tax Treaties between Developed and Developing Countries, provide a

framework for dialogue among national tax authorities to enhance and promote international tax

cooperation, provide a framework for dialogue to enhance and promote international tax

cooperation among national tax authorities, consider how existing international tax norms could

affect different groups of countries and consider how new and emerging issues could affect

international cooperation in tax matters and develop recommendations for appropriate responses.

Thus the international tax work of the U.N. would have a stronger institutional framework

considering the fact that tax evasion is a major contributor to illicit moneys.

The 1999 International Convention for the Suppression of the Financing of Terrorism

prohibits direct or complicit involvement in the international and unlawful provision or

collection of funds, attempted or actual, with the intent or knowledge that any part of the funds

may be used to carry out any of the offenses described in the Convention. Such acts include

those intended to cause death or serious bodily injury to any person not actively involved in

armed conflict in order to intimidate a population and any act intended to compel a government

or an international organization to take action or abstain from taking action. The Convention's

offenses are deemed to be extraditable crimes; signatories must establish their jurisdiction over

them, make them punishable by appropriate penalties, take alleged offenders into custody,

prosecute or extradite those offenders, cooperate in preventive measures and countermeasures

and exchange information and evidence needed in related criminal proceedings. The Convention

requires each signatory to take appropriate measures, in accordance with its domestic legal

principles, for the detection, freezing, seizure and forfeiture of any funds used or allocated for the

purposes of committing the listed offenses. Article 18(1) requires signatories to subject financial

institutions and banking professionals to "Know Your Customer" requirements and the filing of

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suspicious transaction reports. Additionally, Article 18(2) requires signatories to cooperate in

preventing the financing of terrorism through the licensing of money service businesses and

other measures to detect or monitor cross-border transactions. Such strong measures enshrined in

an international convention are pointers to the emerging consensus between nations and the rise

of the AML regime.

In addition to conventions, the UN Office on Drugs and Crime (UNODC) has drafted model

laws such as the Model Legislation on Laundering, Confiscation and International Cooperation

in Relation to the Proceeds of Crime and, in response to its expansion into the realm of CTFE,

the Model Money-Laundering, Proceeds of Crime and Terrorist Financing Bill. The UNODC

provides technical assistance on legislative drafting, financial intelligence, capacity building and

a range of services to help governments and law enforcement agencies implement their

obligations under the Vienna Convention and related AML initiatives. The UN Global Program

against Money Laundering (GPML) is within the UN Office of Drugs and Crime (ODC). The

GPML is a research and assistance project with the goal of increasing the effectiveness of

international action against money laundering by offering technical expertise, training and advice

to member countries upon request. Thus, the GPML is a resource for information, expertise and

technical assistance in establishing or improving a country‘s AML infrastructure.

Role of the G-7 at the Macro Level: Hard Law

OECD and EU at the macro level are major actors in the anti-money laundering

movement. On January 25, 1988, the Council of Europe and the OECD opened the Convention

on Mutual Administrative Assistance in Tax Matters for signatures. The Convention is not a

typical tax treaty. Despite some vague references in the protocol, the Convention does not refer

to the elimination of double taxation. Instead, it provides a mutual assistance treaty to prevent the

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evasion and avoidance of all taxes other than customs duties. It provides for a wide range of

exchange of information between any two countries that are parties to the Convention. It also

provides for assistance in the collection of taxes and in the services of documents.

Recognizing the limitations of a multilateral convention, the European Convention on

Laundering, Search, Seizure and Confiscation of Proceeds from Crime (1990) in all criminal

matters offered a regional hard law approach and supplemented the Vienna Convention by

covering areas beyond drugs. The European Convention was also open to non-European

countries to sign and adopt. The European states‘ resolve to thwart money laundering was also

reflected in the European Council‘s Directive on Prevention of the Use of the Financial System

for the Purpose of Money Laundering which extended the duties and obligations of states to a

wide range of financial institutions. In May 1999, the OECD introduced a harmful tax practices

initiative designed to combat tax evasion, level the playing field among nations in tax policy and

facilitate better cooperation in tax matters. The OECD subsequently published a blacklist of so-

called tax havens and called for the jurisdictions listed to make a commitment to ending their

harmful tax practices. A country became a tax haven by having two of the following four

elements: (1) no or low taxes; (2) ring-fencing or discrimination in the types of persons eligible

for tax preferences (typically offering incentives to only foreigners); (3) lack of transparency in

the operation of the tax laws; and (4) inadequate exchange of tax information. The EU's

Directive on the Prevention of the Use of the Financial System for the Purpose of Money

Laundering, amended in December 2001 is significant in its breadth; it applied due diligence

requirements to numerous actors in the private sector, including lawyers and accountants,

whenever they conducted a financial transaction or engage in financial planning.

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Hard law at the macro level thus recognizes the need to bolster the ability of each

government to crack down on money laundering activity within its borders in two ways. On the

one hand it actively promotes the international synchronization of domestic laws and practices

by pushing governments around the world to introduce these measures. On the other hand, the

regime encourages extensive international information sharing and legal cooperation between

governments with respect to investigation, prosecution, confiscation and extradition in money

laundering cases – proof of convergence of the macro, meso and micro levels as also of the

broader framework of international law and its constitutive and transformative practices. As

Helleiner says, ―A key pillar of this approach has been a commitment that participating

governments have made (since the Vienna Convention) not to allow bank secrecy provisions to

interfere with these forms of international cooperation. This important provision eliminated a key

barrier to international cooperation that existed in other areas, such as the fight against tax

evasion‖ (Helleiner, 2000, 4).

Bilateral Cooperation at Macro Level: Hard Law

Bilateral cooperation relying on a ―web of agreements‖ has often been criticized ―for its

piecemeal results and the quirks of historical, political and diplomatic factors which eventually

influence and undermine these agreements‖ (Bassiouni and Gualtieri, 1997, 116). Yet, in the

absence of any major international cooperation, bilateral agreements were the principal

instruments of enforcement in the early days. This has been supplemented by executive

agreements. While the US has MLATs with several countries, it also has executive agreements

for drug offenses only with many other such as the Cayman Islands, Montserrat and the British

Virgin Islands. Larger jurisdiction agreement exists between Canada and the US. New Zealand

has a MLAT with China (2006) (BBC, April 6, 2006). Similarly, as of Dec 26, 2006, China had

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MLATs with 50 countries and extradition treaties with 20 states (BBC, Dec 29, 2006). India and

Mexico have recently signed an MLAT (BBC, Sep 10, 2007).

Regional cooperation has strongly supplemented bilateral cooperation, e.g. Southeast

Asian Mutual Legal Assistance in Criminal Matters Treaty and Commonwealth of Independent

States Conventions on Legal Assistance and Legal Relationship in Civil, Family and Criminal

Matters. Members of the Commonwealth of Independent States (CIS) have signed two

multilateral Conventions on Legal Assistance and Legal Relationship in Civil, Family and

Criminal Matters on January 22, 1993 and October 7, 2002 that regulate extradition, criminal

prosecution and MLA in criminal cases. Kazakhstan has signed and ratified both Conventions.

Kyrgyzstan has signed both but has only ratified the former (ADB/OECD, 2006). Several states -

Australia, Kazakhstan, Bangladesh, Korea, P.R. China, Macao, Cook Islands, Malaysia Fiji,

Pakistan, Hong Kong, Palau, India, Singapore, Indonesia, Thailand , Japan and Vanuatu - have

also enacted legislation to provide MLA and/or extradition to countries with which it has no

treaty relations. Because of their common law legal tradition, many Commonwealth countries

have adopted alternate schemes for international cooperation based on domestic legislation rather

than treaties. These arrangements have been consolidated into the London Scheme for

Extradition within the Commonwealth (1966) and the Scheme Relating to Mutual Assistance in

Criminal Matters within the Commonwealth (the Harare Scheme) (1990) (ADB/OECD). Treaties

also exist between states of the Asia-Pacific region for transmission of evidence and property

derived from corruption and related offences such as those between Australia and Hongkong,

Malaysia and Philippines. Notwithstanding the complex web of MLATs on criminal matters, the

US State Department has identified 26 states for their involvement in money laundering in 2006,

many of which make it to the list every year for a variety of reasons (US State Dept., Vol. II, 2).

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The Micro Level and Domestic Law: In Synch with Hard International Law?

A study by the US Narcotics Control Bureau (2007, 47-55) shows that up to date 198

countries have enacted domestic legislation criminalizing drug money laundering while only 12

have not done so. A total of 177 countries have enacted domestic legislation criminalizing

money laundering beyond drugs while 28 have not done so. A total of 86 countries have not

criminalized terrorist financing which is a cause for global concern. Domestic legislation in 139

countries provides for recording large financial transactions while in 64 they do not – evidence

of the collision of national interest and global concern. Only 102 countries had Financial

Intelligence Units (FIUs) while 74 nations do not have domestic legislation relating to transport

of foreign currency. While 13 nations are yet to join the UN Convention (1988), 54 are yet to

join the International Terrorism Financing Convention. 42 states do not have legal systems to

identify and/or forfeit assets. Of the 33 states that score 8 or more for not having enacted

legislation on 16 parameters in the study, 16 are in Africa, 3 are CIS states and 8 in the Asia-

Pacific region. The same study (2007, 4) has also identified 59 states whose financial institutions

are party to money laundering. It would be seen from this study that the OFCs are a major area of

concern, with other major geographical areas being South Asia, parts of S-E Asia, West Asia and

Middle East and South America (2007, Vol. I, 6).

At the same time the incidence of domestic AML legislation being passed is also on the

rise. Australia formed its Transaction and Reports Analysis Centre (AUSTRAC) in 1989 while

the UK passed its Criminal Justice Act in 1993. In 1998 both Brazil and Switzerland introduced

domestic AML legislation. Japan introduced legislation enhancing the suspicious transaction

reporting system in February 2000 while Canada established its Financial Transactions and

Reports Analysis Centre of Canada. In September-October of the same year the UK Financial

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Services Authority and the Swiss Federal Banking Commission took up investigations in the

Abacha (former Nigerian President) affair. In 2001, both South Africa and Canada brought in

domestic AML legislation. In 2002 seven nations passed AML legislation while the US issued

the Sarbanes-Oxley Act. In 2003 India and Nigeria too passed AML legislation while

newcomers like Syria and Uganda followed suit (all data from KPMG, 2004, 46-47).

The success of FIUs has been varied. Switzerland‘s FedPol reported that the aggregate

assets involved in suspicious-transaction reports rose 19.7 percent from about 681 million Swiss

francs in 2005 to some 815 Swiss francs in 2006 of which 82 percent of reports were passed on

to the prosecution authorities for further investigation (FedPol, 2007). The Philippine

government has proceeded against Major General Carlos Garcia and his family on 165 counts of

money laundering on the basis of the AML Council‘s recommendations arising from the findings

of that country‘s FIU (Mencias, Sy Egco, 2007). Bermuda officially established its FIU in 1998

and currently has a staff of 6: 1 Detective Inspector, 2 Detective Sergeants, 2 Detective

Constables and 1 Detective Constable on secondment from the UK as a consultant (CFATF,

2004, 19). Bahrain‘s AML and anti-terrorist financing unit have reported 260 suspicious

transactions in 2007, up from only 6 in 2001 (Ministry of the Interior, Bahrain, 2007). During

2006, The Bailiwick of Guernsey‘s Financial Intelligence Service received 467 requests for

assistance compared with 439 during 2005. Of these, 52% were received from outside the

Bailiwick (FIS, 2007, 10). Following a request from the Guernsey Customs and Immigration

Service, the Guernsey FIS managed to identify a UK bank account for the principal of a UK drug

smuggling syndicate which was suspected of the importation of Class A drugs into Guernsey.

Details were passed on to the relevant investigation team for consideration of applying for

production orders. The individual was arrested and charged in Guernsey with offences of

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possession with intent to supply Class A drugs (FIS, 2007, 12). However, approximately only

10% of all formal production orders served in Guernsey during 2006 were preceded by a

disclosure report and the sharing of intelligence with the jurisdiction concerned (FIS, 2007, 11).

Similarly Hongkong‘s Joint FIU reported an increase in the number of convictions for

money laundering rising from 68 in 2003 to 90 in 2006 while the value of assets restrained rose

from $107.56 million in 2003 to $327.42 million in 2006. The amount recovered and paid to the

government too rose from $11.21 million in 2003 to $49.70 million in 2006 (Joint FIU, 2007). In

2006-07 UK‘s newly established Serious Organized Crime Agency (SOCA) seized ₤3.30 million

cash, obtained confiscation orders for another ₤14.5 million and enforced ₤4.3 million of such

orders (SOCA, 2007, 14).The SOCA‘s Operation ORNATUS, in which SOCA provided

intelligence to the Royal Canadian Mounted Police (RCMP) on a conspiracy to import multi-

tonnes of cannabis into Canada and also identified individuals based in the UK who were

responsible for the gang‘s money laundering operation. This led to seizure by the RCMP of 22.5

tonnes of cannabis resin with an estimated street value of Can$225m and the arrest of three

people (SOCA, 2007, 10). SOCA also referred 37 cases in 2006-07 to the Asset Recovery

Agency, up from 21 in 2005-06 (SOCA, 2007, 12). SOCA has been working closely with

agencies in the UK, the United Arab Emirates, Italy, Spain, Australia and the USA, to orchestrate

a co-ordinated attack on a network believed to be laundering hundreds of millions of pounds

annually from drugs and other serious crime, with strong links to the UK. Already over forty

individuals are facing prosecution in three jurisdictions, including 22 in the UK, and large

amounts of suspect money and property have been seized. The activity has generated 15 on-

going investigations against criminal targets in the UK and elsewhere (SOCA, 2007, 14).

Notwithstanding these efforts, much remains to be done, particularly in countries where the illicit

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proceeds of crime originate. However, one cannot but derive solace from the fact that all these

positive developments, notwithstanding their relatively limited numbers, date back less than two

decades and provide ample evidence of the convergence of the macro, micro and meso levels of

governance on the international plane and consensual international politics in the framework of

international law.

Regional Cooperation at the Meso Level: Supplementing Hard Law by Soft Law
Role of International Financial Institutions

The major international financial institutions (IFIs) have been playing an important role

in curbing money laundering. The Asian Development Bank (ADB) in collaboration with the

OECD launched the Anti-Corruption Initiative for Asia and the Pacific in 2007. So far 27 states

have endorsed the Anti-Corruption Action Plan for Asia-Pacific of the ADB-OECD‘s Initiative

for the Asia-Pacific. (ADB-OECD, 2007, 10). The Initiative‘s members have, between

themselves, signed and ratified at least 38 and 26 bilateral extradition and MLATs respectively,

some of which were concluded recently (ADB-OECD, 2007, 11). Sixteen members of this

Initiative have mutual extradition arrangements while another 16 have MLATs among

themselves (ADB-OECD, 2007, 14). However, problems of dual criminality, reciprocity,

prohibition of extradition (PR China), definition of the national interest for extradition, double

jeopardy and language, etc. continue to hamper enforcement of AML laws (ADB-OECD, 2007,

23-41).

The International Monetary Fund (IMF) and the World Bank have a joint effort to

counter the abuse of financial systems. The Financial Sector Assessment Program (FSAP),

introduced in 1999, aims to identify both financial vulnerabilities and development needs. FSAPs

assess, supervisory core principles, the susceptibility of the financial system to financial crime

and money laundering, for example, owing to excessive bank secrecy laws (World Bank, 2001,

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10). The Fund-Bank initiative also suggests introduction of new corrective AML legislation and

modifications to banking security regulations and assists in the implementation of new AML

laws in member nations (World Bank, 2001, 10). The IMF and the Bank have also been

collaborating closely in assessing progress in implementing selected international standards

through the program on Reports on Observance of Standards and Codes (ROSCs) in a bid to

develop and implement standards to strengthen the international financial system by promoting

the sound functioning of members‘ economic and financial systems. In this direction the Fund-

Bank conducts assessments of relevant financial sector standards (the Basel Core Principles, the

IOSCO Principles and the IAIS Principles) and prepares ROSCs from such reviews. In addition

these two IFIs have also taken several measures to curb corruption in member countries such as

by their insistence on enhancing transparency and accountability systems.

Financial Action Task Force

By far the most significant achievement in the implementation and enforcement of ‗soft‘

law at the meso level has been the Financial Action Task Force (FATF) which Stessens calls ―the

crown jewel of soft law‖ (2000, 17). The FATF was created at the 1989 Paris summit of the G-7

to ― …..assess the results of cooperation already undertaken in order to prevent the utilization of

the banking system and financial institutions for the purpose of money laundering, and to

consider additional preventive efforts in this field, including the adaptation of the legal and

regulatory systems as to enhance multilateral judicial assistance‖ (Gilmore, 1992, 3). The FATF

issued its first report in 1990 with its Forty Recommendations being its most influential

component covering both repressive and preventive aspects of money laundering. Presently 34

nations are members. There are also 4 associate members. While these Recommendations are

non-binding, yet they form the basis for many judicial pronouncements, domestic legislation and

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enforcement. Thus 15 FATF Recommendations eventually found their way into the EC Directive

of June 10, 1991 which made them into binding law for EC member states (Stessens, 2004, 18).

The EC Directive (1991) and FATF (1990) point to an interesting phenomenon in international

politics and law. On the one hand lay the internationalization of the legislative process while on

the other lay the influence of other legal norms (jus cogens) over and above criminal law. That

soft law was becoming an accepted legal norm was evident from the fact that when the draft EC

Directive (1991) proposed criminal sanctions by member states for money laundering and

provoked an outcry from members wary of their sovereignty; an intergovernmental statement

that bound states to implement anti-money laundering criminal legislation by December 31, 1993

in pursuance of a general prohibition on money laundering (Article 2) of the EC Directive (1991)

was the resultant, though not insubstantial, compromise. The FATF has neither any tightly

defined constitution nor an unlimited life span and reviews its mission every five years. In 2004,

the 33 FATF members agreed to extend the mandate of the Task Force until 2012, a sure sign of

its increasing success and an increasing emphasis upon institutions that are the venue for debate

and consensus between nations – a compromise, per se, between the dictates of national

sovereignty and the concerns of an increasingly interdependent comity of nations.

FATF uses a self-assessment exercise and the mutual evaluation procedure to monitor

progress made by member governments in implementing its Recommendations. In the self-

assessment exercise, every member country provides information on the status of its

implementation of the Forty Recommendations and Nine Special Recommendations by

responding each year to a standard questionnaire. This information is then compiled and

analysed, and provides the basis for assessing the extent to which the Recommendations have

been implemented by both individual countries and the group as a whole. The second element for

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monitoring the implementation of the Forty Recommendations is the mutual evaluation process.

This process is enhanced by the FATF'‘s policy for dealing with members not in compliance

with the Forty Recommendations. The FATF can also apply Recommendation 21, which results

in issuing a statement calling on financial institutions to devote special attention to business

relations and transactions with persons, companies and financial institutions domiciled in the

non-complying country. Then, as a final measure, the FATF membership of the country in

question can be suspended. Each member country is examined in turn by the FATF on the basis

of an on-site visit conducted by a team of three or four selected experts in the legal, financial and

law enforcement fields from other member governments. The purpose of the visit is to draw up a

report assessing the extent to which the evaluated country has moved forward in implementing

an effective system to counter money laundering and to highlight areas in which further progress

may still be required (FATF, 2004). FATF also issues a typology report that covers new areas in

which money laundering has become active illustrated by cases from various countries. FATF

also has members from such parts of the world where money laundering is endemic such as

Russia, the CIS and China. Efforts are underway to get India to join the FATF (FATF Annual

Report 2007, 8). FATF‘s efforts largely reflect the convergence of the macro and micro levels at

the meso level and an increasing willingness on the part of its non-member nations to comply

with FATF‘s Recommendations; such willingness though, is partly conditioned by the lure of

export markets to the Americas and Europe for non-FATF members and access to the world‘s

largest financial systems.

It is evident that cooperation at the G-7 level has helped the emergence of the AML

network. By creating institutions such as the FATF, defined by Robert Keohane as ―persistent

and connected sets of rules (formal and informal) that prescribe behavioral roles, constrain

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activity, and shape expectations,‖ (1989, 3) the G-7 without a secretariat or founding statute,

small size, selected membership, flexible structure, and the shared values and belief in

democracy and liberal capitalism amongst its members has imparted flexibility of operation to its

institutions (Weilemann, 2000, 19). Such institutions, in turn, have facilitated cooperation

amongst states and reduced transaction costs by harvesting the ―practice of iteration‖

(Weilemann, 2000, 30). By issuing four extensions of mandates of the FATF since the Paris

Summit, the G7 set a long-time horizon and regularity of stakes in the area of AML for its

members (Kirton, 2003). In addition, the G7 raised the cost of defection for recipients of large

flows of foreign direct and portfolio investments by endorsing the FATF‘s strategy against Non-

Conforming Countries & Territories (NCCTs). Warnings issued by G7 countries to their

domestic institutions held deep economic consequences for defecting NCCTs. In the G7,

political-economic bargaining takes place amongst a small, ‗privileged‘ group of governments

―intensely interacting with one another and monitoring each others‘ behavior‖ (Keohane, 1984,

77). As Charles Lipson asserts, a small group with extensive interplay, such as the G7, is

important for the establishment and diffusion of conventions (1993, 67). This often leads to the

development of international ‗soft‘ law, which has been the case in the area of AML. Indeed,

G7/8 cooperation is noteworthy because, under anarchy, ‗policymakers generally have an

incentive to cheat‘ (Putnam, 1988, 438). The G7 institution has altered the extent to which

governments expect their present actions to affect the behavior of others. Through the creation of

Financial Intelligence Units (FIUs), the G7 and FATF have facilitated the exchange of

information, enhancing concerted action in international AML initiatives (US Department of

State, 2001, p. 15). By influencing the strategic choices of the member states, the G7 has induced

cooperation in the field of money laundering.

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The emerging AML regime attempts to strengthen the ability of each government to

crack down on money laundering activity within its borders by actively promoting the

international harmonization of AML domestic laws and practices and criminalize money

laundering (as required under the Vienna Convention). As Hellneir says, ―By pushing

governments around the world to introduce these measures, the regime aims not only to reduce

money laundering directly in each country but also to lessen the likelihood of all countries being

vulnerable to the growth in money laundering activities in a less regulated financial center‖

(2000,4). This regulatory regime also encourages extensive international information sharing and

legal cooperation between governments with respect to investigation, prosecution, confiscation

and extradition in money laundering cases. Despite these efforts, the FATF‘s record remains

mixed. Some blame the FATF for engineering AML standards to divide the most powerful

industrialized states and the ―small, developing, pressure-sensitive countries‖ (Allen, 2003, 306).

The international banking community, regarding the new rules as ―burdensome and ineffective,‖

continues to voice frustration at the cost and complexity of implementing AML standards

(Bayne, 2002). There is also a sense that the high costs of implementation yield low enforcement

actions (von Furstenberg, 2005, 194-202).

Inter-governmental Cooperation at the Meso Level: Soft Law Supplement to Hard
Law

As part of the effort to fight money laundering and FATF‘s Recommendations,

governments have created financial intelligence units (FIUs) to analyze information submitted by

covered entities and persons pursuant to money laundering reporting requirements. These units

serve as the focal point for national AML programs, because they provide the bridge for the

exchange of information between financial institutions and law enforcement. In 1995, a number

of FIUs formed the Egmont Group of FIUs (named for the location of its first meeting at the

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Egmont-Arenberg Palace in Brussels) to provide a forum for FIUs to improve support for each of

their national AML programs and to coordinate AML initiatives by expanding and systematizing

the exchange of financial intelligence information, improving expertise and capabilities of

personnel employed by such organizations, and fostering better and more secure communication

among FIUs through the application of technology. The Egmont Group‘s secure Internet system

permits members to communicate with one another via secure e-mail, requesting and sharing

case information as well as posting and assessing information regarding trends, analytical tools

and technological developments. FinCEN (US government), on behalf of the Egmont Group,

maintains the Egmont Secure Web (ESW). Currently, there are 98 FIUs connected to the ESW of

the 100 members. The new Secretariat of this group will become operational in Toronto, Canada

in mid-2008 (US Department of State, 2007).

FATF has also been instrumental in the establishment of similar regional formations called

FATF-style Regional Bodies (FSRBs) such as the Caribbean Financial Action Task

Force (CFATF), Eurasian Group (EAG), Eastern and Southern Africa Anti-Money Laundering

Group (ESAAMLG), Intergovernmental Action Group against Money-Laundering in

Africa (GIABA) and associate members such as The Asia/Pacific Group on Money

Laundering (APG), The Council of Europe Select Committee of Experts on the Evaluation of

Anti-Money Laundering Measures (MONEYVAL) - formerly PC-R-EV, The Financial Action

Task Force on Money Laundering in South America (GAFISUD), Middle East and North Africa

Financial Action Task Force (MENAFATF). Thus CFATF has 30 members, 7 cooperating and

supporting nations (COSUNs) and over 20 observers from agencies such as Interpol, World

Bank and CARICOM. In addition to the FSRBs, intergovernmental regional bodies such as the

Organization of American States Inter-American Drug Abuse Control Commission

BASU 38

(OAS/CICAD) Group of Experts to Control Money Laundering and Pacific Anti-Money

Laundering Program (PALP) (US Department of State Vol. II, 2007, 35-39). Some of these

FSRBs also have their own AML rules such as the CFATF‘s Aruba Recommendations (1990)

which are 19 recommendations that address money laundering from the Caribbean regional

perspective and which complement The Forty Recommendations and the Council of Europe‘s

Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime

(Strasbourg Convention, 1990) (Schott, 2006, III-63)

Non-governmental Cooperation at the Meso Level: Soft Law Supplement to Hard Law

Stessens says, ―Given the absence of a formal international legislator, it is not surprising that

the influence of soft law has been especially notable at the international level‖ (2004, 16). While

omnibus conventions attempted to broad base international cooperation in fighting money

laundering, soft law played an equally important role. Tailored to meet the aversion of financial

institutions to government interference, soft law has been increasingly been used to obtain

international cooperation. Thus money laundering in Switzerland was fought more by codes of

conduct and regulation than by hard legislation. Since financial institutions were the

‗launderettes‘ for launderers, a dynamic soft law tried to ensure their cooperation. A major

initiative was Recommendation No. R(80)10 adopted by the Committee of Ministers of the

Council of Europe in 1980 called ‗Measures against the transfer and safeguarding of the funds of

criminal origin‘ (Stessens, 2004, 16).

Similarly, banking regulators issued the Basle Statement of Principles in 1988, though

mainly to assure stability of the banks and public confidence in them. Though this was a non-

binding Agreement, nevertheless, the Principles found indirect reflection in justiciable national

law that often specified that non-adherence to these Principles was a cognizable and therefore

BASU 39

actionable offence (Belgium, France UK) (Stessens, 2004, 16). The Basle Statement was

evidence of the constitutive power of international law and a national response on an

international forum in the fight against a transnational crime. In 1997, the Basel Committee

issued its Core Principles for Effective Banking Supervision (Core Principles) which provides a

comprehensive blueprint for an effective bank supervisory system and covers a wide range of

topics. Of the total 25 Core Principles, one of them, Core Principle 15, deals with money

laundering; it provides: Banking supervisors must determine that banks have adequate policies,

practices and procedures in place, including strict ―know your customer‖ rules, that promote high

ethical and professional standards in the financial sector and prevent the bank from being used;

intentionally or unintentionally, by criminal elements. In addition to the Core Principles, the

Basel Committee issued a ―Core Principles Methodology‖ in 1999, which contains 11 specific

criteria and five additional criteria to help assess the adequacy of KYC (know your customer)

policies and procedures (Basel Committee, 1999). These, additional criteria include specific

reference to compliance with The Forty Recommendations.

The International Association of Insurance Supervisors (IAIS), established in 1994, is an

organization of insurance supervisors from more than 100 different countries and jurisdictions

(Shott, 2006, III-16). In January 2002, the association issued Guidance Paper No. 5, Anti-Money

Laundering Guidance Notes for Insurance Supervisors and Insurance Entities (AML Guidance

Notes). It is a comprehensive discussion on money laundering in the context of the insurance

industry. Like other international documents of its type, the AML Guidance Notes are intended

to be implemented by individual countries taking into account the particular insurance companies

involved, the products offered within the country, and the country‘s own financial system,

BASU 40

economy, constitution and legal system. The AML Guidance Notes contain four principles for

insurance entities:

• Comply with anti-money laundering laws,

• Have ―know your customer‖ (KYC) procedures,

• Cooperate with all law enforcement authorities, and

• Have internal AML policies, procedures and training programs for employees.

These four principles parallel the four principles in the Basel Committee‘s Statement on

Prevention. The AML Guidance Notes are entirely consistent with The Forty Recommendations,

including suspicious activity reporting and other requirements. In fact, The Forty

Recommendations are included in an appendix to the IAIS‘s AML Guidance Notes (Shott, 2006,

III-17-18).

It is not as if only inter-governmental IFIs only have adopted AML measures or

propagated their adoption. The private international banking sector too has come forward in

continuation of the Basle Principles and similar earlier initiatives. The Wolfsberg Group, an

association of 12 global banks, representing primarily international private banking concerns has

established four sets of principles for private banking (World Bank, 2006, IV-4). The Wolfsberg

Group has adopted a set of 14 principles to govern the establishment and maintenance of

correspondent banking relationships on a global basis. These principles prohibit international

banks from doing business with ―shell banks‖ and use a risk-based approach to correspondent

banking that is designed to ascertain the appropriate level of due diligence that a bank should

adopt with regard to its correspondent banking clients (World Bank, 2006, IV-6).

International banking corporations too are investing heavily in AML strategies and

procedures. A KPMG report stated that the cost of compliance by private banks had increased by

BASU 41

61% from 2001 to 2004 (KPMG, 2004, 5). Interestingly, 28% of the respondents from the Asia-

Pacific reported that their compliance costs had increased by over 100% from 2001 to 2004

while the corresponding figure for Latin America was 33% (KPMG, 2004, 35). This report also

stated that 84% of the respondents found the burden of AML requirements to be acceptable,

while more than half considered the requirements could be made more effective (KPMG, 2004,

6). The report adds that 65% of the respondents stated that they had global AML policy, although

the levels of implementation varied (KPMG, 2004, 12) from country to country. The financial

services sector‘s increasing willingness to participate in the AML regime is also a measure of the

success of domestic AML laws as also the effects of successive bank crashes in the 1990s

(Barings & BCCI) that has driven home the need to adopt AML measures. Perhaps indirectly,

increasing global concern and peer pressure from other dominant partners in this regime have

also forced greater compliance with AML norms by this sector – yet another a sign of

convergence of the micro and the meso levels.

The Illicit Drug Trade and Enforcement

Narcotics are a major concern in many areas of the world. Around 517-732 metric tons

per annum of cocaine hydrochloride (HCl) reaches the US from Latin America, Mexico and

Canada which together produce more than 4,000 metric tons of marijuana per annum (USNCB

2007, Vol. I, 18). Globally over 400,000 hectares are devoted to the cultivation of illicit drugs

and there is an average cash gain of 2400 per cent from field to consumer (UNODC estimated

final drug sales as $321.6 billion in 2003). With such large-scale production and high returns,

concerns of the substantial monetary gains being laundered are genuine. UNODC has also

estimated the value of the illicit drug sales, measured at retail prices, as being higher than the

GDP of 88% of the countries in the world (163 out of 184 for which the World Bank has GDP

BASU 42

data) and equivalent to about three quarters of Sub-Saharan Africa‘s total GDP (US$ 439 billion

in 2003). The sale of drugs, measured at wholesale prices, was equivalent to 12% of global

export of chemicals (US$794 billion), 14% of global agricultural exports (US$674 billion) and

exceeded global exports of ores and other minerals (US$79 billion) in 2003 (UNODC, 2005, p.

127). The offshore financial institutions in many countries therefore continue to remain an area

of concern for hosting illicit drug moneys, notwithstanding enabling regulatory legislation that

has been passed by their respective host countries.

In the past few years, the Government of Antigua and Barbuda has frozen approximately $6

million in Antigua and Barbuda financial institutions as a result of US requests and has

repatriated approximately $4 million (US Dept. of State, 2007, pp. 139-40). On its own initiative,

the Government froze over $90 million believed to be connected to money laundering cases still

pending in the United States and other countries (US Dept. of State, 2007, pp. 139-40). In 2005,

the GOAB cooperated extensively with U.S. law enforcement in an investigation that resulted in

a seizure of $1.022 million. In the first eight months of 2006, Austrian courts froze assets worth

24 million euros (approximately $30 million). In 2005, courts froze assets worth 99.2 million

euros (approximately $124.0 million). Between January 2000 and September 2006, 17

individuals were charged with money laundering by the T&F/MLIS, leading to seven

convictions. In the Bahamas seven defendants await trial, while two defendants fled the

jurisdiction prior to trial (US Dept. of State, 2007, pp. 139-40).

The Bahamas‘ banking community has cooperated with these efforts. During 2006, nearly

two million dollars in cash and assets were seized or frozen (2007, p. 83). In 2006, several major

investigations by USDEA and the sensitive investigation unit (SIU) of the Department of

Administrative Security (DAS) of the Colombian government resulted in arrests and seizures of

BASU 43

major money laundering organizations operating between the countries. These include Operation

Common Denominator, which led to the arrests of money launderers that utilized the black

market peso exchange to launder drug proceeds from the US and Europe, and the seizure of over

17 million euros and 2,000 kilograms of cocaine in Spain; Operation Hoyo Verde, which resulted

in 88 arrests for money laundering in the United States, Curacao, the Dominican Republic,

Puerto Rico, the Netherlands and Colombia, and the seizure of $ 8.6 million in cash, $ 5.8

million in assets and 100 kilograms of cocaine; and Operation Plata Sucia, which led to 28

money laundering arrests in Colombia, New York and Florida, and the seizure of over $5 million

in currency, 65 kilograms of heroin and 60 kilograms of cocaine (US Dept. of State, 2007, pp.

139-40). Extradition requests to the United States are pending in many of the arrests. In January

2007, the Colombian National Police in cooperation with the DEA recovered approximately $80

million in primarily U.S. currency and gold on raids on houses used to stash drug proceeds.

Reportedly, the total value is probably the most ever seized by law enforcement in a single

operation anywhere in the world (US Dept. of State, 2007, 139-40). At the same time UNODC

statistics show that while land available for opium cultivation has declined by about 26 per cent,

there is an increase in 29 per cent in yields per hectare (UNODC, 2007). Clearly the market not

only exists but has also expanded with larger gains for peddlers and a rise in concerns about

money laundering from such a large operation. Domestic enforcement has also been found

wanting in the 2003 collapse of the Dominican Republic‘s third largest bank, Banco

Intercontinental (Baninter), that was a significant example of the corruption and money

laundering scandals that plague the financial sector. The failure of Baninter and two other banks

(Banco Mercantil and Bancredito) cost the Government in excess of $3 billion and severely

destabilized the country‘s finances (2007, 166-67). Criminal laws and international prohibition

BASU 44

regimes are particularly ineffective in suppressing those activities which require limited and

readily available resources and no particular expertise to commit, those which are easily

concealed, those which are unlikely to be reported to the authorities, and those for which the

consumer demand is substantial, resilient, and not readily substituted for by alternative activities

or products‖ (Nadelman, 1990, 486).

African ‘Blood’ Diamonds and Enforcement

Africa produces about 90 million carats of diamonds of world production of about 174

million carats. Of this about 38 million carats are produced in Angola, Sierra Leone and the

Congo (against 16 million carats in South Africa) (Hetherington et al, 2007, 22). United Nations

reports on Angola estimate that in 1996-1997 the Angolan rebel group UNITA exported an

average of US$700 million annually which alone accounted for 10% of the global trade. Global

Witness (2006, 1) estimated that conflict diamonds represented as much as 15% of world total in

the mid to late 1990s at the height of the diamond-fuelled wars in Angola and Sierra Leone. Even

when the international community took positive action against the trade in blood diamonds, the

pressure was not sustained. Thus the UN imposed diamond sanctions in 1998 on Angola, 37

years after the civil war started there and lifted them in 2002 although there was no certainty that

the UNITA (that had controlled 60-70% of the mines) (Global Witness ,2006, 1) would no

longer profit from their trade in an oppressive post-civil war regime. No sanctions were imposed

in the Democratic Republic of Congo (DRC) although 3 million lives were lost in the civil war

from 1998-2003. Similarly, the UN imposed diamond sanctions on Sierra Leone in 2000 only to

lift them in 2003 (Global Witness, 2006, 1) although the trade continued to flourish.

On December 1, 2000 the United Nations General Assembly unanimously adopted a

resolution on the role of the trade in diamonds in fuelling conflict. This resolution supported the

BASU 45

creation of an international certification scheme in an attempt to break the link between the illicit

trade in rough diamonds and mass human rights abuses associated with armed conflict, such as

Angola, the Democratic Republic of Congo and Sierra Leone. The adoption of a UN Resolution

and the imposition of UN sanctions related to armed conflicts in several African countries

galvanized the international community and the diamond industry into establishing a certification

process to prevent conflict diamonds from entering the legitimate trade. That process came to be

called the "Kimberley Process", named after a meeting in Kimberley, South Africa, in 2000

where several diamond producing states first met to address the issue of conflict diamonds. After

lengthy negotiations over several years, the Kimberley Process Certification Scheme (KPCS)

was adopted at a Ministerial Meeting in Interlaken, Switzerland in November 2002 and took

effect in January 2003. The KPCS includes about 70 governments (including all of the major

diamond trading and producing countries) who have since adopted and implemented legislation

to prohibit the trade in conflict diamonds. Despite the enactment of legislation, the KPCS has not

been able to fully address, monitor and end the international trade in conflict diamonds (Amnesty

International, 2006). Such limited success is evident from the fact that leading retailers in the US

such as JC Penney, Sears Roebuck & Company, Target, Shop NBC and Macy‘s are yet to

implement any certain and concrete measures to combat ‗blood diamonds‘. (Amnesty USA,

2006, 1-6).

A United Nations Group of Experts on Cote d‘Ivoire has recently found that poor controls

are allowing significant volumes of blood diamonds to enter the legitimate trade through Ghana,

where they are being certified as conflict free, and through Mali (UN, 2005, 17-19). As well as

pointing to the need for stronger diamond controls in the region, the Group of Experts

recommended that international trading centres introduce better systems for identifying

BASU 46

suspicious shipments of rough diamonds. Many other diamond producing countries have weak

government diamond controls that cannot guarantee the diamonds they export are conflict-free.

In the Congo since the peace agreements signed in 2002, fighting between the national army and

various rebel groups has continued in parts of the country, particularly in the east. Some of this

fighting has centered on diamond mines and other areas rich in natural resources. The US GAO,

in a report to Congress, said that ―diamonds continue to serve as a source of revenue for armed

militias fighting in the north of the country‖ (GAO, 2002, 4). Although the UN lifted its diamond

sanctions in April 2007, Liberia is yet to legalize diamond mining showing thereby how strong

national vested and consumer interests are in this field (Global Policy Forum, June 5, 2007).

Weaknesses in the Kimberley Process are found across the diamond pipeline, including in

countries with trading, cutting and polishing centres. A recent United States GAO (GAO, 2006)

report shows that blood diamonds may be entering the US because of major weaknesses in the

implementation of the Clean Diamond Trade Act, the US law which implements the Kimberley

Process Certification Scheme (KPCS). According to the GAO report, ―the United Nations (UN)

and other sources report that illicit trading of rough diamonds still exists and could potentially

finance civil conflicts as well as criminal and terrorist activities.‖ The GAO report further

concludes: ―To succeed, KPCS depends on all participants having strong control systems and

procedures for collecting and sharing trade data on rough diamonds, for inspecting imports and

exports of these diamonds, and for tracking confirmations of import and export receipts.‖ That

domestic compliance is lacking even in the US and the UK, the world‘s largest diamond markets,

is evident from a survey carried out by Global Witness that covered 597 jeweler stores in the US

(Global Witness, 2006, 246) and UK. (Global Witness, 2006, 333). The survey showed that only

27% of shops had a policy on conflict diamonds. , 30% of the shops that said they had a policy

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